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TMI Blog2018 (1) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ock-in- trade by the owner and in both the situations, the emphasis is on the treatment given by the owner of the capital asset. Thus, till the time the owner himself either converts the capital asset into stock-in-trade, the provisions of section 45(2) of the Act will not be attracted. Thus, what is provided is that only positive act/conduct of the owner assessee in applying/treating a capital asset into stock-in-trade is relevant to determine the applicability of section 45(2) of the Act. We also agree with the assessee’s contention that since the assessee had applied for obtaining permission from the Ghaziabad Development Authority (GDA), Ghaziabad for conversion of industrial land into residential land during financial year 2002-03, the land cannot be treated as converted in the financial year 2002-03 as in terms of section 45(2) of the Act, the conversion takes place only by the voluntary act of the assessee for such conversion and a mere act of seeking permission for conversion of land use will not come within the definition of ‘transfer’. Therefore we hold that the industrial land was held as capital asset till assessment year 2007-08 and the same was converted into stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .V. MEHROTRA, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Appellant : Shri Rohit Jain, Rohit Garg, Advs For The Respondent : Shri S. K. Jain, DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER These four appeals have a common issue and were heard together. For the sake of convenience, they are being disposed of through this common order. ITA 1789/Del/2011 is appeal filed by the assessee for AY 2007-08 whereas ITA 2163 is the cross appeal by the Department. ITA 4579/Del/2011 has been preferred by the assessee for AY 08-09 whereas ITA 5337/Del/2011 is the cross appeal be the Department. 2.0 The brief facts of the case are that the assessee owned 77,638 sq. yards of industrial land since 1940-41 at G.T. Road, Ghaziabad. The land was always shown as capital asset by the assessee since beginning in the books of accounts. It is on this very land, that the Ghaziabad Vanaspati Unit of the assessee was located. On closure of the said Ghaziabad Vanaspati unit, the assessee, pursuant to a scheme of rehabilitation in the financial years 2001 -02/2002-03, decided to sell surplus land of the said unit. Based on the aforesaid, from the financial year 2002-03, rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopt the circle rate of ₹ 100/- per sq. yd. for the determination of fair market value on 1.4.1981. 2.03 Now, both, the assessee as well as the Department, have approached the ITAT. 2.04 The assessee is challenging the action of the Ld. CIT (A) for both the assessment years under appeal in confirming the action of the AO in holding that the assessee had converted the impugned industrial land into stock in trade during FY 2002-03 thereby attracting the provisions of section 45(2) of the Act in that year as against the assessee's claim that the conversion took place in the financial year 2006-07. The assessee is also challenging the action of the Ld. CIT (A) in directing the AO to adopt the Fair Market Value as on 01/04/1981 at ₹ 100/-sq. yard as against ₹ 190/- per sq. yard adopted by the assessee for the purpose of computation of capital gains. 2.05 The Department is challenging the action of Ld. CIT (A) in both the years under appeal in directing the AO to take the Fair Market Value (FMV) of land on 01/04/1981 @ ₹ 100/- per sq. yard as against ₹ 20/- per sq. yard adopted by the AO. 3.0 The Ld. AR submitted that the primary issue that arises for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial Year Wealth Tax Paid 2003-04 13,47,557/- 2004-05 11,20,227/- 2005-06 13,55,765/- (viii) No wealth tax is payable on 'stock-in-trade and, therefore, had the land been treated/ held as 'stock in trade' by the assessee during the relevant years, the assessee would not have been required to pay such huge wealth tax in the relevant years. (ix) The aforesaid position is not at all disputed and the above returns have also attained finality. 3.01 The Ld. AR further submitted that the facts to demonstrate that the Industrial Land was converted into "stock in trade" in the financial year 2006-07 are as under:- (i) Object clause of the Memorandum of Association was amended in September, 2005 to include 'real estate' as one of the main object vide clause (ii). (ii) The approval of the shareholders was taken for amendment of the Memorandum of Association and also for the commencement of business of real estate under section 149(2A) of the Companies Act, 1956. (iii) In the audited financial statements for the relevant Assessment Year 2007-08, the assessee had shown its results separately for 'real estate'. (iv) Note given in Note 12 of Schedule O - Notes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 45(2) of the Act is applicable. 33. Section 45(2), as referred hereinabove, provides the profit or gain arising from the transfer by way of conversion by the owner of the capital asset into, or its treatment by him as, stock-in- trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock- in- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. 