Section 45(2) governs taxation after conversion to stock-in-trade; gains arise on sale, not mere possession transfer under redevelopment.

After conversion of land into stock-in-trade, capital gains were governed by section 45(2) and were taxable only when the converted stock-in-trade was sold or otherwise transferred, not merely on handing over possession under a development arrangement; the gain was therefore matched to the years of sale. The assessee's higher fair market value as on 1 April 1981 was accepted because it was supported by the valuation reference and no contrary material displaced it. Deduction under section 54F was allowed on the residential redevelopment facts. Estimated enhancement of built-up area sale value was rejected for want of evidence of higher receipt, and the claim of long-term capital loss on share sale was accepted on the strength of the books of account.

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Issues: (i) Whether capital gains arising on conversion of land into stock-in-trade and subsequent development arrangement were taxable wholly in the year of handing over possession or proportionately in the years in which the converted stock-in-trade was sold; (ii) whether the fair market value of the property as on 1 April 1981 had to be adopted at the higher rate claimed by the assessee; (iii) whether deduction under section 54F was allowable; (iv) whether the sale value of the built-up area could be enhanced by estimation without evidence of higher receipt; and (v) whether the assessee's claim of long-term capital loss on sale of shares was to be accepted.

Issue (i): Whether capital gains arising on conversion of land into stock-in-trade and subsequent development arrangement were taxable wholly in the year of handing over possession or proportionately in the years in which the converted stock-in-trade was sold.

Analysis: The property had first been converted into stock-in-trade, and after such conversion the special machinery in section 45(2) governed the timing of taxation. The definition of transfer in section 2(47) was held to be inapplicable to stock-in-trade for fixing the year of charge. Mere handing over of possession to the developer under the development agreement did not amount to complete transfer of the converted stock-in-trade. The tax event under section 45(2) arose when the converted stock-in-trade was sold or otherwise transferred, and the capital gain had to be matched with the years in which the constructed area was actually sold.

Conclusion: The issue was decided in favour of the assessee and the capital gain was held taxable proportionately in the years of sale.

Issue (ii): Whether the fair market value of the property as on 1 April 1981 had to be adopted at the higher rate claimed by the assessee.

Analysis: The assessee's valuation was supported by the reference made to the Sub-Registrar, while the lower valuation adopted by the Assessing Officer was based on an unsupported estimate. The property included a building that was to be demolished for redevelopment, and the valuation adopted by the assessee was found to be reasonable in the circumstances. In the absence of contrary material, the substitute figure adopted by the Revenue was not sustainable.

Conclusion: The issue was decided in favour of the assessee and the higher fair market value was directed to be accepted.

Issue (iii): Whether deduction under section 54F was allowable.

Analysis: Once the capital gains issue was decided in favour of the assessee, the residential character of the redevelopment and the receipt of constructed residential area brought the claim within the beneficial scope of section 54F. The denial based on the premise that the assessee had not purchased or constructed a residential house was not accepted.

Conclusion: The issue was decided in favour of the assessee and the deduction under section 54F was allowed.

Issue (iv): Whether the sale value of the built-up area could be enhanced by estimation without evidence of higher receipt.

Analysis: The Revenue relied on an expert valuation, but no material was brought on record to show receipt of on-money or any actual consideration higher than that recorded in the registered sale deeds. The difference between the assessee's declared rate and the estimated rate was marginal, and the declared sale consideration was accepted as the proper basis in the absence of evidence to the contrary.

Conclusion: The issue was decided in favour of the assessee and the estimated enhancement was rejected.

Issue (v): Whether the assessee's claim of long-term capital loss on sale of shares was to be accepted.

Analysis: The shares were of a closely held company and the transactions were not through a stock exchange, so the books of account constituted the primary evidence. The acquisition cost recorded in the books had not been rejected, and the claim could not be disallowed merely for want of external documents such as broker notes or demat records.

Conclusion: The issue was decided in favour of the assessee and the claim of long-term capital loss was accepted.

Final Conclusion: The assessees succeeded on all substantive issues, with the capital gains question, valuation dispute, exemption claim, sale-value estimation, and share-loss claim all being resolved in their favour.

Ratio Decidendi: After conversion of a capital asset into stock-in-trade, the timing of capital gains taxation is governed by section 45(2), and the charge arises only on sale or other transfer of the converted stock-in-trade, not on mere handing over of possession under a development arrangement.

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