Capital gains and business income on land conversion must be bifurcated under section 45(2), with conversion triggered by final approval.
On conversion of a capital asset into stock-in-trade, section 45(2) requires bifurcation of tax treatment: capital gains accrue up to the date of conversion and business income arises on subsequent sale, so the entire sale consideration cannot be taxed only as business income. For assets acquired before 1-4-1981, fair market value as on that date is relevant for cost computation where applicable. Mere intention or an offer under the Urban Land (Ceiling and Regulation) Act did not effect conversion of agricultural land; the land became stock-in-trade only on final approval for non-agricultural use on 3-2-1992. Expense deductions linked to business income required fresh consideration on remand.
Issues: (i) Whether income from sale of plots of land was taxable wholly as business income, wholly as capital gains, or partly under both heads, and whether the fair market value as on 1-4-1981 was relevant for computation of long-term capital gains; (ii) when the agricultural land was converted into stock-in-trade; (iii) whether deduction was allowable for various expenses while computing business income.
Issue (i): Whether income from sale of plots of land was taxable wholly as business income, wholly as capital gains, or partly under both heads, and whether the fair market value as on 1-4-1981 was relevant for computation of long-term capital gains.
Analysis: The land could be treated as stock-in-trade only upon effective conversion, and on such conversion the scheme of section 45(2) of the Income-tax Act applies. Under that provision, profits arising from conversion of a capital asset into stock-in-trade are chargeable in two components: capital gains up to the date of conversion, and business income on sale of the stock-in-trade thereafter. For computation of capital gains, the fair market value on the date of conversion is relevant, and where the asset was acquired before 1-4-1981, the fair market value as on that date becomes relevant for cost of acquisition. The entire sale consideration could not be assessed only as business income.
Conclusion: The income was to be assessed partly as capital gains and partly as business income, and the issue of fair market value as on 1-4-1981 was required to be determined afresh.
Issue (ii): When the agricultural land was converted into stock-in-trade.
Analysis: Mere expression of intention or an offer under the Urban Land (Ceiling and Regulation) Act, 1976 did not by itself alter the character of the land. The land continued to remain agricultural until final approval for conversion into non-agricultural use was granted by the competent authority. Since the conversion depended upon such approval, the crucial date was the date on which final approval was granted.
Conclusion: The agricultural land was converted into stock-in-trade on 3-2-1992 and not in 1979.
Issue (iii): Whether deduction was allowable for various expenses while computing business income.
Analysis: Since business income had to be computed only after determining the correct date and value of conversion, the claim for deduction of expenses also required proper examination on the available material. The matter had not been properly considered by the lower authorities and required fresh adjudication.
Conclusion: The issue of deduction of expenses was remitted for fresh consideration.
Final Conclusion: The sale proceeds were not taxable wholly as business receipts, the transfer date for conversion was 3-2-1992, and the matter required recomputation by separating capital gains from business income with fresh consideration of valuation and expenses.
Ratio Decidendi: On conversion of a capital asset into stock-in-trade, taxability must be determined under section 45(2) by bifurcating capital gains and business income, and mere intention to develop or sell the land does not effect conversion absent final statutory approval.
TaxTMI 
AI Drafter ✕
TaxTMI 
