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Judgment
PER KRINWANT SAHAY AM
Appeal in this case has been filed by the Assessee against the order dated 21.02.2026 passed by the CIT(A)/NFAC, Delhi for the A.Y. 2021-22. Grounds of appeal are as under :-
1.On the facts and circumstances of the case, the worthy CIT (A) is not justified in confirming the addition of Rs. 1,93,78,293/- as Long Term Capital Gains on account of alleged conversion of Capital Asset into Stock In Trade.
2.On the facts and circumstances of the case, the worthy CIT (A) is not justified in confirming the addition of Rs. 2,20,98,985/- as Business Income on account of alleged sale of stock in trade.
3.That the appellant craves leave to add, amend, alter, or substitute any or all grounds of appeal before or at the time of hearing.
Brief facts of the case as per statement of facts are as under :-
"The appellant is an individual who had e filed his Return of Income for the AY 2021-22 on 31.12.2021 vide acknowledgement number 756619810311221 declaring Total income of Rs. 1,05,59,170/-. The case of the appellant was selected for complete scrutiny through CASS. An assessment order u/s 143(3) read with section 144B of the Income Tax Act, 1961 was passed on 28.12.2022 by imposing an impugned addition of Rs. 1,93,78,293/- as Long Term Capital Gain on account of conversion of Capital Asset into Stock in trade and Rs. 2,20,98,985/- as Business Income on account of sale of Stock in Trade whereas the fact is there was no such sale in the year under consideration. The appellant had merely transferred the flats (Stock in trade) to his wife Smt. Alka Singh without any consideration. The Ld. AO is unjustified and unlawful in imposing the impugned additions of Rs. 1,93,78,293/- as LTCG on account of conversion of Capital Asset into stock in trade and Rs. 2,20,98,985/- as Business Income on account of sale of stock in trade."
During proceedings before us the ld. Counsel of the assessee has filed a brief synopsis on both grounds of appeal which are reproduced as under :-
1.On the facts and circumstances of the case, the worthy CIT (A) is not justified in confirming the addition of Rs. 1,93,78,293/- as LTCG on account of conversion of Capital Asset into Stock In Trade.
2.On the facts and circumstances of the case, the worthy CIT (A) is not justified in confirming the addition of Rs. 2,20,98,985/-as Business Income on account of sale of stock in trade.
Ground No. 1
The Ld. AO in para 4.5 (a) of the assessment order has alleged that: " the assessee vide his reply the SCN in point No.1 of his reply admitted to have converted his capital asset into stock in trade. The taxability of income under LTCG has arisen in this case. The assessee had converted his Capital Asset into Stock In Trade(SIT) in the year 2016. The journey of the asset from 2008 to 2016 is covered under the Capital Gains..."
The present appeal raises a short but important question of law. The entire assessment rests on the assumption that execution of an unregistered Joint Development Agreement (JDA) dated 07.04.2016 (placed at page 38-45 of the paper book) automatically resulted in conversion of the appellant's capital asset that is the plot of land (purchase deed placed at page 14-37 of the paper book given to the developer under (DA) into stock-in-trade, thereby attracting Section 45(2) of the Income Tax Act, 1961. It is respectfully submitted that this assumption is contrary to the language of the statute and unsupported by any evidence. Section 45(2) states as under:
"Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital 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 transferred 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."
1. SECTION 45(2) HAS BEEN WRONGLY INVOKED.
Section 45(2) can be invoked only if the Revenue establishes conversion of a capital asset into stock-in-trade; of a business carried on by the assessee. In the present case, in terms of clause (a) of the JDA (page 40 of the paper book), "the developer M/s Pratinav Constructions shall construct at his own cost a Multistoried Building over the said land...". Thus, the appellant has contributed only land and has not converted his land into stock-in-trade for his business. The land has gone to developer whose business is to develop Multistoried Building. There is not a single contemporaneous piece of evidence to prove conversion: No books of account; No balance sheet; No capital account; No inventory; No trading account; No project account; and No business establishment. The appellant never became a builder or developer. The entire construction was undertaken by the developer. The appellant merely contributed the land and received six flats under the JDA (evidence attached at page 46 of the paper book). The AO has assumed conversion but has not proved conversion.
