Court Upholds Tax Treatment of Land Sale as Business Income, Not Capital Gains

Caselaw Name:

Principal Commissioner of Income Tax vs Essorpe Mills Ltd.

T.C.A.No.8 41 of 2 017

Key Takeaways:

1. The court upheld the application of Section 45(2) of the Income Tax Act to compute capital gains up to the date of conversion of land into stock-in-trade.

2. After conversion to stock-in-trade, the profit from the sale of land is to be considered as business income.

3. The court recognized that giving land as security for a sister concern's loan can be considered a business transaction.

Issue:

Should the sale of land by Essorpe Mills Ltd. be taxed as capital gains or as business income, considering the land was converted from a capital asset to stock-in-trade?

Facts:

1. Essorpe Mills Limited (EML) was engaged in real estate, financial services, and other businesses.

2. EML converted land from a capital asset to stock-in-trade in 2000.

3. EML demerged with Essorpe Holdings Pvt Ltd. (EHPL) in 2007, with the real estate division going to EHPL.

4. EML offered 5.075 acres of land as security for loans advanced by M/s Globus Realtors Pvt. Ltd. to EHPL.

5. The land was sold to M/s Rasi Seeds (P) Ltd and M/s Globus Realtors Pvt. Ltd. in January 2009.

Arguments:

Revenue's Arguments:

1. The entire sale consideration should be taxed as business income, not capital gains.

2. The land should be considered a capital asset as it was mortgaged for a loan.

3. The assessee concealed the transaction, warranting a penalty under Section 271(1)(c).

Assessee's Arguments:

1. The gain on transfer should be assessed as capital gains up to the date of conversion to stock-in-trade.

2. After conversion, it should be assessed as business income.

3. The land was given as security for commercial purposes, resulting in a business loss.

Key Legal Precedents:

1. Commissioner of Income Tax vs. Ambadi Enterprises Ltd. (2000) 243 ITR 0431

2. Commissioner of Income Tax vs. Groz-Beckert Saboo Ltd. (1979) 8 CTR 0155

3. Commissioner of Income Tax vs. Essorpe Holding Pvt. Ltd. 2017 (6) TMI 1157

Judgement:

The court dismissed the appeal filed by the Revenue and ruled in favor of Essorpe Mills Ltd. The key points of the judgment are:

1. The Tribunal was correct in directing the Assessing Officer to compute capital gains under Section 45(2) of the Act up to the date of conversion into stock-in-trade.

2. After conversion, when the land was actually sold, the income arising from the sale should be considered as business income.

3. The court applied the decision from a similar case (Commissioner of Income Tax vs. Essorpe Holding Pvt. Ltd.) to this case.

FAQs:

Q1: What is Section 45(2) of the Income Tax Act?

A1: Section 45(2) deals with the taxation of capital gains when a capital asset is converted into stock-in-trade.

Q2: Why did the court consider the land sale as business income?

A2: The court recognized that the land had been converted from a capital asset to stock-in-trade before the sale, so the profit from the sale after conversion should be treated as business income.

Q3: What impact does this judgment have on similar cases?

A3: This judgment reinforces the principle that when an asset is converted from a capital asset to stock-in-trade, the subsequent sale should be treated partly as capital gains (up to the date of conversion) and partly as business income.

Q4: Why was the Revenue's appeal dismissed?

A4: The court found that the facts and issues in this case were similar to a previous case (Commissioner of Income Tax vs. Essorpe Holding Pvt. Ltd.) where the court had ruled in favor of the assessee.

Q5: Can giving land as security for a loan be considered a business transaction?

A5: Yes, the court recognized that giving land as security for a sister concern's loan can be considered a business transaction if done for commercial expediency.

1. Instant tax appeal is filed by the Revenue, against the order of the Income Tax Appellate Tribunal 'D' Bench, Chennai (in short, “the Tribunal”) dated 05.02.2016, passed in I.T.A.No.391/Mds/2015, pertaining to the Assessment Year 2009-10.

