2023 (3) TMI 1139 - AT - Income Tax

Correct head of income - Profit derived from transfer of property under the head capital gains or business income - reasons given by the AO to assess consideration received for transfer of property under the head capital gains, because the assessee could not justify claim of stock in trade in the books of accounts with any evidence - HELD THAT - The intent of the assessee when the property has been purchased was to commercially exploit the property keeping in mind the locational advantage of the property - assessee had also made clear its intention by recording purchase of property as stock in trade in the books of accounts for the relevant assessment years. Therefore, assessee has rightly declared profit derived from transfer of property under the head profit and gains of business and profession. It was only the AO by wrong appreciation of facts has assessed profit derived from sale of property under the head capital gains by holding that income declared by the assessee under the head profit and gains from business or profession is afterthought. Observations of the AO is nothing but suspicion and surmise, but not backed by any evidence. On the other hand, the evidences filed by the assessee clearly suggests that the impugned property sold for the assessment year is a stock in trade and profit derived from transfer of property is assessable under the head profit and gains from business or profession. AO and the CIT(A) completely erred in assessing profit derived from transfer of property under the head capital gains. Application of provisions of section 50C - In this case, what was transferred by the assessee is a stock in trade, but not a capital asset. Therefore, we are of the considered view that provisions of section 50C cannot be applied when asset transferred is not a capital asset. Thus, we are of the considered view that the AO and CIT(A) erred in applying provisions of section 50C of the Act and determination of full value consideration to compute short term capital gains from transfer of property. Thus, we direct the AO to delete additions made towards computation of short term capital gains from transfer of property. Appeal filed by the assessee is allowed.

Issues Involved:
1. Validity of the assessment order under Sec. 143(3) of the Income Tax Act.
2. Adoption of the cash system of accounting by the assessee.
3. Treatment of the land as a capital asset versus stock in trade.
4. Application of Section 50C of the Income Tax Act.
5. Ex-parte disposal of the appeal by the Commissioner of Income Tax (Appeals).
6. Binding nature of judicial precedents on the Assessing Officer.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order for AY 2007-08 was arbitrary, against the law, and contrary to the facts of the case. The Tribunal noted that the assessment was reopened under Section 147 due to the non-disclosure of capital gains from the sale of property. The assessee had not filed the return of income under Section 139(1) and only did so in response to the notice under Section 148, declaring a total income of Rs. 1,39,420/-. The Tribunal upheld the reopening of the assessment as valid.

2. Adoption of Cash System of Accounting:
The assessee argued that the Assessing Officer (AO) erred by ignoring the evidence that the books of accounts were maintained under the cash system of accounting. The AO rejected this claim, stating that the change in the accounting system was an afterthought and not substantiated with evidence. The Tribunal agreed with the AO, noting that the assessee did not provide a valid reason for the change in the accounting system and had not mentioned the method of accounting in previous scrutiny proceedings.

3. Treatment of Land as Capital Asset vs. Stock in Trade:
The AO treated the land as a capital asset and invoked Section 50C, computing short-term capital gains. The assessee contended that the land was purchased for commercial exploitation and shown as stock in trade in the books of accounts. The Tribunal found that the assessee had indeed shown the property as stock in trade and provided evidence of intent for commercial exploitation. The Tribunal concluded that the profit derived from the transfer of property should be assessed under the head "profits and gains from business or profession" and not as capital gains.

4. Application of Section 50C:
The AO applied Section 50C, adopting the market value of Rs. 3 crores as per the Sub-Registrar, instead of the sale consideration of Rs. 95 lakhs. The Tribunal held that Section 50C applies to capital assets, not stock in trade. Since the property was treated as stock in trade, the provisions of Section 50C were not applicable. The Tribunal directed the AO to delete the additions made under Section 50C.

5. Ex-parte Disposal by CIT(A):
The assessee argued that the CIT(A) disposed of the appeal ex-parte without considering the submissions and evidence. The Tribunal did not specifically address this issue in the judgment, focusing instead on the substantive issues related to the assessment and treatment of the property.

6. Binding Nature of Judicial Precedents:
The assessee contended that the AO failed to appreciate the binding nature of judicial precedents. The Tribunal did not explicitly discuss this issue but implicitly addressed it by evaluating the AO's and CIT(A)'s adherence to legal principles and evidence.

Conclusion:
The Tribunal allowed the appeal, directing the deletion of additions made towards the computation of short-term capital gains from the transfer of property. The Tribunal concluded that the property was stock in trade, and the profit should be assessed under "profits and gains from business or profession," not as capital gains. The provisions of Section 50C were deemed inapplicable.

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