By TIOL News Service

BANGALORE, JAN 30, 2015: THE issue before the Bench is - Whether when except the advances shown against the current asset for the fiscal, there is no other evidence to prove that land was purchased for purpose of business, sale of such land attracts tax on capital gains. YES is the answer.

Facts of the case

A) A survey was carried out. On scrutiny it revealed that assessee had claimed a loss of Rs. 98.62 lacs on sale of a property. Assessee entered into an agreement on 31.12.2005 to purchase a property with ‘N’, for a total consideration of Rs. 4.25 crores. He made a payment of Rs. 15 lacs in Dec. 2005. Assessee sold the said plot in three pieces. Total consideration received in three pieces was less by Rs. 98.62 from its purchase price and thus, assessee claimed loss. AO observed that the guidance value of this property for this purpose was Rs.1400 per sft, whereas, as per the sale value consideration shown by the assessee, the rate worked out to Rs.902/- per sft. AO worked out the cost of acquisition at Rs. 1085 per sq. ft. being the proportionate cost of the property as on the date of agreement. On the basis of the same, AO disallowed the loss and made an addition of Rs. 1.65 crores. CIT (A) rejected the claim of the assessee.

In appeal, assessee raised multi fold contentions. It was contended that assessee was in the business of real estate. He was a developer, therefore, he had been purchasing the land for the purpose of the business. The investment was made in trading field. The advances paid by the assessee were shown as a current asset in the account. Therefore, it was contended that the advances made with regard to this plot could also be considered as an advance for the stock. Revenue contended that as on 31.3.2008, the alleged advance had been shifted towards investment. The moment the assessee changed the treatment to the land in dispute, he would have shown the profit in the relevant year, but in this year it will only give rise to the capital gain.

B) Assessee contended that the perusal of section 50C(1) would reveal that it is applicable when land or building or both are sold. The assessee was in possession only rights in the agreement to purchase which cannot be equated with land or building possessed by the assessee. Therefore, section 50C is not applicable in the present case.

After hearing both the parties, the ITAT held that,

A) ++ except the advances shown in the current asset for the year ending on 31.3.2006, there is no other evidence brought to notice by the assessee that this land was purchased for the purpose of business. The assessee himself has changed the character of the land, as an investment while finalising the account for the year ending on 31.3.2008. The moment it was shown as an investment item, on sale of the investment, capital gain would arise. It is for the assessee to demonstrate that a particular item is part of trading asset or investment. The assessee failed to bring any evidence on the record indicating that in the past also the income from this asset was shown as a business income. It was a simplicitor investment at the end of the assessee and on sale of investment, only capital gain would arise to the assessee;

B) ++ the assessee has not placed on record any other correspondences between the vendors i.e ‘N’ vis-à-vis himself, indicating how the limit for payment of the balance was extended, what is the nature of other rights accrued to the assessee by virtue of substantial payment of Rs.3.20 crores. Section 2(47) of the Income Tax Act 1961 provides the definition of expression "Transfer". According to this definition, if possession was delivered to the assessee, transfer would be complete. The assessee has already paid more than 80% of the sale consideration.The self life of the agreement had already expired and if not given effect, a A suit for specific purpose of the contract would be time barred beyond three years. Thus some rights of vendor ‘N’ has been extinguished when it executed agreement in favour of the assessee. Assessee was possessing right to land which was not disputed by the vendor. The moment computation is to be made according to section 48, then consequently section 50C is applicable;

++ Section 50C contemplates where, the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both is less than the value adopted or assessed by any authority of a State Govt. for the purpose of the payment of stamp duty in respect of such transfer, the value so adopted or assessed shall for the purpose of section 48 be deemed to be the full value of the consideration received or accruing, as a result of such transfer. For our purpose, the expression used "full value of the consideration" is relevant. This full value of the consideration is to be replaced by deemed value which is adopted for the purpose of stamp duty evaluation. In the present case, the assessee has shown the full value of the consideration @ Rs.902/- per sft, whereas for the purpose of stamp duty valuation, the full value is Rs.1400 per sft. This Rs.1400 per sft is to be deemed as full value of the consideration provided u/s 48. Thus, the claim of assessee is dismissed.

(See 2015-TIOL-104-ITAT-BANG)