Income Tax Officer v. Devi Exhibitors....opponent(S

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1788 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ INCOME TAX OFFICER....Appellant(s) Versus DEVI EXHIBITORS....Opponent(s) ================================================================ Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1MR RK PATEL, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERIand HONOURABLE MR.JUSTICE K.J.THAKER Date : 23/12/2014ORAL JUDGMENT(PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1.By way of this appeal, the appellant-revenue has challenged the judgment and order dated 16.02.2005 passed by the Income Tax Appellate Tribunal, Ahmedabad [ for short “the Tribunal”] in ITA No. 480/Ahd/1997, whereby the appeal filed by the revenue was dismissed by the Tribunal. 2.The facts, in brief, are that the the assessee is a partnership firm engaged in the business of real estate and also running a theatre. In the year 1971, the assessee acquired a piece of land through lease deed. The assessee constructed two threatres on the said land and started earning income by exhibiting films as well as rental income from some of the shops in the theatre building. The assessee had shown capital gain in its return of income for the assessment year 1993-94. However, the Assessing Officer rejected the assessee’s claim. Against the said order, the assessee filed an appeal before the Commissioner of Income Tax. 2.1.The CIT(A) allowed the appeal of the assessee. Being aggrieved and dissatisfied with the order of the CIT(A), the revenue filed an O/TAXAP/1788/2005 JUDGMENT appeal, before the Tribunal. The Tribunal vide impugned order 16.02.2005 dismissed the said appeal. Hence, this appeal is filed at the instance of the revenue. 3.Whileadmittingthisappealon 26.07.2006, the Court had formulated the following substantial question of law:- whether, on the facts and in the circumstances of the case, and in law, the Income Tax Appellate Tribunal is right in coming to the conclusion that “Floor Space Index” is a capital asset ?” 4.Learned advocate for the appellant-revenue has contended that the Tribunal has committed error in dismissing the appeal of the revenue and in confirming the order of the CIT(A). He further submitted that the Tribunal has wrongly relied upon the provisions of Section 45(2) of the Income Tax Act, in deciding the appeal. Therefore, he urged that this Court may allow this appeal and set aside the order of the Tribunal and the CIT(A). 5.On the other hand, learned advocate for the respondent-assessee has supported the impugned judgment and order of the Tribunal and O/TAXAP/1788/2005 JUDGMENT submitted that the Tribunal after appreciating the evidence on record has passed its order. 5.On the other hand, learned advocate for the respondent-assessee has supported the impugned judgment and order of the Tribunal and O/TAXAP/1788/2005 JUDGMENT submitted that the Tribunal after appreciating the evidence on record has passed its order. Therefore, he contended that there is no germane reason to interfere with the order of the Tribunal. He further submitted that the present appeal deserves to be dismissed in view of the concurrent finding of both the authorities namely the Tribunal and the CIT(A). We have heard learned advocates appearing for both the parties and perused the material on record. While deciding this appeal, the Tribunal in paragraph No.5 has observed as under:- representatives of the parties and perused the record. The assessee acquired land through lease agreement in 1971. The assessee constructed threatre building and started the business of firm exhibition as well as rental income from shops and building. Later on, the real estate business was started. In January, 1988, the assessee introduced FSI as stock-in-trade. The assessee passed accounting entry in the books of account by crediting Rs.1,10,25,000 to the account of capital reserve A/C” and O/TAXAP/1788/2005 JUDGMENT debiting to the account of FSI Right A/c”. These are the undisputed facts as these facts were accepted in relevant assessment year. The Assessing Officer made out the case that it is an after though as the assessee had already got approval from the Surat Municipal Corpn. and started constructing the FSI from 8.2.75 when the sale of shop is made, the sale cannot be bifurcated into (i) sale of four walls and roof (ii) and sale of FSI area. The finding of the Assessing Officer is not correct as clause No.8 of the lease deed which is reproduced in para 4 of this order, clearly provides such right. Now question whether FSI is asset and amounts to transfer. In addition to clause No.8 of the lease deed, the FSI is an asset as per section 3(26) of general clauses. The relevant section is reproduced in para No.4 page 5 of this order. From these facts we find that FSI right in an asset. The second aspect to be examined is whether conversion of asst into stock-in-trade is “transfer”. The relevant provision in IT Act is section 2(47) (iv) which is reproduced above in para 4 page 6 and 7. The O/TAXAP/1788/2005 JUDGMENT taxability of such transaction is provided in section 45(2), reproduced abovein in para 4 of this order. Section 45(2) provides for chargeability of capital gains arising in a case where a capital asset is converted by its owner into, or is treated as stock-in-trade of a business carried on by him. Sub-clause (iv) of section (2) 47 is also provide that conversion of a capital asset into, or its treatment as stock-in-trade of business carried on by its owner shall be deemed as “transfer”. The combined reading these sections is that capital arising on conversion of a capital asset into stock-in-trade are charged to tax in the previous year in which such converted asset is actually sold or otherwise transferred but it never says that capital gain are chargeable to tax in the previous year in which the transfer by way of conversion takes place. Section 45(2) further provides that for the purpose of computing the capital gains, in such cases, the fair market value of the capital asset on the date on which it was converted into or treated as stock-in trade shall be deemed to be the full value of or its treatment as stock-in-trade of business carried on by its owner shall be deemed as “transfer”. The combined reading these sections is that capital arising on conversion of a capital asset into stock-in-trade are charged to tax in the previous year in which such converted asset is actually sold or otherwise transferred but it never says that capital gain are chargeable to tax in the previous year in which the transfer by way of conversion takes place. Section 45(2) further provides that for the purpose of computing the capital gains, in such cases, the fair market value of the capital asset on the date on which it was converted into or treated as stock-in trade shall be deemed to be the full value of O/TAXAP/1788/2005 JUDGMENT consideration received or accruing as a result of the transfer of the capital asset. Therefore, as per the provisions of section 45(2) which is the only applicable section, the year of transfer will be not the year in which capital asst (FSI Right) converted into stock, but the year in which same were sold to outside parties and also it will be to the extent of asset actually sold. The selling price and other parts of working of claim are not in dispute. The decisions cited by the ld. Dr. are distinguishableoffacts.After considering the totality of the facts of the case and as discussion made above we find that the claim of the assessee was correctly allowed by the CIT(A). We accordingly confirm the order of CIT(A).” 7.In view of the above discussions, we are in compete agreement with the view taken by the Tribunal that Floor Space Index is an asset which is attached with the property and not with the business. Therefore, we are of the considered opinion that the Tribunal has not committed any error in dismissing the appeal of the revenue. O/TAXAP/1788/2005 JUDGMENT 8.For the foregoing reason, the present appeal deserves to be dismissed and the same is accordingly dismissed. The question raised in this appeal is answered in favour of the assessee and against the revenue. Therefore, we hold that the Tribunal has not committed any error in coming to the conclusion that “floor Space Index” is a capital asset. (K.S.JHAVERI, J.) (K.J.THAKER, J) pawan