Conversion of land to stock in trade: FMV adoption for both capital gains and business income upheld, addition deleted.

Conversion of land into stock in trade requires adoption of the fair market value (FMV) at the time of conversion for both capital gains under section 45(2) and for computing cost of acquisition when later taxed as business income. The Assessing Officer recalculated FMV for capital gains but did not apply that same FMV while computing income from business, creating a mistake apparent on record. The appellate authority corrected this by treating FMV as cost for business profit computation and deleted the addition; the appellate correction under appellate powers was sustained on appeal.

---

---

Issues: Whether the Assessing Officer was correct in making an addition under Section 45(2) by reworking long term capital gain on conversion of land into stock-in-trade and whether the Commissioner (Appeals) erred in deleting that addition instead of remitting the matter to the Assessing Officer.

Analysis: The issue concerns application of Section 45(2) where land converted from capital asset to stock-in-trade requires adoption of fair market value at conversion as deemed consideration. When such fair market value is adopted for computing capital gains at conversion, that value must also be treated as the cost of acquisition for computing business profit on subsequent sale of the converted stock-in-trade. The alternative of using book value for business profit while using fair market value for capital gains is inconsistent and leads to double counting or incorrect profit computation. The Assessing Officer adopted fair market value to compute capital gains but used book value while computing business income, creating an apparent mistake on the face of the record. The appellate authority applied Section 251(1) to correct this inconsistency by deleting the addition, rather than remitting the issue, because the error was apparent and the correct legal approach required adoption of consistent values for capital gains and business profit calculations. The Assessing Officer's contrary methodology in the assessment proceeded without giving effect to the deemed cost treatment mandated by Section 45(2).

Conclusion: The deletion of the addition under Section 45(2) is upheld and the revenue's appeal is dismissed; decision is in favour of the assessee.

---