Ishoo Narang Vs DCIT (ITAT Hyderabad)
Conclusion: Capital gain arising on account of conversion of capital asset into stock-in-trade should be proportionately computed by considering the stock-in-trade sold by the assessee and not the entire extent of land converted by the assessee, therefore, proportionate capital gain liable for taxation in the impugned A.Y.
Held: During the course of assessment proceedings, AO noticed that on verification of the return of income for the A.Y 2015-16, it was seen that the opening stock was shown at Rs.17,98,60,568/-, whereas the closing stock as per the return filed for the A.Y 2014-15 was nil. Assessee was called upon to explain the discrepancy in opening and closing stock. In response, assessee stated that the capital asset owned by him was converted into stock-in-trade in the financial year 2013-14 relevant to A.Y 2014-15 and because of this, opening stock had been increased. Assessee further contended that as per the provisions of section 45(2) of the I.T. Act, 1961 when capital asset was converted into stock-in-trade, the resultant capital gain was taxable in the year in which the asset was sold. Since only part of the land was sold during the financial year relevant to A.Y 2015-16, capital gains was not offered to tax. AO held that as per section 45(2), assessee had converted the capital asset into stock-in-trade and also sold part of stock-in-trade, capital gain arising out of conversion of capital asset into stock-in-trade should be taxed when stock-in-trade was sold. After obtaining fair market value of land as on date of conversion, the AO computed capital gain. It was held that admittedly, assessee had sold part of the stock-in-trade for the current financial year and remaining stock-in-trade is still held by assessee as closing stock. Therefore, the capital gain arising on account of conversion of capital asset into stock-in-trade should be proportionately computed by taking into account the stock-in-trade sold by assessee for the impugned A.Y but not the entire extent of land converted by assessee. In the present case, AO had computed the Long-Term Capital Gain and Short-Term Capital Gain by taking into total total extent of land converted by assessee even though assessee had sold only part of stock-in-trade. Therefore, AO was directed to ascertain the extent of stock-in-trade sold by assessee and based on such extent, compute proportionate capital gain liable for taxation in the impugned A.Y. In so far as the computation of closing stock by adopting fair market value of the land as per SRO rate as on the date of conversion was concerned, AO was directed to determine the correct fair market value of the land as on the date, this issue also need to go back to the file of AO and recompute the value of closing stock and thus, AO was directed to compute the closing stock after obtaining correct fair market value of the land as on the date of conversion.
