INCOME TAX OFFICER vs. DEVI EXHIBITORS

Facts

The assessee, a partnership firm engaged in real estate and running a theatre, acquired land on lease in 1971 and constructed theatres. The assessee showed capital gain in its return for Assessment Year 1993-94, which the Assessing Officer (AO) rejected. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's appeal. The revenue appealed to the Income Tax Appellate Tribunal (Tribunal), which dismissed the revenue's appeal. The High Court is hearing an appeal by the revenue against the Tribunal's order. The assessee had introduced Floor Space Index (FSI) as stock-in-trade in January 1988, crediting Rs. 1,10,25,000 to a capital reserve account and debiting the FSI Right Account.

Held

The High Court held that the Tribunal was correct in its conclusion that Floor Space Index (FSI) is a capital asset. The Tribunal's reasoning, which the High Court agreed with, was that FSI is an asset as per Section 3(26) of the General Clauses Act and that its conversion into stock-in-trade is a "transfer" under Section 2(47)(iv) of the Income Tax Act. Crucially, Section 45(2) provides that capital gains arising from the conversion of a capital asset into stock-in-trade are chargeable to tax in the previous year in which such converted asset is actually sold or otherwise transferred, not in the year of conversion. For computing capital gains, the fair market value on the date of conversion is deemed the full value of consideration. Therefore, the year of transfer is when the asset is sold to outside parties, and only to the extent of the asset actually sold. The Tribunal correctly confirmed the CIT(A)'s order allowing the assessee's claim. The FSI is an asset attached to the property, not the business. The appeal is dismissed.

Key Issues

1. Whether, on the facts and in the circumstances of the case, and in law, the Income Tax Appellate Tribunal is right in coming to the conclusion that "Floor Space Index" is a capital asset? (Question of law) Assessee's contentions: The Tribunal correctly appreciated the evidence and passed its order. There is no reason to interfere with the Tribunal's order. The appeal should be dismissed due to the concurrent finding of the CIT(A) and the Tribunal. Revenue's contentions: The Tribunal erred in dismissing the revenue's appeal and confirming the CIT(A)'s order. The Tribunal wrongly relied on Section 45(2) of the Income Tax Act in deciding the appeal. The appeal should be allowed, and the orders of the Tribunal and CIT(A) set aside.