2. When the appeal came up for admission today (20.02.2018), notice on behalf of the respondent/assessee was accepted by Mr.R.Vijayaraghavan. With the consent of the learned counsel on either side, instant tax appeal is taken up for final disposal.

3. Short facts leading to filing of the appeal, are as follows:

(i) M/s.Essorpe Mills Limited (in short 'EML'), assessee (respondent herein), is a company, 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 a transfer of property between EML and M/s Rasi Seeds (P) Ltd. and computed the capital gains, in the hands of the EML substantively.

(vi) In the course of assessment proceedings, a protective assessment was made in the hands of EHPL, in respect of the gain arising on the sale of the very same land.

(vii) Contention of EML, before the Assessing Officer, was that there was a demerger, by an order of this Court, with effect from 28.2.2007, in respect of real estate division. The manufacturing division, remained with EML and real estate division was allotted to EHPL, with effect from 28.2.2007 and therefore, EML, is no longer the owner of the landed property.

(viii) Assessing Officer, completed the assessment, by computing Long Term Capital Gain at Rs.34,29,36,053/- and Short Term Capital Gain at Rs.69,26,825/-, on the building for the sale of land as substantive assessment, in the hands of EML, and protective assessment in the hands of the sister concern, EHPL, for the assessment year 2009-10, considering the income, as business income.

(ix) Assessing Officer further taxed the entire sale consideration under the head "Income from Business" and not under the head "capital gains", on the sale of building. Consequently, the assessee's claim of long term capital loss on sale of zero percent non-redeemable preference shares of EML, was not allowed to be set off, since, the sale consideration, on the sale of land, was taxed under the head "business income" and not under the head "capital gains".

(x) Assessing Officer further levied penalty under Section 271(1)(c) of the Income Tax Act, to the tune of Rs.4,70,41,053/-, in the hands of EML, on the grounds that the capital gain arising out of the transfer of property was not disclosed to the department.

4. Aggrieved, by the said order, passed by the Assessing Officer, the assessee (respondent herein) filed an appeal, before the Commissioner of Income Tax (Appeals)-1, Coimbatore.

5. Commissioner of Income Tax (Appeals)-1, Coimbatore, vide order dated 09.12.2014, confirmed the order of the Assessing Officer and dismissed the appeal filed by the assessee (respondent herein), stating as follows:

"3. In response to statutory notices issued, the authorised representative Shri P.A.Baraneedharan, FCA appeared and submitted that he is not pressing for the grounds of appeal and only the additional grounds of appeal may be considered. Hence, the grounds of appeal are dismissed.

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 Income Tax Appellate Tribunal 'D' Bench, Chennai (in short “the Tribunal”) in I.T.A.No.391/Mds/2015.

7. By an order dated 05.02.2016, the Tribunal, reversed the order of the Commissioner of Income Tax (Appeals)-I, Coimbatore in respect of assessment year 2009-10 and allowed the appeal filed by the assessee (respondent herein), on the grounds that since the land was given as security for commercial expediency to the sister concern, there was a business loss arising in the course of business. Since no amount was realized and the assessee-company suffered a loss for giving security to the sister concern, the same has to be allowed as business loss, while computing the taxable income, and accordingly modified the orders of the lower authorities, and directed the Assessing Officer to compute the capital gains u/s 45(2) of the Act on the sale of land upto the date of conversion as stock-in-trade. Further, the Tribunal held that profit on sale of land as stock-in-trade, has to be computed as business loss, since, the assessee has not received any money on sale of the land. Therefore, capital gains computed upto the date of conversion of land into stock-in-trade, has to be set off, against the business loss computed on sale of the stock-in-trade. At paragraph Nos.4 to 7, the Tribunal held as follows:

“4. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee-company was demerged by an order dated 15.9.2009. Before demerger, the assessee-company gave the landed property to sister concern as security for the loans advanced by M/s Globus Realtors Pvt. Ltd. The security was given to M/s Globus Realtors Pvt. Ltd for commercial expediency. In the course of its business activity, it appears that the assessee has also executed a power of attorney in favour of Shri V. Sivakumar, Managing Director of M/s Globus Realtors Pvt. Ltd. in respect of 5.075 acres of land. The power of attorney agent sold the property to enforce the security given by the assessee to M/s Rasi Seeds (P) Ltd. The question arises for consideration is whether the profit arising on sale of the land while enforcing the security given by the assessee for loan given to the sister concern namely, M/s Essorpe Holdings Pvt. Ltd, is assessable in the hands of the assessee or not? As rightly pointed out by the ld. DR, this 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 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]”.

In view of the above provision, the capital gains on transfer of 5.075 acres of land as stock-in- trade has to be assessed as capital gains in the hands of the assessee.

6. Now coming to the contention of the assessee that on sale of the property, the assessee has not received any amount, therefore, it has to be allowed as business loss. It is not in dispute that M/s Essorpe Holdings Pvt. Ltd. is a sister concern of the assessee. The property in question was given as security to M/s Globus Realtors Pvt. Ltd. for advancing loan to the sister concern M/s Essorpe Holdings Pvt. Ltd. Therefore, it is obvious that to promote the business of sister concern, M/s Essorpe Holdings Pvt. Ltd, the assessee gave the land in question as security. While giving the security, the assessee has also executed power of attorney in favour Shri V. Sivakumar, Managing Director of M/s Globus Realtors Pvt. Ltd. When the sister concern could not repay the loan amount, the property which was given as security was sold by Shri V. Sivakumar and the sale consideration was adjusted for repayment of the loan by M/s Essorpe Holdings Pvt. Ltd. In those circumstances, this Tribunal is of the considered opinion that since the land was given as security for commercial expediency to sister concern, there was a business loss arising in the course of business. Since no amount was realized and the assessee-company suffered a loss for giving security to the sister concern, the same has to be allowed as business loss while computing the taxable income. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are modified and the Assessing Officer is directed to compute the capital gains u/s 45(2) of the Act on sale of land upto the date of conversion as stock-in-trade. The profit on sale of land as stock-in-trade has to be computed as business loss since the assessee has not received any money on sale of the land. Therefore, the capital gains computed upto the date of conversion of land into stock-in-trade has to be set off against the business loss computed on sale of the stock-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 was justified in ignoring the fact that there was willful act of concealment on the part of the assessee ?"

9. Mr.T.R.Senthil Kumar, learned counsel for the Revenue, briefly submitted the facts of the case, drew the attention of this Court to the relevant provisions of the Act and assailed the order of the Tribunal, inter alia, as follows:

(i) That the Tribunal has erroneously deleted the addition made by the assessing officer in the quantum appeal.

(ii) That the Tribunal has erred in holding that since quantum addition made by the assessing officer on transfer was deleted by the Tribunal, there cannot be any concealment and deleted the penalty accordingly.

(iii) That the Tribunal has failed to consider that against quantum appeal, for the assessment year 2009-10, Revenue has not accepted the decision and filed an appeal in T.C.A.No.329 of 2016.

(iv) That the case of the assessee is a clear case of concealment of income. The Tribunal has erred by accepting assessee's plea that no amount was realised, and that the assessee company suffered a loss for giving security to sister concern and the same has to be allowed, as business loss, while computing the taxable income.

(v) That the Tribunal has failed to consider that the sister concern EHPL had received loan from M/s.Globus Realtors P Ltd., and utilized the same only for the purpose of business investment. On the plea that assessee has not received any sale consideration for the transaction of the land and that those was business loss, as claimed by the assessee, the same is not allowable for the reason that, assessee though had not received the sale proceeds of the land directly, but utilized the sale proceeds to discharge the loan liability of its sister concern i.e. EHPL. Since the loan was used by the sister concern for its own business purpose, and this business income has not been taxed in the hands of the sister concern, during the assessment year 2009-10, allowability of business loss in the hands of assessee is highly questionable.

