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2015 (7) TMI 48 - AT - Income TaxCapital gain accrued to the assessee on transfer of land - Land initially held as capital asset into stock-in-trade and later on flats constructed thereon under project development agreement were sold to different buyers - Held that - As per project development agreement, the possession was given for construction/development of project with certain conditions stipulated in the agreement. Whatever amount was received, it was simply interest free advance to meet certain expenses to be borne by the assessee in order to discharge certain responsibilities conferred upon it through the agreement. The said advance would be refundable at different phases stipulated in the agreement. Therefore, in the light of judgment Chaturbhuj Dwarkadas Kapadia vs. CIT 2003 (2) TMI 62 - BOMBAY High Court we are of the view that there was no transfer of possession of the land in favour of the developer, M/s Arif Industries Ltd. to attract provisions of section 2(47)(v) of the Act. Therefore, capital gain would only be chargeable in the years in which stock-in-trade would be sold. Therefore, we find ourselves in agreement with the order of the ld. CIT(A) who has rightly dealt with the issue. Accordingly we confirm the same. Cost of land as on 1.4.1981 adopted by the Assessing Officer for computing the capital gain accrued to the assessee on account of conversion of capital asset into stock-in-trade - Held that - The fair market value determined by the registered valuer is not correct. On the other hand, the Assessing Officer has adopted the circle rate as on 1.4.1981 without looking to the fact that the assessee has filed the registered valuer s report to determine the fair market value of the land as on 1.4.1981. We find force in the contention of the assessee that the Assessing Officer is not expert in the field of determining the value of land, therefore, he should have made reference to the DVO to determine the value of land as on 1.4.1981, but he did not do so. He adopted the circle rate as fair market value of land as on 1.4.1981 ignoring the registered valuer s report submitted by the assessee and computed the long term capital gain. The approach adopted by the Assessing Officer does not appear to be correct. Since the market value of the land as on 1.4.1981 was not determined correctly either by the assessee or the Assessing Officer, this issue requires a fresh adjudication by the Assessing Officer. Accordingly, we set aside the order of the ld. CIT(A) in this regard and restore the matter to the file of the Assessing Officer with a direction to readjudicate the issue afresh after determining the fair market value of the land as on 1.4.1981. Since the assessee has filed the registered valuer s report and disputed the circle rate, the Assessing Officer may make reference to the DVO in order to determine the fair market value of the land for the purpose of long term capital gain. - Decided in favour of assessee for statistical purposes. Disallowance made under section 14A - Held that - Undisputedly, in the instant case, the Assessing Officer has not recorded any objective satisfaction with regard to the correctness of the accounts relating to dividend income of the assessee. He straightaway computed the disallowance as per provisions of section 14A of the Act read with per ruled 8D of the rules. Therefore, we are of the view that invocation of provisions of section 14A of the Act without recording an objective satisfaction is not proper, therefore, we set aside the order of the ld. CIT(A) in this regard and delete the addition of the disallowance made under section 14A of the Act. - Decided in favour of assessee.
Issues Involved:
1. Assessment year in which capital gain accrued on transfer of land converted into stock-in-trade. 2. Determination of the cost of land as on 1.4.1981 for computing capital gain. 3. Disallowance under section 14A of the Income Tax Act. Detailed Analysis: 1. Assessment Year for Capital Gain on Transfer of Land: The primary issue was the assessment year in which the capital gain accrued to the assessee on the transfer of land initially held as a capital asset and later converted into stock-in-trade. The Revenue argued that the capital gain should be assessed in the year the project development agreement was entered into, i.e., the assessment year 2004-05. The assessee contended that the capital gain should be assessed in the year the stock-in-trade (flats) was actually sold, i.e., the assessment year 2008-09. The Tribunal upheld the CIT(A)'s view that the capital gain on conversion of land into stock-in-trade should be assessed in the year in which the stock-in-trade is sold, as per section 45(2) of the Income Tax Act. The Tribunal noted that the assessee did not receive any consideration for handing over the possession of the property to the developer, and the possession was handed over merely for construction purposes. The Tribunal concluded that there was no transfer of possession of the land to attract the provisions of section 2(47)(v) of the Act. 2. Determination of Cost of Land as on 1.4.1981: The second issue was the correct valuation of the land as on 1.4.1981 for computing capital gains. The assessee had adopted a deemed cost based on a valuation report by a government-approved valuer, which was based on the auction rate of nearby land in 1985. The Assessing Officer (AO) had rejected this valuation and adopted the circle rate as on 1.4.1981. The Tribunal found that the AO had not provided a valid reason for rejecting the valuation report and had not made a reference to the Departmental Valuation Officer (DVO) under section 55A of the Act. The Tribunal noted that the valuation report was accepted in earlier assessment years. However, the Tribunal also observed that the registered valuer had not correctly scaled down the value of the land from 1985 to 1981. Therefore, the Tribunal set aside the CIT(A)'s order and remanded the matter to the AO to re-determine the fair market value of the land as on 1.4.1981, possibly by making a reference to the DVO. 3. Disallowance under Section 14A: The third issue was the disallowance made by the AO under section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules, for expenses related to earning exempt income (dividends). The AO had made a disallowance without recording any objective satisfaction regarding the correctness of the assessee's accounts. The Tribunal held that the AO had not recorded any objective satisfaction with respect to the correctness of the accounts relating to the dividend income, which is a prerequisite for invoking Rule 8D. The Tribunal referred to various judicial pronouncements and concluded that the AO must record an objective satisfaction before making a disallowance under section 14A. Consequently, the Tribunal set aside the CIT(A)'s order and deleted the disallowance made by the AO. Conclusion: The Tribunal dismissed the Revenue's appeal regarding the assessment year for capital gains and upheld the CIT(A)'s order that capital gains should be assessed in the year the stock-in-trade is sold. The Tribunal remanded the issue of determining the cost of land as on 1.4.1981 back to the AO for fresh adjudication. The Tribunal also deleted the disallowance made under section 14A due to the AO's failure to record objective satisfaction.
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