Once
capital asset is converted
into stock-in-trade provision of section 2(47)
becomes irrelevant and does not apply
[2010] 5 taxmann.com 80 (Chennai -
ITAT)
ITAT, BENCH ‘A’, CHENNAI
R.Gopinath (HUF)
v.
ACIT
ITA NOS. 29 & 30/Mds/2008
JULY 24, 2009
In the revised return of income the assessee declaring the long
term capital gain at Rs.53,73,705/-. In the scrutiny assessment, the Assessing
Officer determined the long term capital gain at Rs.3,67,59,418/-. The
controversy is regarding the land measuring 44,000 sq.ft. which the assessee had
converted this land into stock-in-trade as per his books of accounts.
Thereafter the assessee entered into a development agreement dated 01.09.2003
along with a supplementary development agreement dated 23.12.2003 with a
developer M/s. Cotton City Developers Private Limited. By means of this
development agreement, the assessee provided his land measuring 44,09$ Sq.ft.
to the developer and in return the developer was, to give the assessee a
built-up area of 25,285/- sq.ft. The Assessing Officer was of the opinion that
the assessee's case was liable for tax as per Section 45(2) of the Income Tax
Act, 1961. The Assessing Officer relied upon the judgement of the Hon'ble
Supreme Court in the case of Commissioner of Income Tax Vs. Groz-Bekert Saboo
Limited re#drted in 116 ITR 25 and in the case of Commissioner of Income Tax
Vs. Bai Shirinbai K. Kooka reported in 46 ITR 86 (1962)(SC). The assessee
offered capital gain on the land under the provisions of Section 45(2) of the
Income Tax Act, 1961 in different years in which he sold the built-up are and
thereby the assessee arrived at a long term capital gain but only on the sale
of land proportionately for this year vis-a-vis the built-up area sold for the
period relevant to the assessment year
2004-2005 and thereby split the income on long term capital gain to the
assessment year 2004-2005 and 2005-2006. The Assessing Officer did not accept
the assessee's computation on the long term capital gain on transfer of land.
He was of the view that the long term capital gain on transfer of land was
assessable in the year in which the assessee handed over the possession of the
land to the developer in pursuant to the agreement dated 01.09.2003 and
accordingly brought the entire long term capital gain on transfer of land to tax in
the assessment year 2004-2005 at Rs.3,86,43,118/-.
The Commissioner of Income Tax (Appeals) did not accept the
contention of the assessee and held that since the possession of land was
handed over to the developer in pursuant of the agreement dated 01.09.2003, the
capital asset (viz) the land stands transferred in accordance with the
provisions of Section 2(47) of the Income Tax Act, 1961 r.w.s.53A of Transfer of
Property Act and upheld the action of the Assessing Officer in computing the
long term capital gain on land in the assessment year 2004-2005.
The capital
asset was converted into stock-in-trade by the assessee and thereafter a
development agreement entered into by the assessee with the developer, whereby
the assessee provided his land measuring 44,000 sq.ft. to the developer for
construction of residential apartments, the developer agreed to construct
83,760 sq.ft. (approximately the saleable area as per the plan to be approved
by the authorities). Out of the total constructed area, the owners of the land
were to get constructed area of 25,130 sq.ft The assessee handed over the
possession of the property to the developer for construction purpose and also
agreed to make the application to the authorities concerned for sanction of
plan and for all other requirements in respect of the construction and
effectively carried out the building project including the permission for
retaining the vacant land for construction of building for providing amenities
like water, electricity, sewerage, etc.
