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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI S. RIFAUR RAHMAN
Date of hearing 23.06.2025 Date of pronouncement 09.07.2025 ORDER
PER SATBEER SINGH GODARA, JM
This Revenues’ appeal for assessment year 2020-21, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2023-24/1059802504(1), dated 17.01.2024 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties. Case file perused.
2. This Revenue’s appeal raises the following substantive grounds: “1.Whether on the facts and circumstance of the case, the L.d. CIT(A) has erred in treating the immovable property situated at 1E/20, Jhandewalan Extn., Delhi as capital asset on the date of sale in FY 2019-20 whereas such property was initially accounted as Stock-in- Trade in the FY 2010-112 2. Whether on the facts and circumstance of the case. the Ld. CIT(A) has erred in accepting the board resolution dated 04/04/2016 as sufficient document to allow conversion of stock-in-trade to capital asset but ignored the fact that main business of the assessee is development of property? 3. Whether on the facts and circumstance of the case, the Ld. CIT(A) has erred in allowing expenses incurred in FY 2011-12, 2017-18 & 2018-19 against consideration received from property whereas same were incurred in prior period? 4. Whether on the facts of the case, the CIT(A) has ignored the fact that land converted into capital asset was to avoid taxes and there was no change in nature of business of assessee. 5. The appellant craves leave, to add, alter or amend any ground of appeal
raised above at the time of the hearing.”
3. Both the parties next invite our attention to the CIT(A)/NFAC’s detailed discussion reversing the assessment findings inter alia treating the assessee’s capital gains/loss; as the case may be, as in the nature of business income in assessment order dated 19.09.2022; reading as under: “7.
7. DECISION: I have duly perused the Order of AO, submission of the appellant and other available material on record. 7.1. In this case, appellant had filed its ROI with gross total income of Rs. 1,79,25,600/- under which it has shown loss of Rs. (- )1,53,75,791/- under the head income from business. Further, appellant has shown short term capital loss of Rs. (-)1,69,14,140/- by way of selling property at DLF Gurgaon. In its ROI, appellant has also shown LTCG of Rs. 4,95,89,657/- by way of sale of property being Plot No. 20 Jhandewalan Extension, New Delhi. 7.2. Ground no. 2: 2 | P a g e
2. That on facts and in the circumstances of the case and in law, the Assessment Unit has erred in law and on facts in rejecting claim of transfer expenses of Rs.23,40,000/-in regard to Capital Gains on sale of property at Rs. 3.9 crores on 12.03.2020. The invoices and bank details of payments and TDS deducted and paid furnished by the appellant has not been examined. This ground relates to disallowance of transfer expenses of Rs. 2340000/- in respect of STCLoss related to property at DLF, Gurgaon. AO has mentioned in this connection at page no. 2 in his order at para 2 point number 1, that appellant has not submitted proof of such transfer transfer expenses; hence, the AO in his assessment order COME TAX DEPARTMEName was disallowed by the 7.2.1 However, from the records it is seen that supporting details along with explanation for this claim was filed before AO during scrutiny proceedings in response to show cause issued by AO. The same is not considered by AO without giving any reasons. It is seen that Brokerage expenses amounting to Rs. 11,70,000/- was paid to Anjul Aggarwal HUF for sales made through him. Copy of the bill along with form 16A and copy of the bank statement were filed before the assessing officer in response to show cause notice dated 27.08.2022 reply filed on 02.09.2022 and were placed at P. No. 153, 155, 156 & 162 of the Paper Book-2 filed on 09.01.2024. 7.2.2 Similarly, brokerage expenses of Rs. 11,70,000/- was paid to M/s Harjee Stock and Share Brokers Pvt Ltd as brokerage charges for purchase of Property No. A-8/6, DLF City, City, Phase-1, Gurugram. Copy of the bill along with form 16A and copy of the bank statement were filed before the assessing officer in response to show cause notice dated 27.08.2022 reply filed on 02.09.2022 and is placed at P. No. 154, 157, 158 & 161 of the Paper Book-2 filed on 09.01.2024. 7.2.3 Copy of the sale and purchase deed of this property were filed before the assessing officer in response to notice U/s 142(1) dated 02.12.2021 Reply filed on 23.03.2023 and copy is placed on P. No. 98 to 108 & 128 to 135 of the Paper Book-2 filed on 09.01.2024. 7.2.4 Details of these replies submitted before AO have been filed before me by appellant. However, AO has ignored them. In view of the facts that these expenses are supported by bills, payment has been made by cheque, and TDS has been deducted on the same; I direct the AO to allow the same and delete this addition. This ground of appellant is thus, allowed.
