TMI Blog2018 (3) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... of law framed in the instant tax appeal for the assessment year 2009-10, are answered against the Revenue. - T. C. A. No. 841 of 2017 - - - Dated:- 20-2-2018 - S. Manikumar And V. Bhavani Subbaroyan, JJ. For the Appellant : Mr. T. R. Senthil Kumar For the Respondent : Mr. R. Vijayaraghavan SC for M/s.Subbaraya Aiyar ORDER ( Judgement of this Court was made by S. Manikumar, J. ) Instant tax appeal is filed by the Revenue, against the order of the Income Tax Appellate Tribunal 'D' Bench, Chennai (in short, the Tribunal ) dated 05.02.2016, passed in I.T.A.No.391/Mds/2015, pertaining to the Assessment Year 2009-10. 2. When the appeal came up for admission today (20.02.2018), notice on behalf of the respondent/assessee was accepted by Mr.R.Vijayaraghavan. With the consent of the learned counsel on either side, instant tax appeal is taken up for final disposal. 3. Short facts leading to filing of the appeal, are as follows: (i) M/s.Essorpe Mills Limited (in short 'EML'), assessee (respondent herein), is a company, engaged in the business of real estate, financial service and other business. EML, has converted the land which was considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent non-redeemable preference shares of EML, was not allowed to be set off, since, the sale consideration, on the sale of land, was taxed under the head business income and not under the head capital gains . (x) Assessing Officer further levied penalty under Section 271(1)(c) of the Income Tax Act, to the tune of ₹ 4,70,41,053/-, in the hands of EML, on the grounds that the capital gain arising out of the transfer of property was not disclosed to the department. 4. Aggrieved, by the said order, passed by the Assessing Officer, the assessee (respondent herein) filed an appeal, before the Commissioner of Income Tax (Appeals)-1, Coimbatore. 5. Commissioner of Income Tax (Appeals)-1, Coimbatore, vide order dated 09.12.2014, confirmed the order of the Assessing Officer and dismissed the appeal filed by the assessee (respondent herein), stating as follows: 3. In response to statutory notices issued, the authorised representative Shri P.A.Baraneedharan, FCA appeared and submitted that he is not pressing for the grounds of appeal and only the additional grounds of appeal may be considered. Hence, the grounds of appeal are dismissed. xxxxx 5. In the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al submissions on either side and also perused the material available on record. Admittedly, the assessee-company was demerged by an order dated 15.9.2009. Before demerger, the assessee-company gave the landed property to sister concern as security for the loans advanced by M/s Globus Realtors Pvt. Ltd. The security was given to M/s Globus Realtors Pvt. Ltd for commercial expediency. In the course of its business activity, it appears that the assessee has also executed a power of attorney in favour of Shri V. Sivakumar, Managing Director of M/s Globus Realtors Pvt. Ltd. in respect of 5.075 acres of land. The power of attorney agent sold the property to enforce the security given by the assessee to M/s Rasi Seeds (P) Ltd. The question arises for consideration is whether the profit arising on sale of the land while enforcing the security given by the assessee for loan given to the sister concern namely, M/s Essorpe Holdings Pvt. Ltd, is assessable in the hands of the assessee or not? As rightly pointed out by the ld. DR, this Tribunal in the earlier occasion by an order dated 11.7.2013 examined this issue and found that upto the date of conversion of the capital asset into stock-in-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose circumstances, this Tribunal is of the considered opinion that since the land was given as security for commercial expediency to sister concern, there was a business loss arising in the course of business. Since no amount was realized and the assessee-company suffered a loss for giving security to the sister concern, the same has to be allowed as business loss while computing the taxable income. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are modified and the Assessing Officer is directed to compute the capital gains u/s 45(2) of the Act on sale of land upto the date of conversion as stock-in-trade. The profit on sale of land as stock-in-trade has to be computed as business loss since the assessee has not received any money on sale of the land. Therefore, the capital gains computed upto the date of conversion of land into stock-in-trade has to be set off against the business loss computed on sale of the stock-in-trade. 7. In the result, the appeal of the assessee is allowed. 