48. Where the Property is Treated as Business Asset and not Capital Asset there is no Question of Invoking Section 50C of the I.T. Act

In one case the assessee-company filed its return of income for the assessment year 2004-2005 on 1.11.2004, admitting an income of ` 78.23 lakh and claimed set-off of the entire income against the earlier years losses and claimed capital loss of ` 83.64 lakh. While completing the assessment, the Assessing Officer noticed that the assessee claimed a capital loss on the sale of the property at GR. The consideration shown was for ` 5 crore. However, while registering the sale deed, the SubRegistrar took the guideline value of ` 6.94 crore and levied stamp duty and registration charges on the said value.

The assessee was given power of attorney by the vendor and the assessee was engaged in the business of investment in shares and property development. Because of this, the activities of the assessee were treated as business. Therefore, while computing the income, the question of indexation cost was not considered and the cost of the land was taken as ` 3.19 crore. In the balance sheet, the value of the property was shown as ` 2.55 crore under current assets. The Assessing Officer held that though the apparent sale consideration was ` 5 crore, the sale price should be taken at the amount as fixed by the registering authority on the basis of the guideline value of ` 6,94 crore. Accordingly, the Assessing Officer computed the profit on the sale of the property.


The assessee was aggrieved by this order of the Assessing Officer. Hence, the assessee filed an appeal before the CIT (Appeals) by contending that the Assessing Officer was not correct in invoking Section SOC of the IT. Act since that section would apply only to computation of income under capital gains and not for computation of business income. It was also contended that the payment to the land owners in a sum of
` 63.61 lakh and the brokerage paid in a sum of ` 12.5 lakh should also be reduced. The CIT (Appeals) directed the Assessing Officer to verify the claim. However, he agreed with the assessee’s contention that the provisions of Section 50C of the IT. Act would apply only for computation of capital gains and not for computation of business income. Therefore, he directed the Assessing Officer to adopt the sale consideration of ` 5 crore.


Aggrieved by the order of the CIT (Appeals), the Revenue filed an appeal before the Income-tax Appellate Tribunal which held that the provisions of Section 50C were not applicable when the income was treated as business income. On that ground it dismissed the appeal. The correctness of the order was canvassed by the Department.
 
After perusing the materials on record and hearing the counsel for the Revenue, the High Court was of the view that it was not in dispute that the activity of the assessee was property promoter. It could be gathered from the facts available on record that the assessee had obtained power of attorney from the owner of the property and paid a sum of ` 3.19 crore to the owner of the property and also incurred expenditure in a sum of ` 2.55 crore in connection with the said property for the assessment year 2004-05. The balance of ` 63.61 lakh was incurred during the assessment year 2004-05. The amounts so paid were shown under the head “Loans and advances” in the balance sheet and not under the head “Fixed assets”. Later on the property was sold to MIs. MRF Limited for a sum of ` 5 crore by a deed of conveyance, in which the assessee represented the owner in the capacity of the power of attorney. The Assessing Officer, in order to determine the value of the property invoked the provisions of Section SOC of the I.T. Act and brought the entire amount to ` 6.94 crore. The appellate authority deleted that portion of the order of the Assessing Officer taking the sale consideration at ` 6.94 crore as against ` 5 crore, the apparent sale consideration shown in the sale deed. Taking note of the facts above, the Tribunal also came to the conclusion that invocation of Section SOC of the IT. Act was not warranted as the property was never held by the assessee as capital asset. In view of these facts and circumstances of the case, the High Court was of the view that the Tribunal came to a correct conclusion and the question of law formulated for its determination has to be answered in the affirmative against the Revenue. Thus, the appeal of the Department was dismissed.
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