II. UNREGISTERED JDA DOES NOT ESTABLISH
CONVERSION. The JDA dated 07.04.2016 is admittedly unregistered. The Revenue has treated the JDA itself as proof of conversion; a joint Development Agreement is merely a contractual arrangement. Further, provisions of section 45(5A) of the Income Tax Act, 1961 are not attracted as this section came into force with effect from 01.04.2018 whereas JDA is dated 07.04.2016. Moreso, as per Explanation (i) of section 45(5A), the mandate of JDA has to be registered whereas in the present case it is unregistered. It does not, by itself commence a business, convert investments into stock-in-trade, or make the landowner a builder. The Hon'ble Supreme Court in Balbir Singh Maini v. CIT reported in (2017) 398 ITR 531 (SC) has held that an unregistered development agreement has no efficacy under Section 53A of the Transfer of Property Act. While that judgment concerns Section 2(47)(v), it demonstrates that the Revenue cannot treat an unregistered JDA as a conclusive legal event without independent evidence. The case law discussed by worthy CIT(A), that is Hon'ble Supreme Court in Chaturbhuj Dwarkadas Kapadia v. CIT (129 Taxman 497) is misplaced as this case law is pronounced by Hon'ble Bombay High Court and not by Hon'ble Supreme Court as stated by worthy CIT(A). This pronouncement is dated 13.02.2003 whereas Supreme Court in Balbir Singh Maini (supra) has laid down the law on Transfer of Property Act under similar facts and is dated 04.10.2017. This case law will prevail.
III. THE ALLEGED ADMISSION DOES NOT
DECIDE THE ISSUE. The learned CIT(A) has relied upon one sentence from the written submission filed during assessment proceedings. The appellant fairly states that the earlier counsel proceeded on an erroneous legal understanding. The same written submission also contained an admittedly incorrect claim under Section 54. An erroneous legal submission cannot enlarge the charging provisions of the Act. There is no estoppel against statute. The worthy CIT(A) has duly discussed at page 5 and 6 of his order the very famous CBDT Circular No. 14 (XL-35) dated 11/04/1955 the gist of which is that the AO is duty bound to make a true and correct assessment and not to go with the mistakes of the assessee but he has nowhere taken cognizance of this in his order and has simply gone but the Ld. AO has stated that assessee himself has declared its capital asset converted into stock-in-trade. Now, the Hon'ble Tribunal is required to determine whether Section 45(2) is attracted on the basis of the statute and evidence, and not merely because of an incorrect legal concession. We draw your kind attention to a Judgement of Hon'ble ITAT Delhi Bench C held in the case of Global Health Private Itd vs Dy CIT in ITA no 4237/DEL/2017 placed at page 144-155 of the Paper Book. In para 5.3 the Hon'ble ITAT has held "that in the present case, the assessee company is in the health care business and not in business related to real estate and as such it cannot be said that assessee, by entering into the Joint Development Agreement, has converted the land into its stock in trade. Therefore, we have no hesitation in holding that there is no scope of applicability of section 45(2) of the Act to the facts of the present case."
It is, therefore, humbly prayed that the invocation of Section 45(2) is without authority of law, and the addition of ₹1,93,78,293 deserves to be deleted in full.
Ground No. 2
IV. BUSINESS INCOME ADDITION IS
INDEPENDENTLY UNSUSTAINABLE. Without prejudice, the addition under the head "Business Income also deserves to be deleted. There is no evidence that the appellant carried on any business. The appellant never undertook construction: never marketed flats: never maintained business records: never carried on any organised activity of real estate development. Receipt of six flats under a development agreement does not convert the appellant into a trader.
V. The Ld. AO in para 4.5 (b) sub paragraph 2 of his order has alleged that "the assessee had transferred 05 flats to his wife Smt. Alka Singh vide Sale Deeds dated 23/07/2020 for a total sale consideration of Rs. 4.38, 68.000/-Therefore, the treatment of sale consideration so received by the assessee is from the sale of his SIT (Stock-in-trade) is treated as his Business Income for the year under consideration" In fact, NO ACTUAL CONSIDERATION WAS RECEIVED FROM THE WIFE. The deeds that consideration stood received. However, the appellant produced an affidavit of the wife categorically stating that no consideration was paid; and her bank statement, demonstrating that no payment was ever made, Neither the Ld. AO nor the worthy CIT(A) has disbelieved the affidavit or found the bank statement to be false. No contrary evidence has been brought on record. The authorities have ignored this material evidence and relied only on the recital in the sale deed. A finding rendered without considering relevant evidence cannot be sustained. The deduction of tax at source or the recital in the sale deed cannot, by themselves, establish that actual consideration passed between the parties when the direct evidence on record indicates otherwise. The appellant has transferred five flats, out of six flats received under this JDA, to his wife in order to attain the title of flats so that these could be mortgaged with the bank.