34. Section 45(2) is applicable in a situation where there is a transfer by way of conversion by the owner of a capital asset into stock-in-trade of a business or owner has treated such capital asset as stock-n-trade of a business. To make the provision application, there must be a positive act on the part of the owner of the capital asset to transfer the asset by way of conversion into stock-in-trade or treating such capital asset as stock-in-trade of a business. In the absence of such a positive act on the part of the owner of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that either of the following situation must exist: a) capital asset held by the owner is converted by him into stock in trade; or b) capital asset is treated as stock in trade by the owner. 3.08 It was further submitted that in both the aforesaid situations, the emphasis is on the treatment given by the owner of the capital asset. Thus, till the time the owner himself either converts the capital asset into stock in trade or treats the capital asset as stock in trade, the provisions of section 45(2) of the Act are not at all attracted. The Ld. AR submitted that this contention is fortified by use of the expression "conversion by the owner" and "its treatment by him" in section 45(2) of the Act. The words "by the owner" and "by him" clearly refer to a positive act on the part of the owner of either converting his capital asset into stock in trade or treating the same as such. The Ld. AR reiterated that for section 45(2) to apply what is relevant and conclusive is the conduct of the owner of the capital asset and nothing else. If the assessee/owner has not converted/treated his capital asset into as stock in trade in any particular year, then it will not be open to the assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intention, at that time, to start new venture/ business of real estate. 3.012 The Ld. AR also drew our attention invited to the following decisions wherein the Courts have held that the mere fact that the assessee took certain steps for selling bigger plot to fetch higher price, including seeking relevant permissions, would not mean that the gain realized was business income: Deep Chandra and Co. v. CIT : 107 ITR 716 (All.) CIT v. Kasturi Estates (P.) Ltd: 62 ITR 578 (Mad.) CIT vs. MLM Mahalingam Chettiar: 107 ITR 236 (Mad.) CIT vs. A. Mohammed Mohideen: 176 ITR 393 (Mad.) CIT vs. Suresh Chand Goyal: 298 ITR 277 (MP) Kaur Singh vs. CIT: 144 ITR 756(P&H) Asha Housing Enterprises vs. DCIT: 127 ITD 94 (Bang.) 3.013 Our attention was also invited to the following decisions wherein it has been held that to determine the nature of an asset, one must look at the intention of an assessee at the time of purchase of an asset-whether the same was to be held as "capital asset" or as "stock-in-trade":- CIT v. Mohakapur Ice and Cold Storage: 281 ITR 354~(A1I.) Bhogilal H. Patel v. CIT: 74 ITR692 (Bom.) CIT v. Anandlal Becharlal & Co.: 107 ITR 677 (Bom.) CIT v. B.K. Bhau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept the second step adopted by the registered valuer in increasing the value of land on account of lower saleable area. 3.13 It was submitted by the Ld. AR that on perusal of the aforesaid letter of the UPSIDC, it would be seen that even though the rate of industrial land has been mentioned at ₹ 20/- per sq. yard, yet it was clearly stated that the land allotted to the assessee does not come under the purview of the industrial area for which the said rate was mentioned. Furthermore, the land of the assessee is a freehold land and in the above letter of the UPSIDC, it has not at all been stated as whether the rate of ₹ 20/- per sq. yard is applicable for leasehold land or for freehold land. 3.14 The Ld. AR further submitted that during the year ended 30th June, 1985, the assessee had revalued the value of land in the books of accounts on the basis of the report of an approved valuer vide report dated 8th October, 1985, (available at pages 94-122 of the paper book) wherein the valuer had valued the land at Ghaziabad at ₹ 12,50,000/- per acre, i.e. ₹ 258 per sq. yard. Thus, land having market value of ₹ 258 per sq. yard in 1984-85 could not be valued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /07/2007 filed by the assessee before the Ghaziabad Development Authority (GDA) for issuance of completion certificate. 2. Copy of original layout plan dated 08/08/2002 and revised layout plan dated 17/08/2004. 3. Copy of letter dated 25th of September 2012 issued by GDA to the assessee regarding transfer of parks, roads, etc. 4. Letter dated 05/10/2012 filed by the assessee in response to the aforesaid letter of GDA and requesting issuance of completion certificate. 3.22 The Ld. authorised representative submitted that the assessee had adopted the fair market value at ₹ 190/- per square yard relying on the valuation report wherein the circle rate of ₹ 100/- per square yard was extrapolated in relation to the saleable area. It was submitted that such extrapolation is correct and necessary considering that out of total area of 77,638 yd.², the GDA granted approval for sale to the extent of 43,425 yd.