It is undisputed that once the property in question was converted to capital
asset to stock-in-trade, Section 45(2) of the Income Tax Act, 1961 will be
applicable for determining the year of taxing of the capital gain arising from
the conversion of the capital asset to the stock-in-trade. Therefore, there is no dispute regarding the
applicability of Section 45(2) of the Income Tax Act, 1961 in this
case in respect to determine the year in which the capital gain chargeable
to tax. The assessee also offered the capital gain by applying the provisions of Section 45(2) of the Income Tax Act, 1961 on
the basis of constructed flats sold in the
previous year relevant to the assessment year and accordingly proportionate capital gain arising from the
transfer of land and building to
stock-in-trade was offered. But the Assessing Officer was of the view that this stock-in-trade was sold and transferred at the
point when the assessee entered into the
development agreement dated 01.09.2003. Therefore, the entire long term
capital gain is chargeable to tax in the assessment year 2004- 2005 because as per the Assessing Officer the
stock-in-trade was sold / transferred in the
year 2003. We may point out here that from the record it is apparent that apart from the development agreement and
supplementary development agreement, there is
no other document executed by the assessee. The
Assessing Officer treated the transaction of handing over the possession of
the land and building to the developer as transfer
u/s.2(47) of the Income Tax Act, 1961. The
Commissioner of Income Tax (Appeals) also held that the capital asset stands transferred in accordance with the provisions
of Section 2(47) r.w.s.53A of Transfer of
Property Act. In our view, the lower authorities have not taken a correct view by analyzing the transaction by
applying the provisions of Section 2(47) of
the Income Tax Act, 1961 which is applicable only in case of capital asset. As per Section 2(14) of the Income Tax Act,
1961, capital asset does not include*
stock-in-trade. Therefore, once capital asset is converted into stock-in-trade provisions of section 2(47) becomes
irrelevant and does not apply. The learned Departmental Representative has
contended that the transfer of immovable property satisfies the conditions of
Section 53A of the Transfer of Property Act, then the transaction of transfer
is complete. He has urged that in the case in hand, Section 53A of Transfer of
Property Act applies and despite the conversion of the property into
stock-in-trade, transaction of handing over of possession of land and building
to the developer as per the development agreement amounts to transfer.
Therefore as per the provisions of Section 45(2), the capital gain arising on
conversion of capital asset into stock-in-trade is chargeable to tax in the
year 2003 when the development agreement was entered into by the parties. He
has urged that the lower authorities have rightly held that the entire capital
gain arising from conversion of capital asset into stock-in-trade will be
chargeable to tax in the assessment year 2004-2005.
We are unable
to agree with the contentions of the learned Departmental Representative that
the transaction of transfer is complete by applying the provision of Section
53A of Transfer of Property Act on the date when the possession of the property
was handed over to the developer as per the development agreement dated
01.09.2003. Section 53A of the Transfer of Property Act, does not provide the
conditions for transfer but it provides protection to the transferee of any
immovable property by a written contract, the terms of which constitute the
transfer and can be ascertained with reasonable certainty and the transferee as
part performance of the contract taken the possessions of the property and has
performed or willing to perform his part of contract, then even the said
contract though required to be registered has not been registered and the
transfer has not been completed in the manner prescribed therefore by law, the
transferor is barred from enforcing against the transferee any right in respect
of the property other than the right expressly provided by the terms of the
contract Under the Income Tax Act, 1961 by inserting Clause (v) and (vi) of
Section 2(47), the definition of the term transfer includes the transaction
which fulfills the conditions provided u/s.53A of Transfer of Property Act.
Therefore, Section 53A of the Income Tax Act, 1961 is borrowed only with respect
to the transfer of capital asset as provided u/s.2(47) of the Income Tax Act,
1961 and the same is not applicable in other cases which do not fell u/s 2(47)
of the Income Tax Act 1961. Section 45(1) of the Income Tax Act, 1961 deals
with the profit and gain arising from the transfer of capital asset, whereas
Section 45(2) deals with the profit or gain arising from the transfer by way of
conversion of capital asset into stock-in-trade and shall be chargeable to
income tax in the previous year in which such stock-in-trade is sold or
otherwise transferred. Therefore, the time of chargeability to income tax of
capital gain arising from the conversion of capital asset to stock-in-trade is
the point when the stock-in-trade is sold or otherwise transferred, whereas the
chargeability of capital gain u/s.45 of the Income Tax Act, 1961 from transfer
of capital asset shall be in the previous year in which the transfer took place
including the transfer as provided u/s.2(47) of the
Income Tax Act, 1961. The sale / transfer of stock-in-trade cannot be equated
with the transfer of capital asset under section 2(47). The decisions relied
upon by the learned Departmental Representative as well as the lower authorities
are with respect to the transfer of capital asset u/s.2(47) of the Income Tax
Act, 1961 and not in respect of stock-in-trade. Therefore, these decisions are
not relevant and applicable in the facts of the present case. As far as Section
53A of the Transfer of Property Act is concerned, the said provides only a
protection to the transferee on fulfillment of certain conditions provided
therein but does not provide that even on fulfillment of that condition the
transfer is complete. As per provision of Section 53A of the Transfer of
Property Act when a right is created in favour of the transferee which cannot
be defeated, otherwise then terms and conditions expressly provided in the
contract itself.