VI. The Hon'ble Bench of ITAT, Visakhapatnam in Adilakshmi Srungavarapu vs. ITO, Ward-1(2), Visakhapatnam [ITA No. 702/Viz/2019]. dated 28.06.2022, placed at page 156-161 of Paper Book, on similar facts held that where a property is registered in the name of wife solely to safeguard the interest in the property, and no actual consideration passes from the wife to husband, the transaction cannot be treated as involving real consideration. It was held that consideration mentioned in the sale deed was only for the purpose of stamp duty determination and hence it cannot be treated as a consideration received by the husband nor pard by the wife.
Similarly, the Hon'ble ITAT, Delhi E Bench in Sunil Kumar vs. ITO, Ward 1(4), Faridabad [ITA No. 957/Del/2025), dated 20.08.2025, placed at page 162-166 of Paper Book, has held that a deed executed by a husband in favour of his wife, unsupported by actual payment of consideration and corroborated by bank statements and an affidavit, does not constitute a "transfer" for income-tax purposes and cannot give rise to a sale attracting capital gains or business income.
Thus, the addition of ₹2,20,98,985 assessed as Business Income may kindly be deleted.
Per contra the Ld. DR relied on the orders of the authorities below.
We have considered the findings given by the AO in the assessment order and Ld. CIT(A) in the appellate order. We have considered the arguments of Ld. Counsel of the assessee and that of the Ld. DR. The coordinate Bench order in the case of Global Health Private Limited (supra) it has been clearly held by the coordinate Bench that the assessee company is in the health care business and not in business related to real estate as such it cannot be said that the assessee by entering into joint development agreement has converted the land into its stock in trade.
On this finding the coordinate Bench has held that there is no scope of applicability of Section 45(2) of the Act in such cases.
Based on this finding of the coordinate Bench the Ld. Counsel argued and prayed for rejection of invocation of Section 45(2) of the Act and addition made to the tune of Rs.1,93,78,293 deserves to be deleted in full. We are of this considered view that the assessee is not in the business related to real estate, therefore, in the case it has entered into a Joint Development Agreement for some certain property, the nature of that joint development agreement automatically does not cover the asset into stock in trade and once the issue of a stock in trade is not proved beyond doubt, the section 45 (2) cannot invoked in such cases. Here also, since the capital asset was not converted into stock-in-trade, the addition of Rs. 1,93,78,293/- made by the AO and sustained by the Ld. CIT(A) as LTCG cannot be confirmed. We have considered various case laws brought on record by the Ld. Counsel on this issue and after taking into account the facts of the case, in our considered view, addition made by the AO and sustained by the Ld. CIT(A) cannot be confirmed So assessee’s appeal on this issue is allowed.
The second ground of appeal is confirmation of addition of Rs.2,20,98,985/- as business income on account of sale of stock in trade by the Ld. CIT(A). On this issue the Ld. Counsel of the assessee argued and relied upon the order passed by coordinate Bench of ITAT in the case of Adilakshmi Srungavarapu vs. ITO (supra) passed by Visakhapatnam Bench in ITA No.702/Viz/2019 and Sunil Kumar Vs. ITO in ITA No.957/Del/2025 (supra) passed by the coordinate Bench of ITAT, Delhi. In both these orders it has been held by coordinate Bench that a deed executed by a husband in favour of his wife, unsupported by actual payment of consideration and corroborated by bank statements and an affidavit, does not constitute a “transfer” for income-tax purposes and cannot give rise to a sale for business income.
We have considered the findings given by the authorities below on this issue and we have considered the issue decided by the coordinate Bench on similar facts and issues as discussed above.
The Ld. DR could not rebut the findings given in case laws mentioned by the Ld. Counsel of the assessee.
Similarly on the second issue since the husband has transferred the property in the name of wife for the simple reason to safeguard the interest of property without any actual payment of consideration from wife to the husband. This transaction also cannot be considered as sale of the property from husband to wife. A sale deed might have been expected. But that could be simply for the purpose of some duty consideration and it could not be treated or called as a consideration received by the husband from the wife. Keeping in view the case laws of Sunil Kumar (supra) and Adilakshmi Srungavarapu vs. ITO (supra) we do not find any reason to hold it as business income. Accordingly, additions sustained by the Ld. CIT(A) cannot be sustained.
In the result, the appeal filed by the assessee on both the grounds are allowed.