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2015 (5) TMI 468 - AT - Income TaxLong term capital gain on sale of long term capital assets - chargeabilty to tax u/s. 45(2) - the assets received by the assessee at the time of partition are capital assets or stock-in-trade? - Held that - From the above decision of the Tribunal in the assessee s own case 2012 (6) TMI 56 - ITAT BANGALORE it is seen that the assessee in block assessment proceedings claimed that all the properties held by him and the income arising therefrom belong to the joint family (HUF) and not to him in his individual capacity. The Tribunal after consideration of the material placed before it, held that the entire properties held by the assessee belonged to his joint family, as the same were ancestral in character and any purchase and sale of property was only by ploughing back the wealth obtained from the HUF nucleus. The assessee in his individual capacity did not have income from any source. The provisions of section 45(2) of the Act are attracted only when there is a conversion of a capital asset into stock-in-trade. As already observed by us, there is no material on record to support the view taken by the Assessing Officer that the assessee received certain capital assets on partition of the joint family which were later converted to stock-intrade by the assessee. A perusal of both the order of the Tribunal in the assessee s case in the block assessment coupled with the Memorandum of Family Arrangements and Oral Partition dt.6.3.2004 clearly establishes that the erstwhile joint family of the assessee was carrying on real estate business and was holding several properties as stock-in-trade. These properties which were hitherto being held as stock-in-trade, were allotted to the assessee on partition. It is also evident that the assessee continued to carry on the said real estate business after the partition. In these circumstances, it is clear that, there is no conversion of capital assets to stock-in-trade either by the assessee or the joint family. In this view of the matter, we hold that the provision of section 45(2) of the Act are not applicable in the instant case and consequently the computation of capital gains made by the Assessing Officer is cancelled. From the ratio of the judgment of Kallooram Govindam v CIT 1965 (3) TMI 26 - SUPREME Court it is clear that the value of the properties fixed at the time of partition or determined aliunde would be the cost to be adopted in the hands of the recipient of the properties. However, the specific provisions of section 49(1) of the Act have been enacted in the Income Tax Act, 1961, to fix the cost of the capital asset acquired on partition to be the cost at which it was acquired by the previous owner. In other words, the judgment of the Hon'ble Apex Court would not be applicable in a case of capital assets received on partition in the light of the provisions of section 49(1) of the Act. However, since the provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. Therefore, the judgment of the Hon'ble Apex Court would be squarely applicable to the facts of the instant case and the assessee is justified in adopting the said cost for computing income from business.Thus hold that the provisions of section 45(2) of the Act are not applicable to the facts of the case and therefore there cannot be any long term capital gain that can be brought to tax under those provisions for A.Ys. 2011-12 & 2012-13. - Decided in favour of assessee. Unexplained jewellery - Held that - A specific query was put to the ld. counsel for the assessee as to whether any reconciliation was filed to highlight the difference between the amount offered as income and the report of the valuation. The ld. counsel for the assessee submitted that no such reconciliation was filed. In our view, when the quantum of jewellery found and the valuation is not disputed, the value as per the valuation report ought to have been offered as income on account of excess jewellery found. The valuation is done only as on the date of search. Therefore, the revenue authorities were justified in making the impugned addition. We, therefore, confirm the order of the CIT(Appeals) - Decided against assessee.
Issues Involved:
1. Application of Section 45(2) of the Income-tax Act, 1961. 2. Validity of initiation of search under Section 132 of the Act. 3. Addition of unexplained jewelry as income. Detailed Analysis: 1. Application of Section 45(2) of the Income-tax Act, 1961: The main grievance of the assessee was the CIT(Appeals)'s conclusion that long-term capital gain on the sale of long-term capital assets accrued to the assessee during the assessment years 2011-12 and 2012-13, chargeable to tax under Section 45(2) of the Act. The assessee, a member of an HUF involved in the real estate business, received stock-in-trade from the HUF upon partition, which was then treated as stock-in-trade in his individual capacity. The Revenue argued that the stock-in-trade received on partition was a capital asset and its treatment as stock-in-trade by the assessee amounted to a transfer under Section 45(2), thus liable to capital gains tax upon sale. The Tribunal, however, referred to its earlier decision in the assessee's case for the assessment year 2006-07, where it was held that: - The properties received by the assessee on partition were stock-in-trade and not capital assets. - There was no evidence of conversion of capital assets into stock-in-trade. - The provisions of Section 45(2) were not applicable as there was no conversion of capital assets into stock-in-trade. The Tribunal reiterated that the assets received by the assessee were already stock-in-trade of the HUF's real estate business and continued to be so in the assessee's individual business. Consequently, the provisions of Section 45(2) did not apply, and no long-term capital gain could be taxed under those provisions for the assessment years 2011-12 and 2012-13. 2. Validity of Initiation of Search under Section 132 of the Act: The assessee challenged the validity of the initiation of search under Section 132 of the Act, which led to proceedings under Section 153A. However, since the Tribunal held that the provisions of Section 45(2) were not applicable, the issue of the validity of the search was left open and not adjudicated. 3. Addition of Unexplained Jewelry as Income: During a search on 5.7.2011, excess jewelry was found, and the assessee offered Rs. 50 lakhs as additional income for unaccounted jewelry. However, the valuation report later valued the jewelry at Rs. 56,74,320, leading to an addition of Rs. 6,74,320 by the AO. The assessee contended that the additional income was based on the valuation at the time of the search, not the later valuation report. The Tribunal confirmed the addition, noting that the valuation was done as on the date of the search and the quantum of jewelry found was undisputed. The revenue authorities were justified in making the addition based on the valuation report. Conclusion: The Tribunal allowed the assessee's appeals regarding the application of Section 45(2) for the assessment years 2011-12 and 2012-13, holding that the provisions were not applicable and no long-term capital gain could be taxed. The issue of the validity of the search was left open. The Tribunal confirmed the addition of Rs. 6,74,320 for unexplained jewelry. ITA No.1778/Bang/2012 (A.Y. 2011-12) was partly allowed, and ITA No.1779/Bang/2012 (A.Y. 2012-13) was allowed.
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