2015 (3) TMI 8 - AT - Income Tax

Conversion of land - whether the land which was converted by the assessee into stock in trade (housing plots) is an agricultural land or not? - Held that - The certificate issued by the village officer goes against the fact admitted by the assessee. Since the assessee itself admits that the land was converted into housing plots as on 19-09-2006 the same cannot remain as agricultural land for any longer. In other words, the purpose and usage of the land was converted into non agricultural land as on 19-06-2006 and part of the land was sold as on 27- 03-2007. Therefore, this Tribunal is of the considered opinion that when the assessee itself claims that the land was converted into non agricultural land as on 19-06-2006 it cannot continue as agricultural land any further. Therefore, the certificate said to be issued by the village officer has no relevance in view of the facts admitted by the assessee. Hence, there is no justification in the claim of the assessee that the land is an agricultural land. This Tribunal is of the considered opinion that the subject land is not an agricultural land. - Decided against assessee. Computation of capital gain - which is the year in which the capital gain has to be charged - year in which the conversion was made or the year in which the land was sold after the same was converted into stock-in-trade? - Held that - In the case on hand, the assessee claims that only 188 cents of and was sold in the assessment year 2007-08. No material is available on record in respect of the year in which the remaining land was sold. Therefore, the assessing officer has to ascertain when the remaining portion of the land was actually sold after the same was converted into stock in trade. The capital gain shall be charged in the year in which the land was sold after conversion into stock in trade. Accordingly, the orders of the lower authorities to that extent is set aside and the issue of charging capital gain is remitted back to the file of the assessing officer to find out the assessment years in which the land was actually sold after the same was converted into stock in trade and bring the profit on conversion of the land into stock in trade to capital gain in the assessment years in which the land was actually sold. Apart from the capital gain, the profit on sale of the land after its conversion shall also be chargeable to tax as business income in the year in which the land was sold. Therefore, the assessing officer shall ascertain the year in which the land was sold and bring the profit on sale of land also as business. - Decided in favour of assessee for statistical purposes. Disallowance u/s 14A r.w.r. 8D - Held that - As rightly contended by the ld.DR, though Rule 8D was introduced in the statute book from assessment year 2008-09, the Income-tax Act does not permit for allowance of any expenditure on income which is not chargeable to tax. Therefore, irrespective of Rule 8D, this Tribunal is of the considered opinion that the assessee cannot claim any expenditure including interest on borrowed funds for earning the exempted income. Since the availability of the liquid funds needs to be verified, this Tribunal is of the considered opinion that the assessing officer has to examine the same in the light of the contentions raised by the assessee. Accordingly, the orders of the lower authorities are set aside and the issue is remitted back to the file of the assessing officer. The assessing officer shall reexamine the issue with regard to the availability of liquid funds for making investments for earning tax free income as also the other related expenditure incurred for earning exempted income in the light of contentions raised by the assessee before this Tribunal and thereafter decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee. - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Classification of land as agricultural or non-agricultural.
2. Taxation of capital gains on conversion of land into stock-in-trade.
3. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Classification of Land as Agricultural or Non-Agricultural:
The primary issue in the appeals was whether the land purchased by the assessee and later converted into residential plots was agricultural land. The assessee argued that the land was agricultural, supported by a certificate from the village officer. However, the tribunal noted discrepancies in the survey numbers mentioned in the certificate and the resolutions passed by the assessee. The tribunal found that part of the land was sold, and the purpose of the land was changed to non-agricultural use by converting it into residential plots. Therefore, the tribunal concluded that the land could not be considered agricultural land after its conversion into residential plots.

2. Taxation of Capital Gains on Conversion of Land into Stock-in-Trade:
The tribunal examined the provisions of Section 45(2) of the Income Tax Act, which states that profits or gains arising from the transfer by way of conversion of a capital asset into stock-in-trade shall be chargeable to income-tax in the year in which such stock-in-trade is sold. The assessee claimed that capital gain should be charged in the year the land was sold, not the year it was converted. The tribunal referred to the Kerala High Court's decision in CIT vs National Tyres & Rubber Co Ltd, which supported the assessee's claim. Consequently, the tribunal remitted the issue back to the assessing officer to ascertain the years in which the land was sold and to charge the capital gain in those years.

3. Disallowance under Section 14A read with Rule 8D:
The departmental appeal for the assessment year 2008-09 involved the disallowance made by the assessing officer under Section 14A read with Rule 8D. The assessee argued that it had sufficient capital and reserves to make investments in exempt income, and therefore, no disallowance should be made. The tribunal noted that if the assessee had sufficient liquid funds, the disallowance might not be applicable. However, it was necessary for the assessee to establish the availability of such funds. The tribunal remitted the issue back to the assessing officer to verify the availability of liquid funds and to reexamine the disallowance of interest and other expenses incurred for earning exempt income.

Conclusion:
The tribunal partly allowed the appeals of the assessee and remitted the issues back to the assessing officer for further examination and appropriate action. The departmental appeal was allowed for statistical purposes, with instructions to the assessing officer to reexamine the disallowance under Section 14A in light of the assessee's contentions.