2002 (1) TMI 258 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of development rights as capital assets vs. stock-in-trade.
2. Fair market value determination of development rights.
3. Application of section 45(2) of the Income-tax Act.
4. Set-off of capital gains against brought forward business loss.
5. Levy of interest under sections 234B and 234C.
6. Disallowance of guest house expenses.

Detailed Analysis:

1. Treatment of Development Rights as Capital Assets vs. Stock-in-Trade:
The primary issue was whether the development rights sold by the assessee should be treated as capital assets chargeable to capital gains or as stock-in-trade. The assessee argued that the development rights were trading assets at the time of their sale. However, the CIT(A) upheld the A.O.'s decision that the development rights were capital assets, and their conversion into stock-in-trade amounted to a transfer chargeable to capital gains under section 45(2).

2. Fair Market Value Determination of Development Rights:
The A.O. determined the fair market value of the development rights as on 1-4-1994 by backward interpolation from the sale consideration of Rs. 5.94 crores. The A.O. computed the fair market value at Rs. 5,47,55,251 as on 1-4-1994. The assessee contended that this method was arbitrary and should also be applied to determine the fair market value as on 1-4-1981. The CIT(A) upheld the A.O.'s method, considering it fair and reasonable.

3. Application of Section 45(2) of the Income-tax Act:
The assessee converted the land into stock-in-trade on 1-4-1994 and sold development rights on 29-3-1996. The A.O. invoked section 45(2) to tax the market value of development rights as capital gains on the date of conversion. The CIT(A) agreed with this application, noting that the development rights were capital assets and their conversion into stock-in-trade was taxable under section 45(2).

4. Set-off of Capital Gains Against Brought Forward Business Loss:
The assessee argued that long-term capital gains should be set off against brought forward business loss, citing the Supreme Court's decision in Cocanada Radhaswami Bank Ltd. The CIT(A) rejected this, stating that section 45(2) was introduced after the Supreme Court's decision and specifically prohibits such set-off.

5. Levy of Interest Under Sections 234B and 234C:
The assessee raised an additional ground regarding the levy of interest under sections 234B and 234C. The Tribunal referred to the Supreme Court's decision in Anjum M.H. Ghaswala, which held that these sections are mandatory, thereby dismissing the assessee's contention.

6. Disallowance of Guest House Expenses:
The A.O. disallowed Rs. 2,00,571 spent on the maintenance of a guest house at Delhi under section 37(4). The assessee contended that part of the premises was used for office purposes. The CIT(A) upheld the A.O.'s disallowance. The Tribunal, however, allowed 40% of the total expenses as business expenditure, acknowledging the partial use of the premises as an office.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on treating development rights as capital assets and the application of section 45(2). It directed the A.O. to refer the matter to the departmental valuer for determining the fair market value as on 1-4-1981 and 1-4-1994, considering all depressing factors. The Tribunal also upheld the mandatory nature of interest under sections 234B and 234C and allowed 40% of guest house expenses as business expenditure.