M/s. Shreno Limited, Baroda V. The ACIT, Circle-2(1)(1), Baroda

ITA 1639/AHD/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0602 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Appeal Filed On: 31-10-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset converted into stock in trade; Capital asset; Business income; Question of law; Cost of acquisition; Date of conversion; Fair market value; Set aside; Capital Gains
• Section: 27; 45(2); 2(14); 142(1); 5(2); 201; 54EC; 48; 13; 22; 20

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER 1. ./I.T.A. NO.1638/AHD/2019 2. ./I.T.A. NO.1639/AHD/2019 ( / ASSESSMENT YEARS : 2015-16 & 2016-17 RESPECTIVELY ) SHRENO LIMITED ALEMBIC ROAD BARODA 390 016 / VS. THE ACIT CIRCLE-2(1)(1) VADODARA ./ ./PAN/GIR NO. : AABCA 7953 Q ( /APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI S.N.SOPARKAR, SR.ADV. MS.URVASHI SHODHAN, AR / RESPONDENT BY : SHRI VIDHYUT TRIVEDI, SR.SR /DATE OF HEARING 12/03/2020 / DATE OF PRONOUNCEMENT 13 / 0 3 /20 20 / O R D E R PER SHRI SANDEEP GOSAIN, JUDICIAL MEMBER : THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INST ANCE OF THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE COMMISSIONER O F INCOME TAX (APPEALS)2, VADODARA [CIT(A) IN SHORT] IDENTICALLY DATED 30/08/2019 RELEVANT TO ASSESSMENT YEARS (AYS) 2015-16 & 2016-1 7. SINCE COMMON ISSUES (EXCEPT QUANTUM) AND FACTS ARE INVOLVED IN B OTH THE APPEALS, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WA Y OF THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 2 - 2. THE ASSESSEE IN ITA NO.1638/AHD/2019 FOR AY 2015 -16 RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) [T HE 'LD. CIT(A)'] ERRONEOUSLY AFFIRMING THE FINDINGS OF THE LEARNED ASSESSING OFF ICER [THE 'LD. AO'] IS UNSUSTAINABLE AND OUGHT TO BE QUASHED. 1. GROUND NO. 1: ADDITION OF LONG-TERM CAPITAL GAINS OF 2,58,43,184/-: 1.1. THE LD. CIT(A) HAS GROSSLY ERRED IN CONF IRMING THE ACTION OF THE LD. AO IN COMPUTING LONG TERM CAPITAL GAINS BY RESTRICTING TH E INDEXATION BENEFIT TILL YEAR OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE INSTE AD OF YEAR OF SALE OF SUCH STOCK IN TRADE. 1.2. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE C APITAL GAINS IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE IS CHARGEABLE TO TAX ONLY IN THE YEAR OF SALE OF SUCH STOCK IN TRADE AND HENCE INDEXATION BENEFIT OUGHT T O BE ALLOWED TILL THE YEAR OF CHARGEABILITY, THAT IS, YEAR OF SALE OF SUCH STOCK IN TRADE. 1.3. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE INDEXATION BENEFIT IS ALLOWED FOR OFFSETTING EFFECT OF INFLATION AND IN CASE OF CONVE RSION OF CAPITAL ASSET TO STOCK IN TRADE, THE APPELLANT SUFFERS INFLATION TILL THE YEA R IN WHICH CONSIDERATION IS RECEIVED, THAT IS, YEAR IN WHICH CAPITAL ASSET CONVERTED INTO STOCK IN TRADE IS SOLD. 1.4. THE LD. CIT(A) GROSSLY ERRED IN WRONGLY INTERP RETING AND APPLYING THE JUDICIAL PRECEDENTS TO THE FACTS OF THE CASE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE FILED ITS E-RETURN OF INCOME ON 25/11/2015 DECLARING TOTAL INCOME AT RS.N IL. THE CASE OF THE ASSESSEE WAS SELECTED UNDER SCRUTINY AND ACCORDINGL Y, VARIOUS NOTICES HAVE BEEN ISSUED U/S.143(2) AND 142(1) FROM TIME TO TIME . THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF GLASSWA RE ITEMS, MACHINERY AND EQUIPMENTS FOR CHEMICAL GLASS AND OTHER INDUSTRIES BESIDES REAL ESTATE DEVELOPMENT ACTIVITY. AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE, THE ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 3 - ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S.143( 3) ON 30/12/2017 AFTER MAKING ADDITION OF RS.1,31,82,960/- ON ACCOUNT OF I NCOME FROM HOUSE PROPERTY RS.2,58,43,184/-, ON ACCOUNT OF INCOME FRO M CAPITAL GAIN AND DISALLOWANCE U/S.14A OF RS.48,79,000/-. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFI CER, ASSESSEE PREFERRED APPEAL BEFORE LD.CIT(A), WHO AFTER CONSIDERING THE CASE OF THE ASSESSEE, PARTLY ALLOWED THE APPEAL, BUT SUSTAINED THE ADDITI ONS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LONG TERM CAPITAL GAINS. 5. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), NOW THE ASSESSEE IS IN APPEAL BEFORE US ON THE GROUNDS MENTIONED HEREINABOVE. 5.1. THE SOLITARY GROUND RAISED BY THE ASSESSEE REL ATES TO CHALLENGING THE ORDER OF THE LD.CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN COMPUTING LONG TERM CAPITAL GAINS BY RESTRICTING TH E INDEXATION BENEFIT TILL YEAR OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRA DE INSTEAD OF YEAR OF SALE OF SUCH STOCK-IN-TRADE. 6. THE LD.AR REITERATED THE SAME ARGUMENTS AS WERE RAISED BY HIM BEFORE THE CIT(A) AND SUBMITTED THAT CIT(A) HAS GRO SSLY ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN COMPUTING LONG T ERM CAPITAL GAINS BY RESTRICTING THE INDEXATION BENEFIT TILL YEAR OF CON VERSION OF CAPITAL ASSET TO STOCK IN TRADE INSTEAD OF YEAR OF SALE OF SUCH STOC K-IN-TRADE. IT WAS ALSO SUBMITTED THAT THE REVENUE AUTHORITIES FAILED TO A PPRECIATE THAT CAPITAL GAINS ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 4 - IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK-IN- TRADE IS CHARGEABLE TO TAX ONLY IN THE YEAR OF SALE OF SUCH STOCK-IN-TRADE AND , THEREFORE, INDEXATION BENEFIT OUGHT TO HAVE BEEN ALLOWED TILL THE YEAR OF CHARGEABILITY, I.E. THE YEAR OF SALE OF SUCH STOCK-IN-TRADE. IT WAS ALSO SUBMIT TED THAT THE INDEXATION BENEFIT IS ALLOWED FOR OFF SETTING EFFECT OF INFLAT ION AND IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK-IN-TRADE, THE ASSESSEE SU FFERS INFLATION TILL THE YEAR IN WHICH CONSIDERATION IS RECEIVED, I.E. THE YEAR IN W HICH CAPITAL ASSET CONVERTED INTO STOCK-IN-TRADE IS SOLD. THE LD.AR ALSO RELIED UPON THE REPLY FILED BY HIM BEFORE THE ASSESSING OFFICER AS WELL AS THE CIT(A) AND THE SAME IS REPRODUCED BELOW: 5.2. THE ASSESSEE VIDE SUBMISSION DATED 28.12.201 7 FILED ITS REPLY AND SUBMITTED AS UNDER: 1. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. THE SAID REAL ESTATE PROJECT IS BEING DEVELOPED ON LAND WHICH HAS BEEN C ONVERTED FROM CAPITAL ASSET TO STOCK IN TRADE IN F.Y. 2010-11. THE INCOME FROM THE SAID RE AL ESTATE DEVELOPMENT PROJECT IS BEING OFFERED TO TAX ON THE BASIS OF PERCENTAGE COMPLETIO N METHOD AND IN TERMS OF GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTED ACCOUNTANTS OF I NDIA. 2. SECTION 45(2) OF INCOME TAX ACT DEALS WITH CH ARGEABILITY OF CAPITAL GAINS IN CASE OF CONVERSATION OF CAPITAL ASSET TO STOCK IN TRADE. R ELEVANT EXTRACTS OF AS UNDER- *(2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SEC TION (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 H IM 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 HIMAND, 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 ASSETS. 3. AS PER SECTION 45(2) OF INCOME TAX ACT, CAPITA L GAINS ARISING FROM CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE IS CHARGEABLE TO INCOME TAX IN THE YEAR IN WHICH SUCH STOCK IN T RADE IS ULTIMATELY TRANSFERRED BY THE OWNER OF CAPITAL ASSE T. HENCE, CHARGEABILITY ITSELF IS POSTPONED TO THE YEAR IN WHICH SUCH STOCK IN TRADE IS SOLD AN D NOT ONLY PAYMENT OF CAPITAL GAINS. THEREFORE, EVEN IF CAPITAL ASSET IS CONVERTED INTO STOCK IN TRADE IN F.Y. 2010-11, CAPITAL GAINS ARISING THERE FROM IS CHARGEABLE ONLY IN THE YEAR I N WHICH SUCH STOCK IN TRADE IS SOLD I.E. F, Y. 2014-15. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 5 - 4. SECTION 48 OF THE ACT DEALS WITH COMPUTATION M ECHANISM OF CAPITAL GAINS. RELEVANT EXTRACT OF SECTION 48 IS AS UNDER- . '48. THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED, BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED O R ACCRUING 6S A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS, NAMELY:- (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CON NECTION WITH SUCH TRANSFER; (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST O F IMPROVEMENT THERETO: FROM THE ABOVE PROVISIONS, IT IS CLEAR THAT CHARGEA BILITY IS A PRE-REQUISITE FOR COMPUTING CAPITAL GAINS UNDER SECTION 48. IF INCOME IS NOT C HARGEABLE UNDER HEAD 'CAPITAL GAINS', THEN COMPUTATION PROVISIONS SPECIFIED UNDER SECTION 48 DOES NOT ATTRACT. THUS, IN CASE OF CONVERSION OF CAPITAL ASSET -ID. STOCK IN TRADE, SI NCE CAPITAL GAINS ARISING THEREFROM IS CHARGEABLE ONLY IN YEAR OF SALE OF STOCK IN TRADE, CAPITAL GA IN IS ALSO TO BE COMPUTED/N THE YEAR OF SALE OF STOCK IN TRADE. 5. INCOME (CAPITAL GAIN IN GIVEN CASE) IS TO BE C OMPUTED BASED OH LAW APPLICABLE FOR RELEVANT ASSESSMENT YEAR IN WHICH INCOME IS CHARGEA BLE TO TAX. SINCE, INCOME FROM CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE IS CH ARGEABLE IN YEAR IN WHICH SUCH STOCK IN TRADE IS SOLD, CAPITAL GAIN IS TO BE COMPUTED BASED ON RA TE OF CAPITAL GAIN TAX, EXEMPTION PROVISIONS, ETC. APPLICABLE FOR SUCH YEAR. ACCORDIN GLY, INDEXED COST OF ACQUISITION IS ALSO TO BE CALCULATED CONSIDERING THE COST INFLATION INDEX FOR THE YEAR IN WHICH STOCK IN TRADE IS SOLD OR OTHERWISE TRANSFER. 6. FURTHER, AS PER SECTION 48, INCOME CHARGEABLE UNDER HEAD CAPITAL GAINS SHALL BE COMPUTED BY DEDUCTING INDEXED COST OF ACQUISITION O F THE ASSET FROM FULL VALUE CONSIDERATION RECEIVED/ACCRUED. 7. EXPLANATION (III) TO SECTION 48DEFINES INDEXED COST OF ACQUISITION AS UNDER - '(III) 'INDEXED COST OF ACQUISITION' MEANS AN AMOUN T WHICH BEARS TO THE COST OF ACQUISITION THE SAME PROPORTION AS COS! INFLATION INDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRED BEARS TO THE COST INFLATION INDEX FOR THE FIRST YEA R IN WHICH THE ASSET .WAS HELD BY THE ASSESSES OF FOR THE YEAR BEGINNING ON THE 1ST DAY O F APRIL,1981, WHICHEVER IS LATER,' 8. THE OBJECT OF GIVING RELIEF TO AN ASSESSEE BY ALLOWING INDEXATION IS WITH A VIEW TO OFFSET THE EFFECT OF INFLATION. INDEXATION IS ALLOWED TO C OMPENSATE THE ASSESSEE FOR RISE IN COST DUE TO INFLATION TILL THE DATE CONSIDERATION IS RECEIVE D BY THE ASSESSEE. HENCE, THE ASSESSEE SHOULD BE COMPENSATED TILL THE DATE THE ASSET IS AC TUALLY SOLD AND CONSIDERATION FOR THE SAME IS RECEIVED. IN THE GIVEN CASE, THE CONSIDERATION F LOWS TO THE ASSESSEE ONLY WHEN THE STOCK IN TRADE IS SOLD BY THE ASSESSEE. THEREFORE, ASSESSEE SUFFERS INFLATION NOT UP FO THE DATE OF CONVERSION OF CAPITAL /ASSET INTO STOCK IN TRADE BU T UP TO THE DATE OF SALE OF SUCH STOCK IN TRADE. FURTHER, AS PER THE CBDT CIRCULAR WO.636 DAT ED 31/S/1992 A FAIR METHOD OF ALLOWING ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 6 - RELIEF BYWAY OF INDEXATION IS TO LINK IT TO THE PER IOD FOR WHICH ASSET IS HELD. IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE, ASSE T IS HELD TILL IT IS ULTIMATELY SOLD I.E. FY.2014- 15. THEREFORE, INDEXATION BENEFIT OUGHT TO BE ALLOW ED TILL .YEAR OF SALE OF STOCK IN TRADE. 9. FURTHER, THE TERM 'TRANSFERRED' USED IN EXPLAN ATION (III) TO SECTION 48 REFERS TO ACTUAL/ULTIMATE TRANSFER OF CAPITAL ASSET WHICH HAV E BEEN CONVERTED INTO STOCK IN TRADE AND NOT CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE. SECTION 45(2) OF THE ACT DEEMS FAIR VALUE AS ON DAT E OF-CONVERSION 'OF CAPITAL ASSET TO STOCK IN TRADE AS FULL VALUE CONSIDERATION. THIS DEEMING FICTION IS APPLICABLE ONLY FOR DETERMINING THE 'FULL VALUE CONSIDERATION FOR COMPUTATION- OF CAPI TAL GAINS AND CANNOT BE MADE APPLICABLE FOR DETERMINING OTHER COMPONENTS, OF COMPUTATION. THUS, THE DEEMING FICTION CREATED FOR DETERMINATION OF FILL VALUE OF CONSIDERATION CANNO T BE MADE APPLICABLE FOR DETERMINING INDEXED COST OF ACQUISITION ALSO. HENCE, INDEXED CO ST OF LAND UNDERLYING THE FLATS SOLD IN YEAR UNDER CONSIDERATION HAS TO BE COMPUTED CONSIDERING INDEXATION TILL YEAR OF ULTIMATE SALE OF FLATS. ACCORDINGLY, THE ASSESSES HAS COMPUTED INDEX ED COST OF ACQUISITION OF LAND CONSIDERING INDEXATION BENEFIT TILL YEAR UNDER CONSIDERATION AN D NOT YEAR OF CONVERSION. FURTHER, IF IT WAS INTENDED TO RESTRICT INDEXATION TO THE DATE OF CONVERSION THEN IT WOULD HAVE BEEN SPECIFICALLY PROVIDED IN S. 45(2). THE SECTION PROVIDES DEEMING FICTION FOR CHARGING INCOME IN THE YEAR OF SALE OF STOCK IN TRADE AND AL SO DEEMS FAIR MARKET VALUE AS ON DATE OF CONVERSION AS FULL VALUE OF CONSIDERATION FOR COMPU TING CAPITAL GAINS. IN CASE IF IT WAS INTENDED TO RESTRICT INDEXATION TO THE DATE OF CONV ERSION OF CAPITAL ASSET INTO STOCK IN TRADE THEN IT WOULD HAVE BEEN SPECIFICALLY: PROVIDED. FURTHER, IT IS WELL ACCEPTED PRINCIPLE THAT THE DEE MING FICTION SHOULD BE TAKEN TO ITS LOGICAL CONCLUSION, HENCE IF CAPITAL GAINS IS ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE IS CHARGEABLE IN THE YEAR OF TRANSFER OF ASSET TO BUYE R THEN INDEXATION BENEFIT SHOULD ALSO BE EXTENDED TILL ACTUAL TRANSFER OF ASSET TO THE BUYER . RESTRICTING INDEXATION BENEFIT TO THE YEAR CONVERSION WOULD MEAN INTERPRETING DEEMING FICTION IN ARBITRARY MANNER AND NOT TAKING TO ITS LOGICAL CONCLUSION. RELIANCE IS PLACE ON FOLLOWING DECISIONS WHEREBY IT HAS UPHELD THAT DEEMING FICTION OUGHT TO BE TAKEN TO ITS LOGICAL CO NCLUSION - AJAX PRODUCTS LIMITED 55ITR 741 (SC) L.P. CARDOZA &ORS. 227 ITR 421 (KARNATAKA HQ) 10. AT THIS JUNCTURE, WE WOULD ALSO LIKE TO REFER P ROVISIONS OF SECTION 54EA, 54EB AND 54EC OF THE ACT, WHICH PROVIDES FOR EXEMPTION OF CAPITAL GA INS FOR MAKING INVESTMENTS IN SPECIFIED ASSETS WITHIN A PERIOD OF SIX MONTHS FROM THE DATE OF 'TRANSFER'. THE TERM 'TRANSFER' USED IN AFOREMENTIONED SECTIONS; IN CASE OF CONVERSION OF C APITAL ASSET TO STOCK IN TRADE, REFERS TO ULTIMATE SALE OF STOCK IN, TRADE AND NOT DATE OF CO NVERSION OF CAPITAL ASSET TO STOCK IN TRADE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 7 - 11. RELIANCE IS PLACED ON CIRCULAR 791, DATED 2-6-2 000, WHEREIN CBDT IN CONSULTATION WITH THE MINISTRY OF LAW HAS CLARIFIED THAT, IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE, THE TERM 'TRANSFER' REFERS TO SALE OF STOCK IN TRAD E AND ACCORDINGLY PERIOD OF 6 MONTHS FOR MAKING INVESTMENTS IN SPECIFIED ASSETS FOR THE PURP OSE OF SECTIONS S4EA, 54EB AND 54EC SHOULD BE TAKEN FROM THE DATE ON WHICH SUCH STOCK I N TRADE IS SOLD OR OTHERWISE TRANSFERRED AND NOT DATE OF CONVERSION OF CAPITAL ASSET TO STOC K IN TRADE. FURTHER, CBDT IN AFOREMENTIONED CIRCULAR HAS ALSO N OTED THAT IT IS ONLY WHEN THE CAPITAL ASSET WHICH HAS BEEN CONVERTED STOCK-IN-TRADE IS SOLD, TH AT THE ASSESSEE ACQUIRES RIGHT TO RECEIVE THE SALE CONSIDERATION AND THERE IS ACTUAL FLOW OF MONETARY CONSIDERATION TO THE ASSESSEE. THEREFORE, TERM TRANSFER OUGHT TO BE CONSTRUED AS DATE OF SAFE OF STOCK IN TRADE WHEN THE ASSESSEE ACQUIRES RIGHT TO RECEIVE SALE CONSIDERATI ON. ACCORDINGLY, SUCH LOGICAL INFERENCE DRAWN BY THE CBDT CIRCULAR SHOULD A/SO BE APPLIED I N THE GIVEN CASE AND INDEXATION BENEFIT SHOULD BE AVAILABLE TILL ACTUAL TRANSFER OF STOCK I N TRADE BY THE ASSESSES. 