Tribunal rules in favor of assessee on tax issues, directs AO on capital gains, relief, and stock valuation.

R. Gopinath (HUF) Versus Assistant Commissioner of Income-tax

R. Gopinath (HUF) Versus Assistant Commissioner of Income-tax - TMI Issues Involved:
1. Taxation of capital gains on conversion of capital asset into stock-in-trade.
2. Determination of fair market value of the property as on 1st April, 1981.
3. Entitlement to relief under Section 54F of the IT Act.
4. Estimation of sale value of stock-in-trade.
5. Computation of long-term capital loss on sale of shares.

Issue-wise Detailed Analysis:

Issue 1: Taxation of Capital Gains on Conversion of Capital Asset into Stock-in-Trade
The primary issue revolves around the taxation of long-term capital gains arising from the conversion of a capital asset (land) into stock-in-trade. The assessee converted land measuring 44,000 sq. ft. into stock-in-trade and entered into a development agreement with a developer. The Assessing Officer (AO) taxed the entire capital gain in the assessment year 2004-05, arguing that the transfer occurred when the possession of the land was handed over to the developer. The assessee contended that the capital gain should be proportionately taxed in the years when the stock-in-trade (built-up area) was sold, as per Section 45(2) of the IT Act. The Tribunal held that the provisions of Section 2(47) relating to the transfer of capital assets do not apply once the asset is converted into stock-in-trade. Therefore, the capital gain should be taxed proportionately in the years when the stock-in-trade is sold, aligning with the assessee's contention.

Issue 2: Determination of Fair Market Value as on 1st April, 1981
The assessee adopted a fair market value of Rs. 14,000 per cent as on 1st April, 1981, for computing capital gains. The AO reduced this value to Rs. 10,000 per cent, arguing that the higher value included a bungalow, which was to be demolished. The Tribunal noted that the Sub-Registrar had confirmed the assessee's valuation for part of the property. Given that the AO's estimation lacked substantial supporting material, the Tribunal directed the AO to accept the fair market value of Rs. 14,000 per cent as adopted by the assessee.

Issue 3: Entitlement to Relief under Section 54F
The assessee claimed relief under Section 54F for the assessment year 2005-06, which the AO denied on the grounds that the capital gain was assessed in 2004-05 and the property was developed by a third party. The Tribunal, however, ruled that since the capital gain was to be proportionately taxed in the years the built-up area was sold, the claim under Section 54F was valid. The Tribunal directed the AO to grant the relief as per law, recognizing the property as a residential building.

Issue 4: Estimation of Sale Value of Stock-in-Trade
The AO estimated the sale value of the built-up area at Rs. 2,200 per sq. ft., based on a certificate from M/s Britto, Ilango & Associates, while the assessee declared an average sale value of Rs. 2,079 per sq. ft. based on actual sale deeds. The Tribunal found that the AO did not present any evidence of on-money receipts and noted that the slight variation between the estimated and actual sale values was reasonable. Therefore, the Tribunal set aside the AO's estimation and accepted the sale value as declared by the assessee.

Issue 5: Computation of Long-Term Capital Loss on Sale of Shares
The assessee claimed a long-term capital loss on the sale of shares, which the AO reworked by estimating the cost of acquisition at face value. The Tribunal observed that the shares were of a closely held company, and the cost of acquisition was recorded in the assessee's books of account, which were not rejected by the Department. Given the lack of external evidence due to the nature of the transactions, the Tribunal held that the assessee's recorded cost of acquisition should be accepted and allowed the claim of capital loss.

Conclusion:
The Tribunal ruled in favor of the assessee on all issues, directing the AO to proportionately tax the capital gains in the relevant years, accept the fair market value as declared, grant relief under Section 54F, accept the declared sale value of the stock-in-trade, and allow the claim of long-term capital loss on the sale of shares.