From the
development agreement dated 01.09.2003 as well as the supplementary agreement
dated 23.12.2003, the assessee handed over the possession of the property for
construction of residential apartments by the developer. The assessee did not
receive any consideration for handing over the possession of the property to
the developer but as per the agreement the assessee got the right to get the
built-up area of 25,130 sq.ft. and proportionate car parks as per schedule E
and El of the agreement and the rest of the constructed area was to be sold out
for recovery of the cost and margin of the
developer. From the development agreement, the possession was
handed over for carrying out the construction work by the developer and there
is no other document except the development agreement which transfers the title
of the property to the developer. In the absence of the transfer of the title
of the property and any consideration at the time of development agreement, the
handing over of the possession was merely a temporary measure for carrying out
the construction work by the developer and the exclusive possession of the
property in legal since remain with the assessee which was finally handed over
at the time of execution of the sale deed of the constructed flats by the
assessee. One cannot presume any intension in executing the documents between
the parties other than what was stated or can be inferred reasonably from the
documents itself. A regard must be given to the words Used in the documents.
The nature the transaction between the parties by way of development agreement cannot be said to
be a sale of immovable property which is stock-in-trade or otherwise transfer
as provided in the Transfer of Property Act. We agree with the contentions of
the learned Authorized Representative of the assessee that/the meaning of the
words, "otherwise transferred", in Section 45(2), should be according
to its Ordinary popular and natural sense, and it should not include a
transaction referred to under sub-clause (v) of sub-section (47) of Section 2
in relation to a 'capital asset. By no stretch of imagination, the said
transaction can be termed as transfer more less as sale. When the legal title
and possession of the property was with the assessee, then the transfer of
the said is not possible merely by allowing the developer to carry out the
construction work.
8. We have
considered the rival contentions and the relevant records as well as the
decisions cited by both sides. In the case in hand, the capital asset was
converted into stock-in-trade by the assessee and thereafter a development
agreement entered into by the assessee with the developer, whereby the assessee
provided his land measuring 44,000 sq.ft. to the developer for construction of
residential apartments, the developer agreed to construct 83,760 sq.ft.