12. RELIANCE IS PLACED ON THE DECISION OF THE HONOU RABLE KAMATAKA HIGH COURT IN THE CASE OF CIT V. RUDRA INDUSTRIAL COMMERCIAL CORPORATION [201 2] (20 TAXMANN.COM 611) (KARNATAKA), WHEREIN IT WAS HELD THAT THE COST INFLATION INDEX F OR CALCULATING THE INDEXED COST OF ACQUISITION, IS TO BETAKEN AS THAT OF THE YEAR OF T RANSFER OF THE ASSET UNDER CONSIDERATION AND NOT THE YEAR OF CONVERSION. THE RELEVANT EXTRACT OF THE SAME IS AS UNDER: 'A HARMONIOUS INTERPRETATION OF THESE TWO PROVISION S MAKES IF CLEAR AS TO HOW THE CAPITAL GAINS IS TO BE TAKEN INTO CONSIDERATION. FIRST WE H AVE TO FIND OUT WHAT IS THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION, THEN TO FIN D OUT WHAT IS THE MARKET VALUE OF THE PROPERTY ON THE DATE OF TRANSFER, SO, IN ORDER TO C OMPUTE THE CAPITAL GAINS PAYABLE, IT IS THE MARKET VALUE ON THE DATE OF TRANSFER THAT IS RELEVA NT AND IN ARRIVING AT THAT MARKET VALUE THE INDEX COST OF ACQUISITION AS PRESCRIBED ON (HE DA TE OF TRANSFER IS TO BE TAKEN INTO CONSIDERATION AND NOT THE DATE OF CONVERSION. IN TH E INSTANT CASE, THE INDEX COST OF ACQUISITION WAS 223 ON THE DATE OF TRANSFER IN THE YEAR ENDING 1993 AND THE INDEX COST OF ACQUISITION ON THE DATE OF CONVERSION IS 161. THERE FORE, THE AO COMMITTED A SERIOUS :ERROR IN TAKING 161 AS THE INDEX. THE APPELLATE AUTHORITIES HAVE RIGHTLY INTERFERED WITH THE SAID ASSESSMENT AND HAVE TAKEN, 223 AS CORRECT INDEX COS T OF ACQUISITION. THEREFORE, WHEN THE IMPUGNED ORDER PASSED BY THE APPELLATE AUTHORITIES IS IN ACCORDANCE WITH THE AFORESAID STATUTORY PROVISIONS, THE SAID SUBSTANTIAL QUESTION S OF (AW HAVE TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE.' [EMPHASIS SUPPLIED] BASED ON ABOVE, THE ASSESSEE SUBMITS THAT THE COST INFLATION INDEX UPTO DATE OF HANDING OVER OF POSSESSION OF FLAT HAS TO BE CONSIDERED .FOR THE PURPOSE OF DETERMINATION OF INDEXED COST OF ACQUISITION FOR COMPUTING CAPITA/ GAINS IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 8 - 6.1 THE LD.AR RELIED UPON THE JUDGEMENT OF HONBL E HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. RUDRA INDUSTRIAL COMMERCIAL CORPORATION (2012) 20 TAXMANN.COM 611 (KARNATAKA) A ND DECISION OF ITAT KOLKATA IN THE CASE OF THE HOOGHLY FLOUR MI LLS CO.LTD. VS. DCIT IN ITA NO.615/KOL/2011 FOR AY 2007-08 , DATED 04/05/2012. 7. ON THE OTHER HAND, LD.DR RELIED UPON THE ORDER P ASSED BY REVENUE AUTHORITIES WHILE DEALING WITH THIS GROUND AND RELI ED UPON THE DECISION IN THE CASE OF CIT VS. BAI SHIRINBAI K. KOOKA (1962) 46 ITR 86 (SC ), SPLENDOR CONSTRUCTION (P) LTD. VS. ITO (2009) 27 SO T 39 (DELHI) & TEJ PRATAPSINGH VS. ACIT (2010) 127 ITD 303 (DELHI) . 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES FOR BO TH THE PARTIES. WE HAVE ALSO PERUSED THE MATERIAL PLACED ON RECORD AN D JUDGEMENTS RELIED UPON BY THE PARTIES AS WELL AS THE ORDERS PASSED BY THE REVENUE AUTHORITIES. BEFORE WE DECIDE THIS ISSUE ON MERITS, IT IS NECESS ARY TO EVALUATE THE ORDERS PASSED BY THE LD.CIT(A) WHILE DECIDING THIS APPEAL. THE LD.CIT(A) HAS DEALT WITH THIS GROUND IN PARAGRAPH NO. 5 OF HIS ORDER, H OWEVER, THE RELEVANT PORTIONS CONTAINED IN PARAGRAPH NOS.5.3.7 TO 5.3.2 0 OF HIS ORDER ARE REPRODUCED HEREUNDER: 5.3.7. FROM THE PLAIN READING OF SECTION 45(2) AND 2(47)(IV) ABOVE IT IS CLEAR THAT IF A CAPITAL ASSET IS CONVERTED INTO STOCK IN TRADE OF A BUSINES S CARRIED ON BY THE ASSESSEE THEN IT IS CONSIDERED AS A TRANSFER OF SUCH CAPITAL ASSET AND CAPITAL GAIN OR LOSS AS THE CASE MAY BE SHALL BE COMPUTED IN THE YEAR OF SALE OF SUCH CONVE RTED CAPITAL ASSET. THE CONSIDERATION IN SUCH CASE FOR THE PURPOSE OF COMPUTING CAPITAL GAIN /LOSS SHALL BE EQUIVALENT TO THE FAIR MARKET VALUE OF SUCH ASSET AS EXISTING ON THE DATE OF SUCH CONVERSATION. 5.3.8. SECTION 2(22B) DEFINES THE FAIR MARKET VALUE IN 'RELATION TO A CAPITAL ASSET AS FOLLOWS: ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 9 - (I) THE PRICE THAT THE CAPITAL ASSET WOULD ORDINARI LY FETCH ON SALE IN THE OPEN MARKET ON THE RELEVANT DATE; AND (II) WHERE THE PRICE REFERRED TO IN SUB-CLAUSE (I) IS NOT ASCERTAINABLE, SUCH PRICE AS MAY BE DETERMINED IN ACCORDANCE WITH THE RULES MADE UNDER THIS ACT 5.3.9. FROM THE ABOVE RELEVANT PROVISIONS THE FOLLO WING POINTS CAN BE SUMMED UP: THE FIRST THING FOR APPLICATION OF SECTION 45(2) IS THAT THERE MUST BE A CAPITAL ASSET. IF AN ASSET DOES NOT FALL IN THE DEFINITION OF CAPITAL ASSET U/S 2(14) THEN EVEN IF SUCH ASSET IS CONVERTED INTO STOCK IN TRADE BY AN ASSESSEE IN HIS BUSINESS, THERE WILL BE NO APPLICABILITY OF SECTION 45(2) AND NO CAPITAL GAIN/LOSS THERE FROM W ILL ARISE. FOR EXAMPLE IF A PERSON IS HAVING RURAL AGRICULTURAL LAND WHICH IS OUTSIDE THE DEFINI TION OF A CAPITAL ASSET U/S 2(14) AND SUCH LAND IS TREATED AS STOCK IN TRADE BY THE ASSESSEE I N HIS BUSINESS OF REAL ESTATE, THEN THERE WON'T BE ANY APPLICATION OF SECTION 45(2). 5.3.10. CAPITAL GAIN SHALL BE COMPUTED IN THE YEAR WHEN SUCH CONVERTED ASSET IS SOLD: ALTHOUGH CONVERSION OF A CAPITAL ASSET INTO STOCK I N TRADE IS TREATED AS TRANSFER IN RELATION TO A CAPITAL ASSET BUT SECTION 45(2) PROVI DES THAT CAPITAL GAIN/LOSS SHALL BE CALCULATED ON SUCH CONVERTED ASSET IN THE YEAR IN WHICH SUCH A SSET IS ACTUALLY SOLD. LN THIS CASE, UNDISPUTEDLY, THE APPELLANT CONVERTS ITS LAND INTO STOCK-IN-TRADE OF BUSINESS OF ITS REAL ESTATE IN THE YEAR 2010-11 AND SELLS SUCH LAND IN PART I.E . PROPORTIONATE TO NUMBER OF SALE OF FLATS/APARTMENTS IN THE YEAR 2015-16 THEN THOUGH CO NVERSION HAS TAKEN PLACE IN THE YEAR 2010-11 BUT CAPITAL GAIN/LOSS SHALL BE REALISED IN THE YEAR OF SALE IE. F.Y. 2015-16. 5.3.11. COST OF INDEXATION SHALL BE DONE TILL THE Y EAR OF CONVERSION: ALTHOUGH THE TRANSFER OF CAPITAL ASSET IN CASE OF I TS CONVERSION INTO STOCK IN TRADE, IS DEEMED TO HAVE TAKEN PLACE IN THE YEAR OF CONVERSIO N BUT THE CAPITAL GAIN/LOSS IS REALISED IN THE YEAR OF SALE OF SUCH ASSET. HENCE THE INDEXATIO N OF COST OF ACQUISITION AND IMPROVEMENT WILL BE DONE (IN CASE OF LONG TERM CAPITAL ASSET) B Y CONSIDERING THE C.I.I OF THE YEAR OF CONVERSION FROM ASSETS INTO STOCK IN TRADE. IN THE CASE IN HAND, THE C.I.I OF YEAR 2010-11 WILL BE CONSIDERED (SINCE IT'S THE YEAR OF CONVERSION) W HILE CALCULATING CAPITAL GAIN/LOSS IN THE YEAR 2015-16 PERTAINING TO A.Y. 2016-17. 5.3.12. F.M.V TO BE THE SALE CONSIDERATION IN CASE OF CONVERSION WHILE CALCULATING CAPITAL GAINS: AS PER ABOVE DISCUSSION TRANSFER OF CAPITAL ASSET I NTO STOCK IN TRADE IS TREATED AS TRANSFER IN RELATION TO CAPITAL ASSET AND CAPITAL G AIN/LOSS IS COMPUTED IN THE YEAR OF SALE OF SUCH ASSET. THE QUESTION ARISES IN MIND THAT IN SUC H CASE WHAT SHALL BE THE SALE CONSIDERATION WHICH IS TO BE USED WHILE CALCULATING CAPITAL GAIN/ LOSS. AS PER SECTION 45(2) THE SALE ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 10 - CONSIDERATION WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF SUCH ASSET AS EXISTING ON THE DATE OF CONVERSION. F.M.V. HAS BEEN DEFINED U/S 2(22B) A S PROVIDED ABOVE. 