(133 ITD 363)(Mum.) Vidyavihar Containers Ltd. vs. Deputy Commissioner of Income Tax AYs. : 2002-03 & 2006-07 Date of Order: 21st October 2011

Notional income – assessee cannot be charged to taxed on notional income.

Facts:
The assessee was earlier engaged in manufacturing activity. It discontinued the business and passed a special resolution at the extra ordinary general meeting of shareholders held on 12th September, 1994 authorising commencement of business of real estate and converting its land into stock in trade. It further took steps to make the property fit for development and contracted with a third party for further development in consideration of allotment of constructed area. The assessee also applied for change in the user of land from industrial to commercial user and permission for the same was granted on 4th March, 1997. The AO held that the factory land could not have been converted into stock in trade prior to the permission of the government in respect of change of user of the said land. He further held that the land thus remained to be a capital asset irrespective of the fact that special resolution was passed. Hence the assessee was denied the benefits of section 45(2) and was charged to tax u/s. 45(1).

Held:
The intention of the assessee to pass a special resolution in the meeting of shareholders to authorise the commencement of business of real estate, convert the land into stock in trade, and the further steps taken to make the property fit for further development in consideration of allotment of constructed area makes it clear that the assesseecarried on the business of real estate development. Further, the provisions of section 45(2) only pertain to computation of capital gains and business income arising on sale of asset which is converted into stock in trade prior to sale. It does not prescribe any conditions to be fulfilled. Hence, the question for permission to be sought from government for change in user of land prior to conversion does not arise. Thus the assessee was liable to be charged in terms of section 45 (2) and not section 45(1).

Facts:
The assessee has paid fees amounting to Rs. 23 crore to the collector for change of user of land from industrial to commercial. The assessee claimed the same as business expense. Alternatively, the assessee submitted that the same be treated as cost of improvement while computing capital gains u/s 45(2). The AO however held that there was no real estate development business carried on and thus declined to allow the claim of the assessee. He also disallowed the alternative claim of the assessee for deduction of the said amount in computation of capital gains u/s 48 holding that the said amount was not in the nature of cost of improvement.

Held:
The assessee had paid to the collector the amount for change in user of land before conversion of land into stock in trade. This amount paid was vital in determining fair market value of the asset. If the said amount was paid prior to conversion, the same would constitute cost of improvement. And if the said amount is paid after conversion, the same would constitute business expense. The matter was remanded back to the AO with the direction to consider and allow the claim of the assessee depending upon the fair market value of the property as on the date of conversion.

Facts:
The property of the assessee was offered as collateral security for the bank guarantee limits availed by its holding company in the AY 2002-03. Assessee did not receive any commission for the same. However, the AO noted that the assessee company had foregone commission of 2 percent for offering its property as collateral security and made addition of such notional income.

Held:
There was nothing bought on record to show that any such commission was agreed to be paid to the assessee by its holding company. Thus the addition made by the AO in the form of notional income which had never actually accrued or arisen to the assessee was not sustainable.