Based on recording of inventory in books of A/c, sale of development right in property will not be ‘stock in trade’

While stating that the moment the receipt of amount is received and recorded in the books of accounts of assessee, unless shown to be refunded/returned, it is to be treated as income in the hands of recipient, the Supreme Court of India held that merely on basis of recording of inventory in books of accounts, transaction of sale of development rights in a property would not become stock in trade.

The Division Bench of Justice M R Shah and Justice B V Nagarathna observed that in order to adjudicate if a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade as well as nature of transaction over the years are required to be examined.

ASG Balbir Singh and AOR Raj Bahadur Yadav appeared for the Appellant/Revenue, whereas Advocate Himanshu Mehta appeared for the Respondent/Assessee.

Briefly, the assessee entered into an agreement with one M/s Kirit City Homes Pvt. Ltd., wherein the development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500/-. As per the development agreement and the receipt of the deed, consideration was received by the assessee. During assessment, it was noticed by the AO that the same was not disclosed while filing the return of income. The assessee was accordingly asked to explain the transaction as it was not appearing in its profit and loss account. In response, the assessee 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 a “rectification deed” with the said party, whereby 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 u/s 142(1). The assessee replied to the same and regarding the applicability of provision of Section 50C, the assessee stated that it had sold its stock in trade and not the assets. The AO however, made the addition of Rs. 15,94,06,500/- by treating the same as short term capital gains and consequently, added the same to the income for the year under consideration.

When the matter reached ITAT, it was held that the assessee is engaged in the business of building and development. The ITAT further noted that the assessee showed the cost of land along with related expenditure as work in progress/inventory since 1999-2000 and the assessment orders were subsequently made u/s 143(3), wherein the AO accepted the nature of business of the assessee. Therefore, ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset. The ITAT also held that the assessee has reduced the sale consideration from Rs. 15,94,06,500/- to Rs. 5,24,27,354/- during FY 2007-08 based on MOU and the said amount of the income has already been declared in the AY 2008-09 and therefore, such income cannot be declared in AY 2009-10. Accordingly, the ITAT deleted the addition made by AO of Rs. 15,94,06,500/-.

After considering the submission, the Apex Court found 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 Apex Court said that the ITAT has neither dealt with the findings given by the AO nor verified/examined the total sales made by the assessee during the relevant time and during the previous years.

Speaking for the Bench, Justice Shah clarified that the High Court has also failed to appreciate that even in the event of acceptance of claim made by the assessee, including the assertion that Rs. 15,94,06,500/- was shown in the tax return in the earlier AY i.e., 2008-09, the differential amount of Rs. 10,69,79,146/- on account of reduction in sale consideration of development rights was to be assessed in the current year as either capital gain or business income.

“As per the claim of the assessee and the entry made and reflected in the ledger account of the assessee as on Mar 31, 2008, an amount of Rs. 15,94,06,500/- was paid to a third party i.e., SICCL. However, thereafter, according to the assessee there was a rectification deed and the amount was reduced from Rs. 15,94,06,500/- to Rs. 5,24,27,354”, added the Bench.

Thus, the Top Court pointed out 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.

Accordingly, the Top Court remanded the back to the ITAT to consider the appeal afresh in accordance with law and on its own merits, while taking into consideration as to whether the transaction in question is the sale of capital assets or sale of stock in trade and other aspects.

Cause Title: CIT vs. Glowshine Builders & Developers [Civil Appeal No. 2565 of 2022 / 2023-Enterslice-7-SC-IT]

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