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TMI Blog2019 (2) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the findings arrived at in the assessment order, assessments for AYs 2001-02 to 2004-05 were reopened u/s 147 of the Act and assessments were completed u/s 143(3) r.w.s. 147 of the Act on 05-12-2008. The assessment for the AY 2006-07 was completed u/s 143(3) on 29-12-2008 following the findings in assessment order for AY 2005- 06. The base year in which the core issue arises for consideration is AY 2005- 06 which is challenged in ITA No.1324/Mum/2011 by the assessee and I.T.A. No.1278/Mum/2011 by the department . In all these appeals, the issues involved are common in nature. 3. The revenue, through its appeals, more or less taken common grounds of appeal for all assessment years. For the sake of brevity, grounds of appeal taken for AY 2005-06 in ITA No.1278/Mum/2011 are reproduced hereunder:- "1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in holding thaT capital gains tax will arise in A.Y.2008-09. In doing so, the Ld.CIT(A) failed to appreciate that the assessee had received advance for flat and handed over possession of the flat. The Ld.CIT(A) failed to appreciate that merely because agreement for sale is not registered doe: not mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was running a factory on this land. Subsequently, out of the total land, the assessee decided to take 80,000 sq.ft. for the project and hence, converted into stock in trade. The assessee has applied for permission from MCGM for plan sanction on 02-02-1994. Due to some litigation on the land, subsequently, he has written a letter to MCGM to keep his application in abeyance as a result of which MCGM had issued IOD certificate on 09-01-1997. Further, the MCGM had issued commencement certificate for construction of project on 06-05-1998. The assessee had entered into a construction agreement with M/s Bhoomi Developers for development of land and construction of housing project, viz. Maple Height, A-Wing. As per agreement, the developer has to develop 40,000 sq.ft. building. The assessee has entered into development agreement with M/s Bhoomi Developers on 17-08-1988 where, in lieu of development rights, the assessee was entitled to 26 flats with built up area of 20,400 sq.ft. whereas the developer was entitled for 25 flats with a built up area of 19,600 sq.ft. Out of the total area of land, the assessee has given part of land to M/s Bhoomi Developers in pursuance to a develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the I.T. Act, 1962. Accordingly, the AO computed long term capital gain from conversion of capital asset into stock in trade by taking the value of flat as on 02-02-1994. However, as per the provisions of section 45(2), the said long term capital gain will be taxed as and when the stock in trade is sold. Accordingly, reopened the assessment for the assessment years 2001-02 to 2004-05 and taxed long term capital gain on proportionate basis, on the basis of advance received from customers towards sale of flat. Insofar as computation of long term capital gain, the AO has taken ready reckoner rate of completed flat as on the date of conversion, i.e. on 02- 02-1994 and deducted the estimated cost of construction of Rs. 300 per sq.ft. to arrive at a market value of land. The AO, by taking into account the market value of the land, computed long term capital gain by adopting cost of acquisition of Rs. 3,24,59,208 as on 01-04-1981, which is further based on the report of the government approved valuer and then applied indexed cost of acquisition by taking the indexation benefit and determined long term capital gain of Rs. 4,54,90,393. Though, the AO has discussed the taxability of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its business activity of development of project, the conversion of capital asset into stock in trade as envisaged u/s 45(2) said to have taken place on that date. Therefore, there is no error in the finding of the AO that the conversion of capital asset into stock in trade has been taken place on 02-02- 1994. What is relevant for the purpose of determination of date of conversion is the intention of the assessee, but not the dates on which the assessee has filed an application. In this case, the assessee was intended to convert the plot of land into stock in trade by constructing residential premises / flats on 02-02- 1994 which is evidenced by the fact that he has moved an application, therefore, subsequent events of obtaining IOD on 09-01-1997 and commencement certificate on 06-05-1998 is a follow up action which is irrelevant to decide the date of conversion. Insofar as computation of long term capital gain on conversion of capital asset into stock in trade, the Ld.CIT(A) held that the cost of land has to be arrived at on the basis of either the fair market value of the land as on the date of conversion or cost of construction incurred by the developer of a concerned