TaxTMI 
TaxTMI 
2018 (3) TMI 1210
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...., engaged in the business of real estate, financial service and other business. EML, has converted the land which was considered as capital asset, into stock-in-trade, in the year 2000. (ii) This is a case of demerger of EML with M/s. Essorpe Holdings Pvt Ltd. (in short 'EHPL'). Real estate division of EML, was demerged, by an order of this Court, with effect from 28.2.2007. (iii) EML, entered into a Memorandum of Association with M/s Globus Realtors Pvt. Ltd., offering 5.075 acres of land, as security for amounts advanced by M/s Globus Realtors Pvt. Ltd. to EHPL, a sister concern of EML. (iv) EML, has also executed a power of attorney, in favour of Mr.V.Sivakumar, Managing Director of M/s.Globus Realtors Pvt. Ltd in respect of 5.075 acres of land. Physical possession of the land was also handed over to M/s Globus Realtors Pvt. Ltd. Mr.V.Sivakumar, Managing Director of M/s Globus Realtors Pvt. Ltd, sold 5.075 acres of land to M/s Rasi Seeds (P) Ltd and M/s Globus Realtors Pvt. Ltd. on 5.1.2009 and 7.1.2009, while enforcing the security, for repayment of loan borrowed by the sister concern EMPL. (v) Assessing Officer, found that there was ....
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....s of appeal and only the additional grounds of appeal may be considered. Hence, the grounds of appeal are dismissed. xxxxx 5. In the additional grounds, the authorized representative stated that the Assessing Officer has assessed the alleged sale by Power of Attorney in the case of the appellant for the assessment year 2009-10. The appellant has not received any consideration as mentioned in the Sale Deed and there can be no profit on transfer of stock in trade when no consideration is received. As seen from the grounds of appeal, the assessee is trying to bring in the original issues which were already decided by the CIT(A) and confirmed by the Hon'ble Tribunal. The issue of taxability regarding the transfer in the case of M/s.Essorpe Mills Limited was already adjudicated by the Hon'ble ITAT, Chennai. There is no merit in the additional grounds of appeal which were already adjudicated by the Hon'ble ITAT. The additional grounds of appeal are dismissed. 6. In result, the appeal is dismissed." 6. Aggrieved, by the order of the Commissioner of Income Tax (Appeals)-I, Coimbatore, the assessee (respondent herein), preferred an appeal before the....
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....his Tribunal in the earlier occasion by an order dated 11.7.2013 examined this issue and found that upto the date of conversion of the capital asset into stock-in-trade, the profit has to be assessed as capital gain and after the conversion, it has to be assessed as business income. Accordingly, this Tribunal directed the Assessing Officer to compute the business income in respect of the stock-in-trade of the property. In view of the above direction of this Tribunal, no doubt, the profit on sale of the landed property has to be assessed only in the hands of the assessee and not in the hands of M/s Essorpe Holdings Pvt. Ltd. This order of the Tribunal dated 11.7.2013 attained finality. 5. We have carefully gone through the provisions of sec. 45(2) of the Act which reads as follows: "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 pu....
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....tock-in-trade. 7. In the result, the appeal of the assessee is allowed." 8. Aggrieved by the order of the Tribunal dated 05.02.2016, allowing the appeal filed by the assessee, Revenue, has filed the instant tax appeal, before this Court, on the following substantial questions of law: "(i) Whether on the facts and circumstances of the case the ITAT is correct in holding that since the land was given as security for commercial expediency to sister concern, the sale consideration adjusted for repayment of loan be treated as business loss ? (ii) Whether on the facts and circumstance of the case, the ITAT is correct in ignoring the fact that once the land is mortgaged as security for loan liability, it should be considered as capital asset and the loss suffered can only be categorised as capital loss ? (iii) Whether on the facts and circumstance of the case, the Tribunal was justified in allowing the business loss in the hands of the assessee after deleting the addition of business income in the hands of the sister concern which amounts to perversity ? (iv) Whether on facts and circumstances of the case and in law, the Appellate Tribunal w....
