Fair market value of converted land based on surrounding circumstances, not guideline values. Assessing Officer to refer for accurate valuation.

The Tribunal held that the fair market value of agricultural land converted into stock-in-trade should be determined based on surrounding circumstances and not solely on guideline values. The Tribunal set aside the lower authorities' decisions and directed the Assessing Officer to refer the matter to the District Valuation Officer for accurate valuation based on factors such as sale instances, urbanization, and property valuations. The appeal by the assessee was allowed for statistical purposes.

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Issues Involved:
1. Whether the guideline value of the land should be considered as the fair market value on the date of conversion of agricultural land into stock-in-trade under section 45(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Guideline Value vs. Fair Market Value:
The primary issue in this appeal is the determination of the fair market value of agricultural land converted into stock-in-trade. The assessee argued that the fair market value should be based on actual sale instances and surrounding circumstances, while the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] contended that the guideline value set by the State Government for stamp duty purposes should be used.

Facts and Arguments:
- The assessee, engaged in real estate business, converted 7.54 acres of his own agricultural land into stock-in-trade and valued it at Rs. 27 lakhs per acre based on sale instances.
- The AO adopted the guideline value of Rs. 51,500 per acre as the fair market value, arguing that the guideline value is a scientifically computed value for all practical and legal purposes.
- The CIT(A) upheld the AO's decision, stating that section 45(2) of the Act applies only to capital assets, and agricultural land is not a capital asset. Therefore, the guideline value is the correct method for computing the fair market value.

Legal Provisions and Case Law:
- Section 45(2) of the Income Tax Act, 1961, states that the fair market value of the asset on the date of conversion shall be deemed to be the full value of consideration received or accruing as a result of the transfer of such capital asset.
- The definition of fair market value under section 2(22B) of the Act is the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date.
- The Tribunal referred to the Supreme Court judgments in CIT vs. Bai Shirinbai K. Kooka and CIT vs. Groz-Beckert Saboo Ltd., which emphasized that the fair market value should be the price the asset would fetch in an open market, considering surrounding circumstances and not necessarily the guideline value.

Tribunal's Decision:
- The Tribunal noted that the fair market value should be determined based on surrounding circumstances, including sale instances, urbanization, future prospects, and similar property valuations.
- It was concluded that the matter needs reconsideration to ascertain the fair market value accurately.
- The Tribunal directed the AO to refer the matter to the District Valuation Officer (DVO) to determine the fair market value based on the enumerated factors.

Conclusion:
The Tribunal set aside the orders of the lower authorities and restored the matter to the AO for reconsideration, directing the AO to ascertain the fair market value through the DVO. The appeal filed by the assessee was allowed for statistical purposes.

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