M/S. SHREE MARUTI CHEMICAL INDUSTRIES PVT. LTD.,PASCHIM BURDWAN vs. I.T.O., WARD - 5(1), KOLKATA

Per Rajesh Kumar, AM:

This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 21.11.2025 for the AY 2022-23.

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 assessing by totally ignoring the applicability of Section 54F of the Act to the facts of the assessee's case.

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 parking space. The Ld. AO observed from the balance sheet of the assessee that the said asset has been changed from fixed asset to inventory and came to the conclusion that the said that the nature of asset [land] had ceased to exist and therefore the assessee was liable to pay the entire capital gains tax in one go i.e. on the date of execution of the development on 19.01.2022. The Ld. AO accordingly, took the sales consideration at ₹5.00 crores and after allowing the indexed cost of₹52,17,781/- computed a long term capital gain of ₹4,47,82,219/-. The Ld. AO observed that as against this figure, the assessee has shown a long term capital gain of ₹20,07,578/- and there was a difference of ₹4,27,74,641/- being lesser capital gain returned by the assessee. Accordingly, the assessee was given a show cause notice as to why the same should not be added to the income of the assessee. The assessee replied the said show cause notice by submitting that the assessee has entered into a development/ construction agreement with M/s Mishra Associates Development Consultant P. Ltd. on 19.01.2022 to develop the residential cum commercial complex. The period of the said payment to be received from the developer was spanned over from 19.01.2022 to 08.07.2024 as per the development agreement. It was submitted that the assessee accordingly had shown the capital gain during the year as well as in the subsequent years. The Ld. AO noted that the assessee remained silent as to why the assets has been shown as stock-in-trade in the subsequent years and the capital gain has not been paid. The Ld. AO having observed this, came to the concussion that the entire capital gain has to be brought Page 3 of 11

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 to tax during the year and accordingly, treated the same as undisclosed Long Term Capital Gain and added to the income of the assessee in the assessment framed u/s 143/ 144B of the Act dated 19.03.2024. 4. The Ld. CIT (A) dismissed the appeal of the assessee by simply confirming the order of the Ld. AO. 5. After hearing the rival contentions and perusing the materials available on record, we note that the assessee owned a land, admeasuring 222 cottahs located at Paschim Bardhaman, P.S. Salanpur, Achhra Gram Panchayat, Mouza Harishadi, which was appearing as capital asset in the books of the assessee till 31/12/2021.During the relevant financial year, a Valuation report was got prepared of the impugned asset at Rs.5,11,67,438/- a copy of which is available at page 31 of the paper book and the impugned asset was converted into stock in trade on 01.01.2022.Thereafter, the assessee entered into a Development Agreement on 19.01.2022 with M/s. Misra Associates Development Consultants P. Ltd. to develop a residential cum commercial complex on the impugned land. Copy of the said development agreement is available at page no. 1-38 of the paper book. In terms of the said development agreement, in exchange of granting an exclusive right to the developer to commercially develop the impugned land, the assessee was to receive a total consideration as detailed in schedule 'B' of the Development Agreement dated 19.01.2022, plus a covered parking space measuring 120 sq ft, as future share of expected profit in lieu of the land provided, as owner's allocation.Accordingly, the sale of the Page 4 of 11

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 stock in trade was affected in terms of the Development Agreement on the dates indicated in schedule 'B' of the said Agreement and consideration thereof was received and TDS @ 10% u/s 1941C of the Act was deducted and deposited by the developers.Accordingly,for the sake of ready reference the said Sec. 194IC of the Income Tax Act, 1961 reads as under:

"Payment under specified agreement. 194-IC. Notwithstanding anything contained in section 194-14, any person responsible for paying to a resident any sum by way of consideration, not being consideration in kind. under the agreement referred to in sub-section (5A) of section 45, shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon. 6. It is pertinent to note here that on conversion of the capital asset at Fair Market Value [F.M.V] into stock in trade, a capital gain, being the difference of cost of acquisition and the FMV, arises, but the income is deemed to accrue and arise in terms of sec.45(2) of the Act, reproduced as under:

"sec. 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." 7. As is apparent from the above, on conversion of capital asset to stock in trade, long term capital gain arises, but the same is chargeable to tax as and when the said stock in trade is sold. In the present case the payment was to be received over

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ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 a period of time as is evident from schedule 'B' f the Development Agreement dated 19.01.2022.

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 2(47)(vi), legal conveyance was not essential for the purpose of taxing capital gains on converted assets. Accordingly, he computed capital gains and treated the same as short-term capital gains, for the three assessment years 1989-90, 1990- 91 and 1992-93.On appeal, the Commissioner (Appeals) held that to complete the transfer, one should not wait for execution of the conveyance deed if the entire sale consideration is received, entire construction work is over and entire possession of all the flats is handed over to the buyer. However, according to him, piecemeal possession of some of the flats would not result in transfer of land and building or completion of project on the arguable and possible method of accounting profits on completed project basis. On cross appeals, the Hon'ble Mumbai Tribunal held as under:

