TMI Blog2017 (6) TMI 1157X X X X Extracts X X X X X X X X Extracts X X X X ..... in trade to be considered as business income. - Tax Case Appeal No. 329 of 2016 - - - Dated:- 18-4-2017 - S. Manikumar And D. Krishnakumar, JJ. For the Appellant : Mr. T.R. Senthil Kumar Senior Standing Counsel for I.T For the Respondent : Mr. Vijaya Raghavan, Senior Counsel for Mr. Subbaraya Aiyar JUDGMENT ( Judgment of the Court was made by D. Krishnakumar, J. ) This Appeal has been filed by the Revenue, against the order of Madras 'C' Bench, Chennai, of the Income Tax Appellate Tribunal dated 15.05.2015 in I.T.A. No.245/Mds./2015. 2. The facts of the case are as follows :- The respondent herein/ Assessee, is a company engaged in the business of real estate, financial services and other business. M/s. Essorper Mills Limited [EML] was demerged with the assessee company M/s. Essorpe Holdings Pvt. Ltd. [EHPL], as per the scheme of demerger, approved by this Court, transferring the real estate division of EML as a going concern. Both the companies entered into a Memo of Agreement, for a sale of 10.150 acres of land belonging to M/s. EML, for a total sale consideration of ₹ 41 crores, in lieu of loan of ₹ 26,50,36,747/- advanced to bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stered document for part of land admeasuring 5.075 Acres at Sub Registrar Office, Gandhipuram, Coimbatore. 19.11.2008 BIFR de-registered the company, as requested by EML, after remitting dues with the cash obtained from Sri Sivakumar Other. 05.01.2009 07.01.2009 Shri V.Sivakumar sells a part of the land to M/s. Rasi Seeds (P) Ltd. M/s. Globuse Realtors Private Limited vide two registered documents for ₹ 18,61,15,000/- and ₹ 1,63,85,000/- respectively. 28.07.2009 EML applies to High Court for demerger with EHPL 09.10.2009 Obtained demerger order with effect from 01.01.2009. 28.04.2010 EML and EHPL enters into supplementary MOA and MOU with Shri V. Sivakumar M/s. Globuse Realtors Pvt Ltd., represented by Shri V. Sivakumar whereby the sale consideration was reduced from ₹ 41,00,000/- to ₹ 35,25,00,000/-. 22.11.2010 Shri V. Sivakumar sold 5.075 acres to M/s. Globuse Realtors Private Ltd., Coimbatore for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee company that the balance 5.075 acres of the land, development division was demerged with Essorpe Holdings Pvt. Ltd., the respondent herein, with effect from 01.01.2009, by virtue of the Order of this Court in C.P. No.213/2009. As demerger is not a transfer, under Section 47(vi)(b), the applicability of provisions of Section 45(2), is postponed till the asset is actually sold by the Transferee company. The Commissioner of Income Tax (Appeals) has rejected the appeal for the reason that plea of the assessee that the land before demerger, was converted into stock in trade by EML and so the capital gains as accrued under Section 45(2), as on the date of conversion, has to be actually charged at the time of actual sale of the land, deserves no merit. The assessee company, is a new company formed on the basis of demerger, as approved by this Court and hence the provisions under Section 45(2) of the Income Tax Act, 1961, are not applicable to the sale of land made by the assessee. By an order dated 23.12.2014, the Commissioner dismissed the appeal. 6. Aggrieved by the order of the Commissioner, an appeal was filed by the assessee company, before the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the provisions of Section 45(2) of the Act. The assessee has not seriously objected for considering the sale consideration for the assessment year 2009-10 at ₹ 20,25,00,000/- as against the direction given by the Commissioner of Income Tax (Appeals) to adopt at ₹ 17,62,50,000/-......... 9. Therefore, we uphold the order of the Commissioner of Income Tax (Appeals) as far as assessing the income in respect of transfer of property of the assessee as business income. However, the gain on transfer of property up to the date of conversion into stock-in-trade has to be assessed under the head capital gainsand the gain in respect of property i.e. after the date of conversion into stock-in-trade has to be assessed as business income. As the Assessing Officer computed the entire sale consideration under the head long term capital gains, he did not apply the provisions of Section 45(2) of the Act. In the circumstances, we direct the Assessing Officer to compute the business income in respect of stock-in-trade of the property taking into consideration the provisions of section 45(2) of the Act in accordance with law after giving an adequate opportunity of hearing to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 can be altered by a mere board resolution, has not been considered by the Tribunal. Therefore, the order of the Tribunal is unsustainable in law. The application of Section 45(2) was limited only to EML and not EHPL. Therefore, the order of the Tribunal is liable to be set aside, on the said questions of law, raised by the assessee. 9. It is also submitted that both the companies, EML and EHPL, have the same Board of Directors and so the Board's resolution dated 01.04.2010 has got no legal sanctity and when the audited accounts of the EHPL for the period 31.03.2010 and 31.03.2011 are already available with the Revenue, which evidence that the land to an extent of 5.075 acres was held as stock in trade only and the Board's resolution is only a colourable device, to avoid taxation. The sale of 5.075 acres of land has to be brought to tax as 'business income' only and not under 'capital gains'. Therefore, allowing the benefit of Section 45(2) of the Act, to the assessee EHPL, has no application to the facts of the instant case. The benefit of Section 45(2) of the Act can be given to the owner of the land, namely, EML and by virtue of demerger on 01.01.