3 | P a g e 7.3. Ground nos. 1, 3, 3(i) and 4: "1. That the Assessment Unit of Income Tax Department has grossly erred both in law and on facts in making an assessment under section 143(3) r.w 1448 of the Act at an income of Rs. 6,11,19,987/-and short-term capital loss of (-) Rs.1,45,74,040/- as against returned income filed at Rs. 1,79,25,800/ 3. That on facts and in the circumstances of the case and in law, the Assessment Unit has erred in law and on facts in re- computing income from sale of property on 14.05.2019 for Rs. 10,11,00,000/- as business Income. The fact that the property was shown in FY 2010-11 as Inventory and In FMA 2016-17 it was duly transferred to Investment, has been ignored by the learned assessing officer and the assessment has been made as Business income holding the investment in property as stock inventory on sale of inventory as against Capital gains shown by the appellant, which was erroneous and bad in law. 3(i) The learned AO has also ignored the fact that conversion of stock in trade into investment was taxable as per section 28(Via) from A.Y. 2019-20. Prior to it was not taxable. Action of learned AO is bad in law and illegal.
4. That the learned AO has also erred in law and on facts in disallowing short term capital loss of Rs. 1,45,74,040/- which was set off against long term Capital Gain. Above grounds being related to same issue and in consequence thereof; are being adjudicated collectively. 7.3.1 In respect of LTCG shown by the appellant regarding the property at Jhandewalan Extension, New Delhi, AO treated the transaction as business income instead of capital gains. This property was sold by the appellant on 14th May, 2019. This property was purchased in FY 2010-11 and was shown as inventory in the balance sheet of appellant. Explanation of the appellant that, this property shown as inventory in FY 2010-11 in the balance sheet of the appellant was converted into capital asset in FY 2016-17 was not accepted by the AO as mentioned in page 5 of AO's Order at point no. 1 and thus, this transaction was treated as business income instead of capital gains by the AO. 7.3.2 From the records and from reply submitted by appellant to AO during scrutiny proceedings in response to show cause notice, it is seen that the appellant purchased the property situated a, IE/20 Jhandewalan during the FY 2010-11 for Rs. 2,04,86,480/- and the 4 | P a g e same was shown as inventory in the accounts. During the financial year 2016-17, the appellant company transferred such property from inventory to investment. The conversion of inventory to investment was approved by board of directors vide board resolution dated 04 April 2016, copy of the said board resolution is placed at page no. 41 of paper book. This fact of conversion/reclassification was also mentioned in the audit report the extract of the financial statement showing reclassification of this property is given as under:
“…………………………… ………………………………. The appellant company has converted such property into investment and duly disclosed the said facts in financial statement. On conversion of such property into investment, such property became the Capital......" The definition of the Capital Assets as per Section 2(14) of the Act is given as under: Section 2(14) Capital Assets; Capital assets means- (a) property of any kind held by an assessee whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); [(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,] but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession; 7.3.3 In view of above legal position and facts that it's clear that this property ceased to exist as stock-in-trade w.e.f 01.04.2017, hence such property became the Capital Assets of the appellant.At the time of sale of property, such property was in the nature of capital assets and the same is evident from the note no. 10 of audited financial statement for the year ended 31st March 2019 as can be seen from Copy of audited financial statement is enclosed at page no. 42 to 62 5 | P a g e of paper book. These facts along with explanation were put forth before AO by appellant during assessment proceedings vide reply submitted in response to show cause notice issued by AO. However, AO has not specifically commented on these facts while treating the transaction as business income, 7.3.4 Further, as per the provision of section 45 of the Act, any profit or gain arising from transfer of Capital Assets is chargeable to Income Tax under the head "Capital Gain". The provisions of Section 45(2) of the I.T. Act, deals with the issue of capital gain where the investment is converted into stock in trade. According to this section, 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 tax as the income from the previous year in which such stock in trade is sold or otherwise transferred by him, and for the purpose of Section 48. 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 transfer of the capital asset. 7.3.5 While incorporation the Sub Section 2 to Section 45, the legislature has not visualized the situations in other way round, where, the stock in trade is to be converted into the investments and later on the investment was sold on profit. Hence for the period before amendment; in the absence of a specific provision to deal with this type of situations; such transaction cannot be treated as business transaction when on the date of sale of such asset; it was capital asset. 7.3.6 Considering the aforesaid facts and provision of section 2(14) and 45 of the Act, any profit on transfer of such property is chargeable under head capital gains and the appellant has disclosed and offered for tax such gain under the head Capital gains. The appellant converted his property being property at 1E/20, Jhandewalan during F.Y.16-17 i.e. A.Y.17-18 from stock-in-trade to capital asset. The AO has ignored this fact that change in law had come into w.e.f. FY 18- 19 and the sale took place in AY under question. The action of the AO is contrary to the established position of law. Section 28 was amended by Finance Act 2018 to include clause (via) to provide that the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner will be treated as "Income" under the head "Profits and gains of business or profession. The conversion was permissible in law and the AO is wrong in denying the appellant's claim of capital gains.
