2018 (11) TMI 589 - AT - Income Tax

Tribunal Upholds Assessee's Appeal on Capital Gains Computation

The DCIT, Corporate Circle 3 (2), Chennai. Versus M/s. VGN Builders Pvt Ltd.

The DCIT, Corporate Circle 3 (2), Chennai. Versus M/s. VGN Builders Pvt Ltd. - TMI Issues:- Appeal filed by Revenue against Commissioner of Income-tax (Appeals) order for assessment years 2012-13, 2013-14, and 2014-15.- Dispute over computation of short term capital gains on sale of land by a domestic company.- Interpretation of provisions under Section 47(Xiii) and Section 45(2) of the Income Tax Act.- Application of Fair Market Value for conversion of land into stock-in-trade.- Comparison with a previous Tribunal decision in ACIT Vs. B.V.Reddy Enterprises Private Limited.Analysis:The judgment pertains to appeals filed by the Revenue against the Commissioner of Income-tax (Appeals) order for the assessment years 2012-13, 2013-14, and 2014-15, involving a dispute over the computation of short term capital gains on the sale of land by a domestic company. The key contention was whether the cost of acquisition of the land, treated as stock-in-trade, should be based on the cost recorded in the books of the previous owners, i.e., a partnership firm, or as revalued during the conversion into a company. The Revenue argued that the capital gains should be computed based on the original cost recorded in the books of the firm, while the Assessee relied on the provisions of Section 47(Xiii) of the Act to support their position that no transfer occurred upon conversion.The Tribunal analyzed the facts and noted that the partnership firm had revalued its assets before conversion, with the consideration credited to the partners' current accounts. The cost of the revaluation was reflected in the current account of the partners, and upon conversion into a company, the lands were taken over as capital assets. The lands were subsequently converted into stock-in-trade, and capital gains were computed as per Section 45(2) of the Act for the assessment year 2010-11. The Tribunal emphasized that the cost of acquisition for computing profits on the sale of the land should not be disturbed, as long as the position remained consistent with the assessment year 2010-11.Furthermore, the Tribunal referred to a previous decision in ACIT Vs. B.V.Reddy Enterprises Private Limited, where a similar issue was addressed, albeit with shares as assets. The Tribunal found that the Revenue failed to dislodge the findings of the Commissioner of Income-tax (Appeals) and confirmed that the computation of capital gains should be based on the Fair Market Value at the time of conversion into stock-in-trade. Ultimately, the Tribunal dismissed all appeals of the Revenue, upholding the order of the Commissioner of Income-tax (Appeals) in favor of the Assessee.In conclusion, the judgment clarifies the principles governing the computation of capital gains on the sale of assets converted into stock-in-trade during a company's conversion from a partnership firm. It underscores the importance of consistent valuation methods and adherence to statutory provisions to determine the cost of acquisition for tax purposes. The decision provides a nuanced interpretation of relevant sections of the Income Tax Act and highlights the significance of previous Tribunal decisions in guiding similar cases.