8. Aggrieved by the order of the Tribunal dated 05.02.2016, allowing the appeal filed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment. On the plea that assessee has not received any sale consideration for the transaction of the land and that those was business loss, as claimed by the assessee, the same is not allowable for the reason that, assessee though had not received the sale proceeds of the land directly, but utilized the sale proceeds to discharge the loan liability of its sister concern i.e. EHPL. Since the loan was used by the sister concern for its own business purpose, and this business income has not been taxed in the hands of the sister concern, during the assessment year 2009-10, allowability of business loss in the hands of assessee is highly questionable. (vi) That the Tribunal has failed to consider that even otherwise, though the assessee's land was converted into stock in trade, it was mortgaged/used as security for loan liability. Hence, it can only be considered as a capital asset. So the assessee's company, if at all, suffered only a capital loss, and it cannot be considered as a business loss. Since these facts were not taken into consideration, order of the Tribunal cannot be sustained. (vii) That the Tribunal has failed to appreciate that during the period of or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in directing the Assessing Officer, to compute the business income, in respect of stock-in-trade of the property, after considering the provisions of Section 45(2) of the Act. (iii) Before the Tribunal, contention has been made by the assessee that the property was a capital asset, till the assessment year 2007-08, and from assessment year 2007-08, the property was converted into stock-in-trade, and that the assessee has not received any consideration, on transfer of the land to M/s Rasi Seeds (P) Ltd, and therefore, assessee was right in claiming the same, as loss of business. (iv) That the Assessing Officer, though accepted the transaction, as business transaction, refused to assess the loss incurred on account of non-receipt of the sale consideration as business loss and therefore, Tribunal was right in holding that the assessee had suffered business loss. (v) That in the case of M/s Essorpe Holdings Pvt. Ltd, Tribunal was right in holding that residual land sold was to be treated as capital asset, upto conversion into stock-in-trade and after conversion, when the land, was actually sold, the income arising from the sale of such land has to be considered only a ..... 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 ? 8. Learned Senior Standing Counsel for the appellant Revenue would submit that the Assessing Officer taxed the entire sale consideration as income from business and not under the head capital gains from the sale of a building. Consequently, the assessee's claim of long term capital loss, on the sale of zero percent non-redeemable preference shares of M/s. EML, was not allowed to be set off, since the sale consideration on 10.150 acres of land was taxed under the head of 'business income' and not under the head of 'capital gains'. The Commissioner of Income Tax (Appeals) in ITA No. 50/14-15, has upheld the action of the Assessing Officer on the issue of short term capital gain, on sale of building and denial of setting off, the long term capital loss. Hence, reversing the order of the Commissioner by the Appellate Tribunal is not proper and so prayed to allow the present appeal, filed by the Revenue. Learned counsel further submitted that the asset was converted into stock in trade on 28.12.2007 in the hands of M/s.Essorpe Mills Limited and Essorpe Holdings Private Limited, got demerged subsequently on 01.01. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such stock in trade. The capital gains accruing on conversion of the land in stock in trade has been determined in the hands of EML and the computation has not been questioned by the department. This capital gain as per Section is to be charged to tax on the date of sale or transfer of the stock in trade. But this postponed levy does not alter the character of the converted asset, which will be a stock in trade after conversion, as Section 45(2) itself recognises. 11. Further, learned counsel appearing for the assessee would submit that demerger from EML to EHPL should not be considered as sale or transfer. If such demerger is considered as sale or transfer, the entire amount should have been assessed in the hands of EML itself. Therefore, the provisions of Section 45(2) will become applicable since the land is sold by the assessee. The provisions of Section 45(2) is a charging section for capital gains. It will apply, whenever a land, which originally treated as investment and later converted into a stock in trade, is sold or transferred. Further, he submitted that it is not the case of the Revenue that the converted land was sold or transferred earlier. Hence, the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be only as stock in trade, despite levy of capital gains under Section 45(2). 