MANNE SUBBA RAO,RAJAMAHENDRAVARAM vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), , RAJAMAHENDRAVARAM

आदेश /O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [(CIT(A)]-3, Visakhapatnam vide ITA No.38/2017-18/CIT(A)-3/VSP/2017-18 dated 19.12.2017 for the Assessment Year (A.Y.)2014-15.

2 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

In the Profit & Loss account, the assessee has admitted the receipt of Rs.49,38,000/- towards sale of plots and debited a sum of Rs.89,17,930/- as expenditure (FMV on conversion of the asset as stock-in-trade) and arrived

3 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

at a loss of Rs.39,79,930/-. During the assessment proceedings, the assessee stated that vacant land was purchased by the assessee during the financial year 2012-13 with an intention to construct flats. Due to financial constraints and also in view of his health problems, the said land was converted into plots and was sold in the financial year 2013-14 relevant to the A.Y. 2014-15. The assessee further submitted that the he has not shown the opening stock and the closing stock of vacant plots in the profit and loss account for the year ending 31.03.2012 relevant to the A.Y. 2012- 13. The AO asked the assessee to furnish the evidences in support of conversion of land into plots from the municipal authorities, but the assessee failed to produce any evidence for the same, hence the AO denied the assessee’s claim of business income and treated the same as short term capital gains. Accordingly brought to tax the sum of Rs.19,32,070/- under the head ‘short term capital gains’ as under : Sale consideration received from sale of 9 plots Rs.1,08,50,000 Less : Cost of acquisition as admitted Rs.89,17,930 Short term capital gains Rs.19,32,070

The assessing officer also estimated the income of the assessee @8% of the gross receipts for which the assessee had agreed for the addition. The estimation of income was made on the receipts of

4 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

Rs.76,00,000/- which represent the sale of flats and does not include the receipts of Rs.49,38,000/- relating to the sale of plots.

5 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

by the assessee on account of sale of plots was also not allowed by the AO. Accordingly, the Ld.CIT(A) confirmed the action of the AO in disallowing the loss. For the sake of clarity, we extract the relevant part of the order of the Ld.CIT(A) available in page No.4 para 5.3 to 5.5. which reads as under : “5.3. It is clear from the above that the core issue in this appeal is whether Section 45(2) of the Act is applicable in this case or not? If applicable, whether capital gains as well as business income is exigible? In this context, it is relevant to examine the provisions of Section 45(2) of the Act. Section 45(2): [(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 capitol asset into, or its treatment by him as stack-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.] A cursory reading of Section 45(2) of the Act reveals certain conditions; 1. There must be an asset existing. 2. The asset must be capital in nature 3. There must be a transfer of such asset u/s. 2(47) of the Act. 4. The transfer must be for some consideration u/s. 48 of the Act. 5. The consideration must be in monetary terms. 6. Profits or gains must arise by way of transfer. 5.4. Section 45(2) creates fiction with regard to "consideration" u/s. 48 of the Act. Generally there will be no capital gains without consideration for transfer of capital asset. There is no monetary consideration for the asset if conversion takes place. Due to this aspect, Section 45(2) contemplates fair market value of the asset on the date of conversion as "consideration". Therefore, as per Section 45(2), the capital gains arising out of conversion of asset into stock-in-trade will be charged under the head capital gains. This Section also imposes fiction With reference to transfer u/s.2(47)(iv) of the Act. In the event of conversion, there is no physical transfer of the asset as contemplated u/s. 2(47)(iv) of the Act. However, Section 45(2) contemplates conversion of asset Into stock-in-trade as transfer for the purpose of capital

6 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

gains. This is the reason why Section 45(2) makes both the Sections 48 and 2(47) as non-operational by making the provisions of Section 45(2) as non- abstante clause. Thus, the conversion of capital asset is considered as deemed transfer. Therefore, this deeming provision enabled fair market value as full value of consideration at the time of conversion. Prior to the Introduction of this Section, the taxpayers were making use of conversion of capital asset into the stock-in-trade to avoid capital gains due to the absence of value and transfer. Thus, this provision has come into the statute in order to curb this practice. In the instant case, the appellant had converted the capital asset into stock-in-trade on 01.04.2013 and sold it on 23.04.2013. Therefore, the capital gains will have to be calculated as per Section 45(2) adopting the fair market value as on the date of sale. The fair market value on the date of sale as per SRO is Rs.1,08,50,000/-. The Assessing Officer has correctly adopted the difference of price between purchase price and fair market value of the asset. Thus, the short-term capital gains of Rs.19,32,070/- is confirmed. Section 45(2) of the Act also contemplates business profits as and when the sale of stock takes place. 5.5. Regarding the business profits, the facts are that the appellant had purchased the asset in the financial year 2012-13 for Rs.89,17,930/- and sold to 9 persons for Rs.49,38,000!- and shown/ admitted a loss of Rs39,79,930/-. The Assessing Officer has not considered this aspect in the assessment order. Due date for filing of return of income for the Asst. Year 2014-15 is 30.09.2014. The original return of income was filed on 04.08.2014 without disclosing capital gains and the revised return of income was filed on 22.09.2015 claiming a loss of Rs.33,00,790/-. Since there is no loss claimed in the original return of income, the loss claimed by the appellant due to sate of asset is not allowed by the Assessing Officer. The appellant has filed his revised return of income on 22.09.2015 which is not within the due date, hence, the loss claimed is not allowed.”

7 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

Act for conversion of the capital asset into business asset. Similarly the sale of business assets results into business income. Thus in the instant case, the AO has to assess the short term capital gains as well as the business income. The assessee has sold the land during the year under consideration and accounted only the actual consideration received as business receipt instead of the fair market value. As per section 43CA of the Act w.e.f. A.Y.2014-15, in the case of business asset, being land and building , the assessee is required to adopt the rate assessed by the stamps and Registration authorities of the Govt. of respective state as fair market value of the land and building as deemed consideration for the stock-in- trade also.. Therefore, the AO has to compute the short term capital gains and the business loss/profit by applying the Section 50C and 43CA respectively, as per the SRO value, for the properties converted in to stock in trade and sold as plots. In the instant case, both the issues of short term capital gains as well as the sale of land was occurred in the same assessment year, therefore, the assessee is entitled for set off of loss if any relating to the same assessment year u/s 71 of the Act. Since the AO as well as the Ld.CIT(A) did not examine the above issues, we are of the considered opinion that the issue required to be reexamined by the lower authorities and accordingly, we set aside the orders of the lower authorities

8 I.T.A. No.158/Viz/2018 Manne Subba Rao, Rajamahendravaram

and remit the matter back to the file of the AO to decide the issue afresh on merits. Accordingly, the appeal of the assessee is set aside to the file of the AO for denovo consideration.

Order pronounced in the open court on 7th December, 2018.

Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 07.12.2018 L.Rama, SPS आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. ननर्ााररती / The Assessee – Manne Subba Rao, D.No.78-15-21/5,T-1, Block-1, Rama Residency, Syamala Nagar, Rajamahendravaram 2. राजस्व / The Revenue– ACIT, Circle-2(1), Rajamahendravaram 3. The Pr.Commissioner of Income Tax, Rajamahendravaram 4. The Commissioner of Income Tax-(Appeals)-3, Visakhapatnam 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file

आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, VISAKHAPATNAM