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.... it cannot be considered as a business loss. Since these facts were not taken into consideration, order of the Tribunal cannot be sustained. (vii) That the Tribunal has failed to appreciate that during the period of original assessment, the then Assessing Officer made substantial assessment for the land transaction, in the hands of the assessee, as capital gain, and made protective assessment, in the hands of the sister concern i.e. EPHL as business income. However, the Tribunal in its order No.2256/Mds/2012, 76/Mds/2013, 79/Mds/2013 & C.O.No.108/Mds/2013, dated 11.07.2013, at para 13, has stated that Assessing Officer made addition in respect of transfer of property, under the head business income, protectively. The Tribunal sustained addition, in the case of M/s.Essorpe Mills Ltd., wherein substantial addition was made, and that the Tribunal has dismissed the appeal of the Revenue, as well as the Cross Objection, filed by the assessee. (viii) Since the Tribunal had deleted the addition of business income made, in the hands of the sister concern M/s.Essorpe Holdings P Ltd., in its own order dated 11.07.2013, then, consideration of business loss, in the hand of as....
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....ibunal was right in holding that residual land sold was to be treated as capital asset, upto conversion into stock-in-trade and after conversion, when the land, was actually sold, the income arising from the sale of such land has to be considered only as business income. Since the land was given as security to the sister concern, in the course of business activity for commercial purpose, the loss suffered by the assessee, in the course of business activity, has to be allowed, as business loss. 11. Learned counsel for the assessee submitted that the subject matter is covered by an earlier decision of this Court and referred to a Hon'ble Division Bench (SMKJ & DKKJ) decision of this Court in Commissioner of Income Tax Vs. Essorpe Holding Pvt. Ltd., reported in 2017 (6) TMI 1157 and prayed for dismissal of the tax appeal. 12. Learned counsel, further submitted that facts are similar and M/s.Essorpe Holding Pvt Ltd., was also a party to the earlier decision of this Court, but the only variation is that the assessment year in the said decision relates to 2011-12, and further submitted that except the variation in the assessment year, facts and submissions made, are similar, th....
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....ayed to allow the present appeal, filed by the Revenue. Learned counsel further submitted that the asset was converted into stock in trade on 28.12.2007 in the hands of M/s.Essorpe Mills Limited and Essorpe Holdings Private Limited, got demerged subsequently on 01.01.2009, as per the order of this Court. The fact that 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, has not been considered by the Tribunal. Therefore, the order of the Tribunal is unsustainable in law. The application of Section 45(2) was limited only to EML and not EHPL. Therefore, the order of the Tribunal is liable to be set aside, on the said questions of law, raised by the assessee. 9. It is also submitted that both the companies, EML and EHPL, have the same Board of Directors and so the Board's resolution dated 01.04.2010 has got no legal sanctity and when the audited accounts of the EHPL for the period 31.03.2010 and 31.03.2011 are already available with the Revenue, which evidence that the land to an extent of 5.075 acres was held as stock in trade only a....
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....or capital gains. It will apply, whenever a land, which originally treated as investment and later converted into a stock in trade, is sold or transferred. Further, he submitted that it is not the case of the Revenue that the converted land was sold or transferred earlier. Hence, the charge of capital gains was rightly levied at the time of sale of land by the assessee. Hence, the Tribunal was correct in holding that provisions of Section 45(2) is applicable to the case of assessee. Learned counsel for the assessee company would submit that the assessee took the land as stock in trade and when the land was sold also it was treated as stock in trade and the entire sale consideration of Rs. 15 crores was assessed under the head profits and gains of business, which is over and above the capital gains, levied under Section 45(2). When the land was converted as stock in trade, then the cost of acquisition of the stock in trade, is the market value on the date of conversion. The decisions in the case of Commissioner of Income Tax v. Groz-Beckert Saboo reported in 116 ITR 125 SC and the case of Commissioner of Income Tax v.Ambadi Enterprises reported in 243 ITR 431 Mad., have been relied ....