building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod for recognition of revenue and accordingly capital gain on conversion of capital asset into stock in trade is taxable in the year when the business income was offered to tax. When the facts gathered by the AO undisputedly prove that the assessee has deferred recognition of income on some grounds, even through the project has been completed in all respects much before AY 2008-09, the Ld.CIT(A) was erred in upholding that the action of the AO in taxing long term capital gain for AY 2001-02 to 2006-07 when the assessee has received advance from the customers and handed over the possession of the flat. The Ld.DR further submitted that the Ld.CIT(A) erred in directing the AO to adopt cost of construction incurred by M/s Bhoomi Developers to arrive at fair market value of the land as on the date of conversion of stock in trade, ignoring the fact that the AO has rightly applied R.300 per sq.ft. which is the rate as in the year 1994. 11. The Ld.AR for the assessee, on the other hand, submitted that when the Ld.CIT(A) had accepted the fact that the assessee had obtained IOD on 09-01- 1997 and C.C. on 06-05-1998 and entered into an agreement for development of part of the land on 17-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of ready reckoner rate as on the date of conversion or actual cost incurred by the developer for construction of building. M/s Bhoomi Developers has filed requisite details vide letter dated 20-04-2011 as per which, cost of construction per sq.ft. has been arrived at Rs. 591. Therefore, the AO was erred in taking Rs. 300 per sq.ft. towards cost of construction. 13. We have heard both the parties and perused the material available on record. The solitary dispute in this group of appeals for AYs 2001-02 to 2006- 07 is computation of long term capital gain on conversion of capital asset into stock in trade and the year in which such capital gain is taxable in the hands of the assessee. The AO has taken 02-02-1994 as the date of conversion of capital asset into stock in trade. The assessee has challenged the date of conversion adopted by the AO for the reason that conversion had not taken place on 02-02-1994, because although the assessee had intended to develop the property as stock in trade, because of regulatory reasons and certain legal disputes, the IOD has been issu-05-1998 by the MCGM. Therefore, without any authority of IOD and commencement certificate, the business ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment approved valuer and this has been supplied by the assessee to the AO. There is no dispute with regard to the value determined by the AO as on 01-04-1981. The only dispute is with regard to the deduction of cost of construction from the reckoner value to arrive at fair market value of land. The Ld.CIT(A) had given a finding that the fair market value of the land as on the date of conversion can be determined either on the basis of ready reckoner rate or the cost of construction incurred by the developer. Although, the AO has sought details of construction from the developer, in absence of any details supplied by the developer, went on to decide the value of the land by reducing the estimated cost of construction of Rs. 300 per sq.ft. Therefore, the Ld.CIT(A) has directed the AO to determine the fair market value of the land by obtaining cost of construction incurred by the developer. The assessee claims that M/s Bhoomi Developers has filed requisite details vide their letter dated 20-04-2011, as per which cost of construction per sq.ft. works out to Rs. 591, as against the AOs adoption of Rs. 300 per sq.ft. Therefore, we are of the considered view that the Ld.CIT(A) was right i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject has been recognised, the capital gain shall be payable in respect of the project in the year in which such capital asset has been sold, i.e. in AY 2008-09. 16. Having heard both the sides, we find merit in the arguments of the assessee for the reason that it is an undisputed fact that the assessee has not declared any business income in AYs 2001-02 to 2006-07. Though the assessee has received advance from customers, the said advance has been shown as liability in its books of account pending registration of sale deeds to the customers because the project had not been completed. It is also an undisputed fact that the assessee has proved with necessary evidence that the said project has been completed in all respects in AY 2008-09. It is also an undisputed fact that capital gain on conversion of capital asset into stock in trade is payable only in the year in which the assessee ultimately sells such stock in trade. In this case, on perusal of facts, there is no doubt, whatsoever with regard to completion of project in AY 2008-09. This fact has not been disputed by the AO. Therefore, we are of the considered view that the Ld.CIT(A) was right in coming to the conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued by MCGM