Vildirect: IncomeTax-caselaws-2000-VIL-293-ITAT-MUM

2000-VIL-293-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

IT Appeal Nos. 1420, 1421 (Mum) of 1992

Date: 28.02.2000

DEPUTY COMMISSIONER OF

CREST HOTELS LTD.

BENCH

R. Easwar And P. Parikh,JJ.

JUDGMENT

Per Shri Pradeep Parikh, Accountant Member.

1. The three appeals by the Department are directed against three separate orders of the learned CIT (Appeals) dated 29-11-1991, 29-11-1991 and 30-3-1994 for assessment years 1989-90, 1990-91 and 1991-92. Since a common issue in involved in all these three appeals, they are being disposed off together by this combined order.

2. The common ground in all the three appeals is against holding that capital gains on conversion of capital asset into stock-in-trade being immovable properties arise only when last flat is given to the buyer, and accordingly holding that the amount of capital gains of Rs. 5,18,09,053 arising in assessment year 1989-90, of Rs. 1,39,39,769 arising in assessment year 1990-91 and of Rs. 3,96,52,458 arising in assessment year 1991-92, be taxed in assessment year 1992-93. The assessee has also raised cross objections in all the three years supporting the aforesaid decision of the CIT (Appeals).

3. The assessee-company had constructed a residential complex known as "Madhuli". Earlier, the building was a five-star hotel named as Poonam International which later on was renamed as Hotel Central Park. Assessee-company is stated to be the owner of the land and building of the said hotel. In April, 1986, the hotel business was discontinued and the capital asset comprising of land and building of the hotel business were converted into stock-in-trade of the construction business in the form of residential complex. The Written Down Value of the converted asset was Rs. 3,09,81,911. As per the valuation report of M/s. R.M. Patange, Architect, market value of the converted asset was Rs. 14,21,67,625. In assessment year 1989-90, assessee first worked out deemed capital gains at Rs. 6,62,45,386 as follows:-

Rs. (a)	Pertaining to scientific research	3,935
(b)	On shareholders meeting	30,115
(c)	On staff members (away from place of work)	5,94,271
(4)	Payments to clubs	52,485 6,80,806."

Assesses offered the above sum of Rs. 1,40,71,849 for taxation. The reasons for deferring the taxability of capital gains given by the assessee to the Assessing Officer can be summarized as follows:

(1) Transfer is not complete unless conveyance is executed;

(2) Project gets complete only when Building Completion Certificate (B.C.C.) is obtained from Municipal Corporation and it is received only when all the formalities of construction as per approved plan, including smallest and minutest specification are complied with.

(3) Conversion from capital asset to stock-in-trade being done in assessment year 1987-88, provisions of section 2(47)(v) and section 2(47)(vi) do not apply as the same are applicable from 1-4-1988, and hence date of handing over possession of flats is not relevant.

(4) The entire land belonging to the assessee-company being lease hold property, and hence cannot assign or part with the possession of the demised premises without the consent of the lessors.

4. Assessing Officer referred to section 45(2) to stress the point that capital gains shall be chargeable to tax in the previous year in which the stock-in-trade is sold or otherwise transferred- He emphatically stressed the applicability of sections 2(47)(v) and 2(47)(vi) to the facts of the present case. He also referred to the meaning of "immovable property" as given in clause (d) of section 269UA. According to him, in view of the amended provisions in sections 2(47)(v) and 2(47)(vi), legal conveyance was not essential for the purpose of taxing capital gains on convened assets. Accordingly, he computed capital gains for the year as follows:

(Editor: The text of the vernacular matter has not been reproduced. required.)

Further, in view of the provisions of section 50 of the Act, Assessing Officer treated the same as short term capital gains.

5. Similarly, in assessment year 1990-91, short term capital gains of Rs. 1,39,39,769 was worked out on 19,692 sq.ft of area, the possession for which was handed over during the said year. In assessment year 1991-92 possession of 56,015 sq.ft. of area was handed over and accordingly short term capital gains worked out to be Rs. 3,96,52,458.

6. In the first appeal, at the outset, CIT (Appeals) held that to complete the transfer, one should not wait for execution of conveyance deed if the entire sale consideration is received, entire construction work is over and entire possession of all the flats are handed over to the buyer. Assessee was aggrieved by this observation of the CIT (Appeals) and has raised objection against it in ground No. 3 of its cross objections for assessment years 1989-90 and 1990-91. However, CIT (Appeals) found merit in assessee's contention that piecemeal possession of some of the flats would not result in transfer of land and building or completion of project on the arguable and possible method of accounting profits on completed project basis. Accordingly, he held that in multi-storied structure even if single unit is not handed over possession, then possession of land and building is not given to the occupier. He also held that the amended provisions of section 2(47) would not apply in this case as according to him, amendment is applicable to 'transfer in relation to capital asset and not to stock-in-trade'. CIT (Appeals), therefore, on the fact that last possession was handed over on 5-10-1991, held that capital gains would accrue only in assessment year 1992-93 and this, according to him, would not jeopardize the position of revenue. He also held that so far as capital gain on land is treated, the same should be treated as long term capital gain and that arising on sale of building, should be treated as short-term capital gain.