6 | P a g e 7.3.8 Further, the incidence of levy under Section 45 is on the capital gains to be computed in the manner provided for in Section 48 read with Section 55(2) of the Act. The deduction permissible under Section 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable under Section 45 are the "profits or gains arising from the transfer of a capital asset" and the charge of income- tax on the capital gains is on income of the previous year in which the transfer took place. The only condition which must be satisfied in order to attract the charge to tax under Section 45 is that the property transferred must be a capital asset on the date of transfer and that it is not necessary that it should have been capital asset also on the date of its acquisition by the assessee. 7.3.9 For these views, I place reliance on following judgement of Hon'ble Courts. (i) Asstt. CIT v. Bright Star Investments (P.)Ltd. [2008] 24 SOT 288 (Mum. - Trib.) -relevant portion of which is reproduced as under: "6. Having heard the rival submissions end from careful perusal of the record, we find that the shares held in stock in trade were converted into investment at the book value shown in the books of accounts. Later on, the shares held in investment were sold and the assessee offered the capital gain accrued on the sale of shares. Admittedly, the provisions of Section 45(2) of the I.T. Act, deals with the issue of capital gain where the investment is converted into stock in trade. According to this section, 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 tax as the income from the previous year in which such stock in trade is sold or otherwise transferred by him, and for the purpose of Section 48. 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 transfer of the capital asset. While incorporation the Sub Section 2 to Section 45, the legislature has not visualized the situations in other way round, where, the stock in trade is to be converted into the investments and later on the investment was sold on profit. In the absence of a specific provision to deal with this type of situations, a rational formula should be worked out to determine the profits and gains on transfer of the asset. We are also conscious about the judgments in the cases of Sir Kakabhai Premchand v. CIT (1952) 24 ITR 506 (S.C.), CIT v. Dhanuka and Sons ITR 24 (Cal.) (supra) in which it has been 7 | P a g e held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in a different account of the assessee himself. The question of gain or loss would arise only in future when, the stock transferred to the investment account might be dealt with by the assessee. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In the absence of a specific provision to deal with the present situation, two formulas can be evolved to work out the profits and gains on transfer of the assets. One formula which has been adopted by the Assessing Officer i.e., difference between the book value of the shares and the market value of the shares on the date of conversion should be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as-a capital gain. The other formula which is adopted by the assessee's i.e., the difference between the sale price of the shares and this cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. In the absence of a specific provision, out of these two formulas, the formula which is favourable to the assessee, should be accepted. We, therefore, of the view that CIT (A) has properly examined this issue in the present situation and directed the Assessing Officer to accept the capital gain offered by the assessee." (ii) Arun Sunny vs Dy CIT (2009) 184 Taxmann 498 (Ker) of which is reproduced as under: relevant portion "The point that arises for consideration in this appeal is as to what is the date on which the cost of acquisition/fair market value of the appellant's property has been computed. Is it the date of the notification, namely 6.1.1994, on which date the asset was notified as the capital asset or is it to be computed as on 1.4.1981 in terms of Section 55(2)(b) of the Income Tax Act.
