The Sc Ruled That A Transaction Cannot Be Classified As Stock In Trade Simply By Registering Inventories In The Books Of Accounts

Case title:

Commissioner of Income Tax 8 Mumbai v. Glowshine Builders & Developers Pvt. Ltd

Date of Order:

4 May 2023

Bench:

Hon’ble Justice M.R. Shah and Hon’ble Justice B.V. Nagarathna

Parties:

Appellant; Commissioner of Income Tax 8 Mumbai 

Respondent: Glowshine Builders & Developers Pvt. Ltd

SUBJECT

The Supreme Court has quashed the judgment and order passed by the Bombay High Court and the Income Tax Appellate Tribunal (ITAT) and has remitted the matter back to the ITAT for a fresh consideration of the appeal, taking into account the court's observations. The bench concluded that the ITAT did not properly consider the relevant factors while determining whether the transaction in question should be treated as stock in trade or sale of capital assets or business transaction.

OVERVIEW

• The assessee entered into an agreement dated 06.05.2008 with 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/¬ with a consideration of Rs. 15,94,06,500/ being received by the assessee.
• During   assessment, the AO noticed this amount wasn’t disclosed while filing ITR. In response, the assessee vide letter dated 04.10.2011 stated that the transaction was duly offered to tax in AY 2008­09 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). The   assessee   stated   that   it had sold its stock in trade and not the assets. The AO 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.
• The   Commissioner, IT (Appeals), Mumbai dismissed the appeal and confirmed the addition made by the AO. In   the   absence   of   proof   to buttress   such   claim, the   CIT   (A)   discarded the claim of the assessee that value of   the   transfer   of   development   rights   was reduced.
• The   ITAT, after   examining   the   chart submitted   by   the   assessee   pertaining   to opening balance and closing balance, held   that   the   assessee   is   engaged   in   the business of building and development.  The ITAT further noted that since 1999–2000, the assessee had listed the cost of the land and any associated expenses as work in progress or inventory. Subsequently, assessment orders were issued under Section 143(3) of the IT Act, wherein the AO acknowledged the assessee's line of business. 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   on   the basis of MOU on transfer of development rights and the said amount   of   the   income   has   already   been declared in the AY 2008¬09 i.e., FY 2007¬08 and   therefore, such income cannot   be declared in AY 2009¬10 i.e., FY 2008¬09. The ITAT agreed with the assessee that the sale consideration was Rs. 5,24,27,354/¬ only. Based on these findings, 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 Revenue filed an appeal with the High Court, which dismissed it after concluding that none of the questions it put out constituted significant legal issues. 

ISSUES RAISED

• Whether the Rs. 15,94,06,500/ being received by the assessee, from agreement dated 06.05.2008 with M/s Kirit City Homes Pvt. Ltd, should be considered as short-term capital gains for the AY 2009¬10?
• Whether the Rs. 15,94,06,500/ being received by the assessee, from agreement dated 06.05.2008 with M/s Kirit City Homes Pvt. Ltd, should be reduced to Rs.5,24,27,354/-   on   the basis of MOU on transfer of development rights for calculation of ITR?

