SHRI KRISHNAKUMAR RAMSINH PARMAR,,SILVASSA vs. THE INCOME TAX OFFICER,, VAPI

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकरअपीलसं./ITA No.1235 & 1709/AHD/2017 (�नधा�रणवष� / Assessment Year: (2013-14) (Virtual Court Hearing) Krishnakumar Ramsinh Parmar, The Income Tax Officer, Silvassa C-Twin Bunngalow 4, Manorath Ward-Silvassa. Vs. Residency, Gurudev Complex, Silvasa-396230. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: ACFPP2308B (Assessee) (Respondent) Chandrasinh Ramsinh Parmar, The Income Tax Officer, Silvassa Vs. Parmarwadi, Sayli Road, Silvassa, Ward-Silvassa. Dadra & Nagar Haveli-3962310. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AIYPP9167F (Assessee) (Respondent) Assessee by : Shri Hiren R Vepari - CA Respondent by : Ms Anupama Singla – Sr. DR सुनवाईक�तार�ख/ Date of Hearing : 19/10/2020 घोषणाक�तार�ख/Date of Pronouncement : 03/11/2020 आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER:

Captioned two appeals filed by the different assessees, pertaining to the Assessment Year (AY) 2013-14, are directed against the separate orders passed by the ld. Commissioner of Income Tax (Appeals), Valsad [in short the “CIT(A)”] in Appeal No. CIT(A)/VLS/259/16-17/302 dated 07.04.2017 and CIT(A)/VLS/260/16-17 dated 07.04.2017 respectively, which in turn arise out of separate assessment orders passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”].

4. At the outset, Learned Counsel, Shri Hiren R. Vepari, informs the Bench that assessee does not want to press ground No.1, therefore, we dismiss the same. Ground No.3 raised by the assessee is general in nature therefore does not require adjudication.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar issue which we are required to adjudicate in this appeal, which is: whether or not Land (asset) held as stock-in-trade in the partnership firm is a capital asset and would attract the provisions of section 45(3) of the Income Tax Act,1961 ?

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar "08. As per the findings given in para 05 and 06 above, it is very clear that Shri Ranjanben R. Parmar has on 27.08.2010 i.e. the date she was granted permission by the Chief Officer, Siivassa for construction of 22 Buildings/Apartments on 34000 Sq. Mtr at S. No. 24/2 1, 2 and 3 at Siivassa, converted her capital asset i.e. the NA land mentioned above, into Stock- in- Trade. At this point, the provisions of Sec. 45(2) of the Income Tax Act, 1961 would apply. The AO should note here that the Fair Market Value of the asset on the date of conversion which in this case is Rs.11,40,00,000/- i.e. the value as per the gift deed dated 20.12.2012 shall be deemed to be the value of consideration received or accruing, as a result of transfer of the capital asset. The indexed cost of acquisition would be as determined by the AO in his show cause notice dated 01.02.2016 i.e. Rs. 2,42,82,000/-. 08.1 Section 45(2) of the IT Act, 1961 also provides that the profits/gains accruing by way of conversion of the capital asset into Stock- in- Trade is chargeable to tax in the year in which the Stock- in- Trade is sold. In this case, as discussed in the paras above, Smt. Ranjanben R. Parmar has gifted the land at S. No.24/2, 1, 2 and 3 at Siivassa admg. 38000 Sq. mtr to her brothers, Shri Chandrasinh R. Parmar and Shri Krishnakumar R, Parmar equally, as explicitly mentioned on page 2 of the Registered Gift Deed. Automatically, alongwith the land, the constructed building, permission obtained, etc. will also pass on to Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar, equally. 08.2 In view of the details mentioned in para 08 and para 08.1 above, the AO will apply the provisions of section 45(2) of the I. T. Act, 1961 in the cases of Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar at the point of sate. Alongwith the gift of the land from Smt. Ranjanben R, Parmar, the liability of taxation of capital gain as per the provisions of section 45(2) of the I. T. Act has also duly passed on to them in all its scope and entirety. As the charging of capital gains under section 45(2) of the I. T. Act, 1961 is in the year which the Stock- in- Trade has been sold, the AO will bring to tax the capital gains in the year of sale, i.e. the year in which M/s. Sai Enterprises (in respect of 1677 Sq. Mtr, of land) and M/s. Sai Samarth Enterprises (in respect of 1677 Sq. Mtr. of land), has sold the Stock- in-Trade /booked the profit on sale as both the firms are seen to be following project completion method for offering the profit/income to tax. The AO will also ensure that the action as above is taken in respect of the remaining land of 34,000 Sq. Mtr. for which the building construction has been duly approved, as discussed in the paras above.

