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Issues: Whether revision under section 263 of the Income-tax Act, 1961 was validly invoked on the ground that the Assessing Officer had not examined the taxability arising from conversion of capital asset into stock-in-trade and the subsequent partial sale of such stock-in-trade.
Analysis: Section 45(2) of the Income-tax Act, 1961 applies where a capital asset is converted into stock-in-trade and the resulting profits or gains are chargeable in the year in which the stock-in-trade is sold or otherwise transferred. The provision was read to mean that where only part of the converted asset is sold, the capital gain relatable to that part is also taxable in the year of such sale, with fair market value on the date of conversion forming the relevant basis under section 48 of the Income-tax Act, 1961. The Assessing Officer had not made any enquiry on this aspect, which constituted a clear case of no enquiry.
Conclusion: Revision under section 263 of the Income-tax Act, 1961 was justified and the order of assessment was erroneous and prejudicial to the interests of the Revenue.
Final Conclusion: The assessee's challenge to the revisional order failed, and the assessment was upheld for fresh consideration of the taxable consequences arising from the partial sale of converted stock-in-trade.
Ratio Decidendi: Where a capital asset is converted into stock-in-trade, taxability under section 45(2) of the Income-tax Act, 1961 extends to the part actually sold in the relevant year, and failure to enquire into such taxability renders the assessment amenable to revision under section 263.
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