7. The learned D.R., after narrating the facts, which already find a place above, submitted that it would be a strange situation if the contention of the assessee was to be accepted, in so far as that assessee did not deny the sale of flat but it was without sale of land. Moreover, assessee itself has offered the profit arising on sale of flat at business profit but denied its sale for capital gains purpose. He referred to the decision of Punjab and Haryana High Court in Hira Lal Ram Dayal v. CIT [1980] 122 ITR 461 to stress that factum of sale was important. Referring to the definition of "immovable property" in section 269UA(J) and referring to the decisions in Mysore Minerals Ltd v. CIT [1999] 239 ITR 775 (SC) and CIT v. Podar Cement (P.) Ltd. [l997] 226 ITR 625 (SC), the learned D.R. submitted that the definition of the term "owner" was all pervasive. Referring to the decision in M. Syamala Rao v. CIT [1998] 234 ITR 140 (AP), it was submitted that conversion would affect only the determination as to whether it was short term or long term capital gain. The learned D.R. in particular referred to the order of the CIT (Appeals) in assessment year 1991-92 in which it has been mentioned that in order to constitute a transfer it was not necessary that conveyance deed should be executed. He strongly challenged the decision of the CIT (Appeals) that for capital gains purpose, transfer would be complete only when last flat was given to the buyer. Finally, the learned D.R. strongly relied on the observations of the Supreme Court at page 643 in the case of Podar Cement (P.) Ltd. (supra) and at page 781 in the case of Mysore Minerals Ltd. (supra).

8. The main contention of the learned Counsel was that as per section 2(47) there was no capital gain in the years under appeal as what was sold in these years was stock-in-trade and section 2(47) was not concerned with stock-in-trade at all. To drive home this point it was submitted that the definition of the term "capital asset" as per section 2(14) specifically excluded stock-in-trade. As a consequence, it was submitted, clauses (v) and (vi) of section 2(47) were not relevant at all. Our attention was drawn to the fact that till the construction work went on, there was addition in construction account from year to year and in assessment year 1992-93, when the work was complete, construction account was transferred to the Profit and Loss Account. Further, it was contended that as long as agreed work was not done, how the work could be said to be complete. Nonetheless, assessee co-operated with the department by showing business profit in the return, though, in the books, construction account was still continuing. Actual sales had not taken place because permission from Mumbai Municipal Corporation was not obtained and possession had been given only for the purpose of carrying out interior works and not for dwelling. In nutshell, it was sought to be emphasized that in the facts of the given case clauses (v) and (vi) of section 2(47) were not at all relevant and transfer, for the purpose of capital gain should relate to the date of conveyance.

9. We have considered the rival contentions and the material on record. We are concerned here about the time of accrual of capital gains in case where capital asset is converted into stock-in-trade and the arisal of tax liability thereon. As per section 45(1) capital gain arises on transfer of capital asset. Also, as per the said section, capital gain is chargeable to tax in the previous year in which the transfer takes place. As per section 2(14), capital asset does not include stock-in-trade. As per the inclusive definition of the term "transfer" given in section 2(47) of the Act, sale is one of the several modes of transfer. Conversion of capital asset into, or its treatment as, stock-in-trade of the business carried on by the assessee, is another mode of transfer as per the said definition. Section 45(2) acts as an exception to section 45(1). It [i.e., section 45(2)] provides that capital gain arising on account of conversion of capital asset into or its treatment as stock-in-trade (hereinafter referred to as 'conversion' for short) shall be chargeable to tax in the previous year in which such stock-in-trade is sold or otherwise transferred.

10. With this background let us consider the facts in the present case. In the case before us, conversion had taken place in June, 1986. As noted above, conversion is a mode of transfer under the Act. Thus, after June, 1986, the asset in question no longer remained a capital asset. As a consequence, what was sold in the years under consideration was part of stock-in-trade and not capital asset. If what was sold was not capital asset, one cannot go back to section 2(47) to ascertain whether transfer by way of sale is complete or not. In fact, in the instant case, the role of section 2(47) was relevant only in 1986 when conversion took place. Thereafter, it had no role to play at all, because it is merit only for capital asset and not stock-in-trade. We have noted earlier that capital asset does not include stock-in-trade. Thus, all the arguments connected with section 2(47) made by either side have no relevance at all. In other words, the argument of the learned counsel that transfer can be effected only when conveyance is executed, is of no significance. The alternate argument that transfer is effective only after the last flat is sold, is also of no significance. The observation of the Assessing Officer about the applicability of clauses (v) and (vi) of section 2(47) is also irrelevant.