5.3.13. BUSINESS INCOME ALSO TO BE CALCULATED IN TH E YEAR OF SALE: AFTER THE CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE OF BUSINESS OF APPELLANT, WHERE THE FAIR MARKET VALUE ON THE DATE OF CONVERSI ON IS CONSIDERED AS FULL SALE CONSIDERATION OF SUCH CAPITAL ASSET FOR THE PURPOSE OF CAPITAL GA IN/LOSS COMPUTATION, SUCH FAIR MARKET VALUE IS CONSIDERED AS COST OF SUCH ASSET AS CONVERTED IN TO STOCK IN TRADE IN THE BOOKS OF ACCOUNTS AND AT THE TIME OF SALE OF SUCH STOCK IN TRADE THE SALE PRICE (AS REALIZED FROM SALE OF SUCH STOCK IN TRADE ASSET) WILL BE DEDUCTED FROM THE FAI R MARKET VALUE OF SUCH ASSET AS EXISTING ON THE DATE OF CONVERSION(SINCE IT'S THE COST PRICE OF STOCK IN TRADE) AND THE PROFIT ARISING THEREFROM, IF ANY SHALL BE TREATED AS INCOME UNDER THE HEAD BUSINESS AND PROFESSION. 5.3.14. SCHEMATIC DIAGRAM SHOWING METHODOLOGY HOW T O DERIVE LTCG AND BUSINESS INCOME OUT OF LAND TURNED INTO STOCK-IN-TRADE IS GIVEN BEL OW: FMV- FAIR MARKET VALUE OF LAND FMC- FAIR MARKET VALUE OF LAND AS ON DATE OF CONVER SION ICOA- INDEXED COST OF ACQUISITION COA- COST OF ACQUISITION COST(FMV)- COST FOR COMPUTING BUSINESS PROFIT. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 11 - 5.3.15. ON CAREFUL CONSIDERATION AND PERUSAL OF THE RATIO OF DECISION CIT V. RUDRA INDUSTRIAL COMMERCIAL CORPORATION, ITA NO. 3119/2005 ORDER DAT ED 25.01.2011, PASSED BY THE HON'BLE HIGH COURT, AND CITED BY THE ARS, I FIND IT IS FACT UALLY AND CONTEXTUALLY DIFFERENT FROM THE FACT INVOLVED IN THE PRESENT CASE AND THEREFORE, DISTING UISHABLE. IT WAS HELD THEREIN THAT WHAT IS RELEVANT IS THE HOLDING OF ASSETS AS INVESTMENT OR STOCK IN TRADE. FOR PROFIT MOTIVE, INTENTION IS IMPORTANT. IN THE CASE CITED BY THE APPELLANT, T HERE ARE TWO PARTIES. ONE PARTY IS THE FIRM AND ANOTHER PARTY IS THE DEVELOPER. FIRM HAD OWNERS HIP OF LAND. IT HAS SIGNED AN AGREEMENT WITH DEVELOPER ON THE CONDITION THAT DEVELOPER WOUL D HAND OVER SOME FLATS TO THE FIRM IN LIEU OF LAND. FIRM LATER SOLD THE PROPERTY AND DECLARED LTCG. ON THE OTHER HAND DEVELOPER SOLD REMAINING PROPERTIES AND DECLARED BUSINESS PROFIT. FIRM CLAIMED INDEXATION ON COST OF ACQUISITION TILL DATE OF ACTUAL SALE OF FLATS IN HI S SHARE. THE HON'BLE HIGH COURT HELD FIRM'S ACTION VALID SO FAR AS LTCG IS CONCERNED ON THE REA SONING THAT THAT FIRM WAS NEVER INVOLVED IN DEVELOPMENT ACTIVITIES AND ITS MAIN CLAUSE IS NO T TO BUILD FLATS. LAND REMAINED AN INVESTMENT IN FIRM'S HAND. WHEN IT WAS SOLD THE LTC G WAS LEVIABLE GIVING BENEFIT OF INDEXATION UPTO THE DATE OF SALE. SIMILARLY, DEVELO PER DECLARED BUSINESS PROFIT TAKING FMV AS ON DATE OF CONVERSION OF PLOT AND EXPENSES INCURRED IN DEVELOPING FLATS/APARTMENTS. HERE IN THE CASE IN HAND, THE DISPUTE IS ABOUT INDEXATION O F COST OF ACQUISITION OF LAND. SENIOR AR SHRI UMESH GALA VEHEMENTLY ARGUED THAT RULING OF THE HON 'BLE KARNATKA HIGH COURT IS SQUARELY APPLICABLE IN THE CASE OF APPELLANT. HOWEVER, I AM NOT ALL CONVINCED FOR MORE THAN ONE REASON AS UNDER: (I) IN THIS CASE, OWNERSHIP OF LAND IS WITH THE APPELLANT COMPANY AS ALSO REFLECTED IN AUDITED BALANCE SHEET AS AT 31.03.2010 AND TILL DAT E. AR AGREED THIS FACTS AS WELL. WHEREAS CASE REFERRED BY THE AR, OWNERSHIP OF LAND WAS HELD WITH THE FIRM. (II) IN THIS CASE, LAND IS DEVELOPED BY PASSING BO ARD RESOLUTION BY DECIDING THAT LAND BE CONVERTED INTO STOCK IN TRADE W.E.F. F.Y. 2010-11. CASE REFERRED BY AR SUGGESTS LAND WAS DEVELOPED BY THIRD PARTY I.E. M/S RUDRA INDISTR ICAL COMMERCIAL CORPORATION LTD. ONLY THING IS COMMON IS THAT APPELLANT COMPANY AND ALSO CASE UNDER REFERENCE BY AR HAS OPTED TO SHOW LTCG AND BUSINESS PROFIT IN THEIR INDIVIDUAL ITR. SINCE FIRM WAS NEVER INVOLVED IN DEVELOPMENT WORK HENCE IT DISCLOSED LTC G WHEREAS M/S. RUDRA CORPORATION DECLARED BUSINESS INCOME. WITH THESE DISCUSSION, AR AGREED THAT CASE RELIED UPON BY THE AR IS ON DIFFERENT SET OF FACTS AND HENCE NOT APPLICAB LE HERE. 5.3.16. IN MY CONSIDERED VIEW, INDEXATION BENEFIT S HALL BE APPLICABLE ONLY TO DATE TO CONVERSION AND NOT THE DATE OF ACTUAL SALE. IN THIS REGARD, I MUST TAKE GUIDANCE OF THE RULINGS OF THE HON'BLE MADRAS HIGH COURT PRONOUNCED ON 18.0 4.2017 IN CASE OF THE COMMISSIONER OF INCOME TAX VS M/S. ESSORPE HOLDINGS PVT LTD WHEREIN REVENUE FILED APPEAL SETTING INTO FOLLOWING QUESTION OF LAW: 1. WHETHER ON THE FACTS OF THE CASE, THE APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE LAND WAS TO BE TREATED AS CAPITAL ASSET UPTO CONVER SION OF IT INTO STOCK IN TRADE AND LIABLE FOR CAPITAL GAIN U/S 45(2) AND WHEN THE ASSE SSEE ACTUALLY SOLD THE LAND THE SAME IS TO BE ASSESSED AS BUSINESS LNCOME_ FOR THE ASSESSMENT YEAR 2011-12? ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 12 - 2. WHETHER ON THE FACTS OF THE CASE, THE APPELLATE TRIBUNAL WAS RIGHT WITHOUT CONSIDERING THE CHARACTER OF LAND WHICH WAS QUALIFI ED 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 ? IN THIS CASE ASSESSEE TAKING SHELTER OF SECTION 45( 2), CLAIMED THAT LTCG ON SALE OF INVESTMENT WHEN CONVERTED INTO STOCK IN TRADE IS PO STPONED TILL THE ASSET IS ACTUALLY SOLD BY THE TRANSFEREE COMPANY. THE COMMISSIONER OF INCO ME TAX (APPEALS) HAS REJECTED THE APPEAL FOR THE REASON THAT PLEA OF THE ASSESSEE THA T THE LAND BEFORE DEMERGER, WAS CONVERTED INTO STOCK IN TRADE BY EML AND SO THE CAP ITAL GAINS AS ACCRUED UNDER SECTION 45(2), AS ON THE DATE OF CONVERSION, HAS TO BE ACTU ALLY CHARGED AT THE TIME OF ACTUAL SALE OF THE LAND, DESERVES NO MERIT. THE ASSESSEE COMPAN Y, IS A NEW COMPANY FORMED ON THE BASIS OF DEMERGER, AS APPROVED BY THIS COURT AND HE NCE THE PROVISIONS UNDER SECTION 45(2) OF THE INCOME TAX ACT, 1961, ARE NOT APPLICAB LE TO THE SALE OF LAND MADE BY THE ASSESSEE. BY AN ORDER DATED 23.12.2014, THE COMMISS IONER DISMISSED THE APPEAL. 6. AGGRIEVED BY THE ORDER OF THE COMMISSIONER, AN APPE AL WAS FILED BY THE ASSESSEE COMPANY, BEFORE THE INCOME TAX APPELLATE TRIBUNAL, WITH A PRAYER TO TREAT THE ENTIRE SALE CONSIDERATION AS CAPITAL GAINS, INSTEAD OF TRE ATING AS BUSINESS PROFIT, ON THE FOLLOWING AMONG OTHER GROUNDS. FACTS OF THE CASE: THERE ARE TWO COMPANIES - ESSORPE MILLS LTD (EM L) AND ESSORPE HOLDINGS PVT. LTD. (EHPL) (ASSESSEE IN THE SAID CASE). THE SEQUENCE OF EVENTS IS SUMMARIZED AS UNDER: DATE RELEVANT AY EVENT EML IS OWNER OF 10.150 ACRES OF LAND HELD BY IT AS CAPITAL ASSET 28/12/2007 2008 - 09 CONVERSION OF LAND HELD AS CAPITAL ASSET INTO STOCK IN TRADE BY EML 25/02/2008 2008 - 09 MOU ENTERED FOR SALE OF 10.150 ACRES OF LAND FOR IN R 41 CRORES . LATER, ON 28/04/2010, CONSIDERATION WAS FIXED AT INR 35.25 CRORES BY WAY OF SUPPLEMENTARY MOU. 05/01/2009 2009 - 10 SALE OF PART LAND (5.075 ACRES) FOR INR 20.25 CRORE S BY EML 28/07/2009 2010 - 11 DEMERGER OF REAL ESTATE BUSINESS OF EML INTO EHPL WITH EFFECTIVE DATE 01/01/2009 ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 13 - 01/04/2010 2011 - 12 CONVERSION OF LAND HELD AS STOCK IN TRADE TO CAPITA L ASSET BY WAY OF BOARD RESOLUTION BY EHPL. THIS BOARD RESOLUT ION RECONVERTING STOCK IN TRADE TO CAPITAL ASSET IS DIS REGARDED BY THE ASSESSING OFFICER AS WELL AS THE APPELLATE A UTHORITIES. 