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TMI Blog2000 (2) TMI 788X X X X Extracts X X X X X X X X Extracts X X X X ..... y had constructed a residential complex known as "Madhuli". Earlier, the building was a five-star hotel named as Poonam International which later on was renamed as Hotel Central Park. Assessee-company is stated to be the owner of the land and building of the said hotel. In April, 1986, the hotel business was discontinued and the capital asset comprising of land and building of the hotel business were converted into stock-in-trade of the construction business in the form of residential complex. The Written Down Value of the converted asset was Rs. 3,09,81,911. As per the valuation report of M/s. R.M. Patange, Architect, market value of the converted asset was Rs. 14,21,67,625. In assessment year 1989-90, assessee first worked out deemed capital gains at Rs. 6,62,45,386 as follows:- Rs. (a) Pertaining to scientific research 3,935 (b) On shareholders meeting 30,115 (c) On staff members (away from place of work) 5,94,271 (4) Payments to clubs 52,485 6,80,806." Assesses offered the above sum of Rs. 1,40,71,849 for taxation. The reasons for deferring the taxability of capital gains given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the CIT (Appeals) and has raised objection against it in ground No. 3 of its cross objections for assessment years 1989-90 and 1990-91. However, CIT (Appeals) found merit in assessee's contention that piecemeal possession of some of the flats would not result in transfer of land and building or completion of project on the arguable and possible method of accounting profits on completed project basis. Accordingly, he held that in multi-storied structure even if single unit is not handed over possession, then possession of land and building is not given to the occupier. He also held that the amended provisions of section 2(47) would not apply in this case as according to him, amendment is applicable to 'transfer in relation to capital asset and not to stock-in-trade'. CIT (Appeals), therefore, on the fact that last possession was handed over on 5-10-1991, held that capital gains would accrue only in assessment year 1992-93 and this, according to him, would not jeopardize the position of revenue. He also held that so far as capital gain on land is treated, the same should be treated as long term capital gain and that arising on sale of building, should be treated as short-ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transferred to the Profit and Loss Account. Further, it was contended that as long as agreed work was not done, how the work could be said to be complete. Nonetheless, assessee co-operated with the department by showing business profit in the return, though, in the books, construction account was still continuing. Actual sales had not taken place because permission from Mumbai Municipal Corporation was not obtained and possession had been given only for the purpose of carrying out interior works and not for dwelling. In nutshell, it was sought to be emphasized that in the facts of the given case clauses (v) and (vi) of section 2(47) were not at all relevant and transfer, for the purpose of capital gain should relate to the date of conveyance. 9. We have considered the rival contentions and the material on record. We are concerned here about the time of accrual of capital gains in case where capital asset is converted into stock-in-trade and the arisal of tax liability thereon. As per section 45(1) capital gain arises on transfer of capital asset. Also, as per the said section, capital gain is chargeable to tax in the previous year in which the transfer takes place. As per secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf has offered for taxation. If sale of stock-in-trade is not denied, then as per section 45(2) which only fixes the year of liability, assessee cannot deny his tax liability on capital gains also which by fiction, had already arisen in 1986. The Legislature in its wisdom, considering the fact that on conversion only notional income has arisen, postponed the tax liability thereon till real income was earned on that asset. The assessee cannot, in our opinion, further postpone the liability beyond the point of time contemplated by section 45(2). In short, tax liability on the capital gain on conversion will arise in the same year/s in which business profit arises to the assessee on sale of such asset. The asset cannot have dual characteristic at the same point of time in the hands of the same person, which view the assessee has sought to canvass before us. This is not contemplated by any of the provisions of the Act and hence cannot be accepted. By assessee's own action, the asset had assumed the characteristic of stock-in-trade. Hence, when business profit on sale of such stock accrues to the assessee, tax on capital gain also will be levied in the same year as is envisaged by sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management of Wembly Hotels in August, 1986. However, with effect from 31-12-1988, hotel business was discontinued and assessee-company had become partner in the partnership firm of M/s. Wembly Hotels. Thus, since a new entity had come into existence, Assessing Officer did not permit set off of losses of the erstwhile proprietary business pertaining to assessment years 1987-88 and 1988-89 either against business profit or capital gain of assessment year 1989-90. Similarly, in assessment year 1990-91 also the loss was disallowed. CIT (Appeals) confirmed the disallowance after observing that the business taken over never commenced and the expenses were more in the nature of takeover costs. Such costs being of the pre-commencement period and of distinct business, set off was not allowed. 15. The learned D.R. supported the orders of the lower authorities whereas the learned counsel contended that the CIT (Appeals) had no right to sit over the judgment on tosses determined in earlier years. 16. Considering the material on record, we uphold the contentions of the learned counsel and direct that losses of earlier years pertaining to Wembly Hotels be allowed to be carried forward. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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