The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that where respondent/ taxpayer has converted part of land from capital asset to stock-in-trade and Assessing Officer computed capital gains at fair market value at conversion under section 45(2) but did not use same value to calculate business profits on sale, such method resulted in a mistake, as same fair market value at conversion must be adopted for business profit computation
The Division Bench comprising Anubhav Sharma (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the Assessing Officer has adopted a fair market value at the time of conversion of land as stock-in-trade and he proceeded to complete the assessment without giving the effect of adopting fair market value at the time of conversion while determining the profit under the head ‘income from business’.
This is so, when the Assessing Officer recalculated the fair market value at the time of conversion, the same market value had to be adopted while computing the profit under the head ‘income from business’ while determining the cost of acquisition by adopting the fair market value as determined at the time of conversion, added the Bench, while observing that there is mistake apparent on record in the method adopted by the Assessing Officer.
Briefly, the respondent was allotted land by HSIIDC for development of majority IT/ITES space with a small percentage of residential and commercial space, and the construction started in 2008. In the year under consideration, it completed some towers, converted 50% of the land into stock-in-trade while retaining 50% as fixed assets, and followed the percentage completion method, declaring 90.6% and 93.3% completion for Towers E and D in its Profit and Loss account.
The Assessing Officer invoked the provisions of section 45(2) and observed that respondent had not booked the long-term capital gain arising on the transfer of land from capital asset to stock-in-trade. He observed that the land amounting to Rs. 9.32 crores was transferred from capital asset to stock-in-trade for the current year. Accordingly, he reworked the long-term capital gain and determined the long-term capital gain of Rs. 7.35 crores.
On appeal, the Commissioner (Appeals) observed that the Assessing Officer had charged the capital gain to tax arising out of conversion of capital asset being land into stock-in-trade at the time of its sale under section 45(2) at a fair market value as calculated by him. However, while computing the business profit of the respondent arising out of the sale of stock-in-trade was converted, Assessing Officer had not taken the same fair market value of land was adopted for computing capital gains at the time of conversion of the said capital asset into stock-in-trade as cost of purchase, but, taken the value which was shown by the respondent in its books of account.
Appearances:
Advocate P.S. Sodhi and CA R.S. Ahuja, for the Appellant/ Revenue
Senior DR Rajesh Kumar Dhanesta, for the Respondent/ Taxpayer
