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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI G. MANJUNATHA
आदेश /O R D E R PER MAHAVIR SINGH, VP: This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-Puducherry in dated 30.11.2018. The assessment was framed by the DCIT, Villupuram Circle, Villupuram for the assessment year 2013-14 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 31.03.2016.
2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in considering the guideline value of the land as mentioned in section 50C of the Act as fair market value on the date of conversion of said land into stock- in-trade u/s.45(2) of the Act.
Brief facts are that the assessee is an individual deriving income from partnership firm engaged in real estate business and interest income from bank. During the financial year 2011-12 relevant to assessment year 2012-13, the assessee was engaged in the business of layout development under the name ‘Modern City’ as a proprietary concern. The layout comprises of agricultural lands in Melpettai Village, Pachalam Village, Salvathi Village and Vittalaburam village. The extent of the layout is 29.67 acres in the following manner:- S. Date Extent in Acres Consideration Mode of acquisition No. & Rs. in Rs. Lakhs 1 20.02.2012 7.54 acres 203.58 Conversion of own agricultural @ Rs.27 lakhs land held as capital asset in the per acres name of your appellant into Stock-in-trade 2 20.02.2012 10.45 acres 282.15 Purchase of agricultural land @ Rs.27 lakhs as stock-in-trade from Mrs.T. per acres Premakumari through Agreement for sale deed dated 20.02.2012. 3 20.02.2012 5.62 acres 151.74 Purchase of agricultural land
@ Rs.27 lakhs as stock-in-trade from Mr.T. per acres Venkatesan through Agreement for sale deed dated 20.02.2012 4 20.02.2012 6.06 acres 163.62 Purchase of agricultural land @ Rs. 27 lakhs as stock-in-trade from Mr.T. per acre Ramanikanth through Agreement for sale deed dated 20.02.2012 Total 29.67 801.09 The assessee before the AO claimed that he has purchased agricultural land at Sl.No.2,3 & 4 at the prevailing market rate of Rs.27 lakhs per acres. But this prevailing market rate is much higher than the guideline value fixed by the Stamp Valuation Authority for registering the sale deed i.e., Rs.51,500/-. The AO noted the fact that the assessee has converted his own agricultural land as stock-in-trade and the same was held as capital asset in the name of the assessee admeasuring 7.54 acres. The AO noted that the assessee has computed fair market value as on 20.02.2012 on the basis of sale deed registered at Rs.27 lakhs per acre and accordingly, computed income and declared in computation of income. The AO noted that the fair market value of assessee’s own agricultural land converted as stock-in-trade admeasuring 7.54 acres as on 20.02.2012 should be valued on the basis of guideline value fixed by Government for all practical and legal purposes which is based on fair market value prevailing in that area. The AO noted that if any land is registered at higher value then that value will become the new guideline value. He also noted that the assessee, being engaged in real estate business for long period had always been offering the full value onsideration based on guideline value fixed by Government. Accordingly, the AO adopted the guideline value at Rs.51,500/- per acre as fair market value for conversion of agricultural land of the assessee into stock-in-trade and computed profit in respect of real estate business for the relevant assessment year 2013-14. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) after considering the submissions of the assessee and facts of the case noted that the provisions of section 45(2) of the Act is applicable in the case of capital asset and agricultural land is not a capital asset. He also confirmed the findings of the AO that the guideline value notified by the Government for registration of documents for the purpose of stamp duty is the correct method for computing fair market value. For this, the CIT(A) recorded his finding in para 5.5 as under:- “5.5 I have examined the facts of the case and the submissions filed. Appellant’s argument that as per section 45(2), only fair market value of the land needs to be considered and the guideline value, is not correct. As noted by the AO, Section 45(2) is applicable only in the case of a capital asset and agricultural land is not a capital asset. Even otherwise, in such transactions as that of the appellant, the value has to be arrived at only based on the notified guideline value which is treated as scientifically computed value based on various facts and circumstances. As per the guideline value notified by the registration authorities, the value for the subject property is Rs.51,500/-. Therefore, AO has correctly adopted the same. However, the AO has considered the entire layout of 29.67 acre for application of guideline value for conversion. Out of the above 29.67 acres, only 7.54 acre is conversion of capital asset into stock in trade. Rest was purchased as stock in trade. For the purchase of stock in trade, the actual consideration was rightly considered by the appellant. Therefore, the AO shall compute the value based on guideline value only for 7.54 acres. Interest under 234A, B and C may be computed as per law.”
Aggrieved now assessee is in appeal before the Tribunal.
