The Supreme Court ruled that merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade.
Facts
The dispute pertains to the Assessment Year (AY) 2009-10. The assessee entered into an agreement with one M/s Kirit City Homes Pvt. Ltd. The development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500/. It appears that as per paragraph 6 of the development agreement and as per the receipt of the deed, consideration of Rs. 15,94,06,500/ was agreed and received by the assessee.
During assessment, it was noticed by the AO that the aforesaid was not disclosed while filing the return of income. The assessee did not enter the aforesaid income into his profit and loss account.
The assessee was asked to explain the transaction as it was not appearing in its profit and loss account. The agreement was also furnished to the assessee along with the notice. In response, the assessee vide letter stated that the transaction was duly offered to tax in AY 2008-09 reflecting a consideration of Rs. 5,24,27,354/. The assessee also stated that it had entered into a “rectification deed” with the said party on 30.05.2008. By the said ratification, it was claimed that the value of the development rights was reduced from Rs 15,94,06,500/ to Rs. 5,24,27,354/. As the transaction was pertaining to AY 2009-10, the assessee was served a further notice under Section 142(1).
Submission
Balbir Singh, ASG appearing for the Revenue, submitted that the High Court had failed to appreciate that the order of the ITAT was perverse and contrary to facts on record.
It is submitted that the ITAT failed to appreciate that the assessee has taken contrary stands before the assessing authority and the Tribunal, on account of sale of development rights.
Senior Advocate S.K. Bagaria, appearing for the assessee, submitted that the assessee has been engaged in the business of building and development of properties since the year 1999-2000. The assessee’s balance sheets show that it had work in progress/inventories year after year, since 1999-2000. The same has been accepted by the department all these years; even after scrutiny assessments under Section 143(3) of the Income Tax Act, 1961.
Decision
The division bench of Justice M.R. Shah And Justice B.V. Nagarathna observed that the AO treated the transaction as capital assets. ITAT has reversed the said findings and held that the transaction was stock in trade. It appears that the AO specifically recorded the findings on examining the balance sheets for the AY 2006-07 to 2009-10 that there was not even a single sale during all these years and that there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade.
The court said that the ITAT after examining the opening and closing balance for the AY 1996-97 to 2007-08 observed that in multiple years, inventory was shown in the balance sheet, without discussing the claim of the assessee and held that the transaction in question is sale of stock in trade.
The bench added that merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade.
“As per the settled position of law in order to examine whether a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade, nature of transaction over the years etc., are required to be examined”, the court stated.
The bench observed that the ITAT has without examining any of the relevant factors confirmed that the transaction was transfer of stock in trade.
It was noted by the court that as per the claim of the assessee and the entry made and reflected in the ledger account of the assessee as on 31.03.2008, an amount of Rs. 15,94,06,500/ was paid to a third party i.e., SICCL.
The court said that the ITAT has not even questioned the factum of refund of differential amount of Rs. 10,69,79,146/ to the purchaser on account of rectification deed. The ITAT ought to have appreciated that the moment the receipt of the amount is received and recorded in the books of accounts of the assessee unless shown to be refunded/returned, it is to be treated as income in the hands of the recipient.
The bench held that the ITAT has not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade and has not considered the relevant aspects as above which as such were required to be considered by the ITAT.
Case title: Commissioner of Income Tax v/s Glowshine Builders & Developers Pvt. Ltd.
Citation: Civil Appeal No. 2565 Of 2022