on 09-01-1997 and commencement certificate issued on 06-05-1998. The project stated to have been commenced only when the assessee has started physical construction activity which happened in this case on 05-10-1998. Therefore, the first objection of the AO that the project was started before 01-10-1998 is not based on any evidence. In this regard, the assessee has furnished a certificate from the architect where it was stated that A-Wing of the building commenced on 05-10-1998. The assessee further stated that the building has been completed in all respects before 31-03-2008. Even though the assessee could not get occupation certificate from the MCGM which is because of certain legal hurdles in view of the nature of land on which the building was constructed. Otherwise, the assessee has obtained all other formalities including permission from fire fighting department of Municipal Corporation, certificate for lift operation from Municipal Corporation and also furnished architect's certificate for completion of building on 27-11-2007. The assessee also filed copies of possession letter issued to occupants of the building along with certificate of civil engineer dated 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate for completion of building on 27-11-2007, copies of possession letter issued to the buyers of the flat and also certificate of complete of civil engineer dated 14-01- 2008. On perusal of details filed by the assessee, we find that the project has been completed before 31-03-2008. Insofar as occupation certificate, though it is necessary to obtain occupation certificate from MCGM after completion of the project, in this case, on perusal of details, it is very clear that the assessee has filed an application before MCGM for issue of occupation certificate on 19- 05-2005 in case of A-Wing of the building. In respect of B-Wing, the details filed by the assessee including various permissions obtained from concerned departments, it is abundantly clear that the building has been completed in all respects before 31-03-2008. The assessee has given reasons for not obtaining OC from the Municipal Corporation as per which there was an ongoing dispute between the authorities and the land owners in respect of nature of land before the Hon'ble High Court because of which, the assessee could not get OC from the Municipal Corporation authorities. However, all other required permissions, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en interest earned from FDR and business activity of the assessee, he has rightly treated interest income as part of its business receipts. The AO has assessed interest earned on FDRs under the head 'Income from other sources' on the ground that the nature of activity, which decides the head of income, whether it is assessable under the head 'Income from other sources' or 'Income from business or profession'. The AO further observed that merely because the assessee has used its business funds to earn interest income, the character of the receipts cannot be changed when assessee's main business activity is construction and development of flats. The AO has analysed the fund flow position of the assessee to come to the conclusion that the funds deployed in FDR is arising out of profit derived from the project and hence, resultant interest income is assessable under the head 'Income from other sources'. 22. We have heard both the parties and considered material available on record. The assessee has earned interest income on FDRs kept in bank and treated the same as part of its business receipts. According to the assessee, it has parked surplus funds generated from business in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case, on perusal of facts, we find that the AO has arrived at a conclusion that the assessee has not borrowed any funds and whatever funds deployed in short term FD are generated out of his own business profits. The assessee failed to controvert the findings of the AO with any details. Under these facts, the ratio laid down by the Hon'ble Supreme Court in the case of Totgar Cooperative Sales Society Ltd vs ITO (2010) 322 ITR 283 (SC) will squarely apply, where it was held that the Parliament has included specific business profit into the definition of the word 'income'. Therefore, one is required to give a precious meaning to the words 'Profits and gains of business or profession'. In the instant case, when we apply the ratio laid down by the Hon'ble Supreme Court in the said case, we find that interest earned on short term FD could not be said to be attributable to the activities of the assessee, mainly carrying on the business of construction and development of flats. Therefore, we are of the considered view that the AO was right in assessing interest earned on FDR under the head 'Income from other sources'. The Ld.CIT(A), without appreciating these facts directed the AO to a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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