2023 (2) TMI 794 - AT - Income Tax

Computation of LTCG - provisions of section 2(47)(v) applicability - assessee s property is converted as stock-in-trade - CIT(A) considered the arbitral award and noted that the assessee had to sell only 40 grounds and 1896 sq.ft. for a consideration and not the entire land for the consideration stated in the sale agreement - HELD THAT - Once the property is converted into stock-in-trade by the assessee and which is undisputed fact and not disturbed by Revenue by rejecting the method of accounting adopted, the Revenue cannot assess the same as capital gains and this is to be assessed as business income. Even the sale is not compete and even the sale deed is not executed in this case till date as confirmed by the ld.AR for the assessee by making statement at bar. He made categorical statement that assessee is yet to transfer the land by executing sale deed. CIT(A) has erred in upholding the part consideration as capital gains qua 40 grounds and 1896 sq.ft. for a sale consideration of Rs.170 crores. We reverse the order of CIT(A) and allow this appeal of assessee. Consequently, the appeal of Revenue is dismissed.

Issues Involved:
1. Applicability of Section 2(47)(v) of the Income-tax Act, 1961.
2. Computation of capital gains for the property 'Firhaven'.
3. Conversion of property into stock-in-trade.
4. Validity of the arbitral award and its impact on the computation of capital gains.
5. Compliance with Section 53A of the Transfer of Property Act, 1882.

Detailed Analysis:

1. Applicability of Section 2(47)(v) of the Income-tax Act, 1961:
The core issue in both appeals was whether the provisions of Section 2(47)(v) of the Act applied to the property 'Firhaven'. The Assessing Officer (AO) argued that the possession of the entire property was handed over to AEPL, thereby constituting a transfer under Section 2(47)(v). The CIT(A) upheld this view partially, stating that the conditions for transfer were met for 40 grounds and 1896 sq.ft. of the property, thus making it liable for capital gains tax.

2. Computation of Capital Gains for the Property 'Firhaven':
The CIT(A) directed the AO to recompute the capital gains by considering the sale consideration of Rs.170 crores for 40 grounds and 1896 sq.ft., as per the arbitral award. The AO had originally computed the capital gains based on the entire sale consideration of Rs.380 crores for 79 grounds and 2222 sq.ft. The CIT(A) noted that the arbitral award stipulated the sale of only a portion of the property for Rs.170 crores, and thus, the capital gains should be computed accordingly.

3. Conversion of Property into Stock-in-Trade:
The assessee argued that the property 'Firhaven' was converted into stock-in-trade w.e.f. 25.03.2016, and thus, any gains should be assessed under the head 'business income' rather than 'capital gains'. The Tribunal noted that this conversion was not disputed by the Revenue and should be taken into account. The Tribunal emphasized that once the property is converted into stock-in-trade, it cannot be taxed under capital gains.

4. Validity of the Arbitral Award and Its Impact on the Computation of Capital Gains:
The arbitral award dated 19.03.2018 and the memorandum of compromise entered on 10.03.2018 were crucial in determining the quantum of land transferred and the sale consideration. The CIT(A) relied on these documents to conclude that only 40 grounds and 1896 sq.ft. were transferred for Rs.170 crores. The Tribunal upheld this view, noting that the arbitral award and the memorandum of compromise were binding and should be considered for computing the capital gains.

5. Compliance with Section 53A of the Transfer of Property Act, 1882:
The AO and the CIT(A) considered whether the transaction fell under Section 53A of the Transfer of Property Act, which deals with part performance of a contract. The Tribunal referred to the Supreme Court's decision in the case of PCIT vs. Chuni Lal Bhagat, which clarified that Section 53A requires registration of the agreement for it to be considered a transfer. Since the sale deed was not executed, the Tribunal concluded that the transaction did not fall under Section 53A, and thus, the provisions of Section 2(47)(v) of the Act were not applicable.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, concluding that the property 'Firhaven' was converted into stock-in-trade and should be assessed under 'business income'. Consequently, the appeal filed by the Revenue was dismissed. The Tribunal directed the AO to recompute the capital gains based on the sale consideration of Rs.170 crores for 40 grounds and 1896 sq.ft., as per the arbitral award. The Tribunal emphasized that the transaction did not constitute a transfer under Section 2(47)(v) of the Act, as the sale deed was not executed.

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