2016 (2) TMI 732 - AT - Income Tax

Sale of land - nature of transaction - capital gain u/s.45(2) read with 2(47)(iv) or business income - whether land shown as investment was converted into stock-in-trade? - Held that - In the present case since the property has been transferred in the relevant assessment year, the capital gain which arose in the year of its conversion i.e assessment year 2004-05 becomes taxable in the relevant asst year 2007-08. Further as per sec 45(2) the full value of consideration for computing capital gain will be the fair market value of the said land in the year of conversion i.e. Assessment year 2004-05 as held by the special Bench of Kolkata in the case of Octavis Steel 2002 (5) TMI 204 - ITAT CALCUTTA and Mumbai D Bench in the case of Ramesh Abaji Walwavalkar 2013 (4) TMI 480 - ITAT, MUMBAI . We find no infirmity in the order of Ld.CIT-A and he rightly followed the principle laid down by the Special Bench of Kolkata in directing the AO to compute capital gain in pursuance of the u/s 45(2) read with section 2(47)(iv) and to delete the addition made by the AO by treating the same as business income. - Decided against revenue

Summary

Issues Involved:
- Determination of capital gain under section 45(2) read with 2(47)(iv) for the assessment year 2007-08.

Analysis:
1. Background and Facts: The appellant, a company involved in construction, acquired land as an investment during 1988-89 to 1998-99. In the assessment year 2004-05, the land was converted into stock-in-trade, and flats were constructed and sold during the relevant assessment year.

2. AO's Position: The Assessing Officer treated the entire income as business income, stating that the capital gain was not computed in the original return but only in the revised return. The AO did not apply the provisions of sec 45(2) read with sec 2(47)(iv) and assessed the income as business income.

3. Assessee's Arguments: The assessee contended that no capital gain arose at the time of conversion, and capital gain should be computed as per sec 45(2) read with sec 2(47)(iv). The assessee relied on relevant case laws to support their position.

4. CIT-A's Decision: The CIT-A directed the AO to compute capital gain as per sec 45(2) read with sec 2(47)(iv) and delete the addition made by treating the income as business income.

5. Appellate Tribunal's Decision: The Revenue appealed the CIT-A's order, arguing that the assessee was not entitled to claim exemption under section 80IB, and the fair market value of the land was disputed. The Tribunal, after considering the arguments and case laws, upheld the CIT-A's decision. It emphasized the application of sec 45(2) and the fair market value of the land at the time of conversion for computing capital gain.

6. Legal Interpretation: The Tribunal referred to the provision of sec 45(2), which mandates that the profit from the transfer of a converted asset into stock-in-trade is chargeable as capital gain when the stock-in-trade is sold. The Tribunal also cited relevant case laws to support its decision.

7. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT-A's order to compute capital gain under sec 45(2) read with sec 2(47)(iv) and delete the addition made by the AO. The decision was based on the principles laid down in the case laws and the specific provisions of the Income Tax Act.

In summary, the Tribunal upheld the application of sec 45(2) read with sec 2(47)(iv) for computing capital gain in the case of the appellant, emphasizing the importance of fair market value at the time of conversion and following established legal precedents.