2002 (5) TMI 204 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee was rightly assessed to capital gains tax on a sum of Rs. 3,92,850 u/s 2(47)(iv) and 45(2) of the Act.
2. Whether the assessee is liable to capital gains tax on the above sum notwithstanding that the conversion of the capital asset into stock-in-trade took place prior to 1-4-1985, the date from which both the sections came into force.

Summary:

Issue 1: Assessment to Capital Gains Tax u/s 2(47)(iv) and 45(2)
The assessee-company held a plot of leasehold land as an investment, which was converted into stock-in-trade during the accounting year ending on 31-3-1983. The market value of the land at the time of conversion was estimated at Rs. 27.29 lakh. The Assessing Officer (AO) invoked sections 45(2) and 2(47)(iv) to assess the difference between the sale price and the market value of the land as business profit, and the difference between the market value and the original cost as capital gain. The AO computed the net capital gain as Rs. 15,08,106.

Issue 2: Liability to Capital Gains Tax for Conversion Prior to 1-4-1985
The CIT(A) initially allowed relief to the assessee for the earlier year on the ground that the conversion took place before 1-4-1985, and thus could not be considered a transfer. However, for the current assessment year, the CIT(A) held that the emphasis is on the date the stock-in-trade is sold, not the date of conversion. The Tribunal upheld this view, stating that capital gains should be charged in the year the stock-in-trade is sold or otherwise transferred, even if the conversion occurred before 1-4-1985.

Tribunal's Analysis and Conclusion:
- The Tribunal referenced section 45(2), which charges capital gains tax in the year the converted stock-in-trade is sold, regardless of the conversion date.
- The Tribunal noted that the provisions of section 2(47)(iv) and 45(2) were introduced to address the gap identified in earlier Supreme Court decisions, which held that no profit arises on conversion as one cannot make a profit out of oneself.
- The Tribunal cited the Gauhati High Court and Supreme Court decisions, emphasizing that the law applicable at the time of the taxable event (sale of converted assets) should be applied, not the law at the time of conversion.
- The Tribunal upheld the CIT(A)'s order and dismissed the appeal, confirming that the capital gains tax was rightly assessed in the year the stock-in-trade was sold.

Result:
The appeal was dismissed, and both questions were decided against the assessee.