2018 (3) TMI 1210 - HC - Income Tax

Court rules land conversion for stock-in-trade allows business loss deduction

The High Court dismissed the Revenue's appeal, affirming the Tribunal's decision. It held that the land should be treated as stock-in-trade ... Computation of profit - sale of asset after conversion from capital asset to stock-in-trade - Treatment to sale considerations - capital gain or business income - Held that:- In view of the undisputed facts being similar, and taking note of the decision of the Hon'ble Division Bench of this Court in Commissioner of Income Tax Vs. Essorpe Holding Pvt. Ltd. [2017 (6) TMI 1157 - MADRAS HIGH COURT] wherein held as an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost of the assessee. In the impugned order, HC directed the AO to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value of sale and stock in trade to be considered as business income. Substantial questions of law framed in the instant tax appeal for the assessment year 2009-10, are answered against the Revenue. Issues Involved:1. Classification of sale consideration as business loss or capital loss.2. Applicability of Section 45(2) of the Income Tax Act.3. Treatment of the land as stock-in-trade or capital asset.4. Allegation of concealment of income by the assessee.Issue-Wise Detailed Analysis:1. Classification of Sale Consideration as Business Loss or Capital Loss:The main contention revolved around whether the sale consideration adjusted for repayment of the loan should be treated as a business loss or a capital loss. The Tribunal held that since the land was given as security for commercial expediency to the sister concern, the sale consideration adjusted for repayment of the loan should be treated as a business loss. The Tribunal found that the assessee did not receive any amount from the sale, and thus, the loss incurred should be considered a business loss arising in the course of business.2. Applicability of Section 45(2) of the Income Tax Act:The Tribunal directed the Assessing Officer to compute the capital gains under Section 45(2) of the Income Tax Act on the sale of land up to the date of conversion into stock-in-trade. The Tribunal emphasized that the profit on the sale of land as stock-in-trade has to be computed as business loss since the assessee did not receive any money on the sale of the land. The capital gains computed up to the date of conversion of land into stock-in-trade were to be set off against the business loss computed on the sale of the stock-in-trade.3. Treatment of the Land as Stock-in-Trade or Capital Asset:The Tribunal noted that the land was converted into stock-in-trade in the year 2000, and the real estate division was demerged to the sister concern, EHPL, effective from 28.02.2007. The Tribunal upheld that the land should be treated as stock-in-trade after its conversion and that the business loss incurred due to non-receipt of sale consideration should be allowed while computing the taxable income. The Tribunal also referenced Section 45(2) of the Act, which charges the profits or gains arising from the transfer by way of conversion of a capital asset into stock-in-trade as capital gains, to be assessed at the time of actual sale.4. Allegation of Concealment of Income by the Assessee:The Revenue argued that the case involved a clear act of concealment of income by the assessee. However, the Tribunal found that since the quantum addition made by the Assessing Officer on transfer was deleted by the Tribunal, there could not be any concealment. The Tribunal's decision was based on the finding that the assessee did not receive any sale consideration and suffered a business loss, which should be allowed while computing the taxable income.Conclusion:The High Court dismissed the appeal filed by the Revenue, affirming the Tribunal's decision. The High Court agreed with the Tribunal's interpretation and application of Section 45(2) of the Income Tax Act and held that the land should be treated as stock-in-trade after its conversion. The business loss incurred due to non-receipt of sale consideration was to be allowed while computing the taxable income. The substantial questions of law framed were answered against the Revenue, and the Tribunal's order was upheld.