2022 (1) TMI 243 - AT - Income Tax

Capital gain - Conversion of capital asset into stock in trade - FMV determination - AO has adopted about ₹ 100/- per sq.ft as fair market value of the property as on date of conversion and such rate was determined on the basis of guideline value of property, when the assessee has subsequently sold plots after conversion of capital asset into stock in trade - HELD THAT - No doubt, guideline value of property may not be a sound indicator for determining fair market value of the property. It is an admitted fact that there is large difference between guideline value and fair market value of property. Therefore, one cannot go by guideline value of property to determine fair market value of the property, including for the purpose of conversion of capital asset into stock in trade. To this extent reasons given by the Assessing Officer to adopt fair market value of the property at the time of conversion of capital asset into stock in trade at ₹ 100/- cannot be sustained. Similarly, valuation of closing stock by adopting guideline value as on 31.03.2012 also cannot be accepted. However, fact remains that the assessee has also not able to justify adoption of fair market value at ₹ 250/- per sq.ft at the time of conversion of capital asset into stock in trade. Therefore, considering fact that both the parties have failed to justify respective rates adopted for conversion of capital asset into stock in trade, we deem it appropriate to adopt a sum of ₹ 200/- per sq.ft as fair market value of the property as on date of conversion of capital asset into stock in trade to settle dispute between the parties. Hence, we direct the Assessing Officer to adopt a sum of ₹ 200/- per sq.ft. as fair market value of the property and rework gross profit, if any, to be considered for taxation. Appeal filled by assessee is partly allowed.

Issues involved:
1. Dispute over fair market value of property for conversion into stock in trade.
2. Justification of additions made by Assessing Officer towards gross profit from real estate business.
3. Valuation of closing stock and difference in profit admitted on sale of plots.
4. Adjudication of net profit estimation for branch distribution.
5. Compliance with principles of natural justice in passing the order.

Issue 1: Dispute over fair market value of property for conversion into stock in trade:
The judgment pertains to an appeal challenging the order passed by the Commissioner of Income Tax (Appeals) regarding the assessment year 2012-13. The Assessing Officer disputed the fair market value adopted by the assessee for converting agricultural land into stock in trade. The Assessing Officer reworked the gross profit derived from real estate business by adopting a different value for the land, resulting in additions to the total income of the assessee. The appeal contended that the fair market value should have been determined as per the provisions of section 45(2) of the Act. The Tribunal observed that both parties failed to justify their respective rates for the conversion. Consequently, the Tribunal directed the Assessing Officer to adopt a fair market value of ?200 per sq.ft. for settling the dispute.

Issue 2: Justification of additions made by Assessing Officer towards gross profit from real estate business:
The appellant challenged the additions made by the Assessing Officer towards gross profit from the real estate business. The appellant argued that the Assessing Officer erred in recasting the trading account without considering the provisions of section 45(2) of the Act. The Tribunal noted that the Assessing Officer's adoption of a guideline value of the property was not supported by evidence and could not be sustained. The Tribunal held that the fair market value should be determined reasonably and directed the Assessing Officer to rework the gross profit based on a fair market value of ?200 per sq.ft.

Issue 3: Valuation of closing stock and difference in profit admitted on sale of plots:
The assessment involved the valuation of closing stock and the difference in profit admitted on the sale of plots. The Commissioner of Income Tax (Appeals) sustained the additions made by the Assessing Officer based on the recasting of the trading account. The appellant contended that the valuation should be based on fair market value as per section 45(2) of the Act. The Tribunal's decision to adopt a fair market value of ?200 per sq.ft. impacted the valuation of closing stock and profit calculations.

Issue 4: Adjudication of net profit estimation for branch distribution:
The appellant raised an issue regarding the estimation of net profit for a branch distribution. However, the judgment did not provide detailed analysis or resolution of this specific issue.

Issue 5: Compliance with principles of natural justice in passing the order:
The appellant argued that there was a lack of proper opportunity given before passing the impugned order, violating the principles of natural justice. The judgment did not explicitly address this issue in the detailed analysis provided.

In conclusion, the Tribunal partly allowed the appeal, primarily focusing on the dispute over the fair market value of the property for conversion into stock in trade and the justification of additions made by the Assessing Officer towards gross profit from the real estate business. The decision highlighted the importance of determining fair market value reasonably and directed the Assessing Officer to rework the calculations based on a fair market value of ?200 per sq.ft.

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