2016 (3) TMI 742 - AT - Income Tax

Assessment of capital gains on sale of 5.075 Acres of land - Held that - The property in question was given as security to M/s Globus Realtors Pvt. Ltd. for advancing loan to the sister concern M/s Essorpe Holdings Pvt. Ltd. Therefore, it is obvious that to promote the business of sister concern, M/s Essorpe Holdings Pvt. Ltd, the assessee gave the land in question as security. While giving the security, the assessee has also executed power of attorney in favour Shri V. Sivakumar, Managing Director of M/s Globus Realtors Pvt. Ltd. When the sister concern could not repay the loan amount, the property which was given as security was sold by Shri V. Sivakumar and the sale consideration was adjusted for repayment of the loan by M/s Essorpe Holdings Pvt. Ltd. In those circumstances, this Tribunal is of the considered opinion that since the land was given as security for commercial expediency to sister concern, there was a business loss arising in the course of business. Since no amount was realized and the assessee-company suffered a loss for giving security to the sister concern, the same has to be allowed as business loss while computing the taxable income. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are modified and the Assessing Officer is directed to compute the capital gains u/s 45(2) of the Act on sale of land upto the date of conversion as stock-in-trade. The profit on sale of land as stock-in-trade has to be computed as business loss since the assessee has not received any money on sale of the land. Therefore, the capital gains computed upto the date of conversion of land into stock-in-trade has to be set off against the business loss computed on sale of the stock-in-trade. - Decided in favour of assessee

Summary

Issues: Assessment of capital gains on the sale of land

Analysis:
1. The only issue in this case is the assessment of capital gains on the sale of 5.075 acres of land by the assessee.

2. The assessee claimed that the land, initially a capital asset, was converted into stock-in-trade in 2000 and later demerged by a High Court order in 2007. The land was offered as security to a sister concern for a loan. The Assessing Officer treated the transaction as a transfer of property and computed capital gains. The assessee argued that the land was converted into stock-in-trade after the demerger, and no consideration was received for the sale to M/s Rasi Seeds (P) Ltd, thus claiming it as a business loss. The Tribunal had previously directed the Assessing Officer to compute business income post-conversion into stock-in-trade. The assessee contended that the loss incurred should be allowed as a business loss due to the security given for commercial expediency.

3. The Departmental Representative argued that the Tribunal had previously decided that gains pre and post-conversion should be assessed as capital gains and business income, respectively. The CIT(A) found no merit in the assessee's claim based on the Tribunal's earlier decision.

4. The Tribunal noted that the land was given as security for loans to a sister concern for commercial reasons. As no consideration was received on the sale, the Tribunal considered it a business loss incurred in the course of business activity. The Tribunal directed the Assessing Officer to compute capital gains up to the date of conversion and treat the profit on the sale as a business loss, setting it off against the capital gains.

5. The Tribunal referred to section 45(2) of the Income Tax Act, which states that profits arising from the conversion of a capital asset into stock-in-trade shall be chargeable to income tax as business income when sold. The capital gains on the transfer of the land as stock-in-trade were to be assessed as capital gains in the hands of the assessee.

6. The Tribunal concluded that the loss incurred by the assessee in giving the land as security to the sister concern should be allowed as a business loss while computing taxable income. The Tribunal disagreed with the lower authorities and directed the Assessing Officer to compute capital gains up to the date of conversion and treat the profit on the sale as a business loss due to the absence of consideration received.

7. Consequently, the appeal of the assessee was allowed, and the orders of the lower authorities were modified to compute capital gains and set off the business loss incurred on the sale of the stock-in-trade land against it.