DCIT CIR 2(1) vs. THE HINDUSTAN SPINNING & WEAVING MILLS LTD,

The present appeal has been preferred by the Revenue against the order dated 25.06.2003 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 1998-99.

The assessee has taken the following grounds of appeal: "1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the A.O. to allow VRS expenditure of Rs.4,18,05,537/- as revenue expenditure which was treated as capital expenditure by AO in view of Supreme Court Decision in the case of Assam Bengal Cement Co. Ltd. Vs. CIT (1955)

The assessee is a limited company and it filed its returns of income for A.Y. 1998-99 during November, 1998 declaring loss of Rs.17,17,19,140/-. The case was selected for scrutiny and assessment under section 143(3) was completed vide Assessing Officer’s (hereinafter referred to as the AO) order dated 23.03.2001. Certain adjustments and disallowances were made by the AO and loss was recomputed at Rs.10,45,17,509/-. Aggrieved, the assessee filed just appeal before the Ld. CIT(A) and contested the disallowances and adjustments.

The appeal was finally allowed in favour of the assessee vide Ld. CIT(A)’s order dated 25.06.2003. Aggrieved by the stand of Ld. CIT(A), the Revenue is in appeal before us.

The first ground of appeal relates with VRS expenditure claimed by the assessee. An amount of Rs.4,18,65,537/- was paid by the assessee as VRS expenditure and a portion of this expenditure was debited to Profit & Loss Account. But the same was claimed in full as revenue expenditure in computation of income. AO treated the same as advantage of a capital nature and disallowed the same in full. Ld. CIT(A) allowed the same in full relying upon its order for A.Y. 1996-97 in assessee’s own case on identical issue.

We notice that identical issue has already been decided in favour of the assessee by ITAT in assessee’s own case for A.Ys. 1996-97 & 1997-98 vide & 3823/M/03 dated 30.06.2016. Respectfully following the decision of the Tribunal in the own case of the assessee, this appeal is also decided in favour of the assessee.

The second ground of appeal relates with addition made to closing stock in respect of conversion value of flat from Capital Asset into stock in trade. The assessee entered into an agreement with a developer during A.Y. 1994-95 to develop its lands and according to agreement the assessee was to receive

Ld. CIT(A) deleted the additions holding the same being notional profit on conversion of investment into stock in trade and held the same to be taxable only in the year of sale as per provision of section 45(2). He held that the land continued to be capital asset. He held that the notional profit on conversion cannot be taxed in the year of conversion but it was taxable only in the year of sale of such asset. Being aggrieved by the above findings of the Ld. CIT(A), the Revenue has come in appeal before us.

We have heard the rival contentions and have also gone through the record. We have also gone through the order of the Tribunal for assessment year 1994-95 in the case of the assessee. Admittedly, the land in question was converted as stock in trade in the year 1993. This factual position has already been noted and upheld by the Tribunal in the case of assessee for A.Y. 1994- 95. Since then the land continued to be stock in trade. Any flat built on the 4 M/s. Hindoostan Spg. & Wvg. Mills Ltd. land was also part of the stock in trade. The assessee in the books of account has rightly inventorised the same. There was no justification on the part of the assessee to remove it from the closing stock in the computation of income. Hence, we do not find any infirmity in the order of the AO while treating the flat in question as part of the closing stock.

So far as the finding of the Ld. CIT(A) that the profit/income on conversion of the investment into stock in trade is taxable only in the year of sale as per provisions of section 45(2), is concerned; the assessee is liable to return the corresponding capital gains as on the date of conversion of investment into the stock in trade on the sale of such converted stock in trade as held by the Tribunal in the case of the assessee in its order dated 13.05.11 passed in for A.Y. 1994-95. We direct the AO to follow the order dated 13.05.11 for A.Y. 1994-95, so far as the taxation of the capital gains on account of conversion of investment into stock in trade is concerned.

So far as the addition made by the AO on account of treating the flats as part of the stock in trade is concerned, we do not find any infirmity in the same and the said addition is confirmed.

The last ground of appeal relates with exclusion of an amount of Rs.1.52 crores which represent proportionate profit from property development business from the computation of total income. During the assessment year, the assessee offered a sum of Rs.1.52 crores as proportionate profit from property development activity carried on by it. The Ld. CIT(A) noted that entire profit from transfer of developments rights in the land were already brought to tax by the department in assessment year 1994-95. As full amount was already taxed in A.Y. 1994-95, the assessee raised additional ground before Ld. CIT(A) to exclude the said amount from computation of total income so as to avoid double taxation. The plea of the assessee was accepted by Ld. CIT(A) and relief of Rs.1.52 crores was provided to the assessee.

In nutshell, the appeal of Revenue is partly allowed.