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2022 (10) TMI 539 - AT - Income TaxCapital gain - income arising from sale of impugned property - Addition applying provisions of section 50C - valuation done to arrive at the fair market value of the impugned land property - HELD THAT - AO and CIT(A) left the calculation of income on the sale transaction of impugned land property midway, owing to non-availability of fair market value of impugned land property on the date of conversion i.e. as on 31.03.2008. CIT(A) while giving relief to the assessee has accepted the income from the sale transaction of the impugned land as business income as claimed by the assessee in its return. By accepting such a claim of the assessee by the CIT(A), it implies that provisions of section 45(2) have been applied which is without verifying and examining the veracity of the claim of conversion itself. It is pertinent to note that assessee itself made a submission before the ld. AO vide its letter dated 09.03.2016, contents of which are reproduced in para 2.2 above, whereby assessee had discontinued its business and had no staff and also that the impugned property is the only property which it held as stock in trade. As already noted that there are two components of income which are brought to tax when the provisions of section 45(2) are applied, viz., capital gains on the conversion and business income on the sale of converted stock in trade. In the present case, the business income is subjected to tax as claimed by the assessee and allowed by the Ld. CIT(A). However, the other component of capital gains on the conversion of capital asset into stock in trade has been assumed to be forming part of the business income itself, which to our mind is not a correct application of the provisions of section 45(2) of the Act. It is proper to set aside the order of ld. CIT(A) on the issue of income from sale transaction of land property and remit the matter back to the file of CIT(A) to call for and obtain the pending valuation report from the DVO for which he had directed the Ld. AO as stated - We also direct to conduct due verification and examination of the claim of conversion made by the assessee in terms of our above observations for which, if deem fit, a remand report may be called from the ld. AO. Based on the valuation report of the DVO, examination of the veracity of claim of conversion and the remand report from the ld. AO, if any, Ld. CIT(A) is directed to arrive at both the components of income from sale transaction of the impugned land property by applying the provisions of section 45(2) of the Act and decide the issue accordingly. The assessee is also directed to cooperate with the Ld. DVO and Ld. CIT(A) in having the valuation done to arrive at the fair market value of the impugned land property as on 31.03.2008 i.e. the date of conversion. Needless to say that the assessee be given a reasonable opportunity of the heard before disposal of the appeal by the Ld. CIT(A). In the result, ground taken by the Department in this respect is partly allowed for statistical purposes. Disallowance u/s 14A - sufficiency of own funds - HELD THAT - As undisputed facts are that own funds available with the assessee are much more than the investments made by the assessee. Accordingly, respectfully following the decisions referred by the Ld. Counsel in the case of South Indian Bank 2021 (9) TMI 566 - SUPREME COURT by the Hon ble Supreme Court, we direct to delete the disallowance made by the ld. AO under section 14A of the Act. Thus, ground taken by the Department in this respect is dismissed.
Issues Involved:
1. Treatment of the sale of property as capital asset or stock-in-trade. 2. Application of Section 50C of the Income-tax Act, 1961. 3. Application of Section 45(2) of the Income-tax Act, 1961. 4. Disallowance under Section 14A of the Income-tax Act, 1961. Detailed Analysis: 1. Treatment of the Sale of Property as Capital Asset or Stock-in-Trade: The primary issue was whether the sale of the property should be treated as a capital asset or stock-in-trade. The Assessing Officer (AO) treated the property as a capital asset due to the absence of clauses in the Memorandum and Articles of Association (MoA and AoA) for dealing in land and buildings. The assessee contended that the property was converted into stock-in-trade in FY 2007-08 and reported as such in the audited financial statements. The Commissioner of Income-tax (Appeals) [CIT(A)] accepted the assessee's claim and treated the transaction as business income, noting that the conversion was bona fide and disclosed in the financial statements. The Tribunal directed the CIT(A) to re-examine the claim of conversion and obtain a valuation report from the District Valuation Officer (DVO) to determine the fair market value as of 31.03.2008. 2. Application of Section 50C of the Income-tax Act, 1961: The AO applied Section 50C, which deals with the valuation of capital assets for stamp duty purposes, to compute long-term capital gains. The AO computed the gain by taking the fair market value for stamp duty purposes and deducting the indexed cost of acquisition. The CIT(A) rejected this approach, holding that the transaction was an adventure in the nature of trade and thus assessable under the head business income. The Tribunal noted that the AO's calculation was incomplete due to the lack of a proper fair market value determination as of the conversion date and directed a re-examination. 3. Application of Section 45(2) of the Income-tax Act, 1961: Section 45(2) deals with the conversion of capital assets into stock-in-trade. The AO alternatively calculated short-term capital gains under this section but did not pursue it, fearing double taxation. The CIT(A) found the AO's calculation incomplete and incorrect. The Tribunal emphasized that income from such a transaction should be divided into capital gains on conversion and business income on sale. The Tribunal remanded the case for a proper determination of the fair market value as of the conversion date and recalculation of income under Section 45(2). 4. Disallowance under Section 14A of the Income-tax Act, 1961: The AO made a disallowance under Section 14A, related to expenses incurred for earning exempt income, totaling Rs. 2,08,690/-. The assessee argued that the investments were made from its own funds, which were significantly higher than the borrowed funds. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, citing the Supreme Court's ruling in South Indian Bank v. CIT, which supports no disallowance if investments are made from own funds. Conclusion: The Tribunal partly allowed the Department's appeal for statistical purposes, directing the CIT(A) to obtain a valuation report from the DVO and re-examine the claim of conversion and the computation of income under Section 45(2). The disallowance under Section 14A was deleted, affirming the CIT(A)'s decision.
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