TaxTMI 
TaxTMI 
2017 (6) TMI 1157
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....150 acres of land belonging to M/s. EML, for a total sale consideration of Rs. 41 crores, in lieu of loan of Rs. 26,50,36,747/- advanced to both the companies. Thereafter, the sale consideration was reduced to Rs. 35.25 crores. The assessee company filed return of income electronically, for the assessment year 2011-12, on 16.09.2011 declaring a total income of Rs. 24,71,810/-, including business loss of Rs. 12,32,049/-, long term capital loss of Rs. 1,17,77,478/- and income from other sources of Rs. 40,26,248/-. The return was processed under Section 143(1) of the Income Tax Act and the assessee company's case was selected through CASS for scrutiny assessment. Notice under Section 143(2) of the Act dated 31.07.2012 was issued by the Assistant Commissioner of Income Tax, Company Circle I(2), Coimbatore and served on the assessee company, on 03.08.2012. The issues involved were, the sale of land and building was treated as stock-in-trade and long term capital loss on sale of zero percent non-redeemable preference shares of Essorpe Mills Ltd. (EML) held by the assessee company. The issue of transfer of land came up for the assessment with EML for the assessment year 2009-10. The s....
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....o conversion of such assets on 28.12.2007 or by the assessee EHPL since 01.01.2009, when the said company got this asset. Hence, the profit on sale of such asset will be assessed only under the head 'Profits and gains of businessman' and not under the head 'capital gains'. Profit on the said transaction is shown as below : Sale consideration of land (as admitted by the assessee) : Rs. 34,53,48,275.00 Less : Cost of acquisition (as admitted by the assessee) [indexation not available since income from business is computed, not capital gains ] : Rs. 50,75,000.00 Business Income : Rs. 34,02,73,275.00 4. The assessee company submitted its explanation before the Assessing authority to substantiate the case that the profit on sale of the land at Saravanampatti is assessed under the head 'income from business'. Further, the assessee had submitted that M/s. Essorpe Mills Limited had converted 10.150 acres of land at Saravanampatti village, as stock in trade, on 01.04.2007. According to the assessee, as per Section 45(2) such conversion is deemed to be a transfer and the difference between the market value on the date of conversion and cost is to ....
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....d into investment through the Board's resolution and accordingly the entire profit should be assessed as capital gains. 3. On various grounds, the Commissioner of Income Tax (Appeals) has not appreciated the provisions under Section 45(2) of the Income Tax Act. The Tribunal has observed that based on the market value upto the date of conversion i.e., in the year 2007, the profit should be assessed as capital gains under Section 45(2) and the balance assessed as business profits. The Tribunal has also relied upon the order passed by the co-ordinate Bench of the Tribunal, for the assessment year 2009-10, in the case of M/s.Essorpe Mills Ltd. & Ors., in ITA No.2256/Mds/2012 dated 11.07.2013, wherein it has been observed as follows, in paragraphs 8 and 9 :- "8. Heard both sides. Perused the orders of the lower authorities and records. The Commissioner of Income Tax (Appeals) in his elaborate order considered the submissions of the assessee as well as contentions of the Assessing Officer and arrived at a conclusion that there is a transfer within the meaning of Section 2(47) of the Act in respect of the property and income had arisen during the assessment year 2....
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....nal was right in holding that the land was to be treated as capital asset upto conversion of it into stock in trade and liable for capital gain under Section 45(2) and when the assessee actually sold the land the same is to be assessed as Business Incomefor the assessment year 2011-12 ? 2. Whether on the facts of the case, the Appellate Tribunal was right without considering the character of land which was qualified as stock in trade in the annual accounts and balance sheet for the period ended 31.03.2010 and 31.03.2011 can be altered by a mere board resolution ? 8. Learned Senior Standing Counsel for the appellant Revenue would submit that the Assessing Officer taxed the entire sale consideration as income from business and not under the head capital gainsfrom the sale of a building. Consequently, the assessee's claim of long term capital loss, on the sale of zero percent non-redeemable preference shares of M/s. EML, was not allowed to be set off, since the sale consideration on 10.150 acres of land was taxed under the head of 'business income' and not under the head of 'capital gains'. The Commissioner of Income Tax (Appeals) in ITA No. 50/14-15, h....
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....ly treated as investment and converted into stock in trade from 28.12.2007, by the Transferor company EML. The said conversion being accepted by the Revenue, the legal consequences of conversion of land/ investment into stock in trade, are as under :- "Under Section 45(2) there is a deemed transfer and capital gain being the difference between the market value and the cost of acquisition becomes chargeable on the date of conversion. But the section postpones the charge of tax to the date of actual transfer/sale of such stock in trade. The capital gains accruing on conversion of the land in stock in trade has been determined in the hands of EML and the computation has not been questioned by the department. This capital gain as per Section is to be charged to tax on the date of sale or transfer of the stock in trade. But this postponed levy does not alter the character of the converted asset, which will be a stock in trade after conversion, as Section 45(2) itself recognises. 11. Further, learned counsel appearing for the assessee would submit that demerger from EML to EHPL should not be considered as sale or transfer. If such demerger is considered as sale or tr....