The property held by the assessee became a capital asset as per the notification issued on 6.1.1994. But as per Section 55(2)(b), the cost of any improvement in relation to a capital asset means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after 1st April, 1981 by the previous owner or the assessee. Admittedly, the asset which was declared as capital asset by notification became the asset of the assessee long prior to 1st 8 | P a g e April, 1981. Thus the legislature while explaining the term of cost of acquisition has in express terms provided that it is the value of the assets acquired as on 1st April, 1981 together with all such expenditure of capital nature incurred in making any additions, or alterations to the said asset. Therefore, the contention of the assessee that the value of the e of the asset should be as on the date of the notification when it became a capital asset cannot be accepted. In this connection a bench decision of this court reported in Commissioner of Income-Tax v. Smt. M. Subaida Beevi ((1986) 160 ITR 557) is directly on the point, wherein it was held that the cost of acquisition of a capital asset within the meaning of Section 48 is not the cost on the date on which the asset transferred became a capital asset. The incidence of levy under Section 45 is on the capital gains to be computed in the manner provided for in Section 48 read with Section 55(2) of the Act. The deduction permissible under Section 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable underSection 45 are the "profits or gains arising from the transfer of a capital asset" and the charge of income-tax on the capital gains is on income of the previous year in which the transfer took place. The only condition which must be satisfied in order to attract the charge to tax under Section 45 is that the property transferred must be a capital asset on the date of transfer and that it is not necessary that it should have been capital asset also on the date of its acquisition by the assessee. Thus this decision directly answers the question raised and concluded. This has been followed in a subsequent decision reported in Karvalves Ltd. v. Commissioner of Income-tax ((1992) 197 ITR 95). Therefore, the contention of the assessee was rightly rejected by the tribunal and we find no ground to interfere with the same." 7.3.10 In view of above mentioned factual and legal position, decisions of above mentioned relied upon case laws and explanation along with documentary supporting given by appellant during scrutiny proceedings; I direct the AO to treat the asset in question as capital asset at the time of sale of the same, treat the transaction as capital gains, allow indexation of purchase cost from date of acquisition of the asset and allow set off of income/loss under same or other heads and carry forward of loss; if any as per provisions of the law once this transaction is treated as capital gains. Thus these grounds of appeal raised by the appellant are allowed. 7.4. Ground no. 3(ii):
9 | P a g e 3(ii) The learned AO has also erred in law and on facts in disallowing expenditure of Rs. 13,56,380/- which was paid as stamp duty on purchase of property no. 20 Block IE Jhandewalan Extension. This ground is related to disallowance BF BARTME of additional stamp duty paid in respect of sale of property at Jhandewalan Extension, New Delhi. In this connection, AO has stated at page no. 3 of his order that appellant had already claimed stamp duty expenses in FY 2010-11; hence, the claim of the same in FY 2011-12 was not allowed. 7.4.1 From the records it is seen that the Property No. 1E/20, Jhandewalan Extn., New Delhi-110055 was purchased vide agreement to sell dated 04.02.2011 for a consideration of Rs. 1,80,00,000/-, stamp duty of Rs. 10,80,000/- and other expenses of Rs. 50,100/- total consideration of Rs. 1,91,30,100/- The stamp duty on the said agreement (Agreement to Sell) had been paid at prevailing circle value during the FY 2010-11. 7.4.2 Further, upon conversion to freehold, the sale deed for the said property was registered on 27.07.2011. However, during the FY 2011-12, circle value of the property had been revised and registrar of property had charged Stamp Duty as per the revised rates. Accordingly, the appellant had paid the differential amount of stamp duty amounting to Rs 13,56,380/- on 27.07.2011. The said fact is evident from page 3 of registered sale deed, the relevant extract of the sale deed showing additional stamp duty paid by the appellant. The Copy of agreement to Sell is placed at page no. 204 to 212 & registered sale deed is placed at page no. 213 to 22 of paper book. From the aforesaid facts and registered sale deed it is evident that assessee company had paid additional stamp duty of INR 10,08,240/-, and registration charges amounting to INR 3,48,140/- being 1% of circle value. These facts and documents were put forth before AO in response to show cause notice issued by AO. However AO has not considered them. 7.4.3 In view of above facts and documentary evidence I direct the AO to allow expenses related to payment of additional duty as the same is related to acquisition cost and transfer expenses as I have already held the property in question as capital asset and sale transaction as capital gains. Thus, this ground of appeal raised by the appellant is allowed. 7.6. Ground no. 3(iii):
