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TMI Blog2018 (5) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... f developed portion in assessment year 2011-12 and has offered the income to tax in the said year. Consequently, the business profits arising to the assessee were taxable in the hands of assessee in the year when the project was completed and tenements / flats were handed over to the prospective buyers. The year under appeal is the year when the assessee received advance which does not culminate any completion of transaction and assessability of the amount as business profits in the hands of assessee. Accordingly, we hold so. Since the amount is not assessable to tax as his business profits in the year under consideration, the capital gains arising on conversion of capital asset into stock-in-trade is also not to be taxed in the hands of assessee in the year under consideration but in the year in which the business profits are to be taxed. The assessee has offered the said income in assessment year 2011-12 as offered by the developer in assessment year 2011-12. The Revenue has opposed the said by pointing out that the developer had followed the project completion method, which is one of the method for recognizing the revenue. Said method which has been followed by the devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue receipts and not advances as claimed by the appellant. 2. The learned CIT (Appeals), has not justified in confirming the action of the AO and his conclusion that the amount received in the financial year 2008-09 to be taxed as business receipts. 3. The learned CIT (Appeals) erred in not appreciating the following important facts and the submissions of the appellant that: a) The appellant had converted capital asset into stock in-trade. b) The Capital Gain is taxable in the year in which the units will be finally sold i.e. on the execution of the sale agreement. c) The advances received from the developer cannot be treated as taxable business receipts in the hands of the appellant. d) The business receipts are to be taxed in the hands of appellant in the year in which the possession is finally handed over at the time of execution of sale deed of the constructed flats by the developer. e) The agreement between the appellant and the developer is a joint venture and not a development agreement. f) The method of accounting followed by the developer is project completion method. g) The developer also considered the payments give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment noted the assessee to have agreed to entrust and developer had agreed to develop all the said land for consideration of 18% amount on gross sales, excluding certain charges. During the course of assessment proceedings, the learned Authorized Representative for the assessee furnished the details of payment received from J.K. Developers i.e. in assessment year 2007-08, sum of ₹ 2,58,37,188/- was received and in assessment year 2009-10, sum of ₹ 3,03,95,968/- was received. The Assessing Officer noted that the amount of ₹ 2.83 crores being registration value of property, was to be considered for calculating income from capital gains in assessment year 2006-07 and the same was reduced from total receipts of ₹ 5.62 crores. As per the Assessing Officer, the assessee had received ₹ 2,78,48,656/- over and above the registration value during the year under assessment. The assessee was given an opportunity to explain why the said amount of ₹ 2.78 crores should not be treated as his business income for assessment year 2009-10 and capital gains to be levied in assessment year 2006-07. The assessee in reply pointed out that although the agreement for deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Collector, Pune for getting the land as non-agricultural land for the purpose of carrying on the development on the said land. The profits and gains from transfer by way of conversion by the owner of capital asset into stock-in-trade of a business carried on by him, was chargeable to income tax, as income of the previous year in which such stock-in-trade was sold or otherwise transferred. The assessee contended that definition of transfer in section 2(47) of the Act was applicable only in relation to capital assets and not to stock-in-trade, which stood excluded from the definition of capital asset in section 2(14) of the Act. Further, reference was made to the Development Agreement dated 24.02.2006, under which the assessee had handed over the possession of property for construction of project and the assessee did not receive any consideration for handing over the possession of property to the developer, but as per the agreement had got the right to receive 18% of the amount on gross sales excluding certain charges. As per the assessee, transfer of title and handing over of possession was merely a temporary measure for carrying out construction work by the developer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee stressed that income from land was to be taxed in the year when the possession of flats constructed by the developer was given to the customers and till the time the amount received from flat purchasers were advances and the same were actually considered as advances. The assessee then challenged the order of Assessing Officer in considering the value adopted by stamp duty authority for the purpose of stamp duty on the Development Agreement, which in turn, was based on circle rates, without considering peculiar features of the property sold, could not form the foundation to determine the fair market value of the property transferred. The assessee thus, contended that addition made by the Assessing Officer by considering the amount received by assessee from M/s. J.K. Developers in financial years 2007-08 and 2008-09 after deducting stamp duty value as on the date of development agreement as business income was both incorrect and unwarranted. On without prejudice, it was further submitted that in case it is held that the amount received was taxable, then the assessee was entitled to claim the deduction under section 80IB(10) of the Act. The assessee explained that as per De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the assessee, the CIT(A) held that the agreement dated 24.02.2006 entered into by the assessee with J.K. Developers was Development Agreement and the case of sale simplicitor and not Joint Venture Agreement. The CIT(A) then reflected on the role of assessee in the development and whether it was taking any risk and held that the transaction in question was not an adventure in the name of trade and income arising out of such transaction was liable to the assessed as business income under the profits and gains of business. However, the same is to be assessed in the year of sale. The CIT(A) recognized that the assessee in no way was connected with the development of property. However, it had received ₹ 45 lakhs though nomenclature as security deposit, but in fact it was an adjustable / deductible from the payments to be made in the later period. The assessee as per clause 3 of agreement had handed over the title deeds and documents relating to the said property to the vendor J.K.R. Developers. He stressed that the substance had to be seen than the form of transaction, where the assessee had converted the investment into stock-in-trade and thereafter, entered into Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to be taxed