2012 (6) TMI 56 - AT - Income Tax

Whether the assets received by the assessee at the time of partition are capital assets or stock-in-trade. - properties where held by the family as stock in trade - conversion of capital assets into stock in trade - held that - the assessee was allotted the family s real estate business. - the assessee, on partition of the joint family, had received the balance capital of the family in the real estate business comprising various assets, which were in the nature of stock-in-trade and it cannot be considered that the various assets or properties received by the assessee on partition are capital assets and these capital assets were converted into stock-in-trade of the real estate when the assessee continued to carry on the business of the erstwhile joint family. Valuation - held that - the value of the properties fixed at the time of partition or determined aliunde would be the cost to be adopted in the hands of the recipient of the properties. However, the specific provisions of section 49(1) of the Act have been enacted in the Income Tax Act, 1961, to fix the cost of the capital asset acquired on partition to be the cost at which it was acquired by the previous owner. In other words, the judgment of the Hon ble Apex Court in Kalooram Govindram (1965 (4) TMI 15 (SC)) would not be applicable in a case of capital assets received on partition in the light of the provisions of section 49(1) of the Act. However, since the provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken.

Issues Involved:
1. Assessment of Long Term Capital Gains (LTCG) under section 45(2) of the Income Tax Act, 1961.
2. Nature of assets received on partition: Capital assets vs. Stock-in-trade.
3. Application of section 49(1) of the Income Tax Act, 1961.
4. Justification of the cost of assets sold at values fixed at the time of partition.
5. Charging of interest under section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessment of Long Term Capital Gains (LTCG) under section 45(2) of the Income Tax Act, 1961:
The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the assets received by the assessee on partition of the joint family were capital assets which were later converted into stock-in-trade. Consequently, they assessed LTCG under section 45(2) of the Act. The Tribunal found no material evidence to support the AO's and CIT(A)'s conclusions that the assets were capital assets converted into stock-in-trade. The Tribunal held that the properties received by the assessee on partition were stock-in-trade of the erstwhile joint family, and therefore, section 45(2) was not applicable.

2. Nature of assets received on partition: Capital assets vs. Stock-in-trade:
The Tribunal examined whether the assets received by the assessee on partition were capital assets or stock-in-trade. It was established that the joint family was carrying on real estate business and held properties as stock-in-trade. The Tribunal referred to the Memorandum of Family Arrangement and Oral Partition dated 6.3.2004, which indicated that the properties were held as stock-in-trade. The Tribunal concluded that the assets received by the assessee were stock-in-trade and not capital assets.

3. Application of section 49(1) of the Income Tax Act, 1961:
The AO and CIT(A) applied section 49(1) to compute capital gains, contending that the original cost of the assets should be considered. The Tribunal clarified that section 49(1) applies only when the capital asset becomes the property of the assessee. Since the assets in question were stock-in-trade and not capital assets, section 49(1) was not applicable. The Tribunal cited the decision of the ITAT Mumbai in Atul G. Puranik v. ITO, which supports this interpretation.

4. Justification of the cost of assets sold at values fixed at the time of partition:
The Tribunal considered whether the assessee was justified in adopting the cost of assets at the values fixed during partition. The Hon'ble Apex Court in Kalooram Govindram v. CIT held that the cost of assets to the divided member must be the value at the time of partition. The Tribunal concluded that the assessee was justified in adopting the partition value as the cost for computing business income, as the provisions of section 49(1) did not apply to stock-in-trade.

5. Charging of interest under section 234B of the Income Tax Act, 1961:
The Tribunal noted that the charging of interest under section 234B is consequential and mandatory. The AO's action in charging interest was upheld, but the AO was directed to recompute the interest chargeable while giving effect to the Tribunal's order.

Conclusion:
The Tribunal allowed the appeal, canceling the assessment of LTCG under section 45(2) due to lack of evidence that the assets received on partition were capital assets converted into stock-in-trade. The Tribunal upheld that the assets were stock-in-trade and thus section 45(2) and section 49(1) were not applicable. The assessee was justified in using the partition value as the cost for computing business income. The interest under section 234B was to be recomputed accordingly.

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