² (later revised to 43,418 yd.²) and the remaining land to the extent of 34,213 yd.² (later revised to 33,794 yd.²) occupied by parks, roads, pavements, drains, water supply system and other public utility services which were to be transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was to be used to fund the cost of rehabilitation scheme and repayment of loan. 3. Even for year ending 31.03.2004, 2005 and 2006, the land sold by the assessee was being shown under capital assets in the schedule of fixed assets. 4. The wealth tax returns filed by the assessee for assessment years 2003-04 to 2006-07 show that the land at Ghaziabad was shown as a taxable asset and wealth tax was paid thereon. 5. The object clause of the Memorandum of Association was amended in September, 2005 to include real estate as one of the main objects. 6. In audited financial statement 2007-08, the assessee, for the first time, showed the financial results separately for real estate. 5.1 These above facts demonstrate that the industrial land was held as capital asset till assessment year 2006-07 and the industrial land was converted into stock-in-trade in the financial year 2006-07 and not 2002-03 as held by the Assessing Officer. Further, the Hon'ble Allahabad High Court in assessee's own case in Tax Writ Nos. 47 to 50 of 2010 in the case of Amrit Corporation Ltd. vs ACIT reported in 275 CTR 174 (All) has also held in assessee's favour by impliedly holding that the transfer for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into stock-in- trade by a positive act on the part of the owner of the capital asset and that in absence of such a positive act on the part of the owner of the capital asset, the provisions of section 45(2) will not apply. The Hon'ble High Court also concluded that in the present case, it was not the case of the assessee that the owner had transferred, by way of conversion of the capital asset, converted the capital asset into stock-in-trade or had treated such capital asset as stock-in-trade of the business. Thus, the Hon'ble High Court has adjudicated that the land was a long term capital asset in the hands of the assessee during the financial years 2002-03 to 2005-06 and that there was no conversion of capital asset into stock-in-trade under the provisions of section 45(2) of the Act during such period as contemplated by the revenue. 5.4 Therefore, on count also, there can be no question of the very same land being treated as having been converted into stock-in-trade in financial year 2002-03, as contended by the department, for the purpose of computation of capital gains during the year under consideration. 5.5 Further, the Hon'ble Court has also recognized the fact that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for conversion of land use will not come within the definition of 'transfer'. 5.7 Therefore, on an overall consideration of the facts, we hold that the industrial land was held as capital asset till assessment year 2007-08 and the same was converted into stock-in-trade only in the financial year 2006-07 and not in assessment year 2003-04 as contended by the department. Accordingly, ground nos. 1, 1.1 and 1.2 in assessee's appeal for assessment year 2007-08 and ground nos. 1, 1.1 and 1.2 for assessment year 2008-09 stand allowed. 5.8 The second issue arising for our consideration is the determination of Fair Market Value of the land on 1st April, 1981. The assessee had claimed Fair Market Value at ₹ 190/- per sq yard. The assessee had relied on the valuation report of a registered Valuer in arriving at the Fair Market Value. However, the Assessing Officer had rejected the valuation report and had adopted the Fair Market Value of land at ₹ 20/- per sq yard as intimated by UPSIDC filed in pursuance of notice u/s section 133(6) of the Act. On appeal, the Ld. CIT (A) determined the Fair Market Value at ₹ 100/- per sq yd according to the existing circle rate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of long term capital gain. In our considered opinion, the assessee has a strong case for adopting a higher Fair Market Value given the fact that the total area measuring 77,638 had a saleable area of only 46,232 sq yds. The assessee had to essentially provide for parks, roads, pavements, drains, water supply system and public utility services free of cost to the GDA and as such, the reduction in saleable area would have to be necessarily factored into the Fair Market Value. Therefore, in principle, we do agree with the assessee's contention that the Fair Market Value should be appropriately enhanced so as to offset the reduction in the total saleable area. 5.12 The Bench had raised a query and had asked the Ld. AR to demonstrate before the Bench that the transfer ownership of the areas/facilities as contemplated in clause (iv) of the agreement with GDA had actually taken place and the Ld. AR has filed an application for admission of additional evidence in terms of Rule 29 of the ITAT Rules, 1963 in this regard and we deem it fit to admit the same. The Ld. AR has placed on record an affidavit from the Chairman and MD of the assessee company stating that under the terms of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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