10 | P a g e 3(iii) That the learned AO has also erred in law and on fact in allowing brokerage amounting to Rs. 52,50,000/- against 61,00,000/- claimed. The invoices and bank details of payment and TDS deducted and paid by the appellant has not been examined. 7.6.1 In this ground, appellant has contended that the AO has allowed brokerage only Rs. 52.50 lacs as against 61 61 lacs claimed in respect of sale of property at Jhandewalan Extension, New Delhi. However, as can be seen from page number 5 of AO's order in respect of calculation of income from sale of this property, AO has allowed 61 lacs rupees as transfer expenses fully as claimed by the appellant. Hence, contention of the appellant in this respect is factually incorrect. Hence, this specific ground raised by the appellant is dismissed. 7.7. Ground no. 3(iv): 3(iv) That the learned AO has also erred in law in disallowing additional cost to the property incurred in F.Y. 2017-18 amounting to Rs. 42,50,053/- and in F.Y. 2018-19 amounting to Rs. 54,82,650/-. The action of the learned AO is illegal and bad in law. 7.7.1 In this ground, appellant has contended disallowance made by the AO of additional cost of Rs. 42,50,053/- in FY 2017-18 and Rs. 54,82,650/- in FY 2018-19 in respect of sale of property at Jhandewalan Extension, New Delhi. AO in his Order at page no. 3 vide show-cause notice had mentioned that since valuation report at the time of purchase and sale of this property contains same description of property and so, there does not seem any development done to the property. In response to this, appellant submitted its reply to AO stating that these are interest expenses capitalised. However, rejecting the explanation given by appellant AO stated that the capitalization of interest Rs 96,58,493/- is not allowed as the asset in question was not a capital assets and hence the expenses incurred was the appellant's revenue expenditure. 7.7.2 It is seen from the records that the appellant has paid interest on loan amounting to Rs. 96,58,493/-. Considering the ICDS-IX "Income Computation and Disclosure Standard IX relating to borrowing costs" such interest paid on loan is added to the cost of the property. The relevant extract of ICDS-IX is reproduced as under: Recognition Para 3 of ICDS- IX Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset 11 | P a g e shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalization shall be determined in accordance with this Income Computation and Disclosure Standard. Other borrowing costs shall be recognized in accordance with the provisions of the Act "Qualifying asset" means: (i) land, building machinery, plant assets; or furniture, being tangible (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; (iii) inventories that require a period of twelve months or more to bring them to a saleable condition The property "Building" is a qualifying asset in accordance with ICDS-IX and any interest incurred with relation to qualifying asset need to capitalized as part of the cost of that assets. Considering the ICDS-IX, appellant has capitalized the interest paid and deduction of such interest paid has not been claimed under head profit and gain from business or profession or any other head of income. Copy of financial statement showing such interest capitalized to cost of property and not claimed as expenses was also submitted to the AO during assessment proceedings. 7.7.3 Considering the aforesaid facts, that such interest expense is required to be capitalized to cost of property in accordance with ICDS- IX and benefit of such interest expenses was not claimed by the assessee company. Such expenses should be allowed under the head Capital Gain as development cost. 7.7.4 Further, a copy of certificate from Chartered Accountant certifying that such interest is not claimed as expenses or deduction under PGBP or any other head was also submitted to AO during assessment proceedings. However same is not considered by the AO stating that asset in question is not capital asset and the claim of the appellant was not accepted by the AO. 7.7.5 In view of above factual and legal position, interest expenses need to be capitalised and are to be allowed while computing the 12 | P a g e capital gains. Further, I am relying upon decisions in the following cases for this view. (i) Addl. CIT v K.S. Gupta (1979)119 ITR 372 (AP); the relevant portion is reproduced as below:
6. In the instant case, from the concession made by the department's representative before the Tribunal, it is clear that the interest of Rs. 11,344 paid by the assessee from January 1, 1957, to August 11, 1966, was neither claimed by the assessee nor allowed by the department year after year. Under these circumstances, in order to find out what was the cost of acquisition to the assessee in respect of these plots one has to take into account not only the original price paid by the assessee for these two plots of land at Adarshnagar, but also to include in that cost of acquisition the capitalised interest paid by him on the borrowings by him for paying the purchase price of Rs. 9,138 when he originally purchased the two plots in 1957.
7. In CIT v. Mithlesh Kumari, the Delhi High Court has also taken a view similar to the one which we are taking in this case. The Delhi High Court there has held that the interest paid by the assessee on money borrowed for the purchase of an open plot of land constituted part of actual cost of the assessee within the meaning of Section 12B(2)(ii) of the Indian I.T. Act, 1922, for the purpose of determining the capital gain derived from the sale of the land. The basic principle, in cases of this kind, is to ascertain the actual cost of acquisition to the assessee and in arriving at the figure of actual cost of acquisition the interest which has been capitalised must be included; otherwise, from the commercial point of view and the principles of accountancy, one cannot get a correct idea of the cost of acquisition. The Tribunal, in the instant case, has, therefore, applied the correct principle and come to the correct conclusion.