(approximately the saleable area as per the plan to be approved by the
authorities). Out of the total constructed area, the owners of the land were to
get constructed area of 25,130 sq.ft The assessee handed over the possession of
the property to the developer for construction purpose and also agreed to make
the application to the authorities concerned for sanction of plan and for all
other requirements in respect of the construction and effectively carried out
the building project including the permission for retaining the vacant land for
construction of building for providing amenities like water, electricity, sewerage, etc. It is undisputed that once
the property in question was converted to capital asset to stock-in-trade,
Section 45(2) of the Income Tax Act, 1961 will be applicable for determining
the year of taxing of the capital gain arising from the conversion of the
capital asset to the stock-in-trade. Therefore, there is no dispute regarding the applicability of Section 45(2) of the Income Tax Act, 1961 in this
case in respect to determine the year in which the capital gain chargeable
to tax. The assessee also offered the capital gain by applying the provisions of Section 45(2) of the Income Tax Act, 1961 on
the basis of constructed flats sold in the
previous year relevant to the assessment year and accordingly proportionate capital gain arising from the
transfer of land and building to
stock-in-trade was offered. But the Assessing Officer was of the view that this stock-in-trade was sold and transferred at the
point when the assessee entered into the
development agreement dated 01.09.2003. Therefore, the entire long term
capital gain is chargeable to tax in the assessment year 2004- 2005 because as per the Assessing Officer the stock-in-trade
was sold / transferred in the year 2003. We
may point out here that from the record it is apparent
that apart from the development agreement and supplementary development agreement, there is no other document executed
by the assessee. The Assessing Officer treated
the transaction of handing over the possession of the land and building to the developer as transfer
u/s.2(47) of the Income Tax Act, 1961. The
Commissioner of Income Tax (Appeals) also held that the capital asset stands transferred in accordance with the provisions
of Section 2(47) r.w.s.53A of Transfer of
Property Act. In our view, the lower authorities have not taken a correct view by analyzing the transaction by
applying the provisions of Section 2(47) of
the Income Tax Act, 1961 which is applicable only in case of capital asset. As per Section 2(14) of the Income Tax Act,
1961, capital asset does not include*
stock-in-trade. Therefore, once capital asset is converted into stock-in-trade provisions of section 2(47) becomes
irrelevant and does not apply. The learned Departmental Representative has
contended that the transfer of immovable property satisfies the conditions of
Section 53A of the Transfer of Property Act, then the transaction of transfer
is complete. He has urged that in the case in hand, Section 53A of Transfer of
Property Act applies and despite the conversion of the property into
stock-in-trade, transaction of handing over of possession of land and building
to the developer as per the development agreement amounts to transfer.
Therefore as per the provisions of Section 45(2), the capital gain arising on
conversion of capital asset into stock-in-trade is chargeable to tax in the
year 2003 when the development agreement was entered into by the parties. He
has urged that the lower authorities have rightly held that the entire capital
gain arising from conversion of capital asset into stock-in-trade will be
chargeable to tax in the assessment year 2004-2005.
9. We are unable to agree with the contentions
of the learned Departmental Representative that the transaction of transfer is
complete by applying the provision of Section 53A of Transfer of Property Act
on the date when the possession of the property was handed over to the
developer as per the development agreement dated 01.09.2003. Section 53A of the
Transfer of Property Act, does not provide the conditions for transfer but it
provides protection to the transferee of any immovable property by a written
contract, the terms of which constitute the transfer and can be ascertained
with reasonable certainty and the transferee as part performance of the
contract taken the possessions of the property and has performed or willing to
perform his part of contract, then even the said contract though required to be
registered has not been registered and the transfer has not been completed in
the manner prescribed therefore by law, the transferor is barred from enforcing
against the transferee any right in respect of the property other than the
right expressly provided by the terms of the contract Under the Income Tax Act,
1961 by inserting Clause (v) and (vi) of Section 2(47), the definition of the
term transfer includes the transaction which fulfills the conditions provided
u/s.53A of Transfer of Property Act. Therefore, Section 53A of the Income Tax
Act, 1961 is borrowed only with respect to the transfer of capital asset as
provided u/s.2(47) of the Income Tax Act, 1961 and the same is not applicable
in other cases which do not fell u/s 2(47) of the Income Tax Act 1961. Section
45(1) of the Income Tax Act, 1961 deals with the profit and gain arising from
the transfer of capital asset, whereas Section 45(2) deals with the profit or
gain arising from the transfer by way of conversion of capital asset into
stock-in-trade and shall be chargeable to income tax in the previous year in
which such stock-in-trade is sold or otherwise transferred. Therefore, the time
of chargeability to income tax of capital gain arising from the conversion of
capital asset to stock-in-trade is the point when the stock-in-trade is sold or
otherwise transferred, whereas the chargeability of capital gain u/s.45 of the
Income Tax Act, 1961 from transfer of capital asset shall be in the previous
year in which the transfer took place including
the transfer as provided u/s.2(47) of the Income Tax Act, 1961. The sale /
transfer of stock-in-trade cannot be equated with the transfer of capital asset
under section 2(47). The decisions relied upon by the learned Departmental
Representative as well as the lower authorities are with respect to the
transfer of capital asset u/s.2(47) of the Income Tax Act, 1961 and not in
respect of stock-in-trade. Therefore, these decisions are not relevant and
applicable in the facts of the present case. As far as Section 53A of the
Transfer of Property Act is concerned, the said provides only a protection to
the transferee on fulfillment of certain conditions provided therein but does
not provide that even on fulfillment of that condition the transfer is
complete. As per provision of Section 53A of the Transfer of Property Act when
a right is created in favour of the transferee which cannot be defeated,
otherwise then terms and conditions expressly provided in the contract itself.