22/11/2010 2011 - 12 SALE OF BALANCE 5.075 ACRES OF LAND FOR INR 15 CROR ES BY EHPL EHPL (ASSESSEE IN THE SAID CASE), IN THE AY 201 1-12, OFFERED ENTIRE GAIN FROM SALE OF LAND AS CAPITAL GAINS AND CLAIMED SET OFF OF OTHER CAPIT AL LOSSES AGAINST THE SAME. ASSESSING OFFICER'S CONTENTION: THE AO HELD THAT LAND TRANSFERRED WAS ALWAYS HEL D AS STOCK IN TRADE BY EML AND EHPL DUE TO CONVERSION INTO STOCK IN TRADE W.E.F. 28/12/2007 . FURTHER, THE ASSESSING OFFICER ALSO DISREGARDED THE BOARD RESOLUTION RECONVERTING THE S TOCK IN TRADE INTO CAPITAL ASSET BY EHPL. ACCORDINGLY, THE ASSESSING OFFICER TAXED ENTIRE PRO FIT AS BUSINESS INCOME (REFER PARA 3 OF THE ORDER). CIT(A): CIT(A) HELD THAT SINCE LAND WAS NOT HELD BY EHP L AT THE TIME OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE, BENEFIT OF SECTION 45(2) O F THE ACT COULD NOT BE GRANTED TO EHPL AND ACCORDINGLY UPHELD THE ORDER OF THE ASSESSING OFFIC ER (REFER PARA 5 OF THE ORDER). ITAT: ON FURTHER, APPEAL, TRIBUNAL HELD THAT SALE CON SIDERATION UP TO DATE OF CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE SHOULD BE TAXED U NDER HEAD CAPITAL GAINS. TRIBUNAL RELIED ON ITS EARLIER ORDER IN CASE OF EML FOR AY 2009-10. EML HAS SOLD THE PART LAND (5.075 ACRES) IN AY 2009-10 AND THE ASSESSING OFFICER HAS TAXED ENTIRE GAIN AS BUSINESS INCOME. THE MATTER HA S TRAVELLED TILL TRIBUNAL AND IT WAS HELD THAT GAIN ON TRANSFER OF LAND UP TO THE DATE OF CON VERSION INTO STOCK IN TRADE MUST BE ASSESSED AS CAPITAL GAINS AND BALANCE TO BE ASSESSE D AS BUSINESS INCOME IN ACCORDANCE WITH SECTION 45(2) OF THE ACT. HIGH COURT: ASSESSEE ADVANCE ARGUMENT FOR TAXING ENTIRE GAINS A S CAPITAL GAINS. REVENUE RELIED ON ORDER OF CIT(A). HON'BLE HIGH COURT AFTER GOING THROUGH T HE FACT OF THE CASE UPHELD THE ORDER OF TRIBUNAL FOR FOLLOWING REASONS (REFER PARA 22 AND 2 4 OF THE ORDER): SECTION 45(2) OF THE ACT POSTPONES THE CHARGE O F CAPITAL GAINS TAX IN CASE OF CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE. IT DOES NOT RECO NVERT STOCK IN TRADE TO CAPITAL ASSET. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 14 - CONSIDERATION FROM SALE OF SUCH STOCK IN TRADE WILL BE ASSESSED AS BUSINESS INCOME ONLY. HOWEVER, FAIR MARKET VALUE AS ON DATE OF CONVERSION MUST BE CONSIDERED AS COST IN COMPUTING THE BUSINESS INCOME. DEMERGER IS NOT A TRANSFER UNDER SECTION 2(47) OF THE ACT AND HENCE, CAPITAL GAINS SHALL BE CHARGED ONLY WHEN SUCH LAND IS SOLD BY THE RESUL TING COMPANY. TRIBUNAL IN ITS ORDER FOR AY 2009-10 HAS HELD T HAT GAIN ON TRANSFER OF LAND UP TO THE DATE OF CONVERSION INTO STOCK IN TRADE MUST BE ASSESSED AS CAPITAL GAINS AND BALANCE TO BE ASSESSED AS BUSINESS INCOME. SAME HAS ALSO BEEN ACC EPTED BY THE REVENUE. BASED ON ABOVE, HONBLE HIGH COURT PASSED A FIN AL ORDER STATING THAT CAPITAL GAIN IS TO BE COMPUTED UP TO THE DATE OF CONVERSION AND THEREAFTE R ON ACTUAL SALE OF LAND DIFFERENCE BETWEEN SALE CONSIDERATION AND FAIR MARKET VALUE AS ON DATE OF TRANSFER TO BE CONSIDERED AS BUSINESS INCOME. 5.3.17. THE ABOVE CASE LAW WAS REFERRED BY ME AND D ISCUSSED ON 26.08.2019 WITH AR AT LENGTH. ON 28.08.2019 AR FILED WRITTEN SUBMISSION A S UNDER: WE WOULD LIKE TO HIGHLIGHT TO YOUR HONOR THAT INDEX ATION BENEFIT WAS NOT THE SUBJECT MATTER OF LITIGATION IN THE GIVEN CASE. THERE IS NO DISCUSSION ON INDEXATION BENEFIT AND ALSO TILL -WHAT PERIOD OF TIME INDEXATION SHOUL D BE AVAILABLE IN THE AFOREMENTIONED DECISION. ACCORDINGLY, SAME IS NOT R ELEVANT FOR THE ISSUE UNDER CONSIDERATION. 5.3.18. FROM APPELLANT'S OWN SUBMISSION IT IS NOW C LEAR THAT LTCG HAS TO BE COMPUTED AS ON DATE OF CONVERSION I.E FY 2010-11. WITH THIS BACKGR OUND LET US CONSIDER THE FACTS IN THE PRESENT CASE. IN THE CASE BEFORE US, CONVERSION HAD TAKEN PLACE IN F.Y. 2010-11. AS NOTED ABOVE, CONVERSION IS A MODE OF TRANSFER UNDER THE A CT. THUS, IN THE F.Y. 2015-16, THE ASSET IN QUESTION NO LONGER REMAINED A CAPITAL ASSET. AS A CONSEQUENCE, WHAT WAS SOLD IN THAT YEARS UNDER CONSIDERATION WAS PART OF STOCK-IN-TRAD E AND NOT CAPITAL ASSET. IF WHAT WAS SOLD WAS NOT CAPITAL ASSET, ONE CANNOT GO BACK TO SECTIO N 2(47) TO ASCERTAIN WHETHER TRANSFER BY WAY OF SALE IS COMPLETE OR NOT. IN FACT, IN THE INS TANT CASE, THE ROLE OF SECTION 2(47) WAS RELEVANT ONLY IN 2010-11 WHEN CONVERSION TOOK PLACE . THEREAFTER, IT HAD NO ROLE TO PLAY AT ALL, BECAUSE IT IS MEANT FOR CAPITAL ASSET AND NOT STOCK -IN-TRADE. I HAVE MENTIONED EARLIER THAT CAPITAL ASSET DOES NOT INCLUDE STOCK-IN-TRADE. THUS , ALL THE ARGUMENTS CONNECTED WITH SECTION 2(47) MADE BY EITHER SIDE HAVE NO RELEVANCE AT ALL. IN OTHER WORDS, THE ARGUMENT OF THE AR THAT TRANSFER CAN BE EFFECTED ONLY WHEN CONVEYANCE IS EXECUTED, IS OF NO SIGNIFICANCE. THE ALTERNATE ARGUMENT THAT TRANSFER IS EFFECTIVE ONLY AFTER THE LAST FLAT IS SOLD, IN ALSO OF NO SIGNIFICANCE. 5.3.19. TRANSFER HAS ALREADY TAKEN PLACE IN 2010-11 . SECTION 45(2) MERELY FIXES THE YEAR OF LIABILITY. THE YEAR OF LIABILITY IS THE YEAR IN WHI CH STOCK-IN-TRADE IS SOLD, THE FACT THAT STOCK-IN- TRADE IS SOLD IN PARTS IN THE YEARS UNDER CONSIDERA TION CANNOT BE DISPUTED, BECAUSE THE REAL PROFIT THAT ARISES ON SALE OF STOCK-IN-TRADE IS BUS INESS PROFIT, WHICH THE ASSESSEE ITSELF HAS OFFERED FOR TAXATION. IF SALE OF STOCK-IN-TRADE IS NOT DENIED, THEN AS PER SECTION 45(2) WHICH ONLY FIXES THE YEAR OF LIABILITY, ASSESSEE CANNOT D ENY HIS TAX LIABILITY ON CAPITAL GAINS ALSO ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 15 - WHICH BY FICTION, HAD ALREADY ARISEN IN 1986. THE L EGISLATURE IN ITS WISDOM, CONSIDERING THE FACT THAT ON CONVERSION ONLY NOTIONAL INCOME HAS AR ISEN POSTPONED THE TAX LIABILITY THEREON TILL REAL INCOME WAS EARNED ON THAT ASSET. THE ASSESSEE CANNOT, IN OUR OPINION, FURTHER POSTPONE THE LIABILITY BEYOND THE POINT OF TIME CONTEMPLATED BY SECTION 45(2). IN SHORT, TAX LIABILITY ON THE CAPITAL GAIN ON CONVERSION WILL ARISE IN THE SA ME YEAR/S IN WHICH BUSINESS PROFIT ARISES TO THE ASSESSEE ON SALE OF SUCH ASSET. THE ASSET CANNO T HAVE DUAL CHARACTERISTIC AT THE SAME POINT OF TIME IN THE HANDS OF THE SAME PERSON, WHIC H VIEW THE ASSESSEE HAS SOUGHT TO CANVASS BEFORE US. THIS IS NOT CONTEMPLATED BY ANY OF THE PROVISIONS OF THE ACT AND HENCE CANNOT BE ACCEPTED. BY ASSESSEE'S OWN ACTION, THE A SSET HAD ASSUMED THE CHARACTERISTIC OF STOCK-IN-TRADE. HENCE, WHEN BUSINESS PROFIT ON SALE OF SUCH STOCK ACCRUES TO THE APPELLANT, TAX ON CAPITAL GAIN ALSO WILL BE LEVIED IN THE SAME YEAR AS IS ENVISAGED BY SECTION 45(2). IN SUCH AN EVENT, ALL THE ARGUMENTS RELATING TO CONVEY ANCE, POSSESSION, ETC. WHICH ARE GENERALLY RELATED TO TRANSFER OF CAPITAL ASSET, ARE RENDERED MEANINGLESS. 