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the assessee company would submit that the assessee took the land as stock in trade and when the land was sold also it was treated as stock in trade and the entire sale consideration of ₹ 15 crores was assessed under the head profits and gains of business, which is over and above the capital gains, levied under Section 45(2). When the land was converted as stock in trade, then the cost of acquisition of the stock in trade, is the market value on the date of conversion. The decisions in the case of Commissioner of Income Tax v. Groz-Beckert Saboo reported in 116 ITR 125 SC and the case of Commissioner of Income Tax v.Ambadi Enterprises reported in 243 ITR 431 Mad., have been relied by the assessee. As per the decisions, when the assessee had taken the property on demerger as stock in trade, the cost of acquisition of such property should be taken at the market value, as on the date of conversion. Therefore, notwithstanding levy of capital gains under Section 45(2), the land sold should be taken as stock in trade, treated as stock in trade and sold as stock in trade. The interim Board Resolution of the assessee reconverting the land from stock in trade into in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee submitted that the grounds raised by the Revenue is misconceived. 13. Further, as per Section 45(2), the capital gains accrued on conversion of investment into stock in trade and only the taxation is postponed to the time when the stock in trade is transferred or sold. It is not disputed by the Revenue that demerger is not a sale or transfer, as otherwise the capital gains should have been levied at the time of demerger. Therefore the capital gains computed under Section 45(2) at the time of conversion on 28.12.2007 has been properly brought to tax when the land was sold by the assessee. Levy of capital gains under Section 45(2) is not a benefit but an additional levy over and above the assessable of the entire sale consideration of land as business profits. On sale of an investment converted into stock in trade, two independent taxes are levied : i. Capital gains accruing on the date of conversion, omitted to be charged at the time of conversion, is brought to tax under Section 45(2) at the time of a actual sale / transfer of the stock in trade. ii. Independent levy of capital gains under Section 45(2), the entire sale consideration of stock in trade wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tating that the land was originally converted as stock in trade on 01.04.2007 and so the profit on sale of land or the gain determined on the date of conversion, under Section 45(2), should be assessed as capital gains and the balance as business profit. 18. Further, the assessee pleaded that Section 45(2) of the Income Tax Act 1961 would apply to the present case. Therefore, by considering the submissions of the assessee as well as the representative of the Revenue department, the Tribunal has observed as follows :- 8. Therefore, in our opinion, the land was to be treated as capital asset upto conversion of it into stock in trade and the assessee is liable for capital gain on conversion of it as stock in trade and so the provisions of Section 45(2) is applicable. After the conversion of the land, when the land was actually sold, the assessing officer computed the entire sale consideration under the head 'business income' he did not apply the provisions of Section 45(2) of the Act, which is not proper. Hence, the Assessing Officer was directed to compute the capital gains upto the date of conversion into stock in trade, by applying provisions of Section 45(2) of Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l value of consideration. The deemed capital gains on the date of conversion amounted to ₹ 38,25,57,889/- for the entirety of 10.150 acres and the same was chargeable to tax on the actual sale of the said converted land. The real estate division of EML was demerged into the assessee company, as per the Scheme of demerger approved by the High Court with effect from 01.01.2009. Pursuant to the approved scheme, the land held by EML was demerged and vested with the assessee. After demerger, the assessee company had converted the land into investments from 01.04.2010 as supported by a resolution of the Board of Directors dated 01.04.2010. Thereafter, the assessee company disposed of the land to an extent of 5.075 acres through Power of Approval (POA), for a sale consideration of ₹ 15 crores, with which the loan outstanding amount was settled to the borrowers. The assessee has offered the gain on transfer of the entire 10.15 acres of land as long term capital gains and set it off against the long term capital loss incurred by the assessee. The assessing officer assessed the entire sale consideration as business profit on the ground that the land was shown as stock in trade. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee company. The capital gains accruing on conversion of the land in stock in trade can be determined in the hands of EML and the computation cannot be questioned by the department. Levy of tax is postponed at the time of actual transfer or sale. Under Section 45(2) of the Act, the section charges to capital gains conversion of investment, into stock in trade but postpones the charge of tax to the time, such stock in trade is sold or transferred. Once converted into stock in trade, the asset will continue to be treated as stock in trade, as mentioned in the section itself. Application of provisions of Section 45(2) will not reconvert the converted stock in trade back into an investment. Consideration of sale of such converted asset will always be assessed as profits of business. The said provision was interpreted by the Assessing Officer under the said section. 23. Following the decision of this Court, in the case of Commissioner of Income Tax vs. Ambadi Enterprises Ltd., reported in (2000) 243 ITR 0431, wherein it is held as follows :- The Tribunal has also found that the land had not been developed earlier and that the investment made by the assessee in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade (since this would be the cost to the business) and not the original cost to the assessee............ 24. Therefore, in the light of the decisions rendered by this court as well as the Hon'ble Supreme Court and the orders passed by the coordinate bench of the Income Tax Appellate Tribunal, in the case of ITA No. 2256/Mds/2012 dated 11.07.2013 wherein the revenue has accepted the sale of 50% of the same property by the Essorpe Holdings Pvt. Ltd., to an extent of 5.075 acres of land for the assessment year 2009-10, directing the Assessing Officer to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value of sale and stock in trade to be considered as business income. 25. It is also brought to our notice that pursuant to the orders passed by the Tribunal on 15.05.2015, the Deputy Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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