2022 (1) TMI 1151 - AT - Income Tax

Tribunal confirms Pr. CIT's assessment revision under Section 263, dismissing assessee's appeal.

M/s. Kyori Infrastructure Pvt Ltd. Versus DCIT, Circle-2 (1), Hyderabad

M/s. Kyori Infrastructure Pvt Ltd. Versus DCIT, Circle-2 (1), Hyderabad - TMI Issues Involved:1. Applicability of Section 45(2) of the Income Tax Act.2. Validity of invoking revisionary powers under Section 263 of the Income Tax Act.3. Calculation of capital gains and business income on the sale of converted stock-in-trade.Issue-wise Detailed Analysis:1. Applicability of Section 45(2) of the Income Tax Act:The primary issue revolves around whether Section 45(2) of the Income Tax Act is applicable when only part of the converted capital asset (land) is sold. The assessee argued that Section 45(2) does not apply to partial sales and that capital gains should only be recognized when the entire stock-in-trade is sold. The assessee also claimed that there was no capital gain as the sale resulted in a loss, and thus, no capital gain should be recognized.The Tribunal, however, interpreted Section 45(2) to mean that profits or gains arising from the transfer of a capital asset converted into stock-in-trade should be chargeable to tax in the year in which such stock-in-trade is sold, even if only a part of it is sold. The Tribunal emphasized that the legislation does not intend for the revenue authorities to wait until the entire converted stock-in-trade is sold to tax the capital gains. Therefore, the Tribunal concluded that capital gains should be recognized proportionally in the year the part of the stock-in-trade is sold.2. Validity of Invoking Revisionary Powers under Section 263 of the Income Tax Act:The Pr. CIT invoked Section 263, arguing that the Assessing Officer (AO) failed to examine the applicability of Section 45(2) and did not compute the capital gains arising from the conversion of the capital asset into stock-in-trade. The assessee challenged this, stating that the AO's order was neither erroneous nor prejudicial to the interest of the revenue.The Tribunal held that the AO's failure to make necessary inquiries and compute the capital gains as per Section 45(2) constituted a lack of due diligence. This oversight rendered the assessment order erroneous and prejudicial to the interest of the revenue. Consequently, the Pr. CIT was justified in invoking Section 263 to revise the assessment order.3. Calculation of Capital Gains and Business Income on the Sale of Converted Stock-in-Trade:The Pr. CIT directed the AO to recompute the capital gains on the conversion of the capital asset into stock-in-trade and the business income from the sale of the property. The assessee contended that since the sale resulted in a loss, no capital gains should be recognized. Additionally, the assessee argued that the entire stock-in-trade was not sold, and thus, the provisions of Section 45(2) were not applicable.The Tribunal dismissed the assessee's arguments, stating that the fair market value of the asset on the date of conversion should be deemed the full value of consideration for calculating capital gains. The Tribunal also clarified that the business income should be computed based on the difference between the sale consideration and the cost of the stock-in-trade. Since the AO did not make these calculations, the Pr. CIT's directions to recompute the capital gains and business income were upheld.Conclusion:The Tribunal upheld the Pr. CIT's order to revise the assessment under Section 263, affirming that the AO's failure to apply Section 45(2) and compute the capital gains and business income was erroneous and prejudicial to the revenue. The appeal by the assessee was dismissed, and the Pr. CIT's directions were confirmed.