10. From the
development agreement dated 01.09.2003 as well as the supplementary agreement
dated 23.12.2003, the assessee handed over the possession of the property for
construction of residential apartments by the developer. The assessee did not
receive any consideration for handing over the possession of the property to
the developer but as per the agreement the assessee got the right to get the
built-up area of 25,130 sq.ft. and proportionate car parks as per schedule E
and El of the agreement and the rest of the constructed area was to be sold out
for recovery of the cost and margin of the
developer. From the development agreement, the possession was
handed over for carrying out the construction work by the developer and there
is no other document except the development agreement which transfers the title
of the property to the developer. In the absence of the transfer of the title
of the property and any consideration at the time of development agreement, the
handing over of the possession was merely a temporary measure for carrying out
the construction work by the developer and the exclusive possession of the
property in legal since remain with the assessee which was finally handed over
at the time of execution of the sale deed of the constructed flats by the
assessee. One cannot presume any intension in executing the documents between
the parties other than what was stated or can be inferred reasonably from the
documents itself. A regard must be given to the words Used in the documents.
The nature the transaction between the parties by way of development agreement cannot be said to
be a sale of immovable property which is stock-in-trade or otherwise transfer
as provided in the Transfer of Property Act. We agree with the contentions of
the learned Authorized Representative of the assessee that/the meaning of the
words, "otherwise transferred", in Section 45(2), should be according
to its Ordinary popular and natural sense, and it should not include a
transaction referred to under sub-clause (v) of sub-section (47) of Section 2
in relation to a 'capital asset. By no stretch of imagination, the said
transaction can be termed as transfer more less as sale. When the legal title
and possession of the property was with the assessee, then the transfer of
the said is not possible merely by allowing the developer to carry out the
construction work.
11. In the case of Ghanshyamdas Kishan Chander
Vs. Commissioner of Income Tax, Andhra Pradesh (supra), the Hon'ble Andhra
Pradesh High Court has observed as under:
“The definition of
'transfer' in relation to a
capital asset Under the Income Tax Act, is different from the transfer of any
interest in specific immovable property. Section 58(a) of the Transfer of
Property Act defines '"mortgage" as the transfer of an interest in
specific immovable property for the purpose of securing the payment of money
advanced or to be advanced by way of loan "
The transfer of an interest in specific
immovable property is different from the transfer of the totality of interest
in respect of a capital asset. The Sovereign Parliament, in bur view designedly
used the expressions "sale", "exchange",
"relinquishment of the asset", "extinguishment the "compulsory acquisition of an asset under any
law" in the definition of "transfer" under section 2(47) of the
Income Tax Act. The definition is so clear as to take in only effective
conveyance of the capital asset to the transferee. But, however, mere delivery
of immovable property along cannot be treated to be equivalent to conveyance of
immovable property so as to come within the definition of "transfer".
The definition is clear enough. If any authority is needed, we find it in
Alapati Venkataramiah vs. Commissioner of Income Tax, Hyderabad reported in 57
ITR 185 (SC).