12. It is further submitted that the Revenue has misunderstood the import of Section 45(2) because it relates 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 provision 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. Further, learned counsel for the assessee would reply to the grounds raised by the Revenue that the land was received as stock in trade and sold in stock in trade. Capital gains under Section 45(2) which accrued on conversion is now levied at the time of sale. Application of statutory provision of Section 45(2) cannot be ignored. Levy of capital gains under Section 45(2) is in addition to and does not affect the entire sale price of the land being treated as business income. The land in question was receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that in view of the above, there is no substantial questions of law involved in the appeal and hence the order of the Tribunal is perfectly valid and the appeal is liable to be dismissed. 16. Heard Mr. T.R. Senthil Kumar, learned Senior Standing Counsel for the appellant Revenue and Mr.Vijayaraghavan, learned senior counsel for the respondent assessee and perused the material available on records. 17. The Assistant Commissioner of Income Tax, Company Circle I(2), Coimbatore, passed an assessment order under Section 143(3) of the Income Tax Act, 1961 dated 31.03.2014 for the assessment year 2011-12, by demanding a taxable income of ₹ 34,02,73,275/- being the sale consideration received for transfer of 5.075 acres of land, by including the income received from other sources and determined the total taxable income of ₹ 34,49,89,695/-. Aggrieved by the assessment order, the assessee company filed an appeal in I.T.A. No.50/14-15 before the Commissioner of Income Tax (Appeals)-1, Coimbatore. The Commissioner, dismissed the appeal, in so far it relates to the transfer of land by the assessee company as the provision of Section 45(2) of the Income Tax Act, 1961 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. 20. In the assessment order, it has been observed by the Assessing officer that the assessee company has borrowed a sum of ₹ 35.25 crores over a period from M/s. Globuse Realtors Pvt. Ltd. The aforesaid borrowings was secured by the property of EML, with an understanding that the lenders can enforce the sale of the land, in the event the assessee was not able to repay the loan. The assessee invested part of the borrowings as preference shares in EML, who has converted its entire land holding 10.150 acres into stock in trade, as on 01.04.2007. Consequently, the entire land of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asset, by the Board Resolution. In the case of sale of 50% of the same property, out of 10.150 acres of land, for the assessment year 2009-10 was considered, by the co-ordinate Bench of the Tribunal in the case of M/s. Essorpe Mills Ltd., in ITA No. 2256/Mds/2012 dated 11.07.2013, wherein it was held that the gain on transfer of property up to the date of conversion into stock-in-trade has to be assessed under the head capital gains and 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. Therefore, the Assessing Officer should 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 adequate opportunity of hearing to the assessee. 22. The provisions of Section 45(2) is a charging section for capital gains. It will apply, whenever a land, which originally was treated as investment and later converted into a stock in trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the asset from investment to business asset should be taken and not the original price for which the assessee purchased the property is sustainable in law. The decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Groz-Beckert Saboo Ltd., reported in (1979) 8 CTR 0155, wherein an assessee converts his 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 and not the original cost of the assessee. In paragraph 2, it has been held as follows :- 2. ..........There can, therefore, be no doubt that these raw materials and semi-finished needles were received by the assessee as capital assets and subsequently on 30th Sept., 1961, they were transferred to the business as part of its stock. If that be so, the cost of these raw materials and semi-finished needles to the business could not be said to be nil, but, on the principle laid down by this Court in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) : TC14R.129, and subsequently followed in CIT vs. Hantapara Tea Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied forward (-)2,43,57,444 LONG TERM CAPITAL GAINS/LOSS Long Term Capital Gains on sale of 5.075 acres of land and on application of section 45(2) of the Act as worked out in Para 3.2 above. 17,84,39,549 Less: Long Term Capital Loss on zero% non-convertible redeemable preference shares of M/s.EML as per return of income and as per assessment order u/s 143(3) of the Act dated 31.3.2014 (-)32,10,42,503 (-)14,26,02,954 26. The Deputy Commissioner of Income Tax, Corporate Circle-2, Coimbatore, in the above said order has modified the total income of the assessee/ respondent. The said fact is also placed on record before this Court. 27. In the light of the aforesaid discussions and decisions cited supra and in view of the order passed by the Deputy Commissioner of Income Tax Appeal, the substantial questions of law framed under Section 260A of the Income Tax Act 1961 is answered against the Revenue. Accordingly, TCA No. 329 of 2016 is dismissed. No order as to costs. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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