Before us, the ld.counsel for the assessee Shri Vijayaraghavan took us through the provisions of section 45(2) of the Act, wherein the legislature has brought into concept of fair market value of the asset as on the date of conversion and that shall be deemed to be the full value of consideration received or accruing as a result of transfer of such capital asset. The ld.counsel has stated that the agricultural land is a capital asset because it is converted as stock- in-trade and it has to be valued in term of the provisions of section 45(2) of the Act. The ld.counsel stated that the fair market value cannot be the guideline value as set out by the State Governments for the purpose of registration of documents and for the purpose of collection of stamp duty. He stated that the fair market value can be less, can be more, but this has to be ascertained with the help of surrounding circumstances i.e., sale instances of the area, urbanization of that area, future prospects, valuation of similar properties by the Income-Tax Department or any other Department and the same should be done by an expert like DVO, etc.,
On the other hand, the ld.Senior DR, supported the orders of lower authorities and he argued that the guideline value fixed by the State Government for collection of stamp duty and for registration of documents is the most appropriate method for ascertaining the fair market value. He stated that the lower authorities have rightly taken the view and ascertained the fair market value on the basis of guideline value at Rs.51,500/- per acre of the area which is the real value.
We have heard rival contentions and gone through facts and circumstances of the case. The only disputed point before us is assessee’s own agricultural land admeasuring 7.54 acres converted as stock-in-trade and held as capital asset in the name of the assessee. The assessee has computed fair market value on the basis of sale instances and registration done by assessee in same area at the rate of Rs.27 lakhs per acre, whereas the Revenue has estimated the fair market value based on guideline value fixed by State Government at Rs.51,500/- per acre. We have gone through the provisions of section 45(2) of the Act and the same reads as under:- 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.
The fair market value of the asset as on the date of conversion is to be ascertained as per the provisions of section 45(2) of the Act. The fair market value has been defined in the provisions of section 2(22)(B) of the Act, in relation to a capital asset and which means the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date.
7.1 We noted from the case law of Hon’ble Supreme Court relied on by the assessee in the case of CIT vs. Bai Shirinbai K. Kooka, (1962) 46 ITR 0086, wherein the issue of adoption of fair market value is discussed by the majority view as under:- In an earlier part of this judgment we have taken pains to point 11. out the distinction between Kikabhai’s case (supra) and the case under our consideration. In view of that distinction, we do not think that it is really necessary in the present case to re-examine the ratio of the decision in Kikabhai's case (supra). What then is the basis for computing the actual profits in the present case? We think that the basis must be, as the High Court has put it, the ordinary commercial principles on which actual profits are computed. We think that the approach of the High Court was correct and normally the commercial profits out of the transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. So far as the business or trading activity was concerned, the market value of the shares as on 1st April, 1945, was what it cost the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on 1st April, 1945, as the proper figure for determining the actual profits made by the assessee. That the assesses later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale and not a notional sale; that actual sale resulted in some profits. The problem is how should those profits be computed? To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss, as the case may be. In a trading or commercial sense this seems to us to accord more with reality than with fiction.
7.2 Further another case law of Hon’ble Supreme Court in the case of CIT vs. Groz-Beckert Saboo Ltd., (1979) 116 ITR 0125, considered these two substantial question of law and finally, the Hon’ble Supreme Court held that the assessee received raw materials and semi-finished needles in April, 1961 and introduced in the books of accounts of the business as stock-in-trade on 30th September, 1961, the fair market value of this raw material and semi-finished needles as introduced on 30.09.1961 in the business as part of its stock at their real value represent the fair market value and the same should be adopted. The Hon’ble Supreme Court after discussing the facts held as under:-
It was found as a fact by the Tribunal, and indeed there was no dispute about it, that the raw materials and semifinished needles were received by the assessee from the West German collaborators free of cost by way of gift. These raw materials and semi-finished needles were received some time in April, 1961, and it was only on 30th Sept., 1961, that they were for the first time introduced in the books of account of the business. There can, therefore, be no doubt that these raw materials and semi- finished needles were received by the assessee as capital assets and subsequently on 30th Sept., 1961, they were transferred to the business as part of its stock. If that be so, the cost of these raw materials and semi-finished needles to the business could not be said to be nil, but, on the principle laid down by this Court in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) : TC14R.129, and subsequently followed in CIT vs. Hantapara Tea Co. ~td. (1973) 89 ITR 258 (SC) : TC17R.1227, it would be the market value of these raw materials and semi-finished needles as on 