2017 (10) TMI 925 - AT - Income Tax

Addition on long term capital gain - valuation of assets - conversion of partnership firm into company - Held that - Since the partnership firm was succeeded by the assessee company, the cost of acquisition was determined as on 1.4.1981 in terms of provisions of section 49(1)(iii)(a) read with section 55(2)(b)(ii) as the partnership firm acquired the land prior to 1.4.1981. Further, the ld AR drawn our attention to the show-cause notice issued by ld CIT u/s 263 and subsequent order dropping the said proceedings and submitted that the valuation as on 1.4.1981 so determined by the assessee at ₹ 1,18,77,264/- has been accepted by the ld CIT and there is nothing in the reassessment order where the AO has again disputed the said value. The valuation so determined as on 1.4.1981 based on the valuation report has thus not been disputed by the Revenue nor any other DVO valuation have been brought on record. and we accordingly confirm the findings of the ld CIT(A) in this regard. Further, since the stock-in-trade has been finally sold, the profit on sale of such stock-in-trade is to be brought to tax as business income in the year under consideration. As per the sale deed dated 18.07.2005, the land was sold to M/s Suncity Projects Pvt. Ltd. for a consideration of ₹ 7,57,00,000/- which was duly credited in the profit/loss account and offered to tax in the return of income after taking into consideration stock-in-trade of ₹ 5,65,58,400 and other business expenses. The ld. CIT(A) has also returned a finding that the assessee has offered a net profit of ₹ 1,13,02,091/- as business income in the return of income which has been accepted by the Revenue in the original assessment proceedings. In light of above discussions and in the entirety of facts and circumstances of the case, we donot see any infirmity in the order of the ld CIT(A) and the same is hereby confirmed. The ground of appeal of the Revenue is thus dismissed. Disallowance of amount paid to JVVNL on account of compounding charges - Held that - As per letter dated 4.1.2006 of JVVNL, the assessee has paid an amount of ₹ 6,90,922 through cheque and an amount of ₹ 4,39,262 has been adjusted against bank guarantee, in total ₹ 11,30,184 has thus been paid by the assessee. It consists of ₹ 470,184 towards past dues at on the date of disconnection and fuel surcharge arrears and interest on late payment and balance towards the compounding charges relating to theft case. Accordingly, electricity dues totaling to ₹ 470,184 is hereby allowed as settled and crystallized during the year and the balance is sustained on account of infraction of law.

Summary

Issues Involved:
1. Deletion of addition on account of long term capital gain.
2. Validity of notice issued under section 148 of the Income Tax Act, 1956.
3. Disallowance of ?17,90,922/- paid to JVVNL on account of compounding charges.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Long Term Capital Gain:
The Revenue's appeal contested the deletion of an addition of ?7,82,45,942/- made by the Assessing Officer (AO) on account of long-term capital gain. The AO had issued a notice under section 148, concluding that the income from long-term capital gains had escaped taxation. The AO calculated the sales consideration under section 50C based on the valuation determined by the DVO and Sub-Registrar, and computed the indexed cost of acquisition at ?55,910/-, bringing the long-term capital gains to ?7,82,45,942/-.

The assessee argued that the land was converted into stock-in-trade in AY 2005-06, valued at ?5,65,58,400/-. The AO's application of section 50C was challenged, as the land was already converted into stock-in-trade, and the capital gain/loss had accrued in AY 2005-06. The CIT(A) accepted the assessee's arguments, stating that the provisions of section 50C were not applicable since the land was held as stock-in-trade. The CIT(A) also noted that the assessee had already offered the difference of ?1,13,02,091/- as business income, which was accepted by the Revenue in the original assessment, and the AO's action amounted to double addition.

The Tribunal confirmed the findings of the CIT(A), holding that the capital asset had been converted into stock-in-trade, and the profits on the sale of such stock-in-trade constituted business income, not short-term capital gain. The Tribunal also upheld the determination of the cost of acquisition as on 1.4.1981, invoking the provisions of section 49(i)(iii)(a) read with section 55(2)(b)(ii). The Tribunal dismissed the Revenue's appeal.

2. Validity of Notice Issued Under Section 148 of the Income Tax Act, 1956:
The assessee's cross-objection challenged the validity of the notice issued under section 148. However, since the Tribunal had already decided the matter on merit, this issue became academic and was not adjudicated.

3. Disallowance of ?17,90,922/- Paid to JVVNL on Account of Compounding Charges:
The assessee contested the disallowance of ?17,90,922/- paid to JVVNL, which included compounding charges. The assessee argued that the payment was made as per JVVNL's letter dated 04.01.2006, and the liabilities had crystallized during the year. The CIT(A) noted that the compounding charges included a penalty for infraction of law and were not allowable as expenditure.

The Tribunal partially allowed the cross-objection, allowing the electricity dues of ?4,70,184/- as settled and crystallized during the year, but sustaining the balance on account of infraction of law.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection, confirming the deletion of the addition on account of long-term capital gain and allowing part of the disallowance related to JVVNL charges. The validity of the notice under section 148 was not adjudicated as it became academic.