8. Under these circumstances, it is obvious that the amount of Rs. 11,344 was part of the actual cost of acquisition for purposes of determining the capital gains for the assessment year 1967-68.
We, therefore, answer the question referred to us, viz., whether on the facts and in the circumstances of the case, the interest amount of Rs. 11,344, constituted part of the actual cost of the plots to the assessee for purposes of determining the capital gains for the assessment year 1967-68, in the 13 | P a g e affirmative, i.e., in favour of the assessee and against the revenue." 7.7.6 Further, in the case of Parwati Devi Totlani Vs ITO (ITAT Jaipur) Appeal Number:
Date of Judgement/Order: 28/02/2020 it is held that, Interest paid on the borrowing made for acquiring Capital Asset is part of the cost of acquisition and therefore eligible for indexation and deduction from the Sale Consideration for computation of capital gains the relevant portion of the same is reproduced as under: "11. We have heard the rival contentions and perused the material available on record. The Coordinate Bench in case of Gayatri Maheshwari vs. ITO (supra) has considered the decision of Hon'ble Delhi High Court in case of CIT Mlithilesh Kumari (1973) 92 ITR 9 and also the decision of Hon'ble Karnataka High Court in case of CIT vs. Shri Hariram Hotels (Purchase) Ltd. (2010) 188 taxman 170 (Kar) and has held as under:- 9. We have perused the case records, analysed the facts and circumstances of the case and considered the judicial pronouncements, which was placed before us. In the case of CIT Vs. Mithilesh Kumari (supra), the Hon'ble High Court has held as under:- "(13) We are in respectful agreement with the observations of the Calcutta and the Bombay High Court in the decisions referred to above. In the present case, we find that the assessed in order to purchase the land had not only to borrow the amount of Rs. 95,000,00 which was the consideration for the purchase of the land but also had to pay interest of Rs. 16, 878.00 on the amount borrowed by her. The amount of Rs. 95,000.00 plus the interest paid by the assessed constitutes the actual cost to the assessed of the land. The fact that the amount of Rs. 95,000.00 was paid by the assessed to the vendor and the amount of interest of Rs. 16,878.00 was paid to a different person, namely, her mother- in-law, does not make any difference so far as the assessed is concerned in respect of the actual cost of the land to her. It will not also make any difference whether the interest v.as paid on the date of the purchase or whether it is paid subsequently. To exclude the interest amount from the actual cost of the 3.55,-='-E5 would lead to anomalous results. Supposing she had purchased the land for Rs. 1,00,000.00 by raising a loan of that amount and had paid interest of Rs. 20,000.00 on the said loan and had sold the land for Rs. 1,20,000.00. It would be unreasonable to hold under such circumstances by excluding the interest amount from the 14 | P a g e actual cost of the land that she had made a capital 9 3117 of Rs. 20,000.00 when, as a matter of fact, she had not made any profit at all by the transact transaction. Applying the said oL5ser/ations of the Calcutta and the Bombay High Courts to the present case, we hold that the Tribunal was right in additing the interest amount of Rs. 16,878.00 towards the actual cost of the land," In the case of CIT Vs. Sri Hariram Hotels (Purchase) Ltd. (2010) 188 Taxman 170 (Kar), the Hon'ble Kamataka High Court has held as under:- "7 We are unable to agree with the arguments advanced by the 'earned counsel for the revenue for the simple reason on facts that even the Commissioner of Income-tax (Appeals) has held that interest had accrued as on 31/3/2003 and therefore, the Tribunal is just/fled in granting the relief to the assessee Since the property has been purchased out of the loan borrowed from the Directors and any interest paid thereon is to be included while calculating the cost of acquisition of the asset. Therefore, question No. 1 has to be answered against the revenue." In the case, of ACIT Vs C.Ramabrahmam, the ITAT Chennai Bench 'C' in has held that the assessee had purchased house property, availing loan. The house property was subsequently sold and assessee Included interest paid on housing loan while computing capital gains u/s 48. The Assessing Officer::as of opinion that since interest in question on housing loan, had already been claimed as deduction u/s 24(b), the same could not be taken into consideration for computation u/s 48 and interest amount was added to income of assessee. The CIT(A) reversed the findings of A and held deduction u/s. 24(b) and computation of capital gains u/s 48 were altogether covered by different heads of income i.e., income from 'house. property' and 'capital gains: None of them excludes operative of