9. Now coming to the introduction of land as capital by Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar, the details of which have been discussed in paras 05, 06 & 10 above, the provisions of section 45(3) of the I. T, Act, 1961 would apply. The capital gain on transfer of the capital assets by a partner to a firm is chargeable to tax in the previous year, in which such transfer has taken place. The amount recorded in the books of accounts of the firm as the value of the capital assets is to be taken by the AO as full value of consideration received as a result of the transfer. The details in respect of such transfer by Shri Krishnakumar K. Parmar and Shri Chandrasinh R. Parmar to M/s. Sai Enterprises and M/s. Sai Samarth Enterprises are as per para 07 above. The AO may note that the transfer of capital assets by the partners is only at 1677 Sq. Mtr each in the aforementioned firms, out of 34,000 Sq. Mtr of land approved for construction of flats/apartments. Similar action is required to be taken when Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar transfers the remaining land to any firm/AOP, etc. in future.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar 09.1 The AO is directed to implement the instructions in para 09 above on PROTECTIVE BASIS. The instructions in para 08 will be Implemented by the AO on SUBSTANTIVE BASIS. "

Long term capital gain Rs.39,59,397

Half share of the assessee Rs.19,79,699/- Therefore, the amount of Rs.19,79,699/- (being share of assessee) was added under section 45(2) of the I.T. Act, to the total income of the assessee on substantive basis.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar partner to a firm is chargeable to tax in the previous year, in which such transfer has taken place. The amount recorded in the books of accounts of the firm as the value of the capital assets is to be taken as full value of consideration received as a result of the transfer. The transfer of capital assets by the partners is only at 1677 Sq. Mtr each in the aforementioned firms, out of 34,000 Sq. Mtr of land approved for construction of flats/apartments. Therefore, for the purpose of calculating the capital gain on transfer of land to the firm, the value recorded in the books has to be considered. The value recorded in the books was to the tune of Rs.33,85,312/-. In view of the direction given by the Addl. Commissioner of income Tax, Vapi Range Vapi, vide his order u/s. 144A dated 23.03,2016, the assessing officer made addition under section 45(3) of the Income Tax Act, to the tune of Rs.33,85,312/- on protective basis.

After considering the findings of the assessing officer and submissions of the assessee, I find that the following facts emerge:- (i) The factual matrix of the case indicates that Smt. Ranjnaben R. Parmar converted her agricultural land admeasuring 38,000 Sq. mtr into non-agricultural land in F.Y. 2002-03 and permission for development and construction on 34,000 Sq. mtr of the said land was obtained on 27.08.2010. Construction on 1677 Sq. mtr of land was started in collaboration with M/s. Sai Enterprises (Brothers of Ranjnaben R. Parmar-Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar were partners). M/s. Sai Enterprises was appointed as manager/supervisor with profit sharing of 20%. On 20.12.2012, the land parcel of 38,000 Sq. mtr including the construction thereon was gifted to the two brothers - Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar. The facts till this stage bring out that Smt. Ranjnaben R. Parmar transferred her stock in trade in the form of land of 38,000 Sq. mtr including the construction thereon till that date of 20.12.2012. Thus, the provision of sec.45(2) of the Act is applicable in the case of Smt. Ranjnaben R. Parmar for assessment year 2013-14. The provision of sec. 45(2) of the Act is a non-obstante clause starting with the phrase – “Notwithstanding anything contained in subsection (1)…….. meaning thereby that capital gain has to be computed even if not consistent with provision of sec. 45(1) of the Act. The provision of sec. 45(2) clearly mention that on conversation of capital asset to stock in trade of business carried on by a person will be chargeable to tax as capital gains in the previous year in which such stock in trade is "sold or otherwise transferred" by that person. The AR of the assessee has argued that the stock- in- trade is gifted to the two brothers and therefore, this is not sale and no chargeable capital gain arises. The AR argued that capital gain charged when stock in trade introduced in the firm M/s. Sai Enterprise is ultimately sold as flats. This contention of the AR is not in accordance with the provisions of the Act due to following reasons:- Page | 6

