1989 (6) TMI 87 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 19,21,649 to the Building Projects Division results.
2. Legal effect of converting capital assets (land) into stock-in-trade.
3. Reduction of Rs. 23,74,888 from the value of work-in-progress.

Detailed Analysis:

1. Addition of Rs. 19,21,649 to the Building Projects Division Results:
The CIT(A) upheld the addition of Rs. 19,21,649 to the results of the Building Projects Division, converting a declared loss of Rs. 8,95,173 into a profit of Rs. 10,26,476. The IAC(A) determined that the revaluation of stock-in-trade was an attempt to increase the cost of construction artificially, thereby inflating profits. He took the original cost of stock-in-trade as the book value of the land and buildings at the time of transfer (14-3-1980), leading to the calculated net profit of Rs. 10,26,476 instead of the declared loss. The Tribunal found this approach incorrect, emphasizing that the market value at the time of conversion should be considered, as accepted in the assessment year 1980-81.

2. Legal Effect of Converting Capital Assets (Land) into Stock-in-Trade:
The assessee argued that the conversion of capital assets into stock-in-trade was accepted in the assessment year 1980-81, and the market value at the time of conversion should be used to determine profits. The Tribunal referred to the Supreme Court judgments in CIT v. Bai Shirinbai K. Kooka and CIT v. Hantapara Tea Co. Ltd., which established that the assessable profits on the sale of converted property should be the difference between the sale price and the market value on the date of conversion. The Tribunal noted that the amendments to sections 2(47) and 45(2) of the Act, effective from 1-4-1985, did not apply retrospectively to conversions done before that date.

3. Reduction of Rs. 23,74,888 from the Value of Work-in-Progress:
The CIT(A) upheld the reduction of Rs. 23,74,888 from the value of work-in-progress, which the assessee argued was the difference between the book value and market value of the converted assets. The Tribunal found that this reduction was unjustified, as the market value at the time of conversion was accepted during the assessment year 1980-81. The Tribunal reiterated that the market value at the time of conversion should be used for determining profits, in line with the Supreme Court's established principles.

Conclusion:
The Tribunal set aside the orders of the CIT(A) and the IAC(A), directing them to accept the commercial results declared by the assessee based on the market value of the converted property as on the date of conversion. The appeal was allowed, emphasizing that the statutory amendments effective from 1-4-1985 could not retroactively affect conversions that occurred before that date and were already accepted by the revenue authorities.