5.3.20. THE AR'S ATTENTION WAS DRAWN TOWARDS EXPRES S RULINGS BY THE HON'BLE MADRAS HIGH COURT WHICH IS DIRECTLY APPLICABLE IN THE CASE IN H AND. AR'S ATTENTION WAS DRAWN TOWARDS THE ORDER OF THE HON'BLE ITAT MADRAS IN CASE OF DCIT VS CREST HOTELS LTD., ITAT MADRAS DATED 28.02.2000. TO DRIVE HOME MY VIEW, I TOOK THE AR TO THE DECISION OF THE HON'BLE ITAT MUMBAI IN CASE OF [2019] 102 TAXMANN.COM 187 MUMBAI - TRIB.) PURAN RATILAL MEHTA (SUPRA) DATED 05.12.2018 WHEREIN IT IS HELD AS UNDER: SECTION 45 OF THE INCOME-TAX ACT, 1961 - CAPITAL GA INS - CHARGEABLE AS (SUBSECTION (2)) -ASSESSMENT YEARS 2001-02 TO 2008-09 - ASSESSE E OWNED CERTAIN LEASEHOLD RIGHTS IN LAND -SUBSEQUENTLY, ASSESSEE DECIDED TO D EVELOP SAID LAND INTO A RESIDENTIAL PROJECT AND THUS HE CONVERTED LAND INTO STOCK-IN-TR ADE -ASSESSEE APPLIED FOR PERMISSION FROM LOCAL AUTHORITY FOR PLAN SANCTION I N YEAR 1994 -LOCAL AUTHORITY GAVE PERMISSION FOR CONSTRUCTION OF PROJECT IN YEAR 1998 - THEREUPON, ASSESSEE ENTERED INTO DEVELOPMENT AGRE EMENT WITH 'B' DEVELOPERS - SINCE CONSTRUCTION OF PROJECT WAS COMPLETED IN AS SESSMENT YEAR 2008-09, CAPITAL GAIN ARISING THEREFROM WAS OFFERED TO TAX I N SAID YEAR -ASSESSING OFFICER TOOK A VIEW THAT DATE ON WHICH ASSESSEE HAD FILED HIS AP PLICATION TO LOCAL AUTHORITY WAS TO BE TAKEN AS DATE OF CONVERSION OF CAPITAL ASSET INT O STOCK-IN-TRADE WITHIN MEANING OF SECTION 45(2) - WHETHER FOR PURPOSE OF SECTION 45(2 ), DATE OF CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE HAS TO BE DETERMINED EITH ER ON BASIS OF ENTRY PASSED IN BOOKS OF ACCOUNT OF ASSESSEE OR INTENTION OF ASSESS EE TO EXPLOIT CAPITAL ASSET AS STOCK-IN-TRADE FOR ITS BUSINESS PURPOSE - HELD, YES - WHETHER SINCE ASSESSEE HAD FILED AN APPLICATION BEFORE LOCAL AUTHORITY IN YEAR 1994 SEEKING PERMISSION FOR DEVELOPMENT OF LAND, ASSESSING OFFICER WAS RIGHT IN COMING TO CONCLUSION THAT CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE SAI D TO HAVE BEEN TAKEN PLACE IN SAID YEAR ITSELF- HELD, YES -WHETHER SO FAR AS YEAR OF T AXABILITY OF CAPITAL GAIN WAS CONCERNED, SINCE PROJECT WAS COMPLETED IN ALL RESPE CTS IN ASSESSMENT YEAR 2008-09 AND THEREUPON REVENUE FROM SAID PROJECT HAD BEEN RE COGNISED, CAPITAL GAIN WAS PAYABLE IN ASSESSMENT YEAR 2008-09 - HELD, YES [PAR AS 13 AND 15] [PARTLY IN FAVOUR OF ASSESSEE]. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 16 - 8.1. AFTER HAVING GONE THROUGH THE FACTS OF THE PRE SENT CASE AS WELL AS THE ORDERS PASSED BY THE REVENUE AUTHORITIES, WE NOTICE FROM THE RECORDS THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. THE LAND WAS CONVERTED INTO STOCK-IN-TRADE BY THE ASSESSEE I N FY 2010-11. THE INCOME FROM THE SAID REAL ESTATE DEVELOPMENT PROJEC T WAS BEING OFFERED TO TAX ON THE BASIS OF PERCENTAGE COMPLETION METHOD. THE CAPITAL GAINS ON CONVERSION OF CAPITAL ASSET, BEING LAND UNDERLINING THE FLATS, INTO STOCK-IN- TRADE WAS OFFERED FOR TAXATION IN THE YEAR IN WHICH POSSESSION OF THE FLATS WAS HANDED OVER IN TERMS OF SECTION 45(2) OF THE ACT. 8.2. AS PER LD.AR, THE ASSESSEE CALCULATED THE CAPI TAL GAINS ON CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE IN THE YEAR OF SALE OF STOCK-IN-TRADE BY CONSIDERING:- (I) FAIR MARKET VALUE OF LAND AS ON THE DATE OF CO NVERSION AS FULL VALUE CONSIDERATION, (II) FAIR MARKET VALUE OF SUCH LAND AS ON 01/04/19 81 AS COST OF ACQUISITION (III) INDEX COST OF ACQUISITION CALCULATED BY TAK ING INDEXATION TILL THE YEAR OF SALE OF STOCK-IN-TRADE. 8.3. HOWEVER, THE REVENUE AUTHORITIES RESTRICTED TH E INDEXATION BENEFIT TILL THE YEAR OF CONVERSION OF CAPITAL ASSET INTO STOCK- IN-TRADE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 17 - 8.4. AFTER APPRECIATING THE PROVISIONS CONTAINED IN THE INCOME TAX ACT, WE NOTICE THAT FINANCE ACT, 1984, AMENDED SECTION 2(47 ) OF THE ACT TO DEEM TO INCLUDE CONVERSION OF CAPITAL ASSET TO STOCK-IN-TRA DE AS TRANSFER AND INSERTED SUB-CLAUSE(2) U/S.45 OF THE ACT TO CHARGE CAPITAL G AINS TAX, IN CASE OF CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE. ACCORDINGLY, WHILE SECTION 2(47) OF THE ACT, DEEMED TO CONVERSION OF CAPITAL A SSET INTO STOCK-IN-TRADE AS TRANSFER, SECTION 45 SUB-CLAUSE (2) OF THE ACT PO STPONED THE CHARGE OF CAPITAL GAINS TO THE YEAR OF TRANSFER IN NORMAL S ENSE, I.E. SALE OF S STOCK-IN- TRADE, INSTEAD OF THE YEAR OF SUCH DEEMED TRANSFER . THUS, ACCORDINGLY ALL INCIDENTS OF CAPITAL GAINS TAXATIONS WOULD BE DETER MINED BASED ON PROVISIONS APPLICABLE FOR THE YEAR OF TRANSFER OF STOCK-IN-T RADE WHICH INCLUDES (I) THE MINIMUM PERIOD FOR DETERMINING LONG TERM C APITAL ASSETS OR SHORT TERM CAPITAL ASSETS. (II) AVAILABILITY OF EXEMPTION PROVISIONS (III) CLAIM OF ROLL OVER BENEFIT (IV) RATE OF CAPITAL GAIN TAX. THEREFORE, IF ALL THE ABOVE PROVISIONS FOR CHARGE O F CAPITAL GAINS APPLY ON THE BASIS OF THE LAW AND PROVISIONS APPLICABLE IN THE Y EAR IN WHICH THE STOCK-IN- TRADE IS SOLD, THEN IT IS NOT JUSTIFIABLE TO SUBSTI TUTE THE PERIOD OF INDEXATION TILL THE DATE OF CONVERSION OF THE ASSET INTO STOCK-IN-T RADE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 18 - WE HAVE ALSO TAKE NOTE OF THE LANGUAGE OF SECTION 4 5(2) OF THE ACT. THIS SECTION BY WAY OF DEEMING FICTION PROVIDES FOR CONS IDERING FAIR MARKET VALUE AS ON DATE OF CONVERSION AS FULL VALUE OF CONSIDERA TION FOR COMPUTING CAPITAL GAINS. IN CASE, THE INTENTION OF THE LEGISLATURE W AS TO RESTRICT INDEXATION TO THE DATE OF CONVERSION OF CAPITAL ASSET INTO STOCK- IN-TRADE, THEN IN THAT EVENTUALITY, IT WOULD HAVE BEEN SPECIFICALLY PROVID ED FOR. THE DEEMING FICTION U/S.45(2) OF THE ACT IS FOR LIMITED PURPOSE AND IS APPLICABLE ONLY FOR DETERMINING THE FULL VALUE CONSIDERATION FOR COMP UTATION OF CAPITAL GAINS. WE ARE ALSO OF THE VIEW THAT INDEXATION IS ALLOWED TO COMPENSATE THE ASSESSEE FOR RISE IN COST DUE TO INFLATION TILL THE DATE WHEN CONSIDERATION IS RECEIVED BY THE ASSESSEE. THUS, IN THIS WAY, THE A SSESSEE SHOULD BE COMPENSATED TILL THE DATE, THE ASSET IS ACTUALLY SO LD AND ASSESSEE GETS RIGHT TO RECEIVE THE CONSIDERATION FOR THE SAME. FURTHER, A S PER CBDT CIRCULAR NO.636 DATED 31/08/1992, A FAIR METHOD OF ALLOWING RELIE F BY WAY OF INDEXATION IS TO LINK IT TO THE PERIOD FOR WHICH ASSET IS HELD. IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK-IN-TRADE, ASSET IS HELD TILL IT IS U LTIMATELY SOLD. THEREFORE, INDEXATION BENEFIT BE ALLOWED TILL THE YEAR OF SAL E OF STOCK-IN-TRADE. WE ALSO GOT SUPPORT FROM THE DECISION OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. NAGA HILLS TEA CO.LTD. REPORTED IN (1973) 89 ITR 236 (SC) , WHEREIN IT HAS BEEN HELD THAT IF A PROVISION OF A TAXING STATUTE CAN BE REASONABLY INTERPRETED IN TWO WAYS, THAT INTERPRETA TION WHICH IS FAVOURABLE TO THE ASSESSEE, HAS GOT TO BE ACCEPTED. THIS IS A WE LL ACCEPTED VIEW OF LAW. EVEN OTHERWISE, WE FOUND THE RELIANCE WAS PLACED BY LD.AR ON THE DECISIONS IN THE CASE OF CIT VS. RUDRA INDUSTRIAL COMMERCIAL CORPORATION (2012) 20 TAXMANN.COM 611 (KARNATAKA) AND DECISION OF ITAT ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 19 - KOLKATA IN THE CASE OF THE HOOGHLY FLOUR MILLS CO.L TD. VS. DCIT IN ITA NO.615/KOL/2011 FOR AY 2007-08, DATED 04/05/201 2 , WHEREIN IT WAS HELD THAT THE COST INFLATION INDEX FOR CALCULAT ING THE INDEX COST OF ACQUISITION, IS TO BE TAKEN AS THAT OF THE YEAR OF TRANSFER OF THE ASSET AND NOT THE YEAR OF CONVERSION. IN THE CASE OF CIT VS. RUDRA INDUSTRIAL COMMERCIAL CORPORATION (2012) 20 TAXMANN.COM 611 (KARNATAKA) HELD AS UNDER: HELD THAT IN ORDER TO COMPUTE THE CAPITAL GAINS PA YABLE, IT IS THE MARKET VALUE ON THE DATE OF TRANSFER THAT IS RELEVANT AND IN ARRIVING AT THAT MARKET VALUE, THE INDEX COST OF ACQUISITION AS PRESCRIBED ON THE DATE OF TRANSFER IS TO BE TAKEN INTO CONSIDERATION AND NOT THE DATE OF CON VERSION. THEREFORE, THE ASSESSING OFFICER COMMITTED A SERIOUS ERROR IN TAKI NG THE INDEX COST OF ACQUISITION ON THE DATE OF CONVERSION AS THE INDEX. .. 