the other. The interest in question was indeed expenditure in acquiring asset. Since both provisions were altogether different, assessee was entitled to include interest paid on housing loan for computation of capital gains u/s 48 despite the fact that same had been claimed u/s 24(b) while computing income from house property; The revenue's appeal was dismissed by the ITAT, Chennai Bench and the order of the Id. CIT(A) was upheld from these judicial pronouncements, it is very much clear that if the property is purchased from borrowed funds then consideration for the purchased amount, the interest on borrowed fund also has to be paid. The amount of interest paid by the assessee constitutes the actual cost to the assessee for that property. To exclude the interest amount from the actual cost of the assets/property would lead anomalous result. The interest amount should be definitely a 15 | P a g e c ied to the actual cost of the properly. Respectfully following these regal propositions and on basis of our observations as held herein, we reverse the findings of t-e Id: CIT(A) and that the interest paid to bank for acquiring capital asset would be eligible as part of cost of acquisition. We hold accordingly, The grounds No. 1 to 4 of the assessee's appeal are allowed,"
We therefore find that there is a consistent view among various Hon’ble High Courts and which has been consistently followed by the various Benches of the Tribunal that the assessee is entitled to include interest as part of the cost of the assets while computing the capital gains U/s 48 of the Act. In the absence of any contrary authority brought to our notice, the Assessing Officer is directed to allow the interest expenses of Rs.3,93,898/- paid to LIC Housing Finance Ltd. Subject to appropriate indexation while computing capital gains u/s 48 of the Act. In the result, the appeal of the assessee is allowed." 1.7.7 I have already held the property in question as capital asset and sale transaction as capital gains. In view of this and above mentioned facts and legal position, I hereby hold that Interest paid on the borrowing made for acquiring Capital Asset is part of the cost of acquisition; and therefore, eligible for indexation and deduction from Sale Consideration for computation of capital gains and, as such, I hereby direct the AO to allow the same. Thus, the ground of appellate is allowed.” This leaves the department aggrieved.
4. We have given our thoughtful consideration to the department’s and the assessee’s respective vehement submissions. There is hardly any dispute between the parties that the assessee had purchased the relevant asset/property at Jhandewalan Extension, New Delhi, way-back in financial year 2010-11 relevant to assessment year 2011-12 which was taken as its inventory/stock-in-trade. And that the assessee later on converted/transferred the same from its inventory to investment in 16 | P a g e financial year 2016-17 relevant to assessment year 2017-18 followed by its sale/transfer in the relevant previous year giving rise to treatment of the profits derived therefrom as capital gains. It is in this factual backdrop that the learned departmental representative invites our attention to the Assessing Officer’s first/foremost as well as the main reasoning that the assessee’s stand to convert its above inventory to capital asset in financial year 2016-17 could not be accepted as the corresponding provision to this effect in section 28(via) of the Act came to be inserted by Finance Act, 2018 w.e.f. 01.04.2019 only. The Revenue’s case in other words is that such a conversion before insertion of the above provision does not entitle the assessee to get assessed for corresponding capital gains as the Assessing Officer has rightly recharacterized the same as it’s business income in very terms.
5. We have given our thoughtful consideration to the department’s foregoing vehement contention and the assessee’s reliance placed on the CIT(A) foregoing detailed discussion. We note that so far as the Revenue’s case that the assessee is not entitled to convert its inventory/stock in trade to its investment account, it is hardly found to be res integra in light of hon’ble jurisdictional
17 | P a g e high court’s decision in CIT Vs. Express Securities Pvt. Ltd. (2014) 364 ITR 488 (Del) as follows: “2. The assessee is a company. In the return for the year in question, it had declared long-term capital gain of Rs.3,34,65,931/- and the said gain was claimed as exempt under Section 10(38) of the Income Tax Act, 1961 (Act, for short). The respondent-assessee had claimed before the Assessing Officer that they were maintaining two sets of portfolio, i.e., investment and trading portfolio and the shares, which were sold and subject matter of long-term capital gains, were held in the investment portfolio. This factual position was not disputed.
