2018 (11) TMI 589 - AT - Income Tax

Determination of the short term capital gains - AO adopting the cost of the previous owners being partnership firm - FMV determination - conversion of the said land into stock-in-trade - AO did not accept the contention of the assessee company and had taken the cost of acquisition of the said land being stock-in-trade at the cost as recorded in the books of the firm as on the date of revaluation, and the difference between cost as per the books of the firm being the previous owners, and the sale price received by the assessee, was treated as short term capital gains - CIT-A deleted the addition - Held that - computation for assessment year 2010-11 wherein the capital gains has been determined at Nil, has not been dislodged by the Revenue and that position continues to remain. As long as this position continues, the cost of acquisition in the hands of the assessee company for the purpose of computing the profits or gains on the sale of the said converted stock-in-trade being land during the years only same are sold cannot be disturbed. Obviously what has been sold by the assessee is stock-in-trade and its business is the sale of the land represented as stock-in-trade. Obviously, the business income would be the difference between the sale consideration received by the assessee on the transfer of the said stock-in-trade being the land and the cost as disclosed by the assessee in respect of the said land for assessment year 2010-11 being the year in which the conversion was done and the capital gains disclosed. If at all the A.O wanted to adopt the cost of the asset as recorded in the books of the previous owner, he could have done so when computing the capital gains for the assessment year 2010-11 when the asset was converted from investment to stock-in-trade. The A.O having missed the bus for assessment year 2010-11 cannot make the said adjustment during the impugned assessment years. Perusal of the order of the CIT(Appeals) clearly shows that the Ld.CIT(A) has taken this issue into consideration when deciding the appeal. - Decided against revenue

Summary

Issues:
- Appeal filed by Revenue against Commissioner of Income-tax (Appeals) order for assessment years 2012-13, 2013-14, and 2014-15.
- Dispute over computation of short term capital gains on sale of land by a domestic company.
- Interpretation of provisions under Section 47(Xiii) and Section 45(2) of the Income Tax Act.
- Application of Fair Market Value for conversion of land into stock-in-trade.
- Comparison with a previous Tribunal decision in ACIT Vs. B.V.Reddy Enterprises Private Limited.

Analysis:
The judgment pertains to appeals filed by the Revenue against the Commissioner of Income-tax (Appeals) order for the assessment years 2012-13, 2013-14, and 2014-15, involving a dispute over the computation of short term capital gains on the sale of land by a domestic company. The key contention was whether the cost of acquisition of the land, treated as stock-in-trade, should be based on the cost recorded in the books of the previous owners, i.e., a partnership firm, or as revalued during the conversion into a company. The Revenue argued that the capital gains should be computed based on the original cost recorded in the books of the firm, while the Assessee relied on the provisions of Section 47(Xiii) of the Act to support their position that no transfer occurred upon conversion.

The Tribunal analyzed the facts and noted that the partnership firm had revalued its assets before conversion, with the consideration credited to the partners' current accounts. The cost of the revaluation was reflected in the current account of the partners, and upon conversion into a company, the lands were taken over as capital assets. The lands were subsequently converted into stock-in-trade, and capital gains were computed as per Section 45(2) of the Act for the assessment year 2010-11. The Tribunal emphasized that the cost of acquisition for computing profits on the sale of the land should not be disturbed, as long as the position remained consistent with the assessment year 2010-11.

Furthermore, the Tribunal referred to a previous decision in ACIT Vs. B.V.Reddy Enterprises Private Limited, where a similar issue was addressed, albeit with shares as assets. The Tribunal found that the Revenue failed to dislodge the findings of the Commissioner of Income-tax (Appeals) and confirmed that the computation of capital gains should be based on the Fair Market Value at the time of conversion into stock-in-trade. Ultimately, the Tribunal dismissed all appeals of the Revenue, upholding the order of the Commissioner of Income-tax (Appeals) in favor of the Assessee.

In conclusion, the judgment clarifies the principles governing the computation of capital gains on the sale of assets converted into stock-in-trade during a company's conversion from a partnership firm. It underscores the importance of consistent valuation methods and adherence to statutory provisions to determine the cost of acquisition for tax purposes. The decision provides a nuanced interpretation of relevant sections of the Income Tax Act and highlights the significance of previous Tribunal decisions in guiding similar cases.