TMI Blog2020 (12) TMI 214X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset is converted into stock-in-trade, till that point of time, there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold by the assessee. Sub-section (2) of section 45 carves out an exception to the above and deals with the situation where capital asset is converted into stock-in-trade, that is, there is exception in sub-section (2) of section 45 - The exception is that the Capital gain shall be computed on the assumption that the capital asset is transferred in assessment year 2013-14. By virtue of sub-section (2) of section 45 such capital gain will be taxable in the subsequent assessment year in which such stock-intrade is sold. In the assessee`s case, the stock-in-trade is not sold in the assessment year 2013-14 therefore, there is no any liability on the assessee to pay tax in the assessment year 2013-14, the liability to pay tax will arise in subsequent year in which such stock-in-trade would be sold. Considering the legal position as explained by us in the relevant provisions of subsection (2) of Section 45, sub-section (3) of section 45 and sub-section (14) of section 2 of the Income Tax Act 1961 and taking into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific to the individuals when in fact, unless converted into capital asset, it remains stock-in-trade. (iii)The assessee further submits that when the learned Commissioner of Income-tax (Appeals) states that the nature of assets in the hands of the transferee will depend on nature of use of assets by the transferee and the transferee using it as stock-in-trade, what was introduced remains stock-in-trade as per his own statement. (iv)Without prejudice to the above, the learned Commissioner of Income-tax (Appeals) was not justified in confirming the protective addition into substantive addition without issuing enhancement notice. (3)Miscellaneous; The assessee craves leave to add, alter or vary any of the grounds of appeal. 4. At the outset, Learned Counsel, Shri Hiren R. Vepari, informs the Bench that assessee does not want to press ground No.1, therefore, we dismiss the same. Ground No.3 raised by the assessee is general in nature therefore does not require adjudication. 5. In this appeal, ground No. 2 raised by the assessee is only the effective ground. Although the assessee has raised as many as four sub-grounds below the ground of appeal No.2, as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings given in para 05 and 06 above, it is very clear that Shri Ranjanben R. Parmar has on 27.08.2010 i.e. the date she was granted permission by the Chief Officer, Siivassa for construction of 22 Buildings/Apartments on 34000 Sq. Mtr at S. No. 24/2 1, 2 and 3 at Siivassa, converted her capital asset i.e. the NA land mentioned above, into Stock- in- Trade. At this point, the provisions of Sec. 45(2) of the Income Tax Act, 1961 would apply. The AO should note here that the Fair Market Value of the asset on the date of conversion which in this case is ₹ 11,40,00,000/- i.e. the value as per the gift deed dated 20.12.2012 shall be deemed to be the value of consideration received or accruing, as a result of transfer of the capital asset. The indexed cost of acquisition would be as determined by the AO in his show cause notice dated 01.02.2016 i.e. ₹ 2,42,82,000/-. 08.1 Section 45(2) of the IT Act, 1961 also provides that the profits/gains accruing by way of conversion of the capital asset into Stock- in- Trade is chargeable to tax in the year in which the Stock- in- Trade is sold. In this case, as discussed in the paras above, Smt. Ranjanben R. Parmar has gifted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets by the partners is only at 1677 Sq. Mtr each in the aforementioned firms, out of 34,000 Sq. Mtr of land approved for construction of flats/apartments. Similar action is required to be taken when Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar transfers the remaining land to any firm/AOP, etc. in future. 09.1 The AO is directed to implement the instructions in para 09 above on PROTECTIVE BASIS. The instructions in para 08 will be Implemented by the AO on SUBSTANTIVE BASIS. 8. Addition made by assessing officer on substantive basis: In view of the direction given by the Addl. Commissioner of income Tax, Vapi Range Vapi, as noted above, the assessing officer held that assessee is liable to pay capital gain tax as per the clear cut provisions of section 45(2) of the Act on conversion of the land into Stock-in-Trade and the value of consideration would be the fair market value as on the date of conversion of the land into stock in trade. Thus, assessing officer computed long term capital gain on land admeasuring 1677 Sq. Mtrs, (which converted into stock in trade), as follows: Sale value based on fair market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the findings of the assessing officer and submissions of the assessee, I find that the following facts emerge:- (i) The factual matrix of the case indicates that Smt. Ranjnaben R. Parmar converted her agricultural land admeasuring 38,000 Sq. mtr into non-agricultural land in F.Y. 2002-03 and permission for development and construction on 34,000 Sq. mtr of the said land was obtained on 27.08.2010. Construction on 1677 Sq. mtr of land was