1981 (11) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Conversion of land into stock-in-trade.
2. Computation of income from the sale of converted stock-in-trade.

Detailed Analysis:

Issue 1: Conversion of Land into Stock-in-Trade

The assessee, a registered partnership firm, owned a piece of land and a factory shed which were initially held as fixed assets. On 1st October 1973, the firm decided to convert the land and the right to build 25,000 sq. ft. area into stock-in-trade for its new business of dealing in land and estate. The value of the land was determined at Rs. 3,84,900, and the value of the structure at Rs. 92,468. The accretion in value was Rs. 2,92,432, which was credited to the partners' capital accounts.

Later, on 16th September 1974, the firm decided to bring an additional right to construct 70,000 sq. ft. into stock-in-trade, valued at Rs. 2,44,000. The total conversion value was Rs. 6,28,900. The ITO did not accept the conversion of the land into stock-in-trade and treated the entire difference between the original cost and the sale price of the industrial sheds as business income.

The AAC, on appeal, found that the land was indeed converted into stock-in-trade on 1st October 1973 and valued at Rs. 3,84,900. However, the AAC did not accept the additional right to construct 70,000 sq. ft. as part of the stock-in-trade because this right did not exist at the time of the original conversion. The AAC upheld the conversion of only the initial 25,000 sq. ft. area into stock-in-trade.

Issue 2: Computation of Income from the Sale of Converted Stock-in-Trade

The ITO computed the profit from the sale of industrial sheds by taking the difference between the original cost (Rs. 18,494) and the sale price (Rs. 1,25,000), resulting in a profit of Rs. 1,06,506. The AAC, however, determined the cost of the industrial sheds sold by considering the conversion value of Rs. 3,84,900 for the 25,000 sq. ft. area. The AAC computed the cost of the industrial gala sold as Rs. 76,980 and the profit as Rs. 48,020.

The Tribunal upheld the AAC's method of computation, referencing the Supreme Court decision in CIT vs. Bai Shirinbai K. Kooks, which established that the income should be the difference between the sale price and the market price on the date of conversion. The Tribunal found that the ITO's computation was erroneous and confirmed the AAC's order.

Conclusion:

The Tribunal concluded that the land was converted into stock-in-trade on 1st October 1973, limited to the initial 25,000 sq. ft. area. The computation of income from the sale of the converted stock-in-trade should follow the market value on the date of conversion, as upheld by the AAC. Both the appeals by the revenue and the assessee were dismissed, confirming the AAC's order and the profit computation of Rs. 48,020.