ITAT allows profits from sale of plots earlier converted into stock in trade as capital gain with indexation benefit
ABCAUS Case Law Citation:
ABCAUS 3796 (2023) (08) ITAT
Important Case Laws relied upon:
P.M. Mohammed Meerakhan vs. CIT (1969) 73 ITR 735
In the instant case, the Income Tax Department had challenged the order passed by the CIT(A) in confirming
The assessee was an individual. He acquired agricultural land by way of gift from his father, converted the same to stock in trade, divided into the plots and put the same to sale.
During the relevant financial year, assessee had sold four plots from out of the stock in trade. The assessee treated the plots as ‘capital assets’ and admitted the profit arising out of such sale under the head long term capital gain, by taking the value of such plots as on the date of conversion as the cost of acquisition and worked out the income after allowing the indexed cost of acquisition. Assessee also claimed deduction under section 54F of the Income Tax Act, 1961 (the Act).
The entire land which was converted into stock in trade and later plots after conversion were sold in the same and following three financial years (including the financial year concerned). The assessee computed the capital gains on the sale of these plots by taking the Fair Market Value as on the date of conversion as the cost of acquisition. By indexing the same with reference to the year of sale, the assessee computed the capital gains.
According to the Assessing Officer (AO), the converting of the agricultural land as the commercial land, dividing the same into plots, allotting numbers thereto and selling the same constitute adventure in the nature of trade and referring to the decision of the Hon’ble Supreme Court he concluded that the profit on sale of stock in trade shall be assessed as business income. He, accordingly worked out the same and added it to the income of the assessee.
Aggrieved, assessee preferred appeal before the CIT(A) and contended that under section 45(2) of the Act, when a capital asset is converted into stock in trade, the Fair Market Value on the date of conversion will be deemed as the consideration arising from such conversion and the capital gains are to be taxed in the previous year in which the capital asset was sold.
According to the assessee by reckoning the consideration with reference to the Fair Market Value of the asset in the year of conversion, capital gains were computed in the previous year in which the plots were sold.
The CIT(A) accepted the contention of the assessee and allowed the exemption under section 54F of the Act.
Before ITAT, the Revenue contended that the assessee was engaged in the trading activity of purchase and sale of lands, converted the agricultural lands into stock in trade, made it into plots, numbered and subsequently sold and, therefore, the entire income from sale of plots was income from capital gains and not income from business; whereas the income from capital gains would only be to the extent of the Fair Market Value as on the date of conversion.
Further, according to the Revenue, the assessee was entitled to the relief under section 54F of the Act only to the extent of the capital gains as computed above and the rest of income on the sale of stock in trade is liable to be assessed as income from business.
The assessee contended that he acquired land then formed into a partnership firm with his neighbour, converted such land as stock in trade and subsequently, sold away such land making it into plots. According to the assessee, the sale took place between financial year of conversion and relevant financial year and as and when such sale took place, the capital gains arising therefrom were admitted in the return of income for the respective assessment years by claiming exemption by depositing the same into the capital gains account.
The ITAT observed that though the Assessing Officer in his order stated that in respect of the sale consideration on the sale of plots which were converted from out of the agricultural land to stock in trade, the same has to be treated as ‘business income’ and not as ‘capital gains but by way of additional grounds, the Revenue took a plea that such income derived by the assessee on the conversion of the plots constituted capital gains and on the sale of such plots the assessee would be entitled to exemption under section 54F of the Act only to the extent of the Fair Market Value of such plots as on the date of conversion and nothing more.
Further, the ITAT observed that though the sale price of such plots was much more, the assessee computed the capital gains only with reference to the Fair Market Value as on the date of conversion and by deducting the indexed cost of acquisition applicable to the year of sale.
From the additional grounds of the Revenue, the ITAT opined that Revenue would not have any grievance if the capital gains are computed by taking the sale consideration as the Fair Market Value as on the date of conversion. The ITAT opined that in such an event, Revenue cannot have any grievance and it was only a matter of verification of facts and figures. However, Revenue preferred the appeal without undertaking such an exercise.
The Tribunal confirmed the impugned order with direction of verification whether the assessee computed the capital gains by taking the Fair Market Value as on the date of conversion as the sale consideration and deducting there from the indexed cost of acquisition applicable to the year of sale. If it is so, the addition cannot be sustained.
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Author’s Note:
Here ITAT appears to have ignored the intent of section 45(2) which provides that in case of conversion of a capital asset into stock in trade, capital gain shall for the limited purpose of the said conversion. It follows that on subsequent sale of the capital asset, the profit therefrom shall be taxable as income from business or profession.
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