2022 (1) TMI 1151 - AT - Income Tax

Revision u/s 263 by CIT - chargeability of capital gains as per section 45(2) - applicability of sub-section(2) of Section 45 of the Act to the case of the assessee, wherein, the assessee has sold a part of land, which was converted from capital asset to stock-in-trade during the preceding financial period - HELD THAT - For the purpose of calculation of capital gains u/s 48 the fair market value of the assessee on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. This provision does not provide a situation where the assessee has sold a part of converted capital asset into stock in trade but at the same time, we also observe that it is also not the intention of the legislature that if the assessee is transferring a part of converted capital assets during preceding financial period, then the revenue authorities has to wait till the transfer of entire converted stock in trade for the purpose of taxing capital gains accrued to the assessee on conversion of capital asset into stock in trade. Respectfully following the principles that the right income should be taxed in the right hands in the relevant financial period, we are of the considered view that in a case also where the assessee transfers a part of converted capital asset then also profits or capital gain would be chargeable to tax in the hands of the assessee partially pertaining to part of land or property sold during relevant financial period and same shall be chargeable to tax in the previous year in which if such part of stock in trade is sold or otherwise transferred by taking a fair market value on the date of such transfer or treatment shall be deemed to be full value of the consideration received or accrued to the assessee, as a result of transfer of capital asset. In the present case, undisputedly rather admittedly, the assessee has transferred part of converted capital asset into stock in trade during the relevant financial period and the AO has failed to make any enquiry in this regard and to tax the same in the hands of the assessee partially pertaining to the part of land sold during the year. No enquiry has been conducted by the AO during the assessment p;roceedings in this regard, hence, it is clear case of no enquiry. CIT assumed valid jurisdiction to review the assessment order u/s.263 of the Act and the Pr. CIT was right and brandy in treating the assessment as erroneous so far as prejudicial to the interest of the revenue. We are unable to see any ambiguity, perversity in the order of ld Pr. CIT, which is hereby confirmed. - Decided against assessee.

Summary

Issues Involved:

1. Applicability of Section 45(2) of the Income Tax Act.
2. Validity of invoking revisionary powers under Section 263 of the Income Tax Act.
3. Calculation of capital gains and business income on the sale of converted stock-in-trade.

Issue-wise Detailed Analysis:

1. Applicability of Section 45(2) of the Income Tax Act:

The primary issue revolves around whether Section 45(2) of the Income Tax Act is applicable when only part of the converted capital asset (land) is sold. The assessee argued that Section 45(2) does not apply to partial sales and that capital gains should only be recognized when the entire stock-in-trade is sold. The assessee also claimed that there was no capital gain as the sale resulted in a loss, and thus, no capital gain should be recognized.

The Tribunal, however, interpreted Section 45(2) to mean that profits or gains arising from the transfer of a capital asset converted into stock-in-trade should be chargeable to tax in the year in which such stock-in-trade is sold, even if only a part of it is sold. The Tribunal emphasized that the legislation does not intend for the revenue authorities to wait until the entire converted stock-in-trade is sold to tax the capital gains. Therefore, the Tribunal concluded that capital gains should be recognized proportionally in the year the part of the stock-in-trade is sold.

2. Validity of Invoking Revisionary Powers under Section 263 of the Income Tax Act:

The Pr. CIT invoked Section 263, arguing that the Assessing Officer (AO) failed to examine the applicability of Section 45(2) and did not compute the capital gains arising from the conversion of the capital asset into stock-in-trade. The assessee challenged this, stating that the AO's order was neither erroneous nor prejudicial to the interest of the revenue.

The Tribunal held that the AO's failure to make necessary inquiries and compute the capital gains as per Section 45(2) constituted a lack of due diligence. This oversight rendered the assessment order erroneous and prejudicial to the interest of the revenue. Consequently, the Pr. CIT was justified in invoking Section 263 to revise the assessment order.

3. Calculation of Capital Gains and Business Income on the Sale of Converted Stock-in-Trade:

The Pr. CIT directed the AO to recompute the capital gains on the conversion of the capital asset into stock-in-trade and the business income from the sale of the property. The assessee contended that since the sale resulted in a loss, no capital gains should be recognized. Additionally, the assessee argued that the entire stock-in-trade was not sold, and thus, the provisions of Section 45(2) were not applicable.

The Tribunal dismissed the assessee's arguments, stating that the fair market value of the asset on the date of conversion should be deemed the full value of consideration for calculating capital gains. The Tribunal also clarified that the business income should be computed based on the difference between the sale consideration and the cost of the stock-in-trade. Since the AO did not make these calculations, the Pr. CIT's directions to recompute the capital gains and business income were upheld.

Conclusion:

The Tribunal upheld the Pr. CIT's order to revise the assessment under Section 263, affirming that the AO's failure to apply Section 45(2) and compute the capital gains and business income was erroneous and prejudicial to the revenue. The appeal by the assessee was dismissed, and the Pr. CIT's directions were confirmed.