11. Transfer has already taken place in 1986. Section 45(2) merely fixes the year of liability. The year of liability is the year in which stock-in-trade is sold. The fact that stock-in-trade is sold in parts in the years under consideration cannot be disputed, because the real profit that arises on sale of stock-in-trade is business profit, which the assessee itself has offered for taxation. If sale of stock-in-trade is not denied, then as per section 45(2) which only fixes the year of liability, assessee cannot deny his tax liability on capital gains also which by fiction, had already arisen in 1986. The Legislature in its wisdom, considering the fact that on conversion only notional income has arisen, postponed the tax liability thereon till real income was earned on that asset. The assessee cannot, in our opinion, further postpone the liability beyond the point of time contemplated by section 45(2). In short, tax liability on the capital gain on conversion will arise in the same year/s in which business profit arises to the assessee on sale of such asset. The asset cannot have dual characteristic at the same point of time in the hands of the same person, which view the assessee has sought to canvass before us. This is not contemplated by any of the provisions of the Act and hence cannot be accepted. By assessee's own action, the asset had assumed the characteristic of stock-in-trade. Hence, when business profit on sale of such stock accrues to the assessee, tax on capital gain also will be levied in the same year as is envisaged by section 45(2). In such an event, all the arguments relating to conveyance, possession etc. which are generally related to transfer of capital asset, are rendered meaningless.

12. In the instant case, the assessee itself having recognized business profits on sale of converted asset in the years under consideration, tax on capital gains on conversion will be levied in these years according to the area sold by the assessee in each year. In view of the foregoing discussion, we allow the ground of the department for all the three years.

13. We now take up the cross objections of the assessee. In assessment years 1989-90 and 1990-91 the first five grounds are common and they read as follows:

1. "On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) has rightly upheld that the capital gain on conversion of capital assets into stock-in- trade being immovable properties arises only when possession of last flat is given to the buyers.

2. The Respondent therefore prays that the order of the learned Commissioner of Income-tax (Appeal) on the above ground be upheld.

3. Without prejudice, your respondent submits that under section 2(47) read with section 45(2) of the Income-tax Act, 1961 capital gain arises only when instruments of conveyance is executed and registered by the Respondent in favour of the flat holders collectively to finally "transfer" the immovable properties of land and building.

4. Without prejudice, your respondent submits that in any event no capital gain arises in this assessment year.

5. Without prejudice, your respondent craves leave to rely on the submissions made before the learned Commissioner of Income-tax (Appeals) VI, Mumbai."

In assessment year 1991-92, the following ground is raised:

"On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) has correctly held that the liability to capital gain of Rs. 3,96,52,458 will be taxable in assessment year 1992-93 and not in the year under consideration."

In view of our decision in the Departmental appeals above, all the above grounds of the assessee stand rejected.

14. In assessment years 1989-90 and 1990-91 one more common issue is there. It is against exclusion of expenses and losses of M/s. Wembly Hotels from losses to be carried forward Assessee-company had taken over the management of Wembly Hotels in August, 1986. However, with effect from 31-12-1988, hotel business was discontinued and assessee-company had become partner in the partnership firm of M/s. Wembly Hotels. Thus, since a new entity had come into existence, Assessing Officer did not permit set off of losses of the erstwhile proprietary business pertaining to assessment years 1987-88 and 1988-89 either against business profit or capital gain of assessment year 1989-90. Similarly, in assessment year 1990-91 also the loss was disallowed. CIT (Appeals) confirmed the disallowance after observing that the business taken over never commenced and the expenses were more in the nature of takeover costs. Such costs being of the pre-commencement period and of distinct business, set off was not allowed.

15. The learned D.R. supported the orders of the lower authorities whereas the learned counsel contended that the CIT (Appeals) had no right to sit over the judgment on tosses determined in earlier years.

16. Considering the material on record, we uphold the contentions of the learned counsel and direct that losses of earlier years pertaining to Wembly Hotels be allowed to be carried forward. The Assessing Officer did not allow the carry forward mainly on the ground that later on Wembly Hotels became a partnership firm in which assessee was a partner. Hence according to the Assessing Officer a separate legal entity had come into existence. However, he has overlooked the legal principle that firm has no legal existence of its own and it is merely a business carried on by the partners. This principle was enunciated by the Supreme Court in the case of CIT v. Ramniklal Kothari [1969] 74 ITR

57. Further, it is evident from the assessment order that Wembly Hotels has carried on business in the years under consideration. It is evident from the fact that assessee's share in the losses for the current years have been allowed to be adjusted while computing total income. Hence, we see no reason not to allow the carry forward of losses of earlier years pertaining to Wembly Hotels. Earlier the business of Wembly was carried on by the assessee as a proprietor and now also it has been carried on by the assessee as one of its partners Ramniklal Kothari's case (supra). Therefore, we hold that earlier years' losses of Wembly Hotel as claimed by the assessee be allowed to be carried forward.

17. In the result, all the three appeals by the Department are allowed, Cross Objections of the assessee for assessment years 1989-90 and 1990-91 are partly allowed whereas for assessment year 1991-92 is dismissed.

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