started in collaboration with M/s. Sai Enterprises (Brothers of Ranjnaben R. Parmar-Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar were partners). M/s. Sai Enterprises was appointed as manager/supervisor with profit sharing of 20%. On 20.12.2012, the land parcel of 38,000 Sq. mtr including the construction thereon was gifted to the two brothers - Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar. The facts till this stage bring out that Smt. Ranjnaben R. Parmar transferred her stock in trade in the form of land of 38,000 Sq. mtr including the construction thereon till that date of 20.12.2012. Thus, the provision of sec.45(2) of the Act is applicable in the case of Smt. Ranjnaben R. Parmar for assessment year 2013-14. The provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to substantive addition observing as follows: (ii) With regard to capital gains of ₹ 33,85,312/- taxed in the case of the assessee on protective basis as per direction u/s. 144A of the Act, I find that the AO as well as the Addl. CIT has misinterpreted the issues involved. The facts indicated that the assessee alongwith his brother received capital assets in the form of land parcel of 38,000 Sq. mtr including some construction thereon. This is nothing but capital assets in the hands of the assessee even though it was stock in trade in the hands of Smt. Ranjnaben R. Parmar. The concept of stock in trade is specific to the individuals/persons carrying on the business who had converted their capital assets into stock in trade for exploiting the same for the purpose of business. Once this stock in trade is sold or transferred, the nature this assets in the hands of the transferee will depend on the nature of use of the assets by the transferee. For example, the manufacturing company of machinery will sale its machine as stock in trade whereas the purchaser may use the same as capital assets or stock in trade depending on whether the purchaser is using the machine for so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s.2(14) of the Act. This way, ld Counsel prayed the Bench that substantive addition of ₹ 33,85,312/- may be deleted. 14. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier paras nos.6 to 9 and is not being repeated for the sake of brevity. 15. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The main issue before us is that whether or not Land (asset) held as stock-in-trade in the partnership firm is a capital asset and would attract the provisions of section 45(3) of the Income Tax Act,1961 ? To adjudicate this issue, let us first analyze the relevant provisions of sub- section (2) of Section 45, subsection (3) of section 45 and sub-section (14) of section 2 of the Income Tax Act 1961. 16. Sub- section (2) of Section 45 of the Income Tax Act reads as follows: 45(2) Notwithstanding anything contained in sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, by way of capital contribution, then it shall be chargeable to tax as his income of the previous year in which such transfer takes place. However, as per sub-section (2) of section 45, if such capital contribution is made by partner as stock-in-trade then taxable event of capital gain would arise in the year in which such stock-in-trade is sold. Thus, sub-section (2) of section 45 carves out an exception to the above and deals with the situation where capital asset is converted into stock-in-trade. At that point of time, as per sub-section (2) of section 45 of the Act there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold. In assessee`s case under consideration, we note that 1677 Sq. mtr of land was transferred by assessee as capital contribution, as a stock-in-trade, to the firm M/s. Sai Enterprises in the assessment year 2013-14. Since the capital asset is converted into stock-in-trade during the assessment year 2013-14, it will be treated as transfer under section 2(47) for the assessment year 2013-14 but charge of capital gain does not arise. The charge of capital gain arises when such stock-in- trade is sold. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring about 38000 sq. mtrs (including 1677 sq. mts) to her brothers Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar. As Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar were partners in the firm, M/s. Sai Enterprises, their capital account each was credited by ₹ 33,85,312/- being the value of land introduce as stock-in-trade. That is, land was held as stock-in-trade so gifted to Chandrasinh Parmar and Krishnakumar Parmar (assessee) which is introduced into the partnership firm with their capital accounts credited with ₹ 33,85,312/- each. The issue relates to applicability of capital gains on introduction of stock-in-trade by the assessee into the partnership firm, M/s Sai Enterprise where the assessee is a partner. We note that assessing officer had added this sum on protective assessment basis by treating it as capital asset based on the directions u/s.144A of the Act. On appeal, learned CIT(A) has confirmed the addition on substantive ground by holding that what was introduced by the assessee was capital asset and not stock-in-trade, hence provisions of section 45(3) becomes applicable. 20. Conclusion Admitted facts in the assessee`s case are that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
