By TIOL News Service

MUMBAI, JULY 17, 2013: THE issues before the Bench are - Whether when the assessee is restrained by the court from sale of the factory land till the labour case is settled, any advance taken from a real estate developer can be subjected to capital gains even before the land user change permission is granted by the municipal authorities and Whether when the assessee's Board had decided to treat the factory land as stock-in-trade, the same is to be treated as merely paper entry for lack of construction activities. And the answers go against the Revenue.

Facts of the case

A) Assessee owned a piece of land and factory building at Goregaon, Mumbai. The Assessee was engaged in manufacturing of Ceramic tiles. As the assessee suffered losses, a lock out was declared in December 1989. On 21 June 1990, an Industrial Court passed an order restraining the assessee from selling and/or dealing with the factory land. Further, certain disputes had arisen in respect of the factory land with one M/s. Sterling Construction resulting in a suit being filed against the assessee. On 11 July 1994, this Court by interim order restrained the assessee from selling/transferring the factory land till the final disposal of the suit. Thereafter, on 19 November 1999, the assessee entered into a joint Development Agreement with one M/s. Sheth Developers Ltd. The Assessing Officer in his assessment order for assessment year 2000-01 took a view that the land had been transferred to M/s. Sheth Developers Ltd, during the assessment year and subjected the consideration received to capital gain tax. This was on the ground that under the above agreement, transfer of the land could be said to have taken place under Section 2(47)(v) of the Act.

In appeal, the CIT(A) held that there was no occasion for Section 2(47) of the Act to apply as no possession of the factory land could be given by the assessee under the agreement dated 19 November 1999 to M/s. Sheth Developers Ltd. Further no construction activity had commenced during the year under consideration. Thus, the assessee was not liable to capital gain tax for the assessment year 2000-01. On appeal, the Tribunal upheld the order of the CIT(A) and further held that the amounts received by the assessee from M/s. Sheth Developers Ltd. was only in the nature of advance subject to settlement of labour and other disputes so as to make the factory land free from encumbrances. If for some reason, the assessee was unable to fulfill its obligations, then it was required to refund the amounts to M/s. Sheth Developers Ltd.

B) In the year 1992 itself, the assessee decided to convert its factory land at Goregaon into stock-in-trade for the purpose of engaging in the business of real estate development. For that purpose, the assessee inducted on 12 March 1992 three new directors, having experience in real estate business. Immediately thereafter, on 14 March 1992, the board of directors decided to commence the business of real estate development and by extraordinary general meeting held on 31 March 1992, the assessee took consent from the shareholders to enter into business of real estate development and for that purpose converting its factory land into stock-in-trade. Thereafter, the assessee in furtherance of its objective of developing the factory land at Goregaon, sought permission to shift its factory from Goregaon to Taloja as well as to convert the factory land from industrial zone land to residential zone land. The assessee also obtained an NOC from the BMC for change of user of the factory land in October, 1993. The assessee also made various efforts with the Urban Land Ceiling (ULC) authorities, seeking permission for development under Section 22 of the ULC Act, 1976. The necessary permission was obtained in October 1999.However, the Assessing Officer did not accept the case of the assessee that the factory land had been converted into stock-in-trade in 1992. This was on the basis that there was no activity on the factory land since 1992 to 1999. Accordingly he concluded that the factory land had not been converted into stock-in-trade. In appeal, the CIT(A) took into account the facts stated and concluded that the assessee had converted its factory land into stock-in-trade in 1992. The upheld the finding of fact arrived at by CIT(A) that the factory land was converted into stock-in-trade in 1992. The grievance of the Revenue was that the resolution passed in 1992 were mere paper entries and did not establish conversion of factory land into stock-in-trade.

On appeal, the HC held that,

A) ++ the CIT(A) as well as the Tribunal had held that during the assessment year 2000-01, no transfer of capital assets by sale of land at Goregaon had taken place. This was not only for the reason that the assessee was restrained from disposing the factory land in question but also as observed by the CIT(A) and the Tribunal that during subject assessment year, no construction activity took place and even commencement certificate was issued in a subsequent assessment year. The amount received by the assessee was only an advance requiring fulfillment of certain obligations. The agreement itself provides that in case the assessee is not able to fulfill its obligation, then it was required to refund the amount to the developer;

++ thus, there was no transfer of land during the assessment year 2000-01. The revenue has not challenged the second part of the order of the Tribunal. Moreover, the Assessing Officer has interfered without any evidence that possession of factory land was given to assessee in the subject assessment year on the basis that construction activity had started. This is erroneous as the commencement certificate was only received from BMC on 7 November 2000 i.e. in the next assessment year. We find that two authorities viz: CIT(A) and Tribunal have rendered a finding of fact that no transfer of land took place in the concerned assessment year is not shown to be perverse. In this view of the matter, we see no reason to entertain question (a);

++ Question (b): In the year 1992 itself, the assessee decided to convert its factory land at Goregaon into stock-in-trade for the purpose of engaging in the business of real estate development. For that purpose, the assessee inducted on 12 March 1992 three new directors, having experience in real estate business. Immediately thereafter, on 14 March 1992, the board of directors decided to commence the business of real estate development and by extraordinary general meeting held on 31 March 1992, the assessee took consent from the shareholders to enter into business of real estate development and for that purpose converting its factory land into stock-in-trade. Thereafter, the assessee in furtherance of its objective of developing the factory land at Goregaon, sought permission to shift its factory from Goregaon to Taloja as well as to convert the factory land from industrial zone land to residential zone land. The assessee also obtained an NOC from the BMC for change of user of the factory land in October, 1993. The assessee also made various efforts with the Urban Land Ceiling (ULC) authorities, seeking permission for development under Section 22 of the ULC Act, 1976. The necessary permission was obtained in October 1999;

B) ++ we find that both the CIT(A) and the Tribunal have arrived at finding of fact that the factory land at Goregaon was converted into stock-in-trade during assessment year 1992-93. This finding was arrived on the basis of the facts stated in (i) herein above. The revenue has not been able to point out in what manner the finding of facts arrived at by the CIT(A) and the Tribunal that conversion of land into stock-in-trade during assessment year 1992-93 was perverse. In these circumstances, we see no reason to interfere with the finding of fact arrived at by the Tribunal. Therefore, we see no reason to entertain Question (b) as proposed by the revenue.

(See 2013-TIOL-554-HC-MUM-IT)