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TMI Blog2022 (10) TMI 539X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said property on the date of execution of sale through registered deed was assessed at Rs.7,64,99,960/- by registering authority for the purpose of stamp duty. The said piece of land was conveyed in favour of the assessee on 31.07.2007 for Rs.85,72,068/-with further addition (improvements) of Rs.55,64,298/- made during the same year. Thus, the total value of the property was accounted at Rs.1,41,36,366/- (Rs.85,72,068 + Rs.55,64,298) in the books of accounts of the assessee for FY 2007-08 relevant to AY 2008-09. On 31.03.2008, assessee converted the said capital asset into stock-in-trade and reported the same as part of its stock-in-trade in its audited balance sheet as at 31.03.2008. 2.1. In the course of assessment, Ld. AO enquired about the transaction of sale of this property seeking the following details (as reproduced in the order): 1. Please furnish the Audit report and Tax Audit report with accounts and balance sheet (If every year from the year in which you have purchased the Land at Cossipore and sold during this year i.e. F.Y.2012-13. 2. Furnish the certified copy of both obverse and reverse side of purchase deed of Land at Cossipore. 3. Please conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stock in trade since AY 2008-09. To substantiate this claim, assessee could not produce receipted copy of challan filed with ROC as it was not traceable by the assessee. 2.4. Considering the above submissions made by the assessee, Ld. AO observed that assessee has not dealt with any other land and building except with the impugned land since its inception. Ld. AO also noted that assessee could not furnish any registered or duly approved Memorandum and Articles of Association by the Registrar of Companies incorporating the objectives for carrying out the business of dealing in land and building, promoting of building construction, which was not incorporated in the object clause initially. Accordingly, Ld. AO completed the assessment by treating the impugned property as capital asset instead of treating it as stock in trade as done by the assessee. Ld. AO rejected the claim of the assessee on sale of land with tin shed as stock in trade as part of business income. Based on the conclusion drawn by the Ld. AO, he computed the long-term capital gain by applying the provisions of section 50C read with section 2(14) of the Act as under: Cost of land in 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned property into stock in trade is bonafide in terms of clause number 6, 11 and 18 forming part of incidental objects contained in the Memorandum and Articles of Association and also in terms of resolution passed by the assessee and the disclosure made in the audited financial statement for the year ending on 31.03.2008. Further, it was submitted that the said conversion had been accepted by the Department in scrutiny assessment made under section 143(3) of the Act for AY 2012-13. 2.9. On the alternative approach adopted by the Ld. AO in respect of applying the provisions of section 45(2) of the Act, assessee submitted that Ld. AO tried to compute the long-term capital gain on the date of conversion i.e. 31.03.2008, as per section 45(2) by computing the fair market value on the basis of back calculation of stamp duty value as on 22.01.2011 by using year-wise cost inflation index, which is invalid and bad in law. It was also submitted by the assessee that Ld. AO should have referred the matter for determination of fair market value as on 31.03.2008 to the DVO which was not done. Assessee also submitted that cost inflation index is used for the purpose of computing indexe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaving the issue midway at this stage, ld. CIT(A) examined the subject matter in terms of application of section 50C of the Act and gave his findings in favour of the assessee by holding that the transaction in question is an adventure in the nature of trade and thus assessable under the head business income. Accordingly, addition of long-term capital gain under section 50C of the Act of Rs.5,33,31,450/- made by the ld. AO was deleted. 2.13. On the alternative calculation of capital gains by the ld. AO as per section 45(2), ld. CIT(A) held that although no addition is made to total income, AO s alternative calculation of short-term capital gain under section 45(2) is found to be incomplete and without proper adoption of market value as on the date of conversion and without computation of business income/loss component and thus it is wrong and not permissible as per law. 2.14. Ld. CIT(A) also deleted the disallowance made under section 14A of the Act. Aggrieved, the Department is in appeal before the Tribunal. 3. Before us, Ld. CIT DR submitted that Ld. AO has rightly treated the income arising from sale of impugned property as capital gains by applying the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nents, one being capital gain on conversion of capital assets into stock in trade which is chargeable to tax in the year in which the converted stock in trade is sold by the assessee and second being the business income earned on the sale of stock in trade by the assessee. He thus stated that Capital gain has to be calculated by taking market value of the impugned property on the date of conversion from which the cost of acquisition is reduced. For calculating the business profits which is the second component, the fair market value of the stock in trade on the date of conversion is to be reduced from the sale consideration. Ld. Counsel submitted that though Ld. AO approached for the alternative calculation but left it by stating that assessee may not be taxed twice in different ways for the similar income and completed the assessment by making addition by applying the provisions of section 50C of the Act. 4.2. In respect of disallowance made under section 14A of the Act, Ld. Counsel placed reliance on the decision of Hon ble Supreme Court in the case of South Indian Bank v. CIT (2021) 322 CTR 465 (SC) wherein it was held that if investments in tax-free securities is made out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at by deducting cost of acquisition of the capital asset from the fair market value of the capital asset on the date of conversion, and (ii) business income on the event of sale of stock in trade which is arrived at by deducting the cost of the said stock in trade as recorded in the books of the assessee (which is the fair market value on the date of conversion) from the sale consideration. 5.3. We also understand that it is the prerogative of the assessee to convert its capital asset into stock in trade for which it is obliged to demonstrate its intention of doing so under the provisions of the Act. As noted above, the capital arising from such conversion is chargeable to income-tax not in the year of alleged conversion but only in the year in which the converted stock in trade is sold. In the year of conversion, the exercise of conversion per se does not have any implication on the taxability of the assessee. It is the assessment year in which the said converted stock in trade is sold wherein the ld. AO gets an occasion to examine the veracity of the claim of the assessee on the conversion and its relevant income reported by it in the return. Thus, in the year in which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of the appellant company and facts on record and the provisions of section 45(2) and CBDT circular and since STCG is involved, I find the submissions / arguments of the assessee as a reasonable as per facts and in law and accordingly I hold that no additional income is assessable on the sale of the property at Cossipore by the appellant during the year. 5.6. In the course of Hearing before us, Ld. Counsel for the assessee placed reliance on the decision of coordinate bench of ITAT Kolkata in the case of the DCIT v. Poddar Projects Ltd in ITA No. 2752 2753/Kol/2013 dated 18.05.2018. From the perusal of this order, we note that in para 6, it is categorically mentioned that at the time of conversion, assessee had obtained a report from registered valuer in respect of the capital asset which was converted into stock in trade and the said valuation report was placed on record. 5.7. Ld. Counsel also placed reliance on the decision of coordinate bench of ITAT Mumbai in the case of Tata Housing Development Co. Ltd. v. Dept. of Income-tax in ITA No. 6793 6326/M/03 dated 31.07.2003. In this decision also from para 32, we note that fair market value of the capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X
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