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....al. Under Section 45(2) of the Act, under which capital gains are deemed to accrue at the time of conversion of investment into stock in trade, the actual levy is postponed to the time of actual transfer or sale. So, levy of capital gains under Section 45(2) is only levy of capital gains, which has been already accrued but only the time of its levy is postponed. Merely because capital gains under Section 45(2) is charged, it does not mean it alters the character of the asset converted. Such converted asset continues to be only as stock in trade, despite levy of capital gains under Section 45(2). 12. It is further submitted that the Revenue has misunderstood the import of Section 45(2) because it relates to capital gains conversion of investment, into stock in trade but postpones the charge of tax to the time, such stock in trade is sold or transferred. Once converted into stock in trade, the asset will continue to be treated as stock in trade, as mentioned in the section itself. Application of provision of Section 45(2) will not reconvert the converted stock in trade, back into an investment. Consideration of sale of such converted asset will always be assessed as profits of bus....
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.... passed by the Deputy Commissioner of Income Tax, Corporate Circle-2, Coimbatore, passed pursuant to the order of the Income Tax Appellate Tribunal dated 15.05.15 (without prejudice to the submission made on the merits of the case) and submitted that whatever be the substantial questions of law, for which answer is sought for, under Section 260A of the Income Tax Act, 1961 in the Giving Effect Order, the Assessing Officer himself has granted the reliefs, as prayed for. 15. Learned counsel for the assessee submitted that in view of the above, there is no substantial questions of law involved in the appeal and hence the order of the Tribunal is perfectly valid and the appeal is liable to be dismissed. 16. Heard Mr. T.R. Senthil Kumar, learned Senior Standing Counsel for the appellant Revenue and Mr.Vijayaraghavan, learned senior counsel for the respondent assessee and perused the material available on records. 17. The Assistant Commissioner of Income Tax, Company Circle I(2), Coimbatore, passed an assessment order under Section 143(3) of the Income Tax Act, 1961 dated 31.03.2014 for the assessment year 2011-12, by demanding a taxable income of Rs. 34,02,73,275/- being the sa....
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....sessee company, under Section 143(3) of the Income Tax Act, 1961, assessed the income tax of the assessee for the entire sale consideration of Rs. 15 crores, under the head profits and gains of business. The assessment officer has computed the sale of land under business income and therefore rejected the claim of the assessee to compute the capital gains under Section 45(2) of the Act. It is useful to refer Section 45(2) of the Income Tax Act, 1961, which reads as follows : "45 (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." 20. In the assessment order, it has been observed by the Assessing officer that th....
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....art of the land measuring 5.075 acres, out of the total extent of 10.150 acres, were sold even before filing the demerger application before this Court. The aforesaid sale was not brought to the notice of the High Court. The High Court of Madras, as per the Scheme of Demerger approved EML demerging with M/s. EHPL, transferring the real estate division of EML to EHPL as a going concern. As on 31.03.2010, the assessee company has shown the land in question as stock in trade and the same was later converted as Fixed Asset, by the Board Resolution. In the case of sale of 50% of the same property, out of 10.150 acres of land, for the assessment year 2009-10 was considered, by the co-ordinate Bench of the Tribunal in the case of M/s. Essorpe Mills Ltd., in ITA No. 2256/Mds/2012 dated 11.07.2013, wherein it was held that the gain on transfer of property up to the date of conversion into stock-in-trade has to be assessed under the head capital gainsand the gain in respect of property i.e. after the date of conversion into stock-in-trade has to be assessed as business income. As the Assessing Officer computed the entire sale consideration under the head long term capital gains, he did not a....
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....in-trade, developed the same and after effecting such development, the land was sold in small parcels on a profit. The Tribunal has also observed in its order that lands as in the year 1972 could be held either as an investment or stock-in-trade and that the assessee had held it as investment till July 6, 1972, and it is only thereafter that it had treated the land as its stock-in-trade. the Tribunal's view that for finding out the business profit for the sale of lands, the market value on the date of conversion of the asset from investment to business asset should be taken and not the original price for which the assessee purchased the property is sustainable in law ." The decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Groz-Beckert Saboo Ltd., reported in (1979) 8 CTR 0155, wherein an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost of the assessee. In paragraph 2, it has been held as follows :- "2. ..........Th....