2023 (8) TMI 1190 - AT - Income Tax

Capital gain - Deduction u/s 54F - FMV determination date of conversion as the cost of acquisition - assessee acquired agricultural land by way of gift from his father, converted the same to stock in trade in the financial year 2012-13, divided into the plots and put the same to sale - HELD THAT - On a careful reading of the papers including the submissions made by the counsel on either side, the undisputed facts are that assessee acquired 6.55 acres of land on 11/10/2004 and it was converted into stock in trade to be introduced to the partnership firm. This alone is the property that is converted from agricultural land to plots to be introduced as stock in trade of the partnership firm. This alone is in dispute in this case. Though the assessee sold two more plots one at Hosur and other at Gafoornagar villages, there is no dispute and AO himself accepted the capital gains and allowed exemption u/s 54F - We, therefore, deal with this disputed aspect in detail. The entire extent of 6.55 acres which the assessee converted into stock in trade was of an extent of 1,62,470 sq.ft. The conversion took place in the financial year 2012-13. Plots after conversion were sold in the financial - Assessee claims to have computed the capital gains on the sale of these plots by taking the Fair Market Value as on the date of conversion as the cost of acquisition. By indexing the same with reference to the year of sale, the assessee computed the capital gains. It is pertinent to note that though the AO in his order stated that in respect of the sale consideration on the sale of plots which were converted from out of the agricultural land to stock in trade, the same has to be treated as business income and not as capital gains because the activities of the assessee were resembling the adventure in the nature of trade , but by way of additional grounds, the Revenue has taken a plea that such income derived by the assessee on the conversion of the plots constitutes capital gains and on the sale of such plots the assessee would be entitled to exemption u/s 54F only to the extent of the Fair Market Value of such plots as on the date of conversion and nothing more. In the chart furnished by the AR, it is clearly shown that though the sale price of such plots was much more, the assessee computed the capital gains only with reference to the Fair Market Value as on the date of conversion and by deducting the indexed cost of acquisition applicable to the year of sale. From the additional grounds, we understand that the Revenue has no grievance if the capital gains are computed by taking the sale consideration as the Fair Market Value as on the date of conversion. In such an event, Revenue cannot have any grievance and it is only a matter of verification of facts and figures. Without undertaking such an exercise, Revenue preferred this appeal. We, therefore, no merits in the appeal of Revenue Insofar as the principle is concerned. To that extent, we confirm the impugned order. Only thing that has to be verified is whether the assessee computed the capital gains by taking the Fair Market Value as on the date of conversion as the sale consideration and deducting there from the indexed cost of acquisition applicable to the year of sale. If it is so, the addition cannot be sustained. We direct the AO to cause this verification and if it is found that the assessee computed the capital gains by taking the Fair Market Value as on the date of conversion as the sale consideration and deducting there from the indexed cost of acquisition applicable to the year of sale, to delete the addition. Appeal of the Revenue is dismissed.

Summary

Issues involved:
The judgment deals with the issue of whether the profit on the sale of stock in trade, which was converted from agricultural land into plots and subsequently sold, should be assessed as business income or capital gains. It also addresses the question of whether the assessee is entitled to exemption under section 54F of the Income Tax Act, 1961.

Issue 1: Assessment of Profit on Sale of Stock in Trade
The Assessing Officer concluded that the profit on the sale of stock in trade should be assessed as business income, based on the activities of converting agricultural land into plots and selling them. The Revenue contended that the entire income from the sale of plots should be considered income from capital gains, limited to the Fair Market Value as on the date of conversion. The assessee argued that the capital gains were computed in the year the plots were sold, based on the Fair Market Value at the time of conversion. The CIT(A) accepted the assessee's contention and allowed exemption under section 54F of the Act.

Issue 2: Computation of Capital Gains
The assessee acquired 6.55 acres of land, converted it into stock in trade, and sold plots between financial years 2012-13 and 2015-16. The assessee claimed to have computed capital gains by taking the Fair Market Value at the time of conversion as the cost of acquisition. The Revenue argued that the assessee should only be entitled to exemption under section 54F to the extent of the Fair Market Value at the time of conversion. The Tribunal found that if the capital gains were computed based on the Fair Market Value at the time of conversion and indexed cost of acquisition, the addition could not be sustained.

Decision:
The Tribunal dismissed the appeal of the Revenue, confirming the order of the CIT(A). It directed the Assessing Officer to verify if the assessee computed the capital gains by taking the Fair Market Value at the time of conversion as the sale consideration and deducting the indexed cost of acquisition applicable to the year of sale. If so, the addition should be deleted. The judgment was pronounced on August 24, 2023.