9. THE MATERIAL ON RECORD DISCLOSES THAT THE APPELLANT A PARTNERSHIP FIRM, WHICH OWNED IMMOVABLE PROPERLY, CONVERTED THE SAME INTO STOCK-IN-TRADE IN THE YEAR 1987-88. THEY ENTERED INTO AN AGREEMENT DT . 16TH MARCH, 1988 WITH M/S UNITECH LTD. UNDER WHICH THE SAID COMPANY WAS E XPECTED TO DEVELOP THE PROPERTY, CONSTRUCT FLATS AND GIVE TO THE ASSESSEE THEIR SHARE IN THE CONSTRUCTED BUILDING. THE ASSESSEE IS ASSESSED TO I NCOME-TAX REGULARLY. IN THE YEAR 1988-89 WHEN THIS AGREEMENT WAS ENTERED INTO, THE REVENUE DID NOT TREAT IT AS A TRANSFER AND CALLED UPON THE ASSESSEE TO PAY TAX. HOWEVER, THE CLAIM FOR CAPITAL GAINS IS MADE ONLY WHEN THE ASSES SEE EXECUTED REGISTERED SALE DEEDS IN FAVOUR OF THE PURCHASER OF THE FLATS IN THE FINANCIAL YEAR 1992- 93. AT THAT STAGE, FOR THE PURPOSE OF CALCULATING C APITAL GAINS INSTEAD OF TAKING THE COST INFLATION INDEX, THEY TOOK THE INDEX AS PR EVAILING IN 1988, THE DATE ON WHICH THE IMMOVABLE PROPERTY WAS CONVERTED INTO STO CK-IN-TRADE AND CONSEQUENTLY ENTERED INTO CONTRACT FOR DEVELOPMENT OF THE PROPERTY. IN THIS REGARD, THE QUESTION THAT ARISES FOR CONSIDERATION IS, WHICH IS THE RELEVANT ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 20 - DATE TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF ASSESSING THE CAPITAL GAINS. 10. SEC. 45(2) WHICH IS RELEVANT READS AS UNDER : '45. CAPITAL GAINS.(1) . (2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-S. (1 ) THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY T HE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRA DE 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 S. 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREA TMENT SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET.' 11. EXPLANATION (III) TO S. 48 DEFINES INDEXED COST OF ACQUISITION WHICH MEANS AN AMOUNT WHICH BEARS TO THE COST OF ACQUISITION TH E SAME PROPORTION AS COST INFLATION INDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRED BEARS TO THE COST INFLATION INDEX FOR THE FIRST YEAR IN WHICH THE ASS ET WAS HELD BY THE ASSESSEE OR FOR THE YEAR BEGINNING ON THE 1ST DAY OF APRIL, 1981, WHICHEVER IS LATER. 12. A HARMONIOUS INTERPRETATION OF THESE TWO PROVISIONS MAKES IT CLEAR AS TO HOW THE CAPITAL GAINS IS TO BE TAKEN INTO CONSIDERA TION. FIRST WE HAVE TO FIND OUT WHAT IS THE FAIR MARKET VALUE OF THE ASSET ON T HE DATE OF CONVERSION, THEN TO FIND OUT WHAT IS THE MARKET VALUE OF THE PROPERT Y ON THE DATE OF TRANSFER, SO, IN ORDER TO COMPUTE THE CAPITAL GAINS PAYABLE, IT IS THE MARKET VALUE ON THE DATE OF TRANSFER THAT IS RELEVANT AND IN ARRIVI NG AT THAT MARKET VALUE THE INDEX COST OF ACQUISITION AS PRESCRIBED ON THE DATE OF TRANSFER IS TO BE TAKEN INTO CONSIDERATION AND NOT THE DATE OF CONVERSION. IN THE INSTANT CASE, THE INDEX COST OF ACQUISITION WAS 223 ON THE DATE OF TR ANSFER IN THE YEAR ENDING 1993 AND THE INDEX COST OF ACQUISITION ON THE DATE OF CONVERSION IS 161. THEREFORE, THE AO COMMITTED A SERIOUS ERROR IN TAKI NG 161 AS THE INDEX. THE APPELLATE AUTHORITIES HAVE RIGHTLY INTERFERED WITH THE SAID ASSESSMENT AND HAVE TAKEN 223 AS CORRECT INDEX COST OF ACQUISITION . THEREFORE, WHEN THE IMPUGNED ORDER PASSED BY THE APPELLATE AUTHORITIES IS IN ACCORDANCE WITH THE AFORESAID STATUTORY PROVISIONS, THE SAID SUBSTANTIA L QUESTIONS OF LAW HAVE TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST T HE REVENUE. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 21 - IN THE CASE OF ITAT KOLKATA IN THE CASE OF THE HOOGHLY FLOUR MILLS CO.LTD. VS. DCIT IN ITA NO.615/KOL/2011 FOR AY 2007 -08 , DATED 04/05/2012, HELD AS UNDER: 4. AT THE TIME OF HEARING BEFORE US, THE ID. COUNS EL APPEARING ON BEHALF OF ASSESSEE HAS REITERATED THE SUBMISSIONS MADE BEFORE THE REVE NUE AUTHORITIES THAT THE ASSESSEE HAS SUBMITTED CONVERTED FIXED ASSETS INTO STOCK IN TRADE DURING THE FINANCIAL YEAR 2002-2003 AND FILED ITS RETURN OF IN COME CONSIDERING THE PROVISIONS OF SECTION 45(2) WHICH THE ASSESSING OFFICER HAS ACCEP TED BUT HAS ALLOWED THE BENEFIT OF COST INFLATION INDEX OF F.Y. 2002-2003 (I.E. THE YEAR OF CONVERSION OF FIXED ASSETS INTO STOCK) INSTEAD OF THE COST INFLATION INDEX OF F.Y. 2006-07 (I.E. THE YEAR OF SALE). ASSESSEE SUBMITTED THAT ASSESSING OFFICER HA S NOT CITED ANY PROVISION OF INCOME TAX ACT OR ANY JUDICIAL DECISION IN F RESPEC T OF SUCH A TREATMENT. ASSESSEE SUBMITTED THAT IF THE INCOME PERTAINS TO A.Y. 2007- 08 THEN ALL PROVISIONS RELATING TO A.Y. 2007-08 SHALL APPLY AND ACCORDINGLY THE COST I NFLATION INDEX OF FINANCIAL YEAR 2006-2007 AND NOT THAT OF FINANCIAL YEAR 2002-2003 SHOULD HAVE BEEN APPLIED BY THE ASSESSING OFFICER. THE ID. AR FOR ASSESSEE FUR THER SUBMITTED THAT IT IS NOT MENTIONED IN SECTION 45(2) OR OTHERWISE IN INCOME T AX ACT THAT COST INFLATION INDEX OF THE YEAR OF CONVERSION SHOULD BE CONSIDERED. IN THE APPEAL OF ASSESSMENT YEAR 2004-05 THE MATTER OF YEAR OF TAXABILITY OF CAPITAL GAIN ON CONVERSION OF LAND TO STOCK IN TRADE WAS DECIDED AND IT WAS NOT REQUIRED TO BE DECIDED IN THAT APPEAL AS WHICH YEAR SHOULD BE CONSIDERED FOR COST INFLATION INDEX. THE COPY OF ORDER OF H'BLE ITAT FOR ASSESSMENT YEAR 2004-05 IN APPEAL NO 106/K OL/2009 CONFIRMING THE ORDER OF CIT(A) AND HOLDING THAT IN CASE OF CONVERSION OF LAND INTO STOCK IN TRADE THE CORRESPONDING CAPITAL GAIN ARISING U/S 45(2) WILL B E TAXABLE IN THE YEAR OF ACTUAL RECEIPT OF SALE CONSIDERATION FOR SUCH LAND AND NOT IN THE YEAR IN WHICH DEVELOPMENT AGREEMENT WAS MADE. IN VIEW OF THESE SUBMISSIONS, H E SUBMITTED THAT THE REVENUE IS NOT JUSTIFIED TO CALCULATE THE LONG TERM CAPITAL GAIN BASED ON THE COST INFLATION INDEX APPLICABLE FOR A.YR.2007-08. THEREFORE HE REQ UESTED TO SET ASIDE THE ORDERS OF THE REVENUE AUTHORITIES AND DIRECT AO TO ADOPT THE COST OF INFLATION INDEX FOR A.YR.2007-08. 5. ON THE OTHER HAND, THE ID. DR APPEARING ON BEHAL F OF THE REVENUE RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 6. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CAREF UL PERUSAL OF MATERIALS AVAILABLE ON RECORD, IT IS OBSERVED THAT THE CASE LAWS RELIED BY LD. CIT(A) IN THE CASE OF ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 22 - SPLENDOR CONSTRUCTIONS (P)LTD VS ITO 122 TTJ 34 ARE NOT APPLICABLE IN THE FACTS OF THE CASE BECAUSE OF THE REASON THAT THE FACTS IN TH E CASE OF SPLENDOR CONSTRUCTIONS (P)LTD (SUPRA) ARE THAT RELATING TO THE ASCERTAINME NT OF CAPITAL GAINS EITHER SHORT TERM OR LONG TERM ARE NOT AT ALL RELATING THE COST OF INDEXATION. WHEREAS IN THIS CASE THE FACTS ARE NOT SIMILAR TO THAT OF THE ABOVE . IN OUR CONSIDERED OPINION, WHEN ONCE THE REVENUE HAS COMPUTED THE LONG TERM CAPITAL GAIN BASED ON THE SALE DEED WHICH WAS EXECUTED IN THE FINANCIAL YEAR 2006-07 RE LEVANT TO ASSESSMENT YEAR 2007- 08 THE COST OF INDEXATION TO BE APPLIED IS THE ONE WHICH IS APPLICABLE TO ASSESSMENT YEAR 2007-08. IN THE SIMILAR SET OF FACTS AND CIRCU MSTANCES THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT AND ANOTHER VS RUDRA INDUSTRIAL COMMERCIAL CORPORATION (2011) 244 CTR (KAR) 304 HAS HELD AS UN DER :- ' CAPITAL GAINS--COMPUTATION--RELEVANT DATE FOR APP LYING COST INFLATION INDEX- - ASSESSEE-FIRM WHICH OWNED AN IMMOVABLE PROPERTY, CONVERTED THE SAME INTO STOCK-IN- TRADE IN THE YEAR 1987-88 AND ENTERE D INTO AN AGREEMENT WITH A COMPANY TO DEVELOP THE PROPERTY AND CONSTRUCT FLA TS THEREON--AT THAT STAGE REVENUE DID NOT TREAT THE SAID ARRANGEMENT AS A TRA NSFER--CAPITAL GAIN WAS COMPUTED ONLY WHEN THE ASSESSEE EXECUTED REGISTERED SALE DEEDS IN FAVOUR OF THE PURCHASERS OF FLATS IN THE FINANCIAL YEAR 19 92-93--IT IS THE MARKET VALUE ON THE DATE OF TRANSFER THAT IS RELEVANT FOR COMPUT ATION OF CAPITAL GAINS, AND FOR ARRIVING AT THAT MARKET VALUE THE PRESCRIBED CO ST INFLATION INDEX RELEVANT TO THE DATE OF TRANSFER IS TO BE TAKEN INTO ACCOUNT AND NOT THAT ON THE DATE OF CONVERSION--THEREFORE, AO COMMITTED ERROR IN TAKING THE COST INFLATION INDEX OF 1987- 88 INSTEAD OF COST INFLATION INDEX APPLICA BLE TO THE FINANCIAL YEAR 1992-93.' 