2015 (3) TMI 400 - AT - Income Tax

Capital gains on account of transfer of capital asset - whether on the date of agreement, the impugned property at Bangalore was not a capital asset within the meaning of section 2(14) of the Income Tax Act as the same had been converted into stock-in-trade? - Held that - A.O. s action for computing capital gain on the basis of Development Agreement is not well founded and as such there was no transfer within the meaning of section 2(47)(v) and 2(47)(vi) of the Act. With regard to A.O. s objection that Godrej Properties Ltd. had acted upon the Development Agreement by constructing its site office and also entered into contract agreement with the contractor, we found that GPL had merely constructed site office but not carried out any development activity on the land owned by the assessee in the previous year relevant to A.Y.2008-09. Similarly, GPL had not assigned any contract or appointed M/s Ashed Properties P. Ltd. as contractor pursuant to DA. In fact, after evaluating the market conditions, GPL found that the project as envisaged by the assessee was not viable and hence, DA was annulled. The treatment given in the books of account is not a sole factor to determine the year in which land was converted into stock-in-trade but series of events undertaken, facts and circumstances of the case which are very much relevant while considering the year in which capital asset is converted into stock-in-trade . Thus Development Agreement has to be harmoniously construed with reference to the related facts and circumstances of the case. Before reaching to the conclusion, we cannot forget the fact that the ownership and possession of land were always retained with the assessee and the same has been expressly stated so in clause 6 of the Development Agreement. The assessee has not received any consideration from Godrej Properties Ltd. nor was there any assurance about profit given by the Godrej Properties Ltd. in the project, the project had not materialized and ultimately Development Agreement was annulled in 2011. If we analyse all these facts, we can safely conclude that there was neither any transfer of land to Godrej Properties Ltd. nor any gains arisen to the assessee during the relevant A.Y. 2008-09 under consideration. The ld. D.R. s contention that assessee had entered into sham transaction, we found that neither it is the case of A.O. nor that of ld. CIT(A) that the assessee has entered into any sham transaction to avoid any tax. Accordingly, this contention of the ld. D.R. cannot be accepted at this juncture. Even otherwise, if the Development Agreement is to be ignored, there is no transfer and no income as the A.O. as well as ld. CIT(A) have computed and taxed the assessee on the basis of Development Agreement only. A.O. is directed to delete the capital gains computed in the hands of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the land owned by FK is a 'capital asset' or was converted into stock-in-trade.
2. Whether there was a transfer of land within the meaning of provisions of section 2(47)(v) and section 2(47)(vi) of the Income Tax Act.
3. Whether any income can be said to have accrued to FK when the amount of sale consideration could not be determined as per the terms of the Development Agreement (DA).

Issue-wise Detailed Analysis:

1. Whether the land owned by FK is a 'capital asset' or was converted into stock-in-trade:
The Tribunal examined various documents and steps undertaken by the assessee to determine if the land was converted into stock-in-trade. The land was initially agricultural and converted to non-agricultural use in 2005. The assessee undertook several steps including filing applications with the Bangalore Development Authority (BDA), incurring expenses on construction of a compound wall, and seeking various approvals for residential development. The Tribunal found that these steps collectively established that the land was converted into stock-in-trade in April 2005, not in the financial year 2007-08 as claimed by the Assessing Officer (AO). The Tribunal noted that mere entries in the books of account are not conclusive, and the true nature of the transaction must be determined from the total facts and circumstances of the case.

2. Whether there was a transfer of land within the meaning of provisions of section 2(47)(v) and section 2(47)(vi) of the Income Tax Act:
The Tribunal held that for section 2(47)(v) to apply, the land must be a 'capital asset'. Since the land was converted into stock-in-trade in 2005, it no longer remained a capital asset. The Tribunal also found that the Development Agreement (DA) did not result in a transfer of possession as per section 53A of the Transfer of Property Act, 1882, because the DA was not registered, and the possession of the land continued with the assessee. The Tribunal noted that the AO had wrongly invoked section 2(47)(v) and section 2(47)(vi) because these sections apply to capital assets and specific entities like cooperative societies, companies, or AOPs, which were not applicable in this case.

3. Whether any income can be said to have accrued to FK when the amount of sale consideration could not be determined as per the terms of the Development Agreement (DA):
The Tribunal found that no income accrued to the assessee as the consideration from the DA was not ascertainable. The DA provided only a benchmark for sharing profits and adjusting the deposit of Rs. 13.75 crores paid by Godrej Properties Ltd. (GPL). The Tribunal noted that no villas were constructed or sold pursuant to the DA, and the DA was annulled in 2011. Therefore, there was no transfer of land or accrual of income in the financial year 2007-08. The Tribunal directed the AO to delete the capital gains computed in the hands of the assessee.

Conclusion:
The Tribunal concluded that the land was converted into stock-in-trade in 2005, there was no transfer of land as per section 2(47)(v) and section 2(47)(vi), and no income accrued to the assessee from the DA. The appeals of the assessee were allowed, and the AO was directed to delete the capital gains.