Commissioner of Income Tax vs Saffire Hotels (P) Ltd.

This appeal by the Revenue under s. 260A of the IT Act, 1961 challenges the order dt. 30th Sept., 2011 passed by the Tribunal. The relevant assessment year is 2003-04. The appellant Revenue has raised the following questions of law for our consideration:

"1. Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in accepting the plea of the assessee for invoking of s. 45(2) of the Act in relation to the computation of income arising from the conversion/treatment of land into stock-in-trade of its construction business and profits thereon?

Whether on the facts and in the circumstances of the case and in law the Tribunal is correct in setting aside the case to the file of the AO to decide the year of conversion or treatment of land into stock-in-trade in spite of the fact that the assessee company is involved in construction business and the land under construction was purchased for construction business only?

Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in holding that the onus was on the AO to corroborate his assertion that there was cash component received by the assessee in sale transaction with the purchaser ignoring the documentary evidence found during the course of survey under s. 133A of the Act?"

Re: Question Nos. 1 &2

The respondent-assessee is engaged in the business of developing property and declared an income of Rs. 35.59 lacs. The respondent-assessee claimed to be following project completion method and no premises has been sold during the relevant assessment year. During the assessment proceedings the respondent-assessee''s contention that no premises had been sold was found to be incorrect. Thus, by order dt. 23rd Jan., 2006 the AO enhanced the income by Rs. 2.61 crores being the undisclosed income.

In appeal before the CIT(A) the respondent-assessee took up an alternative stand viz. that even if the AO is correct in determining that the property had been sold during the year yet a portion of the undisclosed income is assessable as capital gains in as much as the land originally was a capital asset of the assessee company which had been formed to run a hotel. Therefore, the provisions of s. 45(2) of the Act were attracted when the land (capital asset) was converted into stock-in-trade. It is at that time the same to be brought to tax although payable when the stock-in-trade was sold. The CIT(A) did not accept the above submission of the assessee and upheld the order dt. 23rd March, 2006 of the AO.

On further appeal, the Tribunal by the impugned order on the basis of the facts found that during the course of assessment proceedings before the lower authorities evidence was brought on record which indicated that the respondent-assessee was incorporated in 1970. Its main object was to carry on its business of running a hotel and for which purpose land in question was acquired as a capital asset. It was only later that the land in question was utilized as part of its stock-in-trade for the purpose of carrying on its business of construction. The aforesaid conclusion was reached by placing reliance upon the permission of the Government of India Tourism Department dt. 21st Aug., 1971 evidencing approval for the proposed construction of a hotel building. Further evidence was led before the Tribunal in the form of commencement certificate issued in 1972 by the Pune Municipal Corporation for undertaking the basic initial construction work for the hotel project. Thus, the Tribunal by the impugned order held that the provisions of s. 45(2) of the Act in the present facts would be applicable.

Further, on the issue as to the date on which capital asset was converted into stock-in-trade was concerned, the respondent-assessee contended that 1993 be treated as the year while Revenue contended that 1989 be treated as the year conversion into stock-in-trade. The impugned order restored this issue of date of conversion into stock-in-trade to the AO to decide on the basis of the evidence produced before it.

The grievance of the Revenue to the impugned order is that it places reliance on commencement certificate dt. 15th June, 1972 issued by the Pune Municipal Corporation which was produced only before the Tribunal and thus same could not be relied upon. Besides, it is emphasized that the respondent-assessee in spite of Being in construction business has been showing land as capital asset in its balance sheet. In these circumstances, it is the submission on behalf of the Revenue that s. 45(2) of the Act is inapplicable as the assessee is in the business of construction. Consequently, it is also submitted that there was no occasion for the Tribunal to restore the issue to the AO to determine the relevant assessment year in which the capital asset was converted into stock-in-trade.

We find that the impugned order of the Tribunal has on facts found that the respondent-assessee was incorporated in the year 1970 with the main object of establishment of its hotel. There was evidence before the lower authorities in the form of letter dt. 21st Aug., 1971 from the Government of India, Department of Tourism granting approval to its proposed hotel and the acquisition of the lands in question was for that purpose. Besides, there was also an opinion of the company secretary in 1993 advising the respondent-assessee that it could utilize the land in its new business of development of land construction. Therefore, even if one ignores the fresh evidence which was in the form of commencement certificate dt. 15th June, 1972 issued by the Pune Municipal Corporation during the course of hearing before the Tribunal, the result would be no different. The fact that the land and its buildings were treated by the respondent-assessee as capital asset as according to them the project was not completed loses all significance, once the Revenue does not accept the same and proceeds to hold that the property had been sold in the subject assessment year and the same has to be subjected to tax. On the aforesaid finding, the issue of conversion of a capital asset into stock in trade would arise and require consideration. The impugned order on facts has found the land was originally a capital asset which has later been converted into stock-in-trade. Thus, s. 45(2) of the Act is applicable.

However, the capital gains on conversion of capital assets into stock-in-trade is payable only in the year in which the assessee ultimately sells such stock-in-trade yet for purpose of computing capital gains the date of conversion would have to be determined. This exercise has to be carried out by the AO after considering the evidence to be led before it. Thus, no fault can be found with the above direction of the Tribunal as it is a consequence of the finding of fact arrived at by the Tribunal that the land in question was originally held as capital asset and was later converted into stock-in-trade.

In view of the above, so far as question Nos. 1 and 2 are concerned the view of the Tribunal is a possible and reasonable view on the basis of the appreciation of facts. Thus, no substantial question of law arises for our consideration. Therefore, we see no reason to entertain question Nos. 1 and 2. Appeal dismissed as regards questions Nos. 1 and 2.

Re: Question No. 3:

As a result of survey proceedings, the AO sought to bring to tax an amount of Rs. 27.31 lacs as concealed income on account of certain cash transactions. This was on the basis of certain documents found during the course of survey. It was on the basis of the documents it was found that the respondent-assessee had paid stamp duty of a sale of a particular flat, from which it was inferred that the same amount of consideration was received in cash. This was on the basis that normally the stamp duty is paid by the buyer. However, the above allegation was denied by the director of the respondent-assessee during the course of assessment proceedings. However, the AO did not accept the same and an amount of Rs. 27.31 lacs was added to the returned income as undisclosed income in the assessment order dt. 23rd March, 2006.

In appeal, the CIT(A) upheld the assessment order on the basis of the registered document of sale showing the consideration of only Rs. 2.11 crores instead of Rs. 2.44 crores as in other cases. On further appeal, the Tribunal, on the facts on the record noticed that in the sale agreement dt. 24th Nov., 2001 the stated consideration is Rs. 2.11 crores. The same was accepted by the appropriate authority as evident by a certificate of clearance under s. 269UL(3) of the Act in Form No. 37-1 was issued. The Tribunal reached a finding of fact on examination of documents that there is no corroboration to the stand of the AO that there was cash element of Rs. 27.31 lacs involved in sale of the flat at Rs. 2.11 crores.

We find that the above findings of the Tribunal are a finding of fact and the lower authorities without any basis drew an inference that an amount of Rs. 27.31 lacs was the amount received in cash by the respondent-assessee. We find that the aforesaid conclusions reached by the Tribunal is a possible and reasonable view. Thus, no substantial question of law arises for our consideration. Therefore, question No. 3 is dismissed. Accordingly, appeal dismissed. No order as to costs.