2015 (11) TMI 386 - HC - Income Tax

Computation of income arising from the conversion/treatment of land into stock-in- trade of construction business and profits thereon - invoking of section 45(2) accepted by ITAT - Held that - The fact that the land and its buildings were treated by the respondent-assessee as capital asset as, according to them, the project was not completed loses all significance, once the Revenue does not accept the same and proceeds to hold that the property had been sold in the subject assessment year and the same has to be subjected to tax. On the aforesaid finding, the issue of conversion of a capital asset into stock-in-trade would arise and require consideration. The impugned order on facts has found the land was originally a capital asset which has later been converted into stock-in-trade. Thus, section 45(2) of the Act is applicable. However, the capital gains on conversion of capital assets into stock-in- trade is payable only in the year in which the assessee ultimately sells such stock-in-trade yet for purpose of computing capital gains the date of conversion would have to be determined. This exercise has to be carried out by the Assessing Officer after considering the evidence to be led before it. Thus, no fault can be found with the above direction of the Tribunal as it is a consequence of the finding of fact arrived at by the Tribunal that the land in question was originally held as capital asset and was later converted into stock-in-trade. - Decided against revenue. Concealed income on account of certain cash transactions - evidence found during the course of survey under section 133A - Tribunal reached a finding of fact on examination of documents that there is no corroboration to the stand of the Assessing Officer that there was cash element of ₹ 27.31 lakhs involved in sale of the flat at ₹ 2.11 crores - Held that - The above findings of the Tribunal are a finding of fact and the lower authorities without any basis drew an inference that an amount of ₹ 27.31 lakhs was the amount received in cash by the respondent- assessee. We find that the aforesaid conclusions reached by the Tribunal is a possible and reasonable view. Thus, no substantial question of law arises for our consideration. - Decided against revenue.

Summary

Issues:
1. Interpretation of section 45(2) of the Income-tax Act for income arising from land conversion.
2. Determination of the year of conversion of land into stock-in-trade.
3. Onus of proof on Assessing Officer regarding cash component in sale transactions.

Analysis:

Issue 1 - Interpretation of section 45(2) of the Income-tax Act:
The respondent-assessee, engaged in property development, initially claimed no sale of premises during the relevant assessment year. However, the Assessing Officer found undisclosed income, leading to an appeal. The respondent argued that a portion of the undisclosed income should be treated as capital gains under section 45(2) due to land conversion into stock-in-trade. The Commissioner of Income-tax (Appeals) and the Tribunal differed in opinion. The Tribunal, based on historical evidence and permissions, held that the provisions of section 45(2) were applicable, emphasizing the conversion of the land from a capital asset to stock-in-trade. The Tribunal's decision was upheld, as the land was originally acquired for a hotel project and later utilized for construction business, justifying the application of section 45(2).

Issue 2 - Determination of the year of conversion of land into stock-in-trade:
Regarding the date of conversion into stock-in-trade, the respondent-assessee claimed 1993, while the Revenue argued for 1989. The Tribunal remanded this issue to the Assessing Officer for evidence-based determination. The Tribunal's decision was supported, highlighting the necessity to ascertain the conversion date for computing capital gains accurately. The Tribunal's directive was deemed appropriate, considering the factual finding that the land was initially a capital asset converted into stock-in-trade.

Issue 3 - Onus of proof on Assessing Officer for cash component in sale transactions:
In a separate matter, the Assessing Officer alleged a cash component in a sale transaction based on documents found during a survey. Despite the denial by the respondent, the Assessing Officer added the amount to the undisclosed income. However, the Tribunal, after examining the sale agreement and related documents, found no corroboration for the cash element. The Tribunal's factual findings were upheld, dismissing the Assessing Officer's inference of a cash transaction. The Tribunal's decision was considered reasonable, leading to the dismissal of the issue.

In conclusion, the High Court upheld the Tribunal's decisions on all three issues, emphasizing the factual basis and reasonableness of the Tribunal's findings. No substantial questions of law were identified, leading to the dismissal of the appeal.