30th Sept., 1961. It is now well settled by these decisions that where an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade (since this would be the cost to the business) and not the original cost to the assessee. Here, the original cost of these raw materials and semi-finished needles to the assessee was undoubtedly nil because these goods were received by the assessee from the West German collaborators free of cost, but they were introduced in the business and converted into its stock on 30th Sept., 1961, and, therefore, their market value as on 30th Sept., 1961, would represent the cost to the business and that would have to be taken into account in determining the profit arising from the sale of manufactured products. The entries made by the assessee in the books of account of the business on 30th Sept., 1961, clearly reflected this position. The assessee debited the sums of Rs. 44,448.20 and Rs. 30,000 representing respectively the market value of these raw materials and semifinished needles to the stock accounts of "Wire and Strip" and "Semi-Processed Needles" which would clearly show that these goods were treated by the assessee as having been introduced in the business as part of its stock at their market value represented by the sums of Rs. 44,448.20 and Rs. 30,000. The position was no different than what it would have been if, instead of giving these raw materials and semi-finished needles to the assessee free of cost, the West German collaborators had gifted the sums of Rs. 44,448.20 and Rs. 30,000 to the assessee and the assessee had introduced these amounts in the business and an identical quantity of raw materials and semi-finished needles had been purchased for the business with these amounts. The cost of raw materials and semi-finished needles thus purchased would have been clearly liable to be deducted from the sale proceeds of the finished products manufactured out of them in determining the profit of the business. Would the position then be different if, instead, the West German collaborators gave these raw materials and semi-finished needles to the assessee free of cost and the assessee introduced them in the business as part of its stock. We do not see any distinction in principle between these two types of cases and we are clearly of the view that the cost of these raw materials and semi- finished needles to the business represented by the sums of Rs. 44,448.20 and Rs. 30,000 debited in the respective accounts of "Wire and Strip" and "Semi- Processed Needles" was liable to be deducted from the sale proceeds of the finished products in arriving at the profit of the business. It is true that initially on 30th Sept., 19061, the credit entries for the sums of Rs. 44,448.20 and Rs. 30,000 were made in "Wire and Strip Gift Account" and "Semi- Processed Needles Gift Account", respectively, and it was only on the last date of the account year, namely, 31st March, 1962, that these amounts were transferred to the credit of the capital reserve account. But that cannot make any difference to the correct legal inference to be drawn from the proved facts because the nomenclature of the account or accounts in which the credit entries were made is not material but what is really decisive is that these amounts were debited to the respect accounts of "Wire and Strip" and "Semi Processed Needles" as representing their real value on 30th Sept., 1961. These raw materials and semi-finished needles were introduced in the business as part of its stock at their real value represented by the sums of Rs. 44,448.20 and Rs. 30,000. The aggregate amount of Rs. 74,448.20 made up of Rs. 44,448.20 and Rs. 30,000 was, therefore, liable to be deducted in determining the profit of the business and it was rightly debited to the trading account.
7.3 We have gone through the definition given in the Act in the provision for section 2(22B) of the Act, whereby it is defined that as to how the fair market value is to be substituted in place of cost of acquisition. According to Section 2(22B) of the Act, it is the price which the capital asset would ordinarily fetch if sold in the open market on the relevant date i.e., date of acquisition of asset in the stock-in-trade. This concept of fair market value is now well settled in the Income-Tax law and other cogent fiscal statutes bringing the question of hypothetical seller and the hypothetical buyer in the hypothetical market. For example and for the purpose of income- tax Act, this has been explained and elaborated in section 55 of the Act, wherein specified date for cost of construction as also for substituting the fair market value for cost of construction is given, like in the present case before us, where the conversion took place as on 20.02.2012. The fair market value can be determined by taking the surrounding circumstances like sale instances of the area, urbanization of that area, future prospects, valuation of similar properties by the Revenue Department or scope of industrialization or growth of these can be considered by determining the fair market value. But for this purpose, the fair market value if could not be ascertained by the Income Tax Officer, the same can be referred to a technical person as conceded by both the sides.
7.4 In view of the above facts and circumstances and the case law of Hon’ble Supreme Court in the case of Groz-Beckert Saboo Ltd., supra, we are of the view that this matter needs reconsideration just to ascertain the fair market value of assessee’s agricultural land of 7.54 acres converted into stock-in-trade and held as capital asset. The AO has to refer this matter to the DVO to ascertain the fair market value based on the above factors enumerated. Hence, we set aside the orders of the lower authorities and restore the matter back to the file of the AO with the above direction.
In the result, the appeal filed by the assessee is allowed for statistical purpose.
Order pronounced in the court on 15th February, 2022 at Chennai.