2000 (2) TMI 788 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of capital gains on conversion of capital assets into stock-in-trade.
2. Exclusion of expenses and losses of M/s. Wembly Hotels from losses to be carried forward.

Summary:

Issue 1: Taxability of Capital Gains on Conversion of Capital Assets into Stock-in-Trade

The Department's appeals contested the CIT (Appeals) decision that capital gains on conversion of capital assets into stock-in-trade arise only when the last flat is given to the buyer. The assessee had converted a hotel into a residential complex, treating the land and building as stock-in-trade. The Assessing Officer (AO) argued that u/s 45(2), capital gains should be taxed in the year the stock-in-trade is sold, applying sections 2(47)(v) and 2(47)(vi). The CIT (Appeals) held that capital gains would accrue only when the last flat was handed over, which was in assessment year 1992-93, and differentiated between long-term and short-term capital gains based on the nature of the asset.

The Tribunal held that conversion of capital assets into stock-in-trade in 1986 was a transfer u/s 2(47), and the asset ceased to be a capital asset thereafter. Thus, the capital gains tax liability arises in the same year as the business profit from the sale of the stock-in-trade, as per section 45(2). The Tribunal rejected the arguments related to conveyance and possession, emphasizing that the asset cannot have dual characteristics. Consequently, the Department's appeals were allowed, and the assessee's cross objections were dismissed.

Issue 2: Exclusion of Expenses and Losses of M/s. Wembly Hotels

The assessee-company had taken over Wembly Hotels, which later became a partnership firm. The AO disallowed the carry forward of losses from the erstwhile proprietary business, considering it a distinct business. The CIT (Appeals) upheld this disallowance.

The Tribunal, however, directed that losses of earlier years pertaining to Wembly Hotels be allowed to be carried forward. It noted that a firm has no separate legal existence from its partners, referencing the Supreme Court's decision in CIT v. Ramniklal Kothari. Since the business was carried on by the assessee as a partner, the losses should be allowed to be carried forward.

Conclusion:

The Tribunal allowed the Department's appeals regarding the taxability of capital gains and directed that the losses of Wembly Hotels be carried forward, partly allowing the assessee's cross objections for assessment years 1989-90 and 1990-91, and dismissing them for assessment year 1991-92.