2022 (2) TMI 770 - AT - Income Tax

Capital gain computation - considering the guideline value of the land as mentioned in section 50C of the Act as fair market value on the date of conversion of said land into stock-in- trade u/s.45(2) - CIT-A noted that the provisions of section 45(2) of the Act is applicable in the case of capital asset and agricultural land is not a capital asset - assessee s own agricultural land admeasuring 7.54 acres converted as stock-in-trade and held as capital asset in the name of the assessee - HELD THAT - As gone through the definition given in the Act in the provision for section 2(22B) of the Act, whereby it is defined that as to how the fair market value is to be substituted in place of cost of acquisition. According to Section 2(22B) of the Act, it is the price which the capital asset would ordinarily fetch if sold in the open market on the relevant date i.e., date of acquisition of asset in the stock-in-trade. This concept of fair market value is now well settled in the Income-Tax law and other cogent fiscal statutes bringing the question of hypothetical seller and the hypothetical buyer in the hypothetical market. For example and for the purpose of income-tax Act, this has been explained and elaborated in section 55 wherein specified date for cost of construction as also for substituting the fair market value for cost of construction is given, like in the present case before us, where the conversion took place as on 20.02.2012. The fair market value can be determined by taking the surrounding circumstances like sale instances of the area, urbanization of that area, future prospects, valuation of similar properties by the Revenue Department or scope of industrialization or growth of these can be considered by determining the fair market value. But for this purpose, the fair market value if could not be ascertained by the Income Tax Officer, the same can be referred to a technical person as conceded by both the sides. Hon ble Supreme Court in the case of Groz-Beckert Saboo Ltd 1978 (11) TMI 2 - SUPREME COURT we are of the view that this matter needs reconsideration just to ascertain the fair market value of assessee s agricultural land of 7.54 acres converted into stock-in-trade and held as capital asset. The AO has to refer this matter to the DVO to ascertain the fair market value based on the above factors enumerated. Hence, we set aside the orders of the lower authorities and restore the matter back to the file of the AO with the above direction. Appeal filed by the assessee is allowed for statistical purpose.

Summary

Issues Involved:
1. Whether the guideline value of the land should be considered as the fair market value on the date of conversion of agricultural land into stock-in-trade under section 45(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Guideline Value vs. Fair Market Value:
The primary issue in this appeal is the determination of the fair market value of agricultural land converted into stock-in-trade. The assessee argued that the fair market value should be based on actual sale instances and surrounding circumstances, while the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] contended that the guideline value set by the State Government for stamp duty purposes should be used.

Facts and Arguments:
- The assessee, engaged in real estate business, converted 7.54 acres of his own agricultural land into stock-in-trade and valued it at ?27 lakhs per acre based on sale instances.
- The AO adopted the guideline value of ?51,500 per acre as the fair market value, arguing that the guideline value is a scientifically computed value for all practical and legal purposes.
- The CIT(A) upheld the AO's decision, stating that section 45(2) of the Act applies only to capital assets, and agricultural land is not a capital asset. Therefore, the guideline value is the correct method for computing the fair market value.

Legal Provisions and Case Law:
- Section 45(2) of the Income Tax Act, 1961, states that the fair market value of the asset on the date of conversion shall be deemed to be the full value of consideration received or accruing as a result of the transfer of such capital asset.
- The definition of fair market value under section 2(22B) of the Act is the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date.
- The Tribunal referred to the Supreme Court judgments in CIT vs. Bai Shirinbai K. Kooka and CIT vs. Groz-Beckert Saboo Ltd., which emphasized that the fair market value should be the price the asset would fetch in an open market, considering surrounding circumstances and not necessarily the guideline value.

Tribunal's Decision:
- The Tribunal noted that the fair market value should be determined based on surrounding circumstances, including sale instances, urbanization, future prospects, and similar property valuations.
- It was concluded that the matter needs reconsideration to ascertain the fair market value accurately.
- The Tribunal directed the AO to refer the matter to the District Valuation Officer (DVO) to determine the fair market value based on the enumerated factors.

Conclusion:
The Tribunal set aside the orders of the lower authorities and restored the matter to the AO for reconsideration, directing the AO to ascertain the fair market value through the DVO. The appeal filed by the assessee was allowed for statistical purposes.