12. In the
case of Vania Silk Mills Private Limited Vs. Commissioner of Income Tax
(supra), the Hon'ble Supreme Court has held as under:
"that capital gains tax was
attracted under section 45 by transfer and not merely by extinguishment of
rights howsoever brought about. Whatever the mode by which the transfer was
brought at out, the existence of the asset during the process of transfer was a
precondition : unless the asset existed in fact, there could not be a transfer
of it. The extinguishment of a right or rights should in any case be on account
to its or their transfer in order to attract the provisions of Section 45. If
it was not, and was on account of the destruction or loss of the asset, it was
not a transfer and did not attract the provisions of Section 45 which related
to transfer and not to mere extinguishment of a right. Hence, an extinguishment
of right not brought about by transfer was outside the purview of Section
45."
13. Delivery
of possession of immovable property cannot by itself be treated as equivalent
to conveyance of immovable property as held by the Hon'ble Apex Court in the
case of Alapati Venkataramiah Vs. Commissioner of Income Tax, Hyderabad
reported in 57 ITR 185. Until and unless the title of the property is passed to
the purchaser, there cannot be a sale or transfer of immovable property, since
in the present case the question is whether the handing over the possession
under the development agreement of the property which is stock-in-trade of the
assessee can be treated as a transfer by applying the definition of transfer in
Section 2(47) of the Income Tax Act, 1961. As we have already stated earlier
that in the case of stock-in-trade, the definition of transfer u/s.2(47) of the
Income Tax Act, 1961 is not applicable; Therefore, the contextual or the
ordinary meaning of the word transfer is applicable in the present case.
14. In the
case of Deputy Commissioner of Income Tax Vs. Crest Hotels Limited (supra), the
Mumbai Benches of this Tribunal has held as under:
“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 4$(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 section 2(14), capital asset does not include stock-in-trade. As per the
inclusive definition of the term "transfer" given in section 2(47) of
the Income Tax Act, sale is one of the several modes of transfer. Conversion of
capital asset into or its treatment as stock-in-trade of the business carried
on by the assessee is another mode of transfer as per the said definition.
Section 45(2) acts as an exception
to section 45(1). It [i.e. section 45(2)] provides that capital gain arising on
account of conversion of capital asset into or its treatment as stock-in-trade
(hereinafter "referred to as ‘conversion’ for short) shall be chargeable
to tax in the previous year in which such stock-in-trade sold or otherwise
transferred.
10. With this
background let us consider the facts in the present case. In the case before
us, conversion had taken place in June, 1986. As noted above, conversion is a
mode of transfer under the Act.
Thus, after June, 1986, the asset in question no longer remained a capital
asset. As a consequence, what was sold in that years under consideration was
part of stock-in-trade and not capital asset. If what was sold was not capital
asset, one cannot go back to section 2(47) to ascertain whether transfer by way
of sale is complete or not. In fact, in the instant case, the role of section
2(47) was relevant only in 1986 when conversion took place. Thereafter, it had
no role to play to all, because it is meant for capital asset does not
stock-in-trade. We have noted earlier that capital asset does not include
stock-in-trade. Thus, all the arguments connected with section 2(47) made by
either side have no relevance at all, in other words, the argument of the
learned counsel that transfer can be effected only when conveyance is executed
is of no significance. The alternate argument that transfer is effective only
after the last flat is sold, in also of no significance. The observation of the
Assessing Officer about the applicability of Clause (v) and (vi) of section
2(47) is also irrelevant.
11.
Transfer has already taken place in 1986. Section 45(2) merely
fixes the year of liability. The year of liability is the year in which
stock-in-trade is sold. The fact that stock-in-trade is sold in parts in the
years under consideration cannot be disputed because the real profit that
arises on sale of stock-in-trade is business profit which the assessee itself
has offered for taxation. If sale of stock-in-trade is not denied. t as per
section 45(2) which only fixes the year of liability assssee cannot deny his tax liability on capital gains alsc by fiction, had already arisen in
1986. The legislature * 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 oh capital gain also will be levied in
the same year as is envisaged by section 45(2). In such an event, all the
arguments relating to conveyance, possession, etc., which are generally related
to transfer of capital asset are rendered meaningless.
12.
In the instant case, the assessee itself having recognized
business profits on sale of converted asset in the year
under consideration tax on capital gains on conversion will be levied in these
years according to the are sold
by the assessee in each year. In view of the foregoing discussion, we allow the
ground of the Department for all the three years."
