2020 (12) TMI 214 - AT - Income Tax

Capital gain - whether or not Land (asset) held as stock-in-trade in the partnership firm is a capital asset and would attract the provisions of section 45(3)? - HELD THAT - We note that sub-section (2) of section 45 deals with the situation where capital asset is converted into stock-in-trade. Where the owner of a capital asset converts the capital asset into or treats it as, stock-in trade of his business, there is no transfer and no gain under the general law, for a man cannot transfer his property to himself or to make gain out of himself. Section 2(47) (iv) as amended by the Taxation Laws (Amendment) Act, 1984 with effect from April 1, 1985 , deems such conversion as transfer and section 45(2) inserted by the same Act with effect from the same date , brings to tax in a singularly ill-suited language, stating that, the profits or gains arising from such transfer in the accounting year in which the stock-in-trade is sold or otherwise transferred. We note that as per provisions of sub-section (2) of section 45, where capital asset is converted into stock-in-trade, till that point of time, there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold by the assessee. Sub-section (2) of section 45 carves out an exception to the above and deals with the situation where capital asset is converted into stock-in-trade, that is, there is exception in sub-section (2) of section 45 - The exception is that the Capital gain shall be computed on the assumption that the capital asset is transferred in assessment year 2013-14. By virtue of sub-section (2) of section 45 such capital gain will be taxable in the subsequent assessment year in which such stock-intrade is sold. In the assessee s case, the stock-in-trade is not sold in the assessment year 2013-14 therefore, there is no any liability on the assessee to pay tax in the assessment year 2013-14, the liability to pay tax will arise in subsequent year in which such stock-in-trade would be sold. Considering the legal position as explained by us in the relevant provisions of subsection (2) of Section 45, sub-section (3) of section 45 and sub-section (14) of section 2 of the Income Tax Act 1961 and taking into account the facts of the assessee s case, we hold that Land (asset) held as stock-in-trade in the partnership firm is not a capital asset and would not attract the provisions of section 45(3) - Decided in favour of assessee.

Summary

Issues Involved:
1. Charge of Capital Gains
2. Determination of Capital Gain at ?33,85,312/-
3. Miscellaneous

Issue-wise Detailed Analysis:

1. Charge of Capital Gains:
The initial grievance raised by the assessee was regarding the charge of capital gains on Alwara Lands, which had no cost. However, this ground was not pressed by the assessee during the appeal, and hence it was dismissed.

2. Determination of Capital Gain at ?33,85,312/-:
The core issue was whether the land held as stock-in-trade in the partnership firm is a capital asset and would attract the provisions of section 45(3) of the Income Tax Act, 1961. The assessee introduced 1677 sq. mtrs of land as capital contribution to the firm M/s Sai Enterprises. The assessing officer made additions on both substantive and protective bases.

Substantive Addition:
The assessing officer computed long-term capital gain based on the fair market value of the land converted into stock-in-trade. The CIT(A) deleted this addition, stating that there was no sale or transfer of stock-in-trade by the assessee. The land was received as a capital asset and introduced into the firm, thus not attracting section 45(2).

Protective Addition:
The assessing officer also made a protective addition under section 45(3), considering the value recorded in the books of the firm. The CIT(A) upheld this addition and converted it into a substantive addition, arguing that the land introduced as capital contribution was a capital asset in the hands of the assessee, thus attracting section 45(3).

Tribunal's Analysis:
The Tribunal analyzed the provisions of sections 45(2), 45(3), and 2(14) of the Income Tax Act. It concluded that the land introduced as stock-in-trade by the assessee does not attract capital gains under section 45(3) until the stock-in-trade is sold. Since the stock-in-trade was not sold in the assessment year 2013-14, no capital gain arises in that year. The Tribunal deleted the addition of ?33,85,312/-.

3. Miscellaneous:
This ground was general in nature and did not require adjudication.

Conclusion:
The Tribunal held that land held as stock-in-trade in the partnership firm is not a capital asset and would not attract the provisions of section 45(3) of the Income Tax Act, 1961. The appeals filed by the assessees were allowed, and the addition of ?33,85,312/- was deleted.