1986 (2) TMI 80 - AT - Income Tax

Summary

Issues:
1. Whether the conversion of a capital asset into stock-in-trade and contribution of the same as capital resulted in taxable capital gains.
2. Whether the assessee genuinely converted the land into stock-in-trade and the contribution as capital was of stock-in-trade.

Detailed Analysis:

Issue 1:
The appeal involved the question of whether taxable capital gains arose from the conversion of a capital asset into stock-in-trade and its contribution as capital by the assessee. The original assessment was reopened, and the Income Tax Officer (ITO) proposed to tax the difference between the value of the land transferred and its original cost as long-term capital gain. The ITO rejected the assessee's argument that the transferred land was stock-in-trade, requiring evidence of purchase and sale transactions. The Income-tax Appellate Tribunal (ITAT) upheld the ITO's decision under Section 144B of the Income Tax Act, relying on precedents like CIT vs. Kartikey V. Sarabhai.

Issue 2:
The assessee contended that the land was genuinely converted into stock-in-trade, supported by entries in personal books of account and a valuation report. The Conversion of the land into stock-in-trade was recorded in the books and contributed to the firm as capital. The CIT(A) accepted this argument, citing precedents like CIT vs. Bai Shirinbai K. Kooka. The Revenue challenged this decision, arguing that the conversion was not genuine and the contribution was of the capital asset, citing Sunil Siddharthbhai vs. CIT. However, the CIT(A) and the assessee's representative maintained that the conversion was genuine, supported by contemporaneous evidence and subsequent business activities carried out through the firm.

Conclusion:
The ITAT analyzed the evidence and found that the conversion of the land into stock-in-trade was genuine, supported by entries in books, affidavit, and partnership deed. The subsequent business activities of construction and sale of flats through the firm further validated the conversion. Distinguishing the case from Anasuyaben, the ITAT upheld the CIT(A)'s decision, dismissing the appeal and concluding that no taxable capital gains arose from the conversion and contribution of the land as capital in the firm.