INCOME TAX ACT, 1961

Section 45(2)

Capital gains - Year of taxability - Conversion of asset (land) into stock-in-trade - Assessee sold its share of land in subsequent year

The assessee happened to be owner of some land situated at 113-114, Anna Salai, Chennai-60002 which is claimed to be owned by assessee for several decades. The assessee entered into a joint development agreement with two associate companies on 28-4-1994 for development of these plots of land into a multi storeyed office complex and out of the total constructed area of 396900 square feet, the assessee was entitled to 148010 square feet together with proportionate undivided interest in land and 96 reserved car parks. Accordingly, the assessee started selling the office complex every year. The assessee has during previous year 2001-02 relevant to impugned assessment year 2002-03 has converted the undivided interest in land as stock in trade. The learned counsel for the assessee submitted before the bench that the assessee has of its own computed capital gains of Rs. 14,30,11,600 at the time of conversion of capital asset into stock in trade and made entries in its books of accounts. However, the assessing officer has interpreted the same that the assessee has admitted to pay tax on this capital gains on sale of building, which it is explained is an error on the part of the assessing officer as the assessee never sold the entire building but merely converted entire building into stock-in-trade in its books of accounts during the year under consideration. It was explained that merely on conversion of capital asset into stock in trade in its books of accounts, the liability to capital gain will definitely arise and get crystalized but the payment of same gets postponed and has to be paid when the said assets are sold by the assessee. Held: The provisions of section 45(2) creates a deeming fiction and it has to be given full play. As is explained by learned counsel for the assessee, what has happened is that the assessing officer has brought to tax entire capital gains arising on conversion of capital assets into stock in trade on mere conversion in previous year 2001-02 relevant to impugned assessment year 2002-03, as well the same capital gains is also brought to tax when such asset was finally sold/transferred in subsequent years which has led to taxing the same income twice in the hands of the assessee which is not permissible. However, the contentions of the assessee need verification by the assessing officer on a comprehensive basis along with all connected issues with respect to this property and accordingly computation of income chargeable to tax for the year under consideration. Thus, the entire matter is restored to the file of the assessing officer for passing de novo assessment order after due verification of the entire spectrum of chargeability to tax of the capital gains or other income arising out of this property at Anna Salai, share of assessee under joint development, share of the assessee, retaining of share by developers who are associated companies and its impact on income of the assessee, treatment in books of accounts, basis of claim of depreciation on this property made by the assessee and/or other issues related/connected thereto with this property having bearing on assessing correct income in the hands of the assessee for the year under consideration, as in our considered view the matter connected with this property including, inter alia, car parking is to be seen comprehensively as they are inter-woven and integrated and cannot be adjudicated in isolation de hors several claims made by assessee such as offer of capital gains in return of income filed, credit of capital gains in books of accounts, claim of depreciation on such assets while computing income of the assessee for the impugned assessment year 2002-03 which is under consideration before us. Thus, all contentions are kept open and needed verification by the assessing officer for computing income of the assessee for the impugned assessment year 2002-03.

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