In
the above said ease, the Mumbai Bench of this Tribunal has elaborately
discussed the identical issue and held that the legislature in its wisdom
considering the fact that on conversion of capital asset into stock-n-trade
only the notional income has arisen postponed the tax liability therein till
the real income was earned Of that asset and further held that the tax
liability on the capital gain on conversion will arise in the same year in
which business profit arises to the assessee on sale of such asset. In the case
of Octavius Steel & Company Limited Vs. Assistant Commissioner of Income
Tax (supra), the Special Bench,
KoTRala of'tnis. Tribunal 1la"s_heiaTfrparagraph 11 as under:
"Section 45(2) starts
with a non obstante clause. Therefore, the provision of Section 45(2)
supersedes all the other provisions. Under this Sub-section (2) of Section 45,
it is clear that capital gain shall be charged in the previous year in which
such stock-in-trade which is known to be so only after conversion, is sold or
otherwise transferred. Admittedly, the transfer of stock-in-trade in the present
case was effected by way of registered deed of conveyance fduring the present
assessment year. Therefore, the first appellate authority was justified in
holding that capital gain is to be computed in the previous year even though
that conversion was effected before lst April, 1985. This Subsection
supersedes provision of "Sub-section (1) and provides for charging of capital gain in the
year when the converted stock-in-trade
is sold or otherwise transferred. For the purpose of Section 48 also this section
has provided the method for computing capital gain in such circumstances, i.e.
fair market value of the asset on the date of such conversion shall fee deemed
to be the full value of the consideration received or accruing as a result of
transfer of capital asset. There is no ambiguity in the said provision. Under
Section 2(47)(iv) which provision also came into effect from 1st
April, 1985, when an asset is converted by the owner as stock-in-trade of
business, such conversion is to be treated as transfer. Corresponding amendment
was made in Section 45 for computing capital gain arising out of such transfer. In the present case
the asset was converted into stock-in-trade before 1st April, 1985.
Even assuming that before 1st
April, 1985, such conversion cannot be said to be transfer within the
meaning of Section 2(47)(iv) but admittedly after 1st April, 1985,
the extended meaning of the word "transfer" is applicable in respect
of such conversion. However, capital gain cannot be computed unless such
stock-in-trade is sold or otherwise transferred, The gain arises only on sale or transfer otherwise.
It does not amount to giving retrospective effect to the statutes but applying
the law applicable on the date of taxable event, i.e. sale of converted assets.
Circular No.397, dated 16th October, 1984 also clarifies that the
capital gain in cases of converted assets in closing stock would be chargeable
in the year when such converted asset
is actually sold as stock-in-trade. In other words, not in the year of
conversion but year of actual sale. The assessee was therefore liable to the
capital gains tax notwithstanding that the conversion of the capital asset into
stock-in-trade took place prior to 1st April, 1985
15.
In the present case, the business profit arises to the assessee on the sale of
the stock-in-trade only when the constructed apartments were sold and not at the time when the development agreement was entered into.
Moreover, in the development agreement, the assessee has not agreed for sale of
the entire constructed property on the land, the assessee has agreed only a
portion of the constructed property for
sale for the purpose of recovery of the cost 01 construction and margin of the
developer. The assessee has executed all the sale deeds for transfer of the
constructed apartments in favour of the end-user / purchaser, therefore the
transfer of the proportionate land took place only when the assessee
transferred the construction property by way of sale deeds and offered the
business income which was accepted fey the Department. In any case, when the
assessee has retained the portion of the land being proportionate to the
constructed area to be retained by the assessee, then there is no question of
transfer of the entire land to the developer. In view of the above discussion,
we hold that the orders of the lower authorities, qua this issue are not
sustainable on the facts as well as on law. We set aside the orders of the
lower authorities, qua this issue and direct the Assessing Officer to tax the
capital gain arising from the conversion of the land and building into
stock-in-trade proportionately into the previous years in which the constructed
property was sold by the assessee or retained for self-use and corresponding
business income was offered.