The absence of proper accounting entries and credible evidence negates the claim of conversion of agricultural land into stock-in-trade, affirming taxability as capital gains.

ORAL ORDER

(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)

1. The Appellant has preferred this Appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) being aggrieved by order dated 22.02.2023 passed under Section 254(1) by the Income Tax Appellate Tribunal, Surat Bench, Surat, in I.T.A.No.143/SRT/2019 for the Assessment Year 2015-2016.

2. The following questions of Law were proposed:-

“(A) Whether on the facts and in the circumstances of the case, the Tribunal has erred in upholding the action of Assessing Officer as confirmed by the CIT(A) to treat the transaction of sale of lands as sale of capital asset giving rise to long term capital gain?

(B) Whether on the facts and in the circumstances of the case, the Tribunal erred in not appreciating that non- passing of entry in the books of accounts is not a decisive factor to determine the taxability of transaction under the Income Tax Act, 1961?”

3. The facts in brief are as under:-

3.1 The assessee is a non-resident (Individual) and filed his return of income on 15.09.2015 declaring total income at Rs.3,45,720/-. The case of the assessee was selected for scrutiny assessment through CASS and accordingly, notice under Section 143(2) of the Act was issued. Thereafter, notices under Section 142(1) were issued on 09.06.2017, 29.08.2017, 08.09.2017. The Penalty notice under Section 271(1)(b) was also issued on 08.09.2017. The assessee with other persons have transferred two non- agricultural land to Shanti Integrated Textile Park Pvt. Ltd. and Assessee's share was Rs.2,28,72,600. The assessee has not offered any capital gain or business income on sale of above land. The assessee vide letter dated 22nd December, 2017 has stated that above lands were acquired in the year 1992, agricultural lands were converted into stock-in-trade, stock-in-trade was converted into non-agricultural land and sales were made hereafter. The assessee has stated that before obtaining permission for conversion of agricultural land into non-agricultural land, capital asset was converted into stock-in-trade at Jantri value of Rs.2,28,72,600/-. When there is such conversion, assessee is not liable for tax either at the time of conversion or at the time of sale, because, agricultural land is itself converted as stock-in-trade from capital asset. As per provisions of Section 45(2) of the Act when capital asset is converted into stock-in-trade and such stock-in-trade is sold subsequently, assessee is required to compute income i.e. (i) difference between fair value of the asset and original cost is liable for capital gain, and (ii) difference between sale value and FMV on the date of conversion is liable as business income. On this basis assessee has explained to AO that when land is converted from capital asset to stock- in-trade, such land was agricultural land itself and as per provisions of Section 2(14) of the Act, assessee is not liable for any tax under the head "income from capital gain". When above land was sold, assessee received consideration of Rs.2,28,72,600/- which is exactly the same as Jantri value prevailing on the date of conversion hence income from business and profession in present case is nil. The assessee in support of its claim has referred to MOU dated 2nd July, 2011 and affidavit dated 29th October, 2011 which is discussed in subsequent para. During the course of assessment proceedings, the assessee has submitted MOU dated 2nd July, 2011 entered into between all the co-owners wherein the land held by different co-owners is mentioned and at page No.4 of such MOU it is stated that each co-owners is transferring their agricultural land into stock-in-trade and as per this MOU, each co-owner would not enter into land dealing independently. It was also stated in such MOU that each co-owner will file affidavit for such conversion. On this basis assessee has submitted his affidavit dated 29th October, 2011, above lands were converted into non- agricultural lands. The