2026 (2) TMI 421 - AT - Income Tax

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 ... Capital gain - conversion of capital asset being land into stock in trade at the time of its sale u/s. 45(2) - FMV determination - mistake apparent on record - exercise of appellate powers under Section 251(1) - AO has not taken the same fair market value of land was adopted for computing capital gains at the time of conversion of the said capital asset into stock in trade as cost of purchase. But taken the value was shown by the assessee in its books of accounts - CIT(A) deleted addition HELD THAT:- AO has adopted a fair market value at the time of conversion of land as stock in trade and he proceeded to complete the assessment without giving the effect of adopting fair market value at the time of conversion while determining the profit under the head ‘income from business’ when the AO recalculated the fair market value at the time of conversion, the same market value had to be adopted while computing the profit under the head ‘income from business’ while determining the cost of acquisition by adopting the fair market value as determined at the time of conversion. Therefore, there is mistake apparent on record the method adopted by the Assessing Officer.CIT(A) has appreciated the above facts and law on record, gave the relief to the assessee. As at the time of hearing Ld. DR prayed that this issue may be remitted back to the Assessing Officer. However, we observed that the mistake was apparent on record and Ld. CIT(A) has applied the proper law, he has applied his power as per Section 251(1) of the Act. Therefore, we do not see any reason to disturb the well reasoned order of the Ld. CIT(A). Decided against revenue. 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.