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TMI Blog2013 (4) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... lage. The said land was subsequently acquired by the Government and the assessee was compensated in monetary terms for the said acquisition. On further requests and applications made by the assessee, he was given on lease by CIDCO two plots of land - one at Sanpada, Vashi, and the other at Nerul, Navi Mumbai - as additional compensation for the acquisition of his agricultural land. The plot of land at Sanpada, Vashi, admeasuring 4000 sq. metres was claimed to be converted by the assessee into stock into trade on 15-05-2002 for the purpose of his real estate business and the fact of this conversion was recorded by him in a Declaration-cum-Affidavit made on that day before the Notary. As per the stand taken by the assessee, the land at Sanpada, Vashi, was big and the same not being required for personal use, he decided to exploit the same for business by developing and constructing a building thereon. After the conversion of land into stock in trade, the assessee claimed to have started looking for a reputed Developer who could take up the work of development and construction as he did not possess the expertise in building construction as well as the capital required for the entire d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of assessment proceedings for assessment year 2005-06, the capital gain offered by the assessee was verified by the AO. On such verification, he found that the assessee was not having any prior business exposure or expertise or financial resources to develop the Sanpada land. He also analysed the Development Agreement entered into by the assessee with M/s. Sai Developers and held on such analysis that the land was to be developed by the Developer at his own cost and responsibility. According to the AO, the assessee did not share any responsibility or risk in the development of land and also did not have any concern over the development work. He also noted that there was no nexus between the profits or losses of the development of land and the affairs of the assessee. He, therefore, held that the assessee had ever started or conducted any business of real estate development and there was no conversion of land as capital asset into stock in trade for the purpose of the said business. He held that merely executing an affidavit before the Notary was not sufficient to support and substantiate the claim of the assessee of having converted the capital asset of land into stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment year 2003-04 completed u/s. 143(3) read with sec. 147 vide an order dated 05-12-2008. The said capital gain was also added by the AO on protective basis in the hands of the assessee in the assessment for assessment year 2005-06 completed u/s. 143(3) vide an order dated 28-12-2007. 6. Against the orders passed by the AO u/s. 143(3) read with sec. 147 for assessment year 2003-04 and u/s. 143(3) for assessment year 2005-06, the assessee preferred appeals before the ld. CIT(A). After taking into consideration the elaborate submissions made on behalf of the assessee in writing as well as the material available on record including the orders of the AO, the ld. CIT(A) agreed with the AO that there was no business of real estate development actually commenced and carried on by the assessee and there was thus no conversion of the capital asset of land into stock in trade for the purpose of real estate business as claimed by the assessee. He accordingly upheld the decision of the AO that the said land retained its character as a capital asset and profit arising from transfer thereof was chargeable to tax as capital gains in the assessment year 2003-04 since there was a transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO during the course of re-assessment. He, however, has relied on some Tribunal decisions in support of the Revenue's case that non-compliance of the provisions of sec. 143(2) would not render the re-assessment made by the AO as null and void where jurisdiction was vested in the AO by virtue of the clear provisions of sec. 147/148 itself. The ld. counsel for the assessee, on the other hand, has relied, inter alia, on the decision of Hon'ble Bombay High court in the case of CIT vs. Ms. Malavika Arun Somaiya rendered on 09-09-2008 in I.T. Appeal No.994/2008 wherein the assessment made by the AO u/s. 143(3) read with sec. 147 was held to be invalid by the Tribunal on the ground that there was no notice issued u/s. 143(2) during the course of re-assessment proceedings. The decision of the Tribunal was challenged by the Revenue by way of an appeal preferred before the Hon'ble High Court on the ground that the assessee having not filed any fresh return in response to the notice issued u/s. 148, there was no requirement of issue of notice u/s. 143(2). This contention of the Revenue, however, was not found acceptable by the Hon'ble Bombay High Court and the decision of the Tribunal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the proposed development of the property. He has also invited our attention to the NOC issued by CIDCO on 21-05-2002 as well as commencement certificate issued by NMMC on 03-08-2002 to show that even prior to the date of Development Agreement, the assessee had taken different steps in the matter of development of his land which, according to him, are sufficient to show that the business of real estate development had not only been commenced by the assessee but