(vi) That the Tribunal has failed to consider that even otherwise, though the assessee's land was converted into stock in trade, it was mortgaged/used as security for loan liability. Hence, it can only be considered as a capital asset. So the assessee's company, if at all, suffered only a capital loss, and 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 assessee, vide order No.ITA 391/Mds/2015, dated 05.02.2016, without considering the same as business income, in the hands of sister concern is perverse and thus, the assessee's willful act of concealing the transaction, warrants levy of penalty under Section 271(1)(c).

(ix) That the Tribunal 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, and now the Tribunal, vide order in ITA No.391/Mds/2015, dated 05.02.2016, has allowed the business loss, in the hands of the assessee, without considering the business income in the hands of the sister concern, which according to the appellant is perverse and for the aforesaid reasons prayed to set aside the order of the Tribunal.

10. Learned counsel for the assessee (respondent herein), justifying the order of Tribunal, inter alia, stated as follows: (i) The Tribunal was right in giving a finding that the gain on transfer of the landed property, has to be assessed, in the hands of the assessee upto the date of conversion into stock-in-trade. According to the assessee, after conversion of the property into stock-in-trade, it has to be assessed as business income.

(ii) Referring to paras 9 & 10, more particularly para 9 of the order of the Tribunal in I.T.A.No. 2256/Mds/2012 dated 11.7.2013, contention has been made by the assessee that the Tribunal was right in directing the Assessing Officer, to compute the business income, in respect of stock-in-trade of the property, after considering the provisions of Section 45(2) of the Act.

(iii) Before the Tribunal, contention has been made by the assessee that the property was a capital asset, till the assessment year 2007-08, and from assessment year 2007-08, the property was converted into stock-in-trade, and that the assessee has not received any consideration, on transfer of the land to M/s Rasi Seeds (P) Ltd, and therefore, assessee was right in claiming the same, as loss of business.

(iv) That the Assessing Officer, though accepted the transaction, as business transaction, refused to assess the loss incurred on account of non-receipt of the sale consideration as business loss and therefore, Tribunal was right in holding that the assessee had suffered business loss.

(v) That in the case of M/s Essorpe Holdings Pvt. Ltd, Tribunal 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, the learned counsel for the respondent/assessee, requested this Court to apply the said decision, to the facts of the case, and prayed for dismissal of the instant appeal.

13. Heard the learned counsel appearing for the parties and perused the materials available on record.

14. There is no dispute by the Revenue that pleaded facts, submissions made by the contesting parties, issues raised in Commissioner of Income Tax Vs. Essorpe Holding Pvt. Ltd., reported in 2017 (6) TMI 1157, are similar to the instant tax appeal No.841 of 2017. Placing on record the above, we deem it fit to extract, paras 7 to 27 from the aforesaid judgement, as hereunder: “7. Challenging the aforesaid order passed by the Tribunal, the Revenue has filed the instant appeal before this Court, which was admitted on 26.07.2016, on the following substantial questions 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 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 Income” for 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 gains” from 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, has upheld the action of the Assessing Officer on the issue of short term capital gain, on sale of building and denial of setting off, the long term capital loss. Hence, reversing the order of the Commissioner by the Appellate Tribunal is not proper and so prayed 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 and the Board's resolution is only a colourable device, to avoid taxation. The sale of 5.075 acres of land has to be brought to tax as 'business income' only and not under 'capital gains'. Therefore, allowing the benefit of Section 45(2) of the Act, to the assessee EHPL, has no application to the facts of the instant case. The benefit of Section 45(2) of the Act can be given to the owner of the land, namely, EML and by virtue of demerger on 01.01.2009, EHPL had taken over the land measuring 5.075 acres as stock in trade for the purpose of carrying out real estate business and hence it has to be rightly assessed as business income and not as capital gains. Therefore, the order of the Tribunal has to be set aside and the substantial questions of law framed by this Court, are to be answered in favour of the Revenue.

