Notice under section 143(2) and section 45(2) conversion principles governed reassessment validity and capital gains timing.

Reassessment proceedings were held to be vitiated where notice under section 143(2) was not issued, so the reassessment for assessment year 2003-04 was cancelled. The Tribunal also treated the Sanpada land as validly converted from a capital asset into stock in trade under section 45(2), relying on development steps, approvals and a notarial declaration. It further held that the resulting capital gains became taxable in assessment year 2005-06, when the converted stock was sold and consideration was received. For computation, the land's market value on allotment was taken as the cost of acquisition, and the fair market value on conversion was accepted as the full value of consideration.

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Issues: (i) Whether the reassessment for assessment year 2003-04 was invalid for want of notice under section 143(2); (ii) whether the Sanpada land was converted from a capital asset into stock in trade within the meaning of section 45(2); (iii) whether the capital gains arising from such conversion were chargeable to tax in assessment year 2005-06; (iv) what was the proper cost of acquisition of the land; and (v) what was the proper full value of consideration for computing capital gains.

Issue (i): Whether the reassessment for assessment year 2003-04 was invalid for want of notice under section 143(2)

Analysis: The reassessment was framed without issuing notice under section 143(2). The jurisdictional legal position followed by the Tribunal required compliance with that notice requirement in reassessment proceedings, and the absence of such notice was held to vitiate the reassessment.

Conclusion: The reassessment for assessment year 2003-04 was invalid and was cancelled, in favour of the assessee.

Issue (ii): Whether the Sanpada land was converted from a capital asset into stock in trade within the meaning of section 45(2)

Analysis: The Tribunal accepted that the assessee had taken steps towards development, obtained approvals, and evidenced conversion by declaration before a notary. It applied the principle that a capital asset may be treated as stock in trade where the surrounding conduct and documents show conversion for the purpose of business, and held that the land was converted into stock in trade.

Conclusion: The land was validly converted into stock in trade on 15-05-2002, in favour of the assessee.

Issue (iii): Whether the capital gains arising from such conversion were chargeable to tax in assessment year 2005-06

Analysis: Under section 45(2), capital gains arising from conversion of a capital asset into stock in trade are taxable in the year in which the converted stock in trade is sold. Since the consideration under the development arrangement was received in the year relevant to assessment year 2005-06, the charge to capital gains arose in that year.

Conclusion: The capital gains were chargeable to tax in assessment year 2005-06, in favour of the assessee.

Issue (iv): What was the proper cost of acquisition of the land

Analysis: The Tribunal held that the market value of the land on the date of allotment constituted the cost of acquisition for the purpose of subsequent transfer, following the principle that the value adopted at the time of acquisition becomes the acquisition cost on later transfer.

Conclusion: The cost of acquisition was to be taken at Rs.1,07,90,000/-, in favour of the assessee.

Issue (v): What was the proper full value of consideration for computing capital gains

Analysis: For section 45(2), the fair market value of the asset on the date of conversion is deemed to be the full value of consideration. The assessee's adopted fair market value at the date of conversion was accepted for computation.

Conclusion: The full value of consideration was to be taken at Rs.2,49,00,000/-, in favour of the assessee.

Final Conclusion: The assessee succeeded on the preliminary jurisdictional challenge and on all merits issues concerning conversion, year of taxability, cost of acquisition, and consideration, resulting in allowance of both appeals.

Ratio Decidendi: In reassessment proceedings, failure to issue notice under section 143(2) vitiates the assessment, and where a capital asset is converted into stock in trade under section 45(2), capital gains are taxable in the year the converted stock is sold, with fair market value on conversion deemed to be the consideration and market value on acquisition forming the cost base.

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