the same was also carried on prior to the date of Development Agreement. He has also relied, inter alia, on the decision of Co-ordinate Bench of the Tribunal in the case of Vidhyavihar Containers Ltd. vs. DCIT (ITA No.1086/Mum/2010 & ors. dated 21-10-2011) wherein a similar issue involving identical facts was considered by the Tribunal. In its order passed in the said case, the Tribunal took note of the different steps taken by the assessee in paragraph 15 and held keeping in view the said steps, which are similar to the steps taken by the assessee in the present case, that the real estate business was duly commenced and carried on by the assessee. The relevant observations recorded by the assessee in this context in parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special resolution was passed by the shareholders of the assessee company authorizing commencement of new business, namely, real estate development business in the year 1996 itself and in furtherance to the same, various steps were taken by the assessee company to make its property fit for redevelopment. The user of the land was got converted initially from industrial to commercial and then commercial to residential. Other permissions required for redevelopment of property were also sought and obtained by complying with the necessary requirements and only after taking all these steps the property was converted into stock in trade. The first phase of real estate development thus was completed by the assessee which had started from the special resolution passed by the shareholders authorizing the company to carry on the real estate development and ended with conversion of the land into stock in trade after making it fit for redevelopment. Taking into consideration all the steps taken by the assessee company in this phase spanning over the period of 6 to 8 years which very much formed part of the activity of real estate development, we are of the view that the real estate business wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the next question that arises for consideration is whether there was a conversion of its property by the assessee company into stock in trade within the meaning of section 45(2). As already noted, what section 45(2) envisages the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock in trade of a business carried on by him. In the present case, as demonstrated by the learned counsel for the assessee, the land was treated by the assessee company as stock in trade in its books of account for the year ended 31-3-2005 and going by this treatment itself, there was a transfer of the land by way of conversion by the assessee into stock in trade. Besides this, a resolution was also passed by the Board of Directors of the assessee company on 29th May, 2004 converting the land into stock in trade. The Revenue authorities, however, have not accepted this contention on the ground that the final order granting approval to the redevelopment of assessee's property was issued by the Collector only on 16-05-2005. One of the contentions raised by the learned DR in this regard is that the assessee was having only occupancy and leasehold rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year in which the stock in trade was sold by the assessee. We, therefore, decide this issue in favour of the assessee and allow ground no. 1 of the assessee's appeal. 16. The next issue raised in ground no. 2 of assessee's appeal relates to the determination of the year in which capital gain arising from the transfer of land by way of conversion into stock in trade is chargeable to tax. 17. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. As already held by us, the profit or gain arising from the transfer of capital asset i.e. land by way of conversion is chargeable to tax as the income of the assessee under the head "capital gains" of the year in which the said land now held as stock in trade was sold by the assessee. It is observed a similar issue had come up for consideration before the Co-ordinate Bench of the Tribunal in the case of Dy.CIT vs. Crest Hotels Ltd. (78 ITD 213) wherein the capital asset comprising of land and building of the hotel business was converted by the assessee into stock in trade of the construction business. The said stock in trade was sold by the assessee in the later year and capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme" and the issue was determination of cost of acquisition of the said plot of land for the purpose of computing capital gains. In this regard, the Tribunal noted that the market value of the plot of land as on the date of allotment is to be considered as full value of consideration at the time of computing capital gain on the first transaction. It was held that once a particular amount was considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. It was held that the market value of the plot of land on the date of allotment thus shall constitute the cost of acquisition for the purpose of computing capital gain when it was subsequently sold or transferred. The ratio of the decision of the Tribunal in the case of Atul G. Puranik is thus squarely applicable to the issue involved in the present case and respectfully following the same, we direct the AO to take the cost of acquisition of the land of the assessee for the purpose of computing capital gain at Rs.1,07,90,000/-, being the market value of the said land on the date of allotment. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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