Capital gains on converted stock-in-trade arise only on actual sale or transfer; later tax provisions cannot apply retrospectively.

Gain on conversion of capital asset into stock-in-trade is chargeable only when the stock-in-trade is actually sold or otherwise transferred; a joint development agreement alone did not trigger taxability in the relevant year, so the revisional view on capital gains and business income was unsustainable. Notional house property income from two unsold flats also could not be brought to tax for assessment year 2013-14 because the provision relied on was inserted later and could not operate retrospectively to create a fresh liability. The revisionary order was therefore set aside and the assessee's appeal succeeded.

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Issues: (i) Whether the revisional order under section 263 could stand where the assessee's converted stock-in-trade was treated as taxable in the year of the joint development agreement instead of the year of actual sale or other transfer; (ii) whether notional income from two unsold flats could be brought to tax for the assessment year 2013-14.

Issue (i): Whether the revisional order under section 263 could stand where the assessee's converted stock-in-trade was treated as taxable in the year of the joint development agreement instead of the year of actual sale or other transfer.

Analysis: Section 45(2) taxes profits arising from conversion of a capital asset into stock-in-trade in the previous year in which such stock-in-trade is sold or otherwise transferred. The agreement with the developer did not, by itself, complete a taxable transfer of the stock-in-trade in the relevant year. The Tribunal held that the stock-in-trade would be taxable only when the assessee actually sold or otherwise transferred it, and the same reasoning applied to the proposed business income based on accrual in the year of the agreement.

Conclusion: The revisional finding on capital gains and business income was unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether notional income from two unsold flats could be brought to tax for the assessment year 2013-14.

Analysis: The proposed taxation rested on section 23(5), but that provision was introduced later and was not in force for the relevant assessment year. A taxing provision creating a fresh liability was treated as prospective and not applicable to the year under revision.

Conclusion: The addition of notional house property income for the assessment year 2013-14 was not sustainable and was decided in favour of the assessee.

Final Conclusion: The revisionary order was held to be unsustainable and the assessee's appeal succeeded.

Ratio Decidendi: Under section 45(2), gain on conversion of capital asset into stock-in-trade becomes chargeable only in the year the stock-in-trade is sold or otherwise transferred, and a joint development arrangement does not by itself trigger taxation of such stock-in-trade in the absence of actual sale or equivalent transfer; a later inserted taxing provision cannot be applied retrospectively to create liability for an earlier assessment year.

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