The Two Bench of Justices M.R. Shah and B.V. Nagarathna of the Supreme Court invalidated the decisions of the Income Tax Appellate Tribunal (ITAT) and the Bombay High Court in order to uphold that the transfer of development rights by a builder constitutes a transfer of capital assets rather than stock in trade as recorded by the Assessing Officer.
The bench remanded the matter to the Income Tax Appellate Tribunal to clarify the transaction as stock in trade or as sale of capital assets or a business transaction.
The assessee, M/s Glowshine Builders & Developers Pvt. Ltd entered into an agreement dated 06.05.2008 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.
The AO discovered during the assessment that the information was not declared while filing the income tax return. The assessee claimed that the transaction was properly offered to tax in AY 2008-09 indicating a consideration of Rs.5,24,27,354 in response to the notice sent by the AO.
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.
The AO increased the income for the year under review by Rs. 15,94,06,500 by categorising the additional amount as short-term capital gains. The assessee’s argument that the value of the transfer of development rights was reduced was similarly rejected by the Commissioner of Income Tax (Appeals).
However in the appeal the ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset.The tribunal also confirmed the reduction. The ITAT reversed the findings of the AO as well as the CIT(A) and allowed the appeal by deleting the addition made by the AO of Rs. 15,94,06,500.
The department preferred an appeal in which the High Court dismissed the said appeal by holding that none of the questions proposed by the Revenue are substantial questions of law.
Balbir Singh, the counsel appeared on behalf of the department, submitted that the High Court had failed to appreciate that the order of the ITAT was perverse and contrary to facts on record.
The division bench bolstered the AO’s records that the sale of land development rights constituted a transfer of capital assets rather than a transfer of stock in trade, and as a result, the transaction qualified as such.
It was further noted the ITAT’s order, which was issued without considering any pertinent facts, confirmed that the transaction involved a transfer of stock in trade. While evaluating the transaction in question as stock in trade, the ITAT did not take into account the pertinent details or relevant circumstances, nor did it take into account the pertinent details listed above, which the tribunal was obligated to take into account.
The Supreme Court ordered that the proper determination be made regarding whether the transaction in question involves the sale of capital assets or the sale of stock in trade, as well as other factors mentioned above. The bench granted the tribunal complete discretion to reach the best decision.
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