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2013 (1) TMI 427 - AT - Income TaxShort term capital gain arising out on transfer of land - assessee had acquired certain plots of land during assessment year 1991-92 which was converted into stock-in-trade on 31.3.2000 by passing a Board Resolution - whether on 31.3.2000 when the land had not been converted into non-agricultural land it can be considered as a non-agricultural land and whether the conversion by the assessee into stock-in-trade was legally valid? - Held that - Even though the land had not been converted into non-agricultural land on 31.3.2000 there is no dispute that the land was situated in the industrial zone and was meant for industrial use. As decided in CWT Vs Officer-in-charge (Court of Wards) (1976 (8) TMI 2 - SUPREME COURT) that for a land to be agricultural it was required to be shown its connection with agricultural purpose and user and not merely possibility of usage by some future owner. Also that the entry in the revenue records though prima facie constituted good evidence but was not conclusive in determining the true nature of land. In the present case no connection of the land to the agricultural purposes or user is established. In fact land was not meant for agricultural purposes and had also not been used by the assessee for agricultural purposes. Thus even though the land had not been converted into non-agricultural it remained non-agricultural land. The conversion into non-agricultural land was necessary for the purpose of usage of the land for industrial purpose and merely because the land was not converted the same could not be considered as agricultural as there was no connection of the land to the agricultural purpose and user. Argument of the DR that since land was beyond Municipal limits the same has to be considered as agricultural cannot be accepted as it is not the location of the land but its connection with agricultural purpose and user which makes it agricultural. The term agricultural land has not been defined either in the Income tax Act or in Wealth Tax Act therefore tests laid down by the Hon ble Supreme Court to determine the true nature of land in a case relating to Wealth tax Act will be equally applicable in case of Income tax Act. Thus land was non-agricultural on the date of conversion on 31.3.2000 and therefore a capital asset. The conversion into stock-in-trade was supported by Board Resolution & also declared by the assessee in the return for the assessment year 2000-01. The assessee was also involved in real estate activities and therefore conversion of the non-agricultural land has to be considered as stock -in-trade of the business of the assessee. The notes to the audited accounts also mentioned this fact and differences between cost of land and market value had been credited into capital reserve. Therefore see nothing illegal about the conversion of land by the assessee into stock -in-trade - no infirmity in the order of CIT(A) in applying the provisions of section 45(2)& provisions of section 50C will not apply to computation of capital gain on conversion of land in assessment year 2000-01 as the said provisions were effective only for assessment year 2003-04 - in favour of assessee.
Issues Involved:
1. Addition on account of short-term capital gain arising from the transfer of land. 2. Validity of conversion of agricultural land into stock-in-trade. 3. Applicability of Section 45(2) of the Income Tax Act. 4. Applicability of Section 50C of the Income Tax Act. 5. Inclusion of capitalized interest in the cost of acquisition. Issue-Wise Detailed Analysis: 1. Addition on Account of Short-Term Capital Gain: The primary dispute was regarding the addition on account of short-term capital gain from the transfer of land. The Assessing Officer (AO) noted that the assessee sold plots for Rs.13,32,87,366/- and Rs.99,49,439/-, with stamp duty values of Rs.27,50,25,000/- and Rs.1,86,25,000/-. The AO computed the short-term capital gain by adopting the stamp duty value for the purpose of computation under Section 50C of the Income Tax Act, which was disputed by the assessee. 2. Validity of Conversion of Agricultural Land into Stock-in-Trade: The AO argued that the land remained agricultural until it was converted into non-agricultural land on 27.5.2004, and thus, there was no capital asset to convert into stock-in-trade on 31.3.2000. The AO deemed the conversion as void ab initio. The assessee contended that the land was always meant for industrial use and had been shown as stock-in-trade in assessments up to the assessment year 2006-07. The CIT(A) agreed with the assessee, stating that the land was in an industrial zone and not used for agricultural purposes, thus constituting a capital asset on 31.3.2000. 3. Applicability of Section 45(2) of the Income Tax Act: The assessee computed capital gain under Section 45(2) of the Income Tax Act, declaring long-term capital loss and business income. The AO rejected this, stating the land became a capital asset only on 27.5.2004. The CIT(A) upheld the applicability of Section 45(2), stating that the land was non-agricultural on the date of conversion and the conversion into stock-in-trade was valid. The Tribunal agreed, noting that the land was non-agricultural and the conversion was supported by a Board Resolution. 4. Applicability of Section 50C of the Income Tax Act: The AO applied Section 50C for computing capital gain, which was contested by the assessee. The CIT(A) ruled that Section 50C, effective from the assessment year 2003-04, could not be applied to the capital gain computation for the assessment year 2000-01. The Tribunal upheld this, stating that Section 50C was not applicable to the computation of business profit and could not be applied retrospectively. 5. Inclusion of Capitalized Interest in the Cost of Acquisition: The AO excluded capitalized interest from the cost of acquisition, computing it at Rs.1,73,57,000/-. The CIT(A) included the capitalized interest, computing the indexed cost of acquisition accordingly. The Tribunal upheld the inclusion of capitalized interest, agreeing with the CIT(A)'s computation. Conclusion: The Tribunal upheld the CIT(A)'s decision, agreeing that the land was non-agricultural on the date of conversion and that the conversion into stock-in-trade was valid. The provisions of Section 45(2) were applicable, and Section 50C did not apply to the capital gain computation for the assessment year 2000-01. The inclusion of capitalized interest in the cost of acquisition was also upheld. The appeal by the revenue was dismissed.
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