ARGUMENTS ADVANCED BY THE APPELLANT

• The revenue submitted that the ITAT failed to recognize that the assessee has taken contrary stands before   the   assessing   authority   and   the Tribunal regarding the sale of development rights.   It was pointed out that the assessee had provided the ledger account for the development agreement, which showed that the assessee claimed to have received Rs. 15,94,06,500 from a development agreement on March 31, 2008, and the said entry was reversed on the same day by passing a rectification entry. Therefore, it was reflected that an amount of Rs. 15,94,06,500/was paid to a third party i.e., SICCL on 31.03.2008 to an entity SICCL Hence, the AO raised questions on reason of rectification and whether the   differential   amount   of   Rs 10,69,79,146/¬   had been refunded to the purchaser.   But ITAT did not even discuss the fact of receipt of money received on 31.03.2008. It is argued that the ITAT confirmed that the transactions related to earlier years, namely Assessment Year 2008–09, without fully examining the true nature of the transactions or the entries made in the assessee’s books of accounts.
• The Revenue believed that the ITAT has failed   to   appreciate   that   the   moment   the receipt of amount is received and recorded in the books of accounts of the assessee, unless shown   to   be   refunded/returned, is   to   be treated   as   income   in   the   hands   of   the recipient.
• The balance sheets for the Assessment Years 2006­07 to 2009­10 showed that there was not even a single sale during these   years   and   there   were   negligible expenses and the transaction in question was the   only and consequently, it was held that the transaction was that of transfer of capital asset and not that of transfer of stock in trade. However, the ITAT determined that there was inventory listed on the balance sheet for a number of years, and since subsequent assessment orders were issued in accordance with Section 143(3) of the Income Tax Act, held that the disputed transaction was a sale of stock in trade without contesting the assessee's statement. It is argued that the ITAT did not review or verify the assessee's total sales for the relevant year or the prior years, nor did it address the findings provided by the assessing officer.
• It is well settled that in order to examine whether a particular transaction is   sale   of   capital   asset   or   business transaction, multiple factors like frequency of trade, volume of trade, nature of transaction over   the   years   etc.   are   required   to   be examined. However, the ITAT, without examining any of the relevant factors, confirmed   that   the   transaction   was transfer of stock in trade solely on the basis of claim made   by   the   assessee, contrary to the accounts   produced   before   the   Assessing Officer.
• The Revenue further argued that the High Court failed to consider the inherent contradiction in the ITAT ruling and that the claim had been approved by the Tribunal despite the records presented to the Assessing Officer. As a result, the High Court's ruling that there was no significant legal issue at stake is illegal and absurd. 

ARGUMENTS ADVANCED BY THE RESPONDENT

• According to the submission, the assessee has been working on real estate projects from around 1999–2000 and that the assessee's financial accounts demonstrate that it has had inventories and work-in-progress every year since. Even after scrutiny assessments were made according to Section 143(3) Income Tax Act, the same has always been accepted by the department.
• It further submitted that it had entered into an MOU dated 27.12.2007 with M/s Kirit City   Homes   Private   Limited, whereby, Development Rights in a property at Vasai were sold   for   a   total   consideration   of   Rs. 5,24,27,354/­.   That   the   said   MOU   was   on record before the lower authorities and has been referred in the Assessment Order as well as   in   the   order   passed   by   the   CIT(A).   In connection with the said transaction, the findings given by the ITAT were pure findings of facts and therefore, the High Court has   rightly   dismissed   the   appeal   after considering the facts and the tribunal’s order and by holding that no substantial question of law arises in the matter.
• JUDGEMENT ANALYSIS
• The Court observed that the   AO   treated   the transaction   as   capital   assets, but the  ITAT   has reversed the said findings and held that the transaction   was   stock   in   trade.   It   considered that the AO recorded that on examining the balance sheets for the AY 2006­07 to 2009­10, there was not even a single sale and that there were negligible expenses and the transaction   in   question   was   the   only transaction. Therefore, the Ao held   that   the   transaction   was   one   of transfer   of   capital   assets   and   not   one   of transfer of stock in trade. However, the ITAT after   examining   the   opening   and   closing balance   for   the   AY   1996­97   to   2007­08 observed   that   in   multiple   years, inventory was   shown   in   the   balance   sheet and held that   the   transaction   in   question   is   sale   of stock   in   trade.   It held 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. 
• The Supreme Court held 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. It is a settled   position   of   law that 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 held 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 AY 2008­09, 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.   The   ITAT   also has   not questioned this refund of differential amount   of   Rs.   10,69,79,146/­   to   the purchaser based on the rectification deed. 

CONCLUSION

The Court concluded that the ITAT has not considered the relevant   aspects/relevant   factors   while considering   whether   the   transaction   in question is the sale of capital assets or sale of stock   in   trade. Therefore, it remanded the matter back to the ITAT to consider the appeal afresh in light of the observations and in accordance with law and on its own merits The orders passed by the High Court and that of the ITAT were quashed and set aside. The Supreme Court did not express anything   on   merits   in   favour   of either of the parties. It is ultimately for the ITAT   to   take   an   appropriate   decision based on relevant factors

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