"As per section 45(1) capital gain arises on transfer of capital asset. Also, as per the said section, capital gain is chargeable to tax in the previous year in which the transfer takes place. As per section 2(14), capital asset does not include stock-in-trade. As per the inclusive definition of the term 'transfer' given in section 2(47), sale is one of the several modes of transfer. Conversion of capital asset into, or its treatment as, stock-in-trade of the business carried on by the assessee, is another mode of transfer as per the said definition. Section 45(2) acts as an exception to section 45(1). Section 45(2) provides that capital gain arising on account of conversion of capital asset into or its treatment as stock-in-trade shall be chargeable to tax in the previous year in which such stock-in-trade is sold or otherwise transferred. In the instant case, conversion had taken place in June 1986. Conversion is a mode of transfer under the Act. Thus, after June 1986, the asset in question no longer remained a capital asset. As a consequence, what was sold in the year under consideration was part of stock-in-trade and not capital asset. If what was sold was not capital asset, one could not go back to section 2(47) to ascertain whether transfer by way of sale was complete or not. In fact, in the instant case, the role of section 2(47) was relevant only in 1986 when conversion took place. Thereafter, it had no role to play at all, because it was meant only for capital asset and not stock-in-trade. Capital asset does not include stock-in-trade. Thus, the argument that transfer could be effected only when conveyance was executed, was of no significance, and also the alternative argument that transfer was effective only after the last flat was sold, was also of no significance. The Assessing Officer's observation about Page 7 of 11

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 the applicability of sub-clauses (v) and (vi) of section 2(47) was also irrelevant. The fact that stock-in-trade was sold in parts in the years under consideration could not be disputed, because the real profit that arose on sale of stock-in- trade was business profit, which the assessee itself had offered for taxation. If sale of stock-in-trade was not denied, then as per section 45(2) which only fixes the year of liability, the assessee could not deny his tax liability on capital gains also which by fiction, had already arisen in 1986. The Legislature in its wisdom, considering the fact that on conversion only notional income had arisen, postponed the tax liability thereon till real income was earned on that asset. The assessee could not further postpone the liability beyond the poasset had assumed the characteristic of stock-in-trade. Hence when business profit on sale of such stock accrued to the assessee, tax on capital gain also would be levied in the same year as was envisaged by section 45(2). In such an event, all the arguments relating to conveyance, possession etc., which were generally related to transfer of capital asset, were rendered meaningless. In the instant case, the assessee itself having recognized business profits on sale of converted asset in the years under consideration, tax on capital gains would be levied in these years according to the area sold by the assessee in each year. 9. It is also noted that the case of the assessee is also squared covered by the Coordinate bench Chennai in the case of R. Gopinath (HUF) v. Assistant Commissioner of Income-tax reported in 133 TTJ 595 following the above ratio and has held that where assessee converted his land into stock-in- trade and entered into development agreement with developer to construct residential building thereon, capital gain arising from conversion of land into stock-in-trade would be taxable proportionately in previous years in which assessee's share of constructed property as per development agreement was sold by assessee. Relevant extract of the judgment reproduced as under:

"15. In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not: at the time when the development agreement was entered into. Moreover, in the development agreement, the assessee has not agreed for Page 8 of 11

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 sale of the entire constructed property on the land, the assessee has agreed only for a portion of the constructed property for sale for the purpose of recovery of the cost of construction and margin of the developer. The assessee has executed all the sale deeds for transfer of the constructed apartments in favour of the end-user/purchaser, therefore the transfer of the proportionate land took place only when the assessee transferred the construction property by way of sale deeds and offered the business income which was accepted by the Department. In any case, when the assessee has retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, we hold that the orders of the lower authorities, qua this issue are not sustainable on the facts as well as on law. We set aside the orders of the lower authorities. qua this issue and direct the AO to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered." 10. Similarly, the decision of the Coordinate bench of Hyderabad in the case of Ishoo Narang vs. DCIT, Circle -2(1), Hyderabad pronounced on 25 September, 2024, applies to the facts before us. In the said decision .it was held as under:

"10. In so far as the computation of capital gain, we find flaws in the Long- Term Capital Gain and Short-Term Capital Gain computed by the Assessing Officer for the simple reason that as observed by the Assessing Officer himself as per section 45(2) of the Act, the profits or gains arising from the transfer by way of conversion of capital asset to stock-in-trade shall be chargeable to income tax as income of the previous year in which such stock- in-trade is sold or otherwise transferred by the assessee. Admittedly, the appellant has sold part of the stock-in-trade for the current financial year and remaining stock-in-trade is still held by the assessee as closing stock. Thereftaking into account the stock-in-trade sold by the assessee for the impugned A.Y but not the entire extent of land converted by the assessee. In the present case, the Assessing Officer has computed the Long-Term Capital Gain and Short-Term Capital Gain by taking into total extent of land converted by the appellant even though the appellant has sold only part of stock-in-trade. Therefore, we direct the Assessing Officer to ascertain the extent of stock-in-trade sold by the assessee and based on such extent, compute proportionate capital gain liable for taxation in the impugned A.Y. 11. Hence, there is no denying the fact that the action of the Ld.AO in computing the Long-Term Capital Gain for the relevant Assessment Year at a figure of ₹4,47,82,219/- based Page 9 of 11

ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23 on the aggregate consideration of ₹5,00,00,000/-, which was actually received as per the Development Agreement and accounted for and offered to tax in terms of sec.45(2) of the IT Act, 1961. Thus, this is nothing but a case of double addition on account of Long term capital gain in proportion to the consideration received, as the assessee has already offered Long term Capital gain in the relevant AY and also in subsequent years which have already been accepted by the Department.

Order pronounced on 28.10.2026.

Sd/- Sd/- (PRADIP KUMAR CHOUBEY) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 28.10.2026 Sudip Sarkar, Sr.PS

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ITA No. 897/KOL/2026 M/s Shree Maruti Chemical Industries Pvt. Ltd.; A.Y. 2022-23

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT DR, ITAT, 4. 5. Guard file. BY ORDER, True Copy// Digitally signed by MANISH MANISH KUMAR BHOI KUMAR BHOI Date: 2026.10.29 10:38:28 +05'30' Dy. Registrar Income Tax Appellate Tribunal, Kolkata

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