The Assessing Officer has recorded that as per the business activities undertaken by the assessee, they were dealing and trading in shares and financial securities in Bombay Stock Exchange, Delhi Stock Exchange and Calcutta Stock Exchange. The respondent- assessee was a registered broker with the said exchanges. The Assessing Officer held that the business of the assessee was not to invest in shares but to deal with the shares as a stock broker and trader. He observed that conversion of stock in trade into investment was done with the intention not to pay taxes as Section 10(38) was introduced by Finance Act, 2004 with effect from 1st April, 2005. Accordingly, he held that the entire amount was taxable as a "trading receipt" and not under the head "capital gains".
The assessment order does not mention the date on which the shares in question were purchased. We also note that the assessment order records that the assessee had converted and transferred the shares in question under the head "investment" on 1st April, 2004. This factual position was not disputed or questioned. The shares in question were sold during the period ending 31st March, 2006, nearly 2 years after the date of conversion of stock in trade into investment with a specific declaration. Mere fact that Section 10(38) was introduced in the statute by Finance Act 2004 with effect from 1st April, 2005, does not mean that the said conversion was improper or illegal. After the said Section was inserted, the assessee on noticing the tax benefit, was entitled to convert and change his holding from stock in trade into investment. Such conversion cannot be dealt with and rejected on the ground that Section 10(38) of the Act was introduced with effect from the said date. Conversion may be rejected for other reasons and grounds like the intention was not to convert and the assessee still continued to treat and regard the shares as stock in trade and not investment. But there is hardly any discussion in the assessment order in this regard. Justification and reasons have not been elucidated and brought on record to uphold the 18 | P a g e contention of the Revenue that the shares were continued to be held as stock in trade and not as an investment.
The Commissioner (Appeals) noticed that the shares in question as held on 31st March, 2004 and their book value was as under: - Scrip name Quantity Book value as on 31.03.2004 Global Tele 3,35,000 2,09,14,050 Himachal Futuristic 6,15,000 73,27.600 NIIT 20,000 33,97,200 6. The Commissioner (Appeals) has observed that in the balance sheet as on 31st March, 2005 the shares were shown under the head "inventories" and in the subsequent balance sheet as on 31st March, 2006 shares were again shown under the head "investment at book/fair value on 1st April, 2004". Thus, the assessee converted the aforesaid stock in trade of Rs.3,18,38,850/- to the head "investment at book/fair value on 1st April, 2004" and the said disclosure was made in the balance sheets as on 31st March, 2005 and 31st March, 2006. In the first year, the Assessing Officer did not disturb the aforesaid conversion and accepted the same. The Commissioner (Appeals) noticed that for the Assessment Year 2005-06 assessment was concluded under Section 143(3) vide order dated 27th November, 2007 but the Assessing Officer did not object to the said conversion. These shares were subsequently sold as detailed in paragraph 2.9 of the order of the Commissioner (Appeals) in August, 2005, September, 2005 and substantial portion was sold in March, 2006 and long-term capital gains was declared. He observed that statute did not reject or frown upon conversion of stock in trade into investment and the said conversion was permissible. Commissioner (Appeals) referred to the Circular No. 4/2007 dated 15th June, 2007 issued by the Central Board of Direct Taxes, which stipulates that two portfolios one for stock in trade and one in respect of investments could be maintained by the same assessee. He took into account the period of holding by the assessee and the fact that the conversion into investment was made on 1st April, 2004 and outlay was disclosed in the audited accounts for the Assessment Year 2005-06. The sales made, as noticed above, were after considerable delay of approximately two years thereafter.
7. In view of the aforesaid factual findings recorded by the Commissioner (Appeals) and the tribunal, we do not see any reason to interfere and issue notice on the main appeal. Accordingly, we are not inclined to issue notice on the application for the condonation of delay and the same and consequentially the appeal are dismissed.”
We accordingly concluded that once the learned departmental authorities had not questioned and rejected the assessee’s conversion of above asset from inventory/stock-in-trade to investment account in financial year 2016-17, its consequential capital gains derived from sale/transfer thereof in subsequent assessment year 2020-21 could not be rejected as per their lordships’ above extracted detailed discussion. The Revenue fails in its instant sole substantive ground therefore.
We next note that the Revenue’s third substantive ground herein seeks to disallow the assessee’s expenditure incurred right from financial year 2011-12 onwards against its sale consideration invoking “prior period” principle which is no more applicable once its land in question stands treated as a capital asset. Rejected accordingly. No other ground or argument has been pressed before us.