during that year itself for which the Assessing Officer has to initiate necessary action with respect to reopening of the said assessment. The cost of deduction will have to be again limited to the extent of area constructed during that year and the work in progress i.e. the stock-in-trade brought forward in the next A.Y. i.e. 2009-10 will be again reduced to the extent of work carried out or area constructed by the developer. During the aforesaid years in my considered opinion the liability of capital gain will also have to be taxed once the same is worked out during A.Y. 2006-07 u/s 45(2). The appellant has not shown to have incurred any expenses towards the transaction nor does the development agreement indicate liability of any expenses to be 'incurred by the appellant. Thus the only expense to be allowed will be limited to the fair cost of the said property as worked out by the valuer in each of the year(s). The Assessing Officer will have to work out the amount of deduction to be granted to the appellant in each of the years against the business receipt being part of the 18% of gross sale proceeds is received by the appellant. The developer M/s JKR Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, wherein the assessee has contributed his land for development and the developer has undertaken construction of project and it was agreed that the land owners, of which the assessee is one of the parties would receive the amount out of sale consideration of project. The assessee has no role to play in the development and once it has no role to play, then it cannot be called as Joint Venture Agreement. The issues raised in the cross appeals are two-fold (a) taxability of capital gains on conversion of land owned by the assessee into stock-in-trade and (b) business profits to be assessed in the hands of assessee for exploitation of stock-in-trade. In order to determine the issue, reference needs to be made to the provisions of the Act. 16. Under section 4 of the Income Tax Act, income tax is to be charged in respect of total income of the previous year. Section 5 of the Act talks of the scope of total income to include all income from whatever sources derived (a) is received or due to be received in India in such year by or on behalf of such person; (b) accrues or arises or is due to accrue or arise to him in India during such year; or (c) accrues or arises to him outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the provisions of section 45(1) of the Act. However, exception is provided in sub-section (2), wherein it is laid down that the profits and gains which arises on treatment of capital asset as stock-in-trade shall be chargeable to tax in the previous year in which such stock-in-trade is sold or otherwise transferred by him. Further, the mode of computation of capital gains is also provided in sub-section (2) that the fair market value of the said asset on the date of conversion or treatment shall be deemed to be the full value of consideration received or accrued as a result of transfer of capital asset i.e. on the date of conversion of capital asset into stock-in-trade. 17. Now, coming to the facts of the present case. The assessee was owning capital asset, which was converted into stock-in-trade in assessment year 2006-07. The first aspect is the computation of capital gains on such conversion of capital asset into stock-in-trade, wherein as per section 45(2) of the Act, it is clearly laid down that fair market value of asset on the date of such conversion is to be deemed to be the full value of consideration. The Assessing Officer in the facts of present case had adopted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to not having proper experience in construction and development of land, entrusted the same for development to M/s. J.K.R. Developers. As per clause 9 of the Preamble, the Party of the Second Part M/s. J.K.R. Developers has agreed to develop the land. It is further provided that after negotiations between the parties, the First Party had agreed to entrust the land and the Second Party had agreed to develop the said land for total consideration of 18% of amount on gross sales (excluding stamp duty, MSEB Meter charges, Society charges, Club house charges, parking charges, etc. work charges). The said covenant further provides that 18% of amount on gross sales which will be collected by the Party of Second Part on the saleable area from the prospective purchasers as per agreement to sell which will be executed with the said prospective purchasers and in pursuance of that arrived and concluded contract between them. As per clause (1) of said agreement, consideration had to be given every after 15 days of each month on the collection amount during the said 15 days and also refundable (adjustable security deposit of ₹ 45 lakhs) was to be paid to the Party of First Part by the Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ousing loan, etc. It was further provided that the First Party shall not be personally liable for repayment of such loan amount or interest thereon. As per clause (d), funds for the construction had to be arranged by the Second Party. Clause 10(a) provided a specific covenant between the parties that the First Party shall at their own cost and risk assure / ensure that the Second Party is entitled and permitted to develop the said property and further is free to develop the said property without any hindrance from any persons. As per clause (b), the First Party shall execute all agreements to sell, mortgage, sale deeds, cancellation deeds, supplementary agreements or any indenture as vendor or confirming party for the purpose and to enable the Second Party to sell, mortgage the premises / flats in the building with or without constructed portion or space to the prospective buyers. As per clause 10(g), it was agreed between the parties that as and when required by the Second Party, the First Party shall sign / execute sale deed(s) of apartments in respect of the said property with or without construction in the name of Second Party / Developer or to execute any other deeds, etc. but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f amount received by the assessee, which has to be determined in the present facts of the case. The said amount received by the assessee is an advance receipt because the right to collect the said amount would crystallize on the day when the tenants or portion of land is sold by the developer to the prospective buyers. Undoubtedly, the assessee has received advance amount equivalent to his share in the year under consideration but we cannot lose sight of the events that it is an advance. It cannot be said to be the sale consideration of the portions sold by the assessee. It is not case where the assessee has sold developed plot of land. The agreement between the parties is to develop the project and sell tenements / flats to the prospective buyers. Reading the terms of agreement, it is clear that the terms have been agreed between the parties for developing the said plot of land and it is eventually sale to different buyers. In order to safeguard its interest, the assessee as owner of the plot of land had agreed to receive consideration in advance i.e. at the time when the amount is received in part but in advance by the developer. But the said amount received by the developer cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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