10. Per contra, learned counsel for the assessee would submit that the land in question was originally 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 transfer, the entire amount should have been assessed in the hands of EML itself. Therefore, the provisions of Section 45(2) will become applicable since the land is sold by the assessee.

The provisions of Section 45(2) is a charging section for 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 by the assessee. As per the decisions, when the assessee had taken the property on demerger as stock in trade, the cost of acquisition of such property should be taken at the market value, as on the date of conversion. Therefore, notwithstanding levy of capital gains under Section 45(2), the land sold should be taken as stock in trade, treated as stock in trade and sold as stock in trade. The interim Board Resolution of the assessee reconverting the land from stock in trade into investment, was not accepted by the Assessing Officer, Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. In fact, the Assessing Officer, while giving effect to the order of the Tribunal, has treated the entire sale consideration of the land, Rs.15 crores, as business income as per the directions of Commissioner of Income Tax (Appeals). The said portion of the order has not been altered in the decision of the Tribunal and the same has become final. 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 business. Further, learned counsel for the assessee would reply to the grounds raised by the Revenue that the land was received as stock in trade and sold in stock in trade. Capital gains under Section 45(2) which accrued on conversion is 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 above the assessable of the entire sale consideration of land as business profits. On sale of an investment converted into stock in trade, two independent taxes are levied :

i. Capital gains accruing on the date of conversion, omitted to be charged at the time of conversion, is brought to tax under Section 45(2) at the time of a actual sale / transfer of the stock in trade.

ii. Independent levy of capital gains under Section 45(2), the entire sale consideration of stock in trade will be assessed under the head business income. The cost of acquisition for the stock in trade will be the market value of the land as on the date of conversion.

This method of computation has been adopted in computing profit, on sale of half portion of 5.075 acres, in the hands of the transferor EML, which has been accepted by the Revenue. 14. Learned counsel appearing for the assessee company, invited our attention to the giving effect order dated 24.07.2015 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 sale consideration received for transfer of 5.075 acres of land, by including the income received from other sources and determined the total taxable income of Rs.34,49,89,695/-. Aggrieved by the assessment 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 liable for capital gain on conversion of it as stock in trade and so the provisions of Section 45(2) is applicable. After the conversion of the land, when the land was actually sold, the assessing officer computed the entire sale consideration under the head 'business income' he did not apply the provisions of Section 45(2) of the Act, which is not proper. Hence, the Assessing Officer was directed to compute the capital gains upto the date of conversion into stock in trade, by applying provisions of Section 45(2) of Act and thereafter on actual sale of the land i.e. difference between the value of sale and stock in trade to be considered as 'business income' and to be assessed in this assessment year, accordingly.”

19. The land in question was originally treated as investment and was subsequently converted as stock in trade from 28.12.2007 by the Transferor company EML. The aforesaid conversion was accepted by the department. The department on scrutiny of the case of the assessee 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 the assessee company has borrowed a sum of Rs.35.25 crores over a period from M/s. Globuse Realtors Pvt. Ltd. The aforesaid borrowings was secured by the property of EML, with an understanding 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 assessee company disposed of the land to an extent of 5.075 acres through Power of Approval (POA), for a sale consideration of Rs. 15 crores, with which the loan outstanding amount was settled to the borrowers. The assessee has offered the gain on transfer of the entire 10.15 acres of land as long term capital gains and set it off against the long term capital loss incurred by the assessee. The assessing officer assessed the entire sale consideration as business profit on the ground that the land was shown as stock in trade. According to the assessee, the land demerged with EML to EPHL, is not a transfer, in view of the provisions of Section 47(vid) of the Act, which reads as follows :-

“Transactions not regarded as transfer.