6.1. IN OUR CONSIDERED OPINION THE FACTS OF THE PRE SENT CASE ARE AKIN TO THAT OF THE ONE DECIDED BY HON'BLE KARNATAKA HIGH COURT. THEREF ORE BY PLACING RELIANCE ON HIGH COURT'S DECISION WE SET ASIDE THE ORDERS OF THE REV ENUE AUTHORITIES AND DIRECT AO TO COMPUTE THE CAPITAL GAINS AFTER GIVING THE COST INF LATION INDEX APPLICABLE FOR THE FINANCIAL YEAR 2006-07. THEREFORE GROUND NO1 RAISED BY ASSESSEE IN THIS APPEAL IS ALLOWED. 9. WE HAVE ALSO CONSIDERED THE DECISIONS RELIED UPON BY THE LD.DR IN THE CASE OF CIT VS. BAI SHIRINBAI K. KOOKA (1962) 46 ITR 86 (SC ), SPLENDOR CONSTRUCTION (P) LTD. VS. ITO (2009) 27 SO T 39 (DELHI) & TEJ PRATAPSINGH VS. ACIT (2010) 127 ITD 303 (DELHI) . HOWEVER, THE ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 23 - PARA MATERIA CONTAINED IN THE ABOVE CITED CASES ARE DIFFERENT FR OM THE FACTS OF THE PRESENT CASE AND, THEREFORE, NOT APPLICABLE. IN THE ABOVE CASES, THE ISSUE WAS WITH REGARD TO THE YEAR OF TAXABILITY, WH ETHER SHORT-TERM CAPITAL GAIN OR LONG-TERM CAPITAL GAIN AND ARE NOT RELATING TO THE COST OF INDEXATION. THIS FACT ALSO FOUND MENTION IN THE DECISION RELIED UPON BY THE ASSESSEE IN THE CASE OF THE HOOGHLY FLOUR MILLS CO.LTD. VS. DCIT IN ITA NO.615/KOL/2011 FOR AY 2007-08 (SUPRA), WHEREIN THE CASES RELIED UPON BY THE ASSESSEE HAVE ALREADY BEEN DISTINGUISHED. T HUS, WE FOUND THE SAME ARE NOT APPLICABLE T THE FACTS OF THE PRESENT CASE. IN THIS RESPECT, WE ALSO FOUND SUPPORT FROM THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HASMUKHBHAI KARAMSINHBHAI GAMBHAVA VS. STATE OF GUJ ARAT, 2015 SCC ONLINE GUJ 2391 : (2016) 1 GLH 406 WHEREIN IT HAS BEEN HELD THAT EACH CASE DEPENDS ON ITS OWN FACTS AND A CLOSE SIMI LARITY BETWEEN ONE CASE AND ANOTHER IS NOT ENOUGH BECAUSE EVEN A SINGLE SIG NIFICANT DETAIL MAY ALTER THE ENTIRE ASPECT. IN DECIDING SUCH CASES, ONE SHO ULD AVOID THE TEMPTATION TO DECIDE CASES BY MATCHING THE COLOUR OF ONE CASE AGA INST THE COLOUR OF ANOTHER. TO DECIDE, THEREFORE, ON WHICH SIDE OF TH E LINE A CASE FALLS, THE BROAD RESEMBLANCE TO ANOTHER CASE IS NOT AT ALL DEC ISIVE AND, THEREFORE, KEEPING IN VIEW THE ABOVE PRINCIPLES LAID DOWN BY H ONBLE SUPREME COURT, WE ARE ALSO OF THE VIEW THAT THE JUDGEMENTS OF HIGHER COURTS CANNOT BE APPLIED EUCLIDS THEOREMS, BUT THE SAME CAN ONLY BE APPLIED IF THE FACTS ARE S IMILAR OR IDENTICAL. THUS, AFTER CONSIDERING THE CASES RELIE D UPON BY THE LD.DR, WE ARE OF THE VIEW THAT NONE OF THE CASES IN ANY WAY DEAL WITH THE ISSUE UNDER CONSIDERATION, I.E. INDEXATION BENEFIT IN CASE WHER E CAPITAL ASSET IS CONVERTED ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 24 - INTO STOCK-IN-TRADE, THEREFORE THOSE CASE RELIED UP ON BY LD.DR ARE NOT RELEVANT TO THE FACTS OF THE PRESENT CASE. 9.1. SINCE THE ISSUE WITH REGARD TO INDEXATION BENE FIT IN CASE WHERE CAPITAL ASSET IS CONVERTED INTO STOCK-IN-TRADE HAS ALREADY BEEN DEALT WITH IN THE CASES CITED AND RELIED UPON BY THE LD.AR, I.E. IN THE CAS E(S) OF CIT VS. RUDRA INDUSTRIAL COMMERCIAL CORPORATION (2012) 20 TAXMANN .COM 611 (KARNATAKA) AND DECISION OF ITAT KOLKATA IN THE CA SE OF THE HOOGHLY FLOUR MILLS CO.LTD. VS. DCIT IN ITA NO.615/ KOL/2011 FOR AY 2007-08 , DATED 04/05/2012. THEREFORE, WHILE PLACING RELIA NCE ON THE ABOVE DECISIONS, WE SET ASIDE THE ORDERS OF THE REVENUE A UTHORITIES AND DIRECT THE ASSESSING OFFICER TO COMPUTE THE CAPITAL GAINS AFTE R GIVING THE COST INFLATION INDEX APPLICABLE TILL THE YEAR OF SALE OF SUCH STOC K-IN-TRADE. 10. IN THE RESULT, THE APPEAL OF THE ASSESSE E IN ITA NO.1638/AHD/2019 FOR AY 2015-16 IS ALLOWED. ITA NO.1639/AHD/2019 FOR AY 2016-17 11. THE ASSESSEE IN ITA NO.1639/AHD/2019 FOR AY 2016-17 RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (A PPEALS) [THE 'LD. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 25 - CIT(A)'] ERRONEOUSLY AFFIRMING THE FINDINGS OF THE LEARNED ASSESSING OFFICER [THE 'LD. AO'] IS UNSUSTAINABLE AND OUGHT TO BE QUA SHED. 1. GROUND NO. 1: ADDITION OF LONG-TERM CAPITAL GAI NS OF 48,20,770/-: 1.1. THE LD. CIT(A) HAS GROSSLY ERRED IN CONF IRMING THE ACTION OF THE LD. AO IN COMPUTING LONG TERM CAPITAL GAINS BY RESTRICT ING THE INDEXATION BENEFIT TILL YEAR OF CONVERSION OF CAPITAL ASSET TO STOCK I N TRADE INSTEAD OF YEAR OF SALE OF SUCH STOCK IN TRADE. 1.2. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE C APITAL GAINS IN CASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE IS CH ARGEABLE TO TAX ONLY IN THE YEAR OF SALE OF SUCH STOCK IN TRADE AND HENCE INDEX ATION BENEFIT OUGHT TO BE ALLOWED TILL THE YEAR OF CHARGEABILITY, THAT IS, YE AR OF SALE OF SUCH STOCK IN TRADE. 1.3. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE INDEXATION BENEFIT IS ALLOWED FOR OFFSETTING EFFECT OF INFLATION AND IN C ASE OF CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE, THE APPELLANT SUFFERS INFL ATION TILL THE YEAR IN WHICH CONSIDERATION IS RECEIVED, THAT IS, YEAR IN WHICH C APITAL ASSET CONVERTED INTO STOCK IN TRADE IS SOLD. 1.4. THE LD. CIT(A) GROSSLY ERRED IN WRONGLY INTERP RETING AND APPLYING THE JUDICIAL PRECEDENTS TO THE FACTS OF THE CASE. 12. BOTH THE SIDES CONSENTED THAT IDENTICAL ISSUES ARE INVOLVED IN THIS APPEAL AS WELL. THUS, FOR PARITY OF REASONS NOTED A BOVE, OUR VIEW IN ITA NO.1638/AHD/2019 FOR AY 2015-16(SUPRA) SHALL APPLY MUTATIS MUTANDIS TO THIS APPEAL CAPTIONED ABOVE. AS A RESULT, THE APP EAL OF THE ASSESSEE IN ITA NO.1639/AHD/2019 FOR AY 2016-17 IS ALSO ALLOWED. ITA NOS.1638 & 1639/AHD/2019 M/S.SHRENO LIMITED VS. ACIT ASST.YEARS 2015-16 & 2016-17 RESPECTIVELY - 26 - 13. IN THE COMBINED RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 13 - 03 - 2020 AT AHMEDABAD SD/- SD/- ( AMARJIT SINGH) ( SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 13 / 03 /2020 # . . , . $ . ./ T.C. NAIR, SR. PS !' #' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. %&' ( / CONCERNED CIT 4. ( ( ) / THE CIT(A)-2, VADODARA 5. )* + $$&' , &' , % / DR, ITAT, AHMEDABAD 6. + ./ / GUARD FILE. / BY ORDER, ) $ //TRUE COPY// / (DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 13.3.20 (DICTATION-PAD 4+ P AGES ATTACHED AT THE END OF THIS FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER ..13.3.20 3. OTHER MEMBER... 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.13.3.20 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 13.3.20 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER