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Income Tax Appellate Tribunal, “SMC”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM
आदेश / O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)- 36, Mumbai dated 26/10/2016 for A.Y. 2003-04 in the matter of order passed by AO u/s.143(3) r.w.s.254 of the Income Tax Act, 1961 dated 29/01/2015. 2. The grievance of assessee relates to taxing income of conversion of fixed assets into stock in trade as per provisions of Section 45(2) of the Income Tax Act. 3. I have gone through the orders of the authorities below and found that it is second round of appeal before the Tribunal. In the first round the Tribunal has restored the matter back to the file of the AO vide its order dated 23/10/2013 with certain observations and directions.
M/s. Ratan Plastic Industries 4. The Tribunal has restored the matter back to the file of the AO for considering assessee’s claim of depreciation, claim of deduction u/s.80HHC and deduction u/s.80IB.
In the set aside proceedings, AO again disallowed assessee’s claim and the CIT(A) confirmed the action of the AO after observing as under:- “6.2. The Ground No.4 relates to calculation of the fair market value of the fixed asset, the sale of which has been treated as STCG by the AO. This issue is connected to the grounds no. 2 & 3. However, the same is adjudicated separately for ease of convenience as there is a direction of the Hon'ble Tribunal on the issue. The Hon'ble Tribunal has directed the AO to determine the fair market value of the asset as per provision of the Act. The AO in his order has held that the determination of the fair value is to be based on some evidence of market price and the appellant has furnished any supporting evidence to arrive on the fair market value of the asset while conversion to the stock in trade. The AO worked out the value of the asset on the basis that the asset was sold within three months of the conversion to stock in trade, hence, the value fetched by the asset is equivalent market value of the asset against the book value of the asset shown by the appellant. The appellant has rebutted the stand of the AO by reiterating that it has sold stock in trade and not the fixed asset, hence, there is no question of calculating the FMV u/s 45(2} of the Act. I have considered the rival arguments and before proceeding further, it will be pertinent to note the provisions of section 45(2) of the Act, which is as under:- "(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" 6.2.1. It is clear from the provisions of the section 45(2) of the Act, that the fair market value of the asset will be the full value of consideration received or accrued on transfer of the particular asset. In this case the asset has been sold within three months of the conversion for Rs.71,11,978/-. By considering the short span of time, it cannot be claimed that the amount received on sale is appreciation on the book value shown by the appellant, wherein there is M/s. Ratan Plastic Industries difference of mere than 100%. As far as the calculation of the fair market value of the asset as per the provisions of the Act is concerned, it is observed that there are no specific provisions relating to the calculation of the FMV of this category of fixed asset. However, the latest provisions inducted for implementation of the Income Declaration Scheme 2016 stipulates that the fair market value of any asset shall be the higher of the cost of acquisition or the price that asset could fetch in the open market. Going by the provisions of these sections together, it can be safely concluded that the fair market value of the asset converted by the appellant as stock in trade is the price which the asset has fetched from the market. In view of this, the fair market value determined by the AO cannot be faulted and the appellant has not produced any evidence to controvert the stand of the AO. Accordingly, this ground of appeal is dismissed.
6. It was argued by learned AR that the Ld. CIT (A) erred in appreciating the facts presented before him, in paper book page No. 5.1 to 5.39, being the documents filed before the AO, that the assessee as per accounting standard (AS) 10 relating to Accounting for Fixed Assets as applicable to the assessee is required to comply with accounting standards in the matter of retirement and disposal of Fixed Assets in the following manner:- a. Clause 14.2 of AS 10 i. Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statement. b. Clause 24 of AS 10 i. Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately in the financial statements.
M/s. Ratan Plastic Industries c. Assessee in compliance with the requirement of AS 10, removed retired moulds out of block of fixed assets at book value at the time of conversion of Moulds from Fixed Assets to Stock in trade.
It was further argued that the Ld. CIT (A) erred in estimating and determining the fair market value of the Moulds at the date of its conversion from Fixed Assets into stock in trade being Rs. 34,56,581 and instead counted it as Rs. 71,11,978/- being the Actual Export sale value of the moulds being sale of stock in trade realized by the assessee and counted it as deemed fair market value at the date of its conversion from Fixed Assets and treatment of it as stock in trade in compliance with requirement of AS 10.
Learned AR further contended that the Ld. CIT (A) failed to appreciate that the assessee has in all converted 22 Moulds during the year from Fixed Assets into Stock in Trade under business necessity, consistently at the book value as per AS 10, as enumerated in page 5.2 of the Paper book submitted before him, but AO has not shown consistent approach. While 2 Moulds out of these 22 Moulds are sold locally, reflected on page 5.20 and page 5.34 of the paper book submitted before him and they have been sold at price lower than the price at which they have been converted from Fixed Assets into Stock in Trade, which is accepted by AO as it is. While 2 other Moulds enumerated on Page 5.38 and Page 5.39 of the Paper Book submitted before him are the ones which have been purchased during the year itself, in aggregate for Rs.14,24,800/- converted into Stock in Trade at the Purchase Value which is Book Value M/s. Ratan Plastic Industries and have been exported out of India and have realized Rs. 20,79,372/- as sale value which is 1.45 times of the original Purchase Value. While 20 out of 22 Moulds have fetched Sale Value at minimum of 1.23 times and maximum 11.75 times of the original purchase value. All these Moulds which have been exported have been exported after lot of business and marketing efforts of 2 to 11 months after they were converted from Fixed Assets into stock in trade by the assessee and have earned precious foreign exchange. AO has treated Export proceeds earned on sale of these Mould Stock as fair value and deemed value at the time of conversion of Fixed Assets into Stock in trade.
It was also argued by learned AR that the Ld. CIT (A) erred in taxing the export proceeds of the stock-in-trade as consideration for Capital Gains purposes u/s. 45(2) r.w.s. 50 and also the Ld. CIT (A) erred in holding that the assessee had sold fixed assets whereas in fact during the relevant year the assessee is having the said assets converted into Stock- in-Trade.
In view of the above, he argued that the Ld. CIT (A) ought to have taken the export realizations from the sale of stock of moulds as Business Income for the purpose of 80HHC, instead of income for Capital Gain purposes.
On the other hand, learned DR relied on the order of the lower authorities.
I have considered rival contentions and carefully gone through the orders of the authorities below and found from record that the assessee is M/s. Ratan Plastic Industries a Registered Firm with three partners and is involved in the business of manufacturing and marketing of Plastic Moulded Articles. During the relevant year the Assessing Officer finds that the assessee had converted its fixed assets from the Block of assets into Stock-in-Trade. The assets converted were the injection moulds. Those moulds numbering 22 have been exported by the assessee and the export proceeds realized have been considered as business income by the assessee while filing its Return of income. And the assessee had claimed the deductions u/ss. 80HHC and 80IB.
The Assessing Officer observed that the assessee had claimed depreciation on the moulds which had hitherto been reflected in its Balance Sheet as fixed asset. As moulds are part of the Capital Assets with his block of assets on which depreciation has been claimed, section 50 is clearly attracted. The proceeds received from the sale fixed assets should not be treated as business income but it liable to tax as capital gains. Therefore, the claim of deduction u/s. 80HHC as claimed by the assessee was disallowed.
From the record I found that the assessee had during the year converted the moulds reflected as fixed assets in the block of assets in to Stock-in-Trade at its book value amount of Rs.34,56,581/-. Consequently, the figure of block of assets of the mould does not include the said amount. Besides, the fresh purchase of moulds, effected by the assessee, during the year have been added to the block of assets at the end of the year which has resulted into positive balance in the block of assets of M/s. Ratan Plastic Industries moulds. What the assessee had sold is the Stock-in-Trade and not the fixed assets as held by the Assessing Officer. Therefore, value of export proceeds cannot be taken as the fair market value of the mould for conversion purposes in order to determine Short Term Capital Gains. Therefore, rejecting the stand of the assessee, the Assessing Officer is not justified to determine the Short Term Capital Gains at a figure of Rs. 19,30,779/-. Particularly when the converted price of mould as effected by the assessee is the book value of impugned assets. As the Stock-in- Trade has been exported by the assessee and export realization in foreign exchange has come to India, the claim of the assessee on the profit earned on such export u/s. 80HHC deserves to be allowed. Hon’ble Supreme Court in the case of Bajaj Tempo Ltd., 196 ITR 188 held that incentive provisions should be construed liberally. In the instant case, I found that what the assessee had sold is its Stock-in-Trade and not the assets which had been converted from his investment. As it is not a case of investment conversion and the present case being the saleable capacity of the fixed assets which the assessee had commercially exploited to its full extent by finding a suitable market abroad. Therefore, the action of the Assessing Officer to treat the business income of the assessee as Capital Gains and consequently determining Short Term Capital Gains within the meaning of Section 45(2) r.w.s 50 at a figure of Rs.19,30,779/- is not at all justified.
15. Furthermore, the Assessing Officer was not justified to disallow the claim of depreciation of Rs.4,28,671/- with the premise that block of M/s. Ratan Plastic Industries assets of moulds has been reduced to Rs. NIL. The assessee during the relevant year had made fresh purchase of moulds worth Rs.29,64,000/- which is reflected in its Balance Sheet and the depreciation has been claimed on the fresh purchase of mould forming part of block of assets and not on the mould which had been converted into Stock-in-Trade. Therefore, the disallowance of depreciation u/s. 32 is uncalled for.
I also found that the assessee had claimed deduction u/s. 80IB for an amount of Rs.9,74,142/- which the Assessing Officer has allowed the reduced claim for Rs.2,33,741/- as the result of which the difference amount of Rs.7,40,401/- has been disallowed. The action of the Assessing Officer is not justified since the deduction u/ss.80HHC and 80IB are independent; AO was not justified to deduct the amount of deduction u/s 80HHC from the eligible profits while computing deduction u/s 80IB. This view finds the support of the following decisions:- 248 ITR 29 (Bom) Nima Specific Family Trust Vs. CIT. 229 ITR 123 (MP) J.P, Tobacco Products Pvt. Ltd., Vs. CIT 251ITR 587 (Guj) CIT Vs. Chokshi Contracts Pvt. Ltd. 252 ITR 777 (Guj) CIT V/s. Sidhpur Isabgul Processing Company Ltd.
In view of the above, I direct the AO to recompute the deduction claimed u/s.80IB.