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TMI Blog2014 (6) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... not yet come, and until that stage comes, in our considered view, such profit cannot be taxed. Unlike in a case of a capital gain which arises on parting the capital asset at the first stage itself, it is a case of business transaction which is completed when the rights so acquired by the assessee are exercised; none can make profits by dealing with himself, as is the settled legal position in the light of the settled legal position in the case of Sir Kikabhai Premchand v. CIT[1953 (10) TMI 5 - SUPREME COURT]. It is for this reason that we are unable to uphold the action of the authorities below on the facts of this case. The authorities below indeed erred in bringing to tax the anticipated business profits on assessee's entering into a development agreement with Menorah Realties Pvt Ltd in respect of the land held by the assessee as stock in trade - Decided in favour of assessee. - I.T.A. No. : 1709/Bang/2013 - - - Dated:- 30-6-2014 - Pramod Kumar AM and P Madhavi Devi JM V Srinivasan, for the appellant TSN Murthy, for the respondent ORDER Pramod Kumar, Accountant Member 1. This appeal, filed by the assessee, is directed against the order dated 10t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of capital asset via the joint development agreement dated 7th May 2009 not to be brought to tax in this assessment year i.e. 2010-11. It was, however, contended by the assessee that even though the assessee had entered into a development agreement in the relevant previous year, no gains arose as a result of this agreement since the proposed building project was not even cleared by the regulatory bodies. It was pointed out that the licence to construct the building project was received in the subsequent previous year, and, therefore, no capital gains could be said to have been arisen in this year. The Assessing Officer did not accept the plea so advanced by the assessee. The Assessing Officer noted that, in terms of the clear provisions of Section 45(1), profit and gains arising from the transfer of a capital asset effected in a previous year are to be brought to tax as income of the previous year in which the transfer took place. It was further noted that in terms of the provisions of Section 2(47)(v), transfer includes any transaction involving he allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted cost of construction to which the assessee was entitled without incurring any costs. While holding so, learned CIT(A), inter alia, observed as follows: '3.7 I have considered the rival contentions carefully. As could be seen from the JDA pg no. 3, clause 1 - it reads as follows : 1. That the landowner has hereby entrusted the schedule property to the promoter . Further, page no. 4, clause 3 starts as follows: 3. (A) the parties have further agreed that in consideration of the landowner having provided the scheduled property for the promoter for the project the promoter shall 3.8 All these conditions clearly show that the possession of the property is already given to the developer. Though Clause 7 on page 7 says that such possession should not be treated as possession u/s 53A of Transfer of Property Act, such a clause is not tenable since it is not as per law. Further, page no. 8 clause 12 clearly shows that the landowner shall execute irrevocable GPA in respect of the property in favour of promoter. Reading together various clauses of the agreement, the clear understanding of the facts is that, the possession of the property is given to the prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and reading together transfer of Property Act and Sale of Goods Act, I am in agreement with the AO that the transfer and the consequent sale has taken place in the year when JDA has been entered. What is sold is 60% of the land or 58% as the case may be reading together the subsequent agreements and the consideration thereof is the construction cost of 42% share of the appellant. This value will go to the closing stock of the appellant since it is resulting in a different stock in trade in the form of constructed buildings eventually. Further, since the appellant did not furnish the working behind accepting 42% share, estimation is the only way left with the Department to arrive at the value of the consideration based on the material available before the AO at the time of assessment. Hence, since the relevant material is available before the AO to estimate and the appellant himself has given his version of estimation in the statement, I find that the AO's estimation was reasonable. When questioned about as to when the plan was submitted, since that is the time when both the parties would know the possible area of construction, it was explained by the AR that it was soon after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions regarding capital gains are admittedly not attracted on the facts of this case. 9. Once we come to the conclusions, as is inescapable in the light of the above position, that the provisions regarding capital gains are not attracted, the definition of 'transfer' under section 2(47) of the Act, and of Section 53A of the Transfer of Property Act - which is relevant in the Income Tax Act only for the limited purposes of connotations of expression 'transfer' under section 2(47) only, have no bearing on the adjudication about taxability of notional profits in the hands of the assessee. While on this issue, we may also mention that learned Departmental Representative's reliance judgment of Hon'ble jurisdictional High Court in the case of Dr T K Dayalu (supra), as also on Hon'ble Bombay High Court's judgment in the case of Chaturbhuj Kapadia (supra), is wholly misplaced at both of these judgments are in the context of the computation of capital gains and in the context of connotations of the expression 'transfer' under section 2(47) - things which, or the reasons set out above, are wholly irrelevant in the present context. 10. Let us, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... piece of land, admeasuring 1 acre and 96.22 cents, on which a group housing project by the name of Alexandria was to be constructed, and what he got in consideration of this transfer is the right to sell 1,28,940.26 sq. ft. constructed area in this project. In his closing stock, even if he is to substitute the part ownership of the land transferred with the value of this right to sell 1,28,940.26 square feet constructed area, it would not make any difference to the profit figures because, as far as this assessee is concerned the cost of acquiring this right is the same as the cost of giving up the right in the hand, and, as is the settled legal position, the closing stock can only be valued at cost price or market price-whichever is less. Obviously, the cost price of this right to sell 1,28,940.26 sq ft, which has been treated as a trading asset, is less than the market price of these rights, and, therefore, these rights can only be valued at cost in the accounts. 15. Let us take a pause here and recall the conceptual reasons for valuing the closing stock at cost price or market price whichever is less. 16. In the landmark judgment of Chainrup Sampatram v. CIT [1953] 24 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised.' (Emphasis, by underlining, supplied by us) 17. The principle is thus unambiguous. The principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, and, at the same time, an anticipated loss to be deducted from commercial profits, at the first sign of its reasonable possibility. Accounting Standard 2, which is a mandatory accounting standard under section 145(2), also states that Inventories shall be valued at cost, or net realisable value, whichever is lower. There may seem to be, at first sight, an element of dichotomy in this approach inasmuch as anticipated losses are taken into account and anticipatory profits are ignored, but that is the impact of accounting principles sanctioned b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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