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.... now levied at the time of sale. Application of statutory provision of Section 45(2) cannot be ignored. Levy of capital gains under Section 45(2) is in addition to and does not affect the entire sale price of the land being treated as business income. The land in question was received as stock in trade and treated as stock in trade and entire sale consideration is assessed under the head business income. The land was not treated as investment. In view of the above, learned counsel for the assessee submitted that the grounds raised by the Revenue is misconceived. 13. Further, as per Section 45(2), the capital gains accrued on conversion of investment into stock in trade and only the taxation is postponed to the time when the stock in trade is transferred or sold. It is not disputed by the Revenue that demerger is not a sale or transfer, as otherwise the capital gains should have been levied at the time of demerger. Therefore the capital gains computed under Section 45(2) at the time of conversion on 28.12.2007 has been properly brought to tax when the land was sold by the assessee. Levy of capital gains under Section 45(2) is not a benefit but an additional levy over and ab....
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....ssment order, the assessee company filed an appeal in I.T.A. No.50/14-15 before the Commissioner of Income Tax (Appeals)-1, Coimbatore. The Commissioner, dismissed the appeal, in so far it relates to the transfer of land by the assessee company as the provision of Section 45(2) of the Income Tax Act, 1961 is not applicable to the sale of land, made by the assessee. Challenging the order of the Commissioner dated 23.12.2014, the assessee went on appeal before the Income Tax Appellate Tribunal in ITA No.245/Mds/2015, stating that the land was originally converted as stock in trade on 01.04.2007 and so the profit on sale of land or the gain determined on the date of conversion, under Section 45(2), should be assessed as capital gains and the balance as business profit. 18. Further, the assessee pleaded that Section 45(2) of the Income Tax Act 1961 would apply to the present case. Therefore, by considering the submissions of the assessee as well as the representative of the Revenue department, the Tribunal has observed as follows :- "8. Therefore, in our opinion, the land was to be treated as capital asset upto conversion of it into stock in trade and the assessee is ....
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....erstanding that the lenders can enforce the sale of the land, in the event the assessee was not able to repay the loan. The assessee invested part of the borrowings as preference shares in EML, who has converted its entire land holding 10.150 acres into stock in trade, as on 01.04.2007. Consequently, the entire land of 10.150 acres, held by EML was deemed to have been transferred under Section 45(2) and the capital gains accrued on such conversion computed with the market value as on date of conversion of the land being treated as full value of consideration. The deemed capital gains on the date of conversion amounted to Rs. 38,25,57,889/- for the entirety of 10.150 acres and the same was chargeable to tax on the actual sale of the said converted land. The real estate division of EML was demerged into the assessee company, as per the Scheme of demerger approved by the High Court with effect from 01.01.2009. Pursuant to the approved scheme, the land held by EML was demerged and vested with the assessee. After demerger, the assessee company had converted the land into investments from 01.04.2010 as supported by a resolution of the Board of Directors dated 01.04.2010. Thereafter, the ....
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....the provisions of section 45(2) of the Act, in accordance with law, after giving adequate opportunity of hearing to the assessee. 22. The provisions of Section 45(2) is a charging section for capital gains. It will apply, whenever a land, which originally was treated as investment and later converted into a stock in trade, is sold or transferred. So the land in this case was converted into a stock in trade in the hands of EML and as demerger is not a transfer, the capital gains under that section is charged when the land was sold by the assessee company. The capital gains accruing on conversion of the land in stock in trade can be determined in the hands of EML and the computation cannot be questioned by the department. Levy of tax is postponed at the time of actual transfer or sale. Under Section 45(2) of the Act, the section charges 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 provisions of Section 45(2) will not reconvert t....
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....ey were transferred to the business as part of its stock. If that be so, the cost of these raw materials and semi-finished needles to the business could not be said to be nil, but, on the principle laid down by this Court in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) : TC14R.129, and subsequently followed in CIT vs. Hantapara Tea Co. Ltd. (1973) 89 ITR 258 (SC) : TC17R.1227, it would be the market value of these raw materials and semi-finished needles as on 30th Sept., 1961. It is now well settled by these decisions that where 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 (since this would be the cost to the business) and not the original cost to the assessee............ " 24. Therefore, in the light of the decisions rendered by this court as well as the Hon'ble Supreme Court and the orders passed by the coordinate bench of the Income Tax Appellate Tribunal, in the case of ITA No. 2256/Mds/2012 dated 11.07.2013 wherein the revenue has accepted the sale of 50% of the....