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar (a) S. 45(2) of the Act states the stock-in-trade sold or otherwise transferred. The gift of land parcel in the current case amounts to "otherwise transfer" for Smt. Ranjnaben R. Parmar. (b)Smt Ranjnaben R. Parmar has gifted the land parcel leading to transfer and hence capital gains on the whole transfer of land parcel of 38000 Sq. mtrs is chargeable to tax in A.Y. 2013- 14 in her case. Accordingly, I find that the direction of the Addl. CIT u/s. 144A of the Act, vide para 8 of his order dated 23.03.2016 is not accordance with the provision of the Act. The AO has computed capital gains of Rs.19,79,699/- u/s. 45(2) of the Act in the case of assessee by taking F.M.V. of 1677 Sq. mtr of land reduced by indexed cost of acquisition for 1677 Sq. mtr land. This is totally incorrect as there is no sale or otherwise transfer of any stock-in-trade by the assessee. The assessee received capital assets in the form of land parcel out of which 1677 Sq. mtr (half share each of the assessee and his brother) introduced as capital contribution in the firm and balance portion is lying in his capital account itself. Thus, the addition of Rs.19,79,699/- u/s, 45(2) of the Act in the case of assessee is not sustainable and the same is hereby deleted.

(ii) With regard to capital gains of Rs.33,85,312/- taxed in the case of the assessee on protective basis as per direction u/s. 144A of the Act, I find that the AO as well as the Addl. CIT has misinterpreted the issues involved. The facts indicated that the assessee alongwith his brother received capital assets in the form of land parcel of 38,000 Sq. mtr including some construction thereon. This is nothing but capital assets in the hands of the assessee even though it was stock in trade in the hands of Smt. Ranjnaben R. Parmar. The concept of stock in trade is specific to the individuals/persons carrying on the business who had converted their capital assets into stock in trade for exploiting the same for the purpose of business. Once this stock in trade is sold or transferred, the nature this assets in the hands of the transferee will depend on the nature of use of the assets by the transferee. For example, the manufacturing company of machinery will sale its machine as stock in trade whereas the purchaser may use the same as capital assets or stock in trade depending on whether the purchaser is using the machine for some production of goods or the machine is being used as a trading item. In the current case, the assessee received capital assets in the form of half shares of land parcel of 38,000 sq. mtr inclusive of construction thereon which was credited to his capital accounts. Out of this capital asset of land, 1677 Sq. mtr of land was transferred by him as capital contribution to the firm M/s. Sai Enterprises in the current assessment year. AR of the assessee has accepted this fact in his submission that only 1677 sq. mtr land was introduced as capital contribution by the two partners and balance was lying in their capital accounts. Thus, for the assessee, the provision of sec. 45(3) of the Act will apply and capital gain on transfer of capital asset of 1677 Sq. mtr to the partnership firm M/s. Sai Enterprises (in which he was one of the partner) in the current assessment year will be chargeable to tax. There is no reason why this capital gain should be charged on protective basis. The capital asset is introduced by the assessee as capital contribution in the current assessment year. Thus, I do not agree with the direction given by the Addl. CIT u/s.144A of the Act. Accordingly, the capital gains computed at Rs.33,85,312/-u/s. 45(3) of the Act is hereby confirmed as substantial income of the current assessment year.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar 12. Aggrieved by the order of the ld. CIT(A) in respect of substantive addition of Rs. 33,85,312/-, the assessee is in appeal before us.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar “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"

Having gone through the above provisions of sub-section (2) of section 45, we have noticed that where capital asset is converted into stock-in-trade and remains in stock- in-trade, till that point of time, there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold or otherwise transferred by the assessee. Now, at the point of conversion of capital asset into stock-in- trade that is, when part of the gifted land was introduced by assessee in M/s Sai Enterprises (partnership firm) as stock-in-trade, there is no charge of capital gain. As per plain language of sub-section (2) of section 45, transfer would take place when such stock-in- trade is sold by partnership firm (M/s Sai Enterprises). Since, the partnership firm (M/s Sai Enterprises) has not sold the stock-in- trade therefore no any capital gain would arise in the hands of the assessee.

From the provisions of sub- section (3) of Section 45 of the Income Tax Act, it is clear that when a person transfers a capital asset to partnership firm in which he is a partner, by way of capital contribution, then it shall be chargeable to tax as his income of the previous year in which such transfer takes place. However, as per sub-section (2) of section 45, if such capital contribution is made by partner as stock-in-trade then ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar taxable event of capital gain would arise in the year in which such stock-in-trade is sold. Thus, sub-section (2) of section 45 carves out an exception to the above and deals with the situation where capital asset is converted into stock-in-trade. At that point of time, as per sub-section (2) of section 45 of the Act there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold. In assessee`s case under consideration, we note that 1677 Sq. mtr of land was transferred by assessee as capital contribution, as a stock-in-trade, to the firm M/s. Sai Enterprises in the assessment year 2013-14. Since the capital asset is converted into stock-in-trade during the assessment year 2013-14, it will be treated as “transfer” under section 2(47) for the assessment year 2013-14 but charge of capital gain does not arise. The charge of capital gain arises when such stock-in- trade is sold. In other words, the Capital gain shall be computed on the assumption that the capital asset is transferred in assessment year 2013-14, however, by virtue of sub-section (2) of section 45 such capital gain will be taxable in the subsequent assessment year in which such stock-in- trade is sold. In the assessee`s case, the stock-in-trade is not sold in the assessment year 2013-14 therefore, there is no any liability on the assessee to pay tax in the assessment year 2013-14, the liability to pay tax will arise in subsequent year in which such stock-in-trade is sold by the assessee. Therefore taxable event or tax liability on the assessee arises on sale of such stock-in-trade .

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar It is s abundantly clear from the provisions of sub-section (14) of section 2 that stock- in-trade is not a capital asset. We note that in assessee`s case capital asset of land, 1677 Sq. mtr was transferred by assessee as capital contribution to the firm M/s. Sai Enterprises in the current assessment year which was treated by the firm as stock-in- trade. The said stock-in-trade is not a capital asset.

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar 20. Conclusion Admitted facts in the assessee`s case are that the character of land when introduced as capital into the partnership, M/s. Sai Enterprises, was nothing but stock-in-trade. The stock-in-trade is not sold by the assessee in the assessment year under consideration, that is, assessment year 2013-14. We note that sub-section (2) of section 45 deals with the situation where capital asset is converted into stock-in-trade. Where the owner of a capital asset converts the capital asset into or treats it as, stock-in trade of his business, there is no transfer and no gain under the general law, for a man cannot transfer his property to himself or to make gain out of himself. However, section 2(47) (iv)[ as amended by the Taxation Laws (Amendment) Act, 1984 with effect from April 1, 1985], deems such conversion as transfer and section 45(2) [inserted by the same Act with effect from the same date], brings to tax in a singularly ill-suited language, stating that, ‘the profits or gains arising from such ‘transfer’ in the accounting year in which the stock-in-trade is sold or otherwise transferred.

We note that as per provisions of sub-section (2) of section 45, where capital asset is converted into stock-in-trade, till that point of time, there is no charge of capital gain. The charge of capital gain arises when such stock-in- trade is sold by the assessee. Since, the partnership firm (M/s Sai Enterprises) has not sold the stock-in- trade therefore no any capital gain would arise in the hands of the assessee. As per sub- section (3) of Section 45 of the Income Tax Act, when a person transfers a capital asset to partnership firm in which he is a partner, by way of capital contribution, then it shall be chargeable to tax as his income of the previous year in which such transfer takes place. However, sub-section (2) of section 45 carves out an exception to the above and deals with the situation where capital asset is converted into stock-in-trade, that is, there is exception in sub-section (2) of section 45 of the Act. The exception is that the Capital gain shall be computed on the assumption that the capital asset is transferred in assessment year 2013-14. However, by virtue of sub-section (2) of section 45 such capital gain will be taxable in the subsequent assessment year in which such stock-in- trade is sold. In the assessee`s case, the stock-in-trade is not sold in the assessment year 2013-14 therefore, there is no any liability on the assessee to pay tax in the Page | 12

ITA 1235 & 1709/Ahd/2017 Assessment Year. 2013-14 K R Parmar & C R Parmar assessment year 2013-14, the liability to pay tax will arise in subsequent year in which such stock-in-trade would be sold.

Considering the legal position as explained by us in the relevant provisions of sub- section (2) of Section 45, sub-section (3) of section 45 and sub-section (14) of section 2 of the Income Tax Act 1961 and taking into account the facts of the assessee`s case, we hold that Land (asset) held as stock-in-trade in the partnership firm is not a capital asset and would not attract the provisions of section 45(3) of the Income Tax Act,1961, hence we delete the addition of Rs. Rs.33,85,312/-.

Order is pronounced on 03/11/2020, as per Rule 34 of Income Tax Appellate Tribunal, Rule 1963.