Income Tax Appellate Tribunal - Mumbai
Estate Of Late N.J. Patel vs Dy. Cit on 30 May, 2006
ORDER
K.K. Boliya, Accountant Member
1. This appeal arises from the order dated 5-3-2004 of Commissioner (Appeals)-XII, Mumbai. As many as 15 grounds of appeal have been raised by the assessee, which are repetitive, narrative and argumentative. After going through the grounds of appeal raised by the assessee and after hearing Shri S.E. Dastur, the learned Counsel appearing for the assessee, we find that the grounds of appeal raise only following three issues for our adjudication:
(i) Whether the income arising to the assessee from sale of plots of land is in the nature of business income or capital gains or partly as business income and partly as capital gains. The related quesuon is 'what is the fair market value of the land as on 1-4-1981 for the purpose of computation of long-term capital gains'.
(ii) At what point of time, the agricultural land owned by the assessee was converted into stock-in-trade.
(iii) Whether deduction is available to the assessee on account of various expenses incurred, while computing income under the head business income.
2. Vide letter dated 28-4-2006, the assessee seeks admission and adjudication of the following additional grounds of appeal: 3
(i) On the facts and circumstances of the case, the learned Commissioner (Appeals) erred in not considering the relevant material, i.e., Hon'ble Bombay High Court judgment in the case of CIT v. V.A. Trivedi .
(ii) The learned Commissioner (Appeals) erred in considering the irrelevant material i.e.,Hon'ble Supreme court judgments in the cases of P.M. Mohammed Meerakhan v. CIT ; CIT V. Vyas Dhotiwala and Raja J. Rameshwar Rao v. CIT .
The learned Counsel, Shri Dastur, was fair enough to concede that the aforesaid additional grounds do not survive on account of the ITAT's order dated 31 -10-2000 in the case of the assessee for the assessment year 1994-95 in ITA No.2108/Mum./98(copy at pages 135 to 152 of the Paper Book). Accordingly, the additional grounds are dismissed as being infructuous.
3. Before we deal with the controversies involved in this case, which have been identified above, it would be appropriate to state the relevant f acts briefly. Narshibhai Jhaveribhai Patel, S/o Shri Jhaveribhai Patel, resident of Mumbai, owned several immovable properties including agricultural lands admeasuring 16.5 acres situated in Gorwal village within the out-skirts of Baroda (now known as Vadodara) in Gujarat. The aforesaid agricultural land was acquired by Shri N.J. Patel in the year 1963. As per the provisions of Urban Land (Ceiling & Regulation) Act, 1976 (for short, ULC Act), Shri N.J. Patel was permitted to hold only 9000 sq. mtrs. of land and the excess land was liable to be declared as surplus land and acquired under the ULC Act. However, Section 21 of the ULC Act provides that if the surplus land was utilized for construction of dwellings for weaker Sections of the society to be sold at a fixed price, then such land would not be acquired under the ULC Act. Taking advantage of Section 21 of the ULC Act, Shri N.J. Patel, on 14-9-1976, filed a declaration under the ULC Act before the concerned authorities to the effect that he was holding surplus land. On 31-3-1979, Shri N.J. Patel offered to construct dwellings for the weaker Section of the society in compliance to the requirement of Section 21 of the ULC Act. Shri N. J. Patel passed away on 5-2-1982 and the relevant agricultural land, under his will, was bequeathed to his children, grand-children and his three sons were appointed as Executors. After the death of Shri NJ. Patel, the executors of the will approached the concerned authorities under the ULC Act and pursued the matter. Ultimately, vide letter dated 10-7-1991, the competent authority under the ULC Act passed an order approving the scheme of construction f or weaker Section of the society (copy of the order at page 330 of the Paper Book). On 12-11-1991, Baroda Municipal Corporation granted permission for development of 319 sub-plots. On 3-2-1992, the competent authority granted approval for conversion of agricultural land into non-agricultural land (copy of the order at pages 345 to 361 of the PB). As a result of conversion of the agricultural land into non-agricultural land on 22-11-1992, the executor entered into a Memorandum of Understanding with Baroda Construction Company and Rajesh Construction Co. for construction of dwellings (copy of MoUs at pages 49 to 67 of the PB). On 16-11-1992, the executors entered into agreements with the purchasers for sale of sub-plots and sample copy of such agreement is at pages 91 to 100 of the PB. On 16-11-1992, a tripartite agreement was entered into among the executors, the contractors and the purchasers for construction of dwellings on the said plots. A sample copy of the agreement is at pages 101 to 107 and 108 to 114 of the PB.
4. The income arising to the assessee on the sale of the plots was offered for taxation as capital gains in the return of income filed for the assessment year 1994-95. The assessing officer accepted the assessee's claim that the income was chargeable to tax under the head capital gains and accordingly the assessment was made on 27-3-1997. The Commissioner of Income-tax, Central-III, Mumbai set aside the aforesaid assessment order under Section 263 of the Income Tax Act on 5-2-1998. It would be appropriate to reproduce below the relevant part of the CIT's order from pages 12 and 13 of his order:
Treatment of the sale proceeds as capital receipts has resulted in under assessment of income, thereby rendering the impugned assessment erroneous insofar as it is prejudicial to the interests of the revenue. It would be appropriate to assess the sale proceeds as business receipts.
Before parting with this order, the alternate contention of the appellant needs to be referred to once again. The claim that a part of the sale proceeds be treated as capital receipt for the assessment year 1992-93 is an issue which can be looked into only during the course of the fresh proceedings for the assessment year 1994-95. At this stage, complete ramification of this submission cannot be properly appreciated. However, while considering this claim of the assessee, the assessing officer may keep in mind the valuation of the lands offered by the assessee for the wealth-tax assessment order for the assessment year 1992-93.
The assessment order dated 27-3-1997 in the assessee's case for the assessment year 1994-95 is cancelled and is directed to be redone in accordance with the law in the light of the discussions and observationsmade in this order.
From the above, it may be seen that the learned CIT directed assessment of the income as business receipts. However, regarding the alternate claim of the assessee that part of the sale proceeds have to be treated as capital receipts, the learned CIT directed the assessing officer to decide the issue in accordance with the provisions of the law.
5. Aggrieved by this order, the assessee went in appeal before the Tribunal, which was decided vide order dated 31-10-2000 referred to above. It would be appropriate to reproduce paragraphs 28, 29 and 30 of the Tribunals order here below:
Applying the ratio of the decisions of the Supreme Court referred to above and considering the totality of the f acts and circumstances of the case, we are of the view that the assessing officer was wrong in not assessing the income as income from business. As already pointed out, he not only blindly accepted the claim of the assessee that the profit was nothing but sale of capital gain but had also not given any foundation or basis for accepting the claim of the assessee. There was thus a loss to the revenue by reason of lack of application of mind by the assessing officer.
The contention on behalf of the assessee that since the profits are to be computed after giving deduction of the cost of land on the date of conversion of the same into stock-in-trade, there would be no loss to the revenue is bereft of any substance. Assuming that it is so, the CIT having been given directions to the assessing officer to consider the claim of the assessee while f raming the fresh assessment, the assessee should have no cause of grievance. The assessing officer is bound to compute the business income in accordance with law and if the computation of income is less than the income assessed by the assessing officer, the assessee is bound to be benefited. Since it is not so, the parties are pursuing the litigation.
We are therefore of the considered view that the decision of the CIT inholding that the order of the assessing officer was erroneous and prejudicial to the interests of the revenue is in order and we find no justification to interfere.
6. In the backdrop of the above-mentioned factual scenario, we have heard both the sides and have carefully gone through the relevant facts as emerging from the record. Shri Dastur pointed out, at the outset, that the most important question to be decided in this case is as to at what point of time the agricultural land was converted into stock-in-trade. The answers to other controversies involved in this appeal would depend upon the adjudication of this issue. The learned Counsel contended that there is no dispute that the land in question was agricultural land and was being used for carrying out agricultural operations till the year 1991. It is submitted that in the month of March, 1979, the original owner of the land offered to use the surplus land for construction of dwellings for weaker Sections of the society as required under Section 21 of the ULC Act. However, no action was taken and no order was passed under the ULC Act on this offer of the original owner and the land continued to be agricultural land for all purposes. It is submitted that the learned Commissioner (Appeals) has wrongly recorded a finding that as soon as the original owner expressed his intention to use the surplus land for the specific purpose, the agricultural land got automatically converted into stock-in-trade in the month of March 1979. It is submitted that the original owner expired on 5-2-1992 and thereafter the executors followed up this matter with the competent authorities. Eventually, the competent authority gave approval to the scheme of construction vide order dated 10-7-1991. As a result of this approval, the competent authority ultimately granted approval for conversion of agricultural land into non-agricultural land vide order dated 3-2-1992. The learned Counsel contended that the character of land was converted only on3-2-1992by virtue of the aforesaid order of the competent authority. It is submitted that there is no basis whatsoever for holding that the land was converted into stock-in-trade in the year 1979. The conversion was therefore entirely dependent upon the official approval granted by the competent authority. In the absence of such approval, there was no way the assessee could have converted the agricultural land into stock-in-trade. Further, it was open to the competent authority to grant the approval only in respect of the part of the land. Therefore, the owner was uncertain till the relevant approval order was passed. It is submitted that on the basis of the order under ULC Act on 10-7-1991, the assessee took concrete action and obtained further permission from the Municipal Corporation and the final approval for conversion on 3-2-1992. It is, therefore, argued that. the agricultural land was converted into stock-in-trade only on 3-2-1992 and not prior to that.
7. The learned CIT DR, Shri Indra Kumar, strongly supported the orders of the revenue authorities and reiterated that the offer was made by the original owner in the year 1979 for conversion of the agricultural land into stock-in-trade. It is, therefore, contended that the learned Commissioner (Appeals) has rightly held that the conversion took place in the year 1979.
8. We have given a careful consideration to the rival submissions and in our view there is hardly any basis for holding that the agricultural land automatically got converted into stock-in-trade in the year 1979. In the year 1979, the original owner of the agricultural land only expressed his intention and offered to construct the dwellings for weaker Sections of the society on the surplus land and he submitted application under Section 21 of the ULC Act. In our view, mere expression of intention or mere making an offer does not in any way change the character of the land. The land continued, for all practical and legal purposes, to be agricultural land and even agricultural operations were carried out till the year 1981. The user of the land cannot be changed unless final approval is received from the competent authority' for conversion of agricultural land into non-agricultural land. The assessee's offer could have been either approved or rejected or could have been partly allowed. In our view, till the final order is passed, the character of the land will not change. In the present case, such final approval was granted on 3-2-1992 and only this is the crucial date when the agricultural land could be converted into non-agricultural land. It may be said that this is the relevant date on which the agricultural land was converted into stock-in-trade. The income under the head capital gains is chargeable to tax by virtue of Section 45(2) of the Income Tax Act on conversion of capital assets into stock-in-trade. Such conversion is to be treated as 'transfer' as defined under Section 2(47)(iv) of the Income Tax Act, which reads as under:
47(iv) 'Transfer' in relation to a capital asset, includes - in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment.
From the above definition, it may be seen that the capital assets can be converted into stock-in-trade of the business carried on by the assessee. In the present case, the assessee was not carrying on any business till 31-2-1992 when the approval was granted for conversion of agricultural land into non-agricultural land. Sub-section (2) of Section 45 may also be reproduced below:
(2) Notwithstanding anything contained in Sub-section (1), the profits orgains arising from the transfer by way of conversion by the owner of acapital 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 transf erred 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.
As per the above provision, on conversion of capital asset into stock-in- trade, capital gain arises in the year in which such stock-in-trade is sold or transferred and for this purpose the fair market value of the asset on the date of conversion shall be deemed to be the full value of the consideration for the purpose of determining the income under the head capital gains. The computation of income under the head capital gains is to be under Section 48 of the Income Tax Act. Accordingly, under Section 48, the full value of the consideration shall be deemed to be the fair market value as on the date of conversion and the cost of conversion and the cost of any improvement shall be deducted. If the asset has been acquired prior to 1-4-1981, the fair market value as on 1 -4-1981 has to be adopted as cost of acquisition. After determination of income under the head capital gains, the second step would be to determine the business income arising from the sale of stock-in-trade, which would be the difference between the sale consideration and the fair market value as on the date of conversion. This is the scheme of Section 45(2) of the Income Tax Act. In our view, the revenue authorities have erred in bringing to the charge of tax the entire sale consideration as business income. As mentioned above, the income has to be bifurcated between capital gains and business income as mandated under the provisions of the Income Tax Act. Therefore, with regard to the first issue, we feel that the income has to be brought to the charge of tax partly under the head capital gains and partly under the head business income. As mentioned above, while determining the income under the head capital gains, the fair market value as on 1-4-1981 is relevant. It is seen from the record that the assessee claimed fair market value as on 1 -4-1981 at Rs. 85,31,000 as per the certificate of the registered valuer. On the other hand, the departmental Valuation Officer estimated the fair market value at Rs. 74,39,700. Since the revenue authorities have brought to the charge of tax the entire income as business income, there is no finding regarding the determination of fair market value as on 1-4-1981. Therefore, for this purpose i.e., for the purpose of determining the net income chargeable to tax under the head capital gains, the issue is restored back to the assessing officer to be considered and decided after allowing opportunity to the assessee and in the light of the observations made by us above.
9. The question of allowing deduction in respect of expenditure would arise while determining the income under the head business income. We find that the assessee's claim regarding deduction for various items of expenditure has not been properly considered and therefore for this purpose also, this issue is restored back to the assessing officer for consideration and decision after allowing adequate opportunity to the assessee to establish the claim for deduction of expenditure.
10. In the result, the assessee's appeal stands partly allowed.