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2013 (4) TMI 480 - AT - Income TaxReassessment - Conversion of land into stock in trade - development and construction of building - the claim of the assessee of having converted the capital asset of land into stock in trade for the purpose of his business as envisaged in sec. 45(2) was not accepted by the AO as well as by the ld. CIT(A) mainly for the reason that there was no business of real estate development actually commenced or carried on by the assessee and it was a case of transfer of land as capital asset simpliciter as per the Development Agreement. - held that - The decision of Hon ble Bombay High Court in the case of Ms. Malavika Arun Somaiya (supra) is directly on the issue involved in the present case - the re-assessment made by the AO u/s. 143(3) read with sec. 147 without issuing notice u/s. 143(2) is invalid. We, therefore, cancel the said assessment and allow the additional ground raised by the assessee. A comparative analysis of the present case and the case of Vidhyavihar Containers Ltd. vs. Deputy Commissioner of Income Tax 2011 (10) TMI 240 ITAT MUMBAI decided by the Tribunal clearly shows that the material facts relating to the issue under consideration as involved in both these cases are similar in which both the sides had taken similar position. The Tribunal finally accepted the stand of the assessee for the elaborate reasons given in its order in the case of Vidhyavihar Containers Ltd. - there was a conversion of land by the assessee into stock in trade on 15-05-2002 within the meaning of sec. 45(2) and as per the said provision, the profits or gains arising from the transfer by way of such conversion were chargeable to tax as the income of the assessee under the head capital gains in the year in which the stock in trade was sold by the assessee. - Decided in favor of assessee. Determination of the year in which capital gain arising from the transfer of land by way of conversion into stock in trade is chargeable to tax. - Held that Here tribunal made the consideration on the case decided by the Co-ordinate Bench of the Tribunal in the case of Dy.CIT vs. Crest Hotels Ltd. 2000 (2) TMI 788 - ITAT MUMBAI wherein the capital asset comprising of land and building of the hotel business was converted by the assessee into stock in trade of the construction business. Tribunal hold, respectfully following the decision of the Co-ordinate Bench of the Tribunal in the case of Crest Hotels Ltd. (supra), that the capital gain on transfer of capital asset by way of conversion is chargeable to tax in assessment year 2005-06 as per the provisions of sec. 45(2). - Decided in favor of assessee. Determination of cost of acquisition of Sanpada plot for the purpose of computing long-term capital gains. - Held that - A similar issue had come up for consideration before the Co-ordinate Bench of the Tribunal in the case of Atul G. Puranik vs. ITO 2011 (5) TMI 576 ITAT , Mumbai wherein a similar plot of land was allotted to the assessee as compensation in lieu of agricultural land acquired by the Government under the same scheme called 12.5% scheme and the issue was determination of cost of acquisition of the said plot of land for the purpose of computing capital gains. The ratio of the decision of the Tribunal in the case of Atul G. Puranik is thus squarely applicable to the issue involved in the present case and respectfully following the same, we direct the AO to take the cost of acquisition of the land of the assessee for the purpose of computing capital gain at Rs.1,07,90,000/-, being the market value of the said land on the date of allotment. - Decided in favor of assessee. Dtermination of sale - Held that - Consideration of land to be taken for the purpose of computing capital gain. In the present case, the fair market value of land on the date of conversion at Rs.2,49,00,000/- was taken by the assessee as the full value of consideration for the purpose of computing capital gain and since the same was in accordance with the provisions of sec. 45(2), we are of the view that the same should be accepted. In that view of the matter, we direct the AO to adopt the fair market value of land at Rs.2,49,00,000/- as the full value of consideration for the purpose of computing capital gain as claimed by the assessee. Ground no. 4 of the assessee s appeal is accordingly allowed. - Decided in favor of assessee.
Issues Involved:
1. Validity of re-assessment under Section 143(3) read with Section 147 without issuing notice under Section 143(2). 2. Conversion of capital asset into stock in trade under Section 45(2). 3. Determination of the year in which capital gain is chargeable to tax. 4. Cost of acquisition of the land for computing long-term capital gains. 5. Determination of sale consideration for computing capital gains. Issue-wise Detailed Analysis: 1. Validity of Re-assessment under Section 143(3) read with Section 147 without issuing notice under Section 143(2): The assessee challenged the validity of the re-assessment made by the AO for assessment year 2003-04 on the grounds that no notice under Section 143(2) was issued during the re-assessment proceedings. The Tribunal noted that the Revenue did not dispute this fact. The Tribunal relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Ms. Malavika Arun Somaiya, where it was held that the absence of notice under Section 143(2) renders the re-assessment invalid. Consequently, the Tribunal canceled the re-assessment for assessment year 2003-04, rendering other grounds for that year infructuous. 2. Conversion of Capital Asset into Stock in Trade under Section 45(2): The Tribunal examined whether the assessee had converted the land into stock in trade for the purpose of real estate business. The assessee provided evidence of steps taken before entering into the Development Agreement, such as obtaining necessary approvals and certificates. The Tribunal referred to the case of Vidhyavihar Containers Ltd., where similar steps were considered sufficient to establish that the real estate business was commenced and carried on. The Tribunal concluded that the conversion of land into stock in trade on 15-05-2002 was valid under Section 45(2). 3. Determination of the Year in which Capital Gain is Chargeable to Tax: The Tribunal held that the capital gain arising from the transfer of land by way of conversion into stock in trade is chargeable to tax in the year in which the stock in trade is sold, as per Section 45(2). The sale of stock in trade was recognized by the assessee in the previous year relevant to assessment year 2005-06 when the consideration in the form of constructed area was received. The Tribunal, following the decision in the case of Crest Hotels Ltd., held that the capital gain is chargeable to tax in assessment year 2005-06. 4. Cost of Acquisition of the Land for Computing Long-term Capital Gains: The assessee had taken the cost of acquisition of the Sanpada land at Rs.1,07,90,000/-, being 83% of the market value on the date of allotment. The AO took the cost as Nil, while the CIT(A) took it at Rs.52,000/-. The Tribunal referred to the case of Atul G. Puranik, where it was held that the market value of the land on the date of allotment should be considered as the cost of acquisition. The Tribunal directed the AO to take the cost of acquisition at Rs.1,07,90,000/-. 5. Determination of Sale Consideration for Computing Capital Gains: The assessee had taken the fair market value of the land at Rs.2,49,00,000/- on the date of conversion as the full value of consideration for computing capital gain. The Tribunal, referring to Section 45(2), held that the fair market value on the date of conversion should be deemed as the full value of consideration. The Tribunal directed the AO to adopt the fair market value of Rs.2,49,00,000/- as the full value of consideration for computing capital gain. Conclusion: Both appeals of the assessee were allowed, with the Tribunal providing a detailed analysis and directions on each issue, ensuring compliance with relevant legal provisions and precedents. The Tribunal's decision was pronounced on 22nd June 2012.
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