47. Nothing contained in Section 45 shall apply to the following transfers :-

(vib) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; ”

21. A part 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 gains” and 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 apply the provisions of Section 45(2) of the Act. Therefore, the Assessing Officer should compute the business income in respect of stock- in-trade of the property, taking into consideration 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 the converted stock in trade back into an investment. Consideration of sale of such converted asset will always be assessed as profits of business. The said provision was interpreted by the Assessing Officer under the said section.

23. Following the decision of this Court, in the case of Commissioner of Income Tax vs. Ambadi Enterprises Ltd., reported in (2000) 243 ITR 0431, wherein it is held as follows :- “The Tribunal has also found that the land had not been developed earlier and that the investment made by the assessee in the year 1968 was only by way of investment and not to treat the lands as its stock-in-trade. The money required for the purchase of the land had come out of the funds which had been lent to it by a sister company as loan or deposit. Instead of keeping the money as deposit or by lending the money to others, it had chosen to invest that money on land, and holding the land as an investment. It was only in the year 1972, the company decided to treat the same as its stock-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._____.There can, therefore, be no doubt that these raw materials and semi-finished needles were received by the assessee as capital assets and subsequently on 30th Sept., 1961, they 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 same property by the Essorpe Holdings Pvt. Ltd., to an extent of 5.075 acres of land for the assessment year 2009-10, directing the Assessing Officer to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value of sale and stock in trade to be considered as “ business income”.

25. It is also brought to our notice that pursuant to the orders passed by the Tribunal on 15.05.2015, the Deputy Commissioner of Income Tax, Corporate Circle-2, Coimbatore has passed an order in proceedings No. PAN:AABCE9372R dated 24.07.2015, by computing the assessment of the assessee, applying the provisions under Section 45(2) of the Income Tax Act, 1961, had modified the total income of the assessee respondent, as follows:-

Loss from business (on sale of 5.075 acres land and on application of Section 45(2) of the Act as worked out in Para.3.2 above (-) 2,90,73,864 Short Term Capital Gains as per assessment order u/s 143(3) of the Act dated 31.03.2014 Rs.7,15,172 Income from other sources as per assessment order u/s 143(3) of the Act dated 31.03.2014 Rs.40,26,248 Nett Loss from business (-) 2,43,32,444 Less: Deduction u/s 80G 25,000 Net Loss from business allowed to be carried forward (-)2,43,57,444 LONG TERM CAPITAL GAINS/LOSS Long Term Capital Gains on sale of 5.075 acres of land and on application of section 45(2) of the Act as 17,84,39,549 (-)14,26,02,954 worked out in Para 3.2 above. Less: Long Term Capital Loss on zero% non-

convertible redeemable preference shares of

M/s.EML as per return of income and as per assessment order u/s 143(3) of the Act dated 31.3.2014 (-)32,10,42,503.

26. The Deputy Commissioner of Income Tax, Corporate Circle-2, Coimbatore, in the above said order has modified the total income of the assessee/ respondent. The said fact is also placed on record before this Court.

27. In the light of the aforesaid discussions and decisions cited supra and in view of the order passed by the Deputy Commissioner of Income Tax Appeal, the substantial questions of law framed under Section 260A of the Income Tax Act 1961 is answered against the Revenue. Accordingly, TCA No. 329 of 2016 is dismissed. No order as to costs.”

15. Thus, in view of the undisputed facts being similar, and taking note of the decision of the Hon'ble Division Bench of this Court in Commissioner of Income Tax Vs. Essorpe Holding Pvt. Ltd., reported in 2017 (6) TMI 1157, relating to assessment year 2011- 12, substantial questions of law framed in the instant tax appeal in T.C.A.No.841 of 2017, for the assessment year 2009-10, are answered against the Revenue. Accordingly, the instant tax appeal is dismissed. No costs.

[S.M.K., J.] [V.B.S., J.] 20.02.2018

Index : Yes

Internet: Yes

kk To

The Income Tax Appellate Tribunal, 'D' Bench, Chennai.

S.MANIKUMAR, J. AND V.BHAVANI SUBBAROYAN, J.