The assessee owned a portion of land in Shivaji Nagar, Pune. The land was occupied by a bungalow, a tenanted bungalow, a garage and two servant quarters. After receiving permission the assessee had planned to develop the land. So he converted the land into stock-in-trade. Thereafter, along with Godrej Properties and Investment Ltd., the assessee entered into a joint venture agreement. Three projects were decided to be constructed which began in the year 1999-2000. One of those three projects was a building named Eternia B.

Conversion of Land into Stock in Trade: When is the Profit Taxable- On Conversion or the Sale of it?

On 31^st October 2001, the assessee filed an income return which showed a loss of Rs.5, 96,756. Thereafter, the assessee submitted a revised account of profit and loss. The assessment was completed by the Assessing Officer and he declared the total income to be Rs.3,32, 90,170. The capital gains which were converted into stock-in-trade amounted to Rs.1, 87, 70,701 and profit earned after completion of the mentioned project was declared to have amounted to Rs.1, 24, 25,705. The Assessing Officer’s opinion was that the capital gain on Eternia B was to be considered as the income of that year. But the assessee said that the land was not sold and only shops and flats were sold. The decision was reached that the property would be taxable from the next year. The ITAT agreed to the Assessing Officers’s decision and thus penalty proceedings were initiated u/s 271(1) (c).

Assessee’s Contention: the Gains would be taxable only once the Property is Sold off

However, the assessee believed that a tax can be levied on the property only after its completion and not before and that taxable portion consisted of all the three wings. The Assessing Officer, however, did not pay heed to these statements and declared that the income and profit of the assessee were deliberately concealed by himself and thus proceedings would continue u/s 271(1) (c).

Later the Mr. R. R. Vora who was the assessee’s learned counsel stated that the Asessing Officer and the assessee differed in their opinions and this lead to income tax levied capital gains because the capital asset was converted into stock-in-trade. But this cannot lead to the conclusion that the assessee was trying to conceal his income particulars. For this, he referred to many other previous decisions in other cases.

Judgment : The Case decided in Favor of Assessee and the Gains would be taxable in the year of Sale of Property

The Asessing Officer had worked against the principles of natural justice for the assessee because when asked to show the exact charges for which he accused the assessee, the Asessing Officer couldn’t show any. Thus there was much ambiguity and vagueness in the case and the assessee had lost his chance to contest the case. Thus, on the grounds of the right to natural justice, the case was quashed.

Conversion of Land into Stock in Trade: Cases referred to arrive at decision in this case were

1. CIT vs. Haryana Warehousing 314 ITR 215.
2. Kanbay Software India Private Limited vs. DCIT 22 DTR 481 (AT).
3. ACIT vs. VIP Industries (2009) 30 SOT 254.
4. CIT Vs. Manjunatha Cotton & Ginning Factory [2013 359 ITR 565]
5. CIT Vs. Dharmendra Textile Processor (306 ITR 277)
6. Wadhwa Estate & Developers Vs. ACIT [ITA N0. 2158/Mum/2016 dated 24/02/2017]

Also Read Provisions relating Capital Gain u/s 50 of Income Tax Act – Depreciable Assets