Principal Commissioner Of Income Tax I v. M/S.essorpe Mills Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE S.MANIKUMARandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Principal Commissioner of Income Tax I,No.63, Race Course Road,Coimbatore. .. Appellant/RespondentVs. M/s.Essorpe Mills Ltd.,37/54, 7[th] Cross,Bharathi Park Road,Coimbatore – 641 043 .. Respondent Prayer: Appeal filed under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,'D' Bench, Chennai, dated 05.02.2016 in I.T.A.No.391/Mds/2015against the order of Commissioner of Income Tax (Appeal)-ICoimbatore dt 09.12.2014 in A.No.409/13-14 and against the orderof Assistant Commissioner of Income Tax Company Circle I(2)Coimbatore dt 18.10.2013 in ACIT /Comp C-I (2)/CBE/AAACE4783D/2013-14 and arising out of the Assessment order of DeputyCommissioner of Income Tax, Company Circle – I (3) Coimbatore,dt 30.12.2011 in PAN- Instant tax appeal is filed by the Revenue, against theorder of the Income Tax Appellate Tribunal 'D' Bench, Chennai(in short, “the Tribunal”) dated 05.02.2016, passed inI.T.A.No.391/Mds/2015, pertaining to the Assessment Year 2009-10. https://hcservices.ecourts.gov.in/hcservices/ 2. When the appeal came up for admission today (20.02.2018),notice on behalf of the respondent/assessee was accepted byMr.R.Vijayaraghavan. With the consent of the learned counsel oneither side, instant tax appeal is taken up for final disposal. 3. Short facts leading to filing of the appeal, are asfollows: (i) M/s.Essorpe Mills Limited (in short 'EML'), assessee(respondent herein), is a company, engaged in the business ofreal estate, financial service and other business. EML, hasconverted the land which was considered as capital asset, intostock-in-trade, in the year 2000. (ii) This is a case of demerger of EML with M/s. EssorpeHoldings Pvt Ltd. (in short 'EHPL'). Real estate division ofEML, was demerged, by an order of this Court, with effect from28.2.2007. (iii) EML, entered into a Memorandum of Association with M/sGlobus Realtors Pvt. Ltd., offering 5.075 acres of land, assecurity for amounts advanced by M/s Globus Realtors Pvt. Ltd.to EHPL, a sister concern of EML. (iv) EML, has also executed a power of attorney, in favourof Mr.V.Sivakumar, Managing Director of M/s.Globus Realtors Pvt.Ltd in respect of 5.075 acres of land. Physical possession ofthe land was also handed over to M/s Globus Realtors Pvt. Ltd.Mr.V.Sivakumar, Managing Director of M/s Globus Realtors Pvt.Ltd, sold 5.075 acres of land to M/s Rasi Seeds (P) Ltd and M/sGlobus Realtors Pvt. Ltd. on 5.1.2009 and 7.1.2009, whileenforcing the security, for repayment of loan borrowed by thesister concern EMPL. (v) Assessing Officer, found that there was a transfer ofproperty between EML and M/s Rasi Seeds (P) Ltd. and computedthe capital gains, in the hands of the EML substantively. (vi) In the course of assessment proceedings, a protectiveassessment was made in the hands of EHPL, in respect of the gainarising on the sale of the very same land. (vii) Contention of EML, before the Assessing Officer, wasthat there was a demerger, by an order of this Court, witheffect from 28.2.2007, in respect of real estate division. Themanufacturing division, remained with EML and real estatedivision was allotted to EHPL, with effect from 28.2.2007 andtherefore, EML, is no longer the owner of the landed property. (viii) Assessing Officer, completed the assessment, by https://hcservices.ecourts.gov.in/hcservices/ computing Long Term Capital Gain at Rs.34,29,36,053/- and ShortTerm Capital Gain at Rs.69,26,825/-, on the building for thesale of land as substantive assessment, in the hands of EML, andprotective assessment in the hands of the sister concern, EHPL,for the assessment year 2009-10, considering the income, asbusiness income. (viii) Assessing Officer, completed the assessment, by https://hcservices.ecourts.gov.in/hcservices/ computing Long Term Capital Gain at Rs.34,29,36,053/- and ShortTerm Capital Gain at Rs.69,26,825/-, on the building for thesale of land as substantive assessment, in the hands of EML, andprotective assessment in the hands of the sister concern, EHPL,for the assessment year 2009-10, considering the income, asbusiness income. (ix) Assessing Officer further taxed the entire saleconsideration under the head "Income from Business" and notunder the head "capital gains", on the sale of building.Consequently, the assessee's claim of long term capital loss onsale of zero percent non-redeemable preference shares of EML,was not allowed to be set off, since, the sale consideration, onthe sale of land, was taxed under the head "business income" andnot under the head "capital gains". (x) Assessing Officer further levied penalty under Section271(1)(c) of the Income Tax Act, to the tune ofRs.4,70,41,053/-, in the hands of EML, on the grounds that thecapital gain arising out of the transfer of property was notdisclosed to the department. 4. Aggrieved, by the said order, passed by the AssessingOfficer, the assessee (respondent herein) filed an appeal,before the Commissioner of Income Tax (Appeals)-1, Coimbatore. 5. Commissioner of Income Tax (Appeals)-1, Coimbatore, videorder dated 09.12.2014, confirmed the order of the AssessingOfficer and dismissed the appeal filed by the assessee(respondent herein), stating as follows:"3. In response to statutory noticesissued, the authorised representative ShriP.A.Baraneedharan,FCAappearedandsubmitted that he is not pressing for thegrounds of appeal and only the additionalgrounds of appeal may be considered. Hence,the grounds of appeal are dismissed. xxxxx 5. In the additional grounds, theauthorized representative stated that theAssessing Officer has assessed the allegedsale by Power of Attorney in the case of theappellant for the assessment year 2009-10.The appellant has not received anyconsideration as mentioned in the Sale Deedand there can be no profit on transfer ofstock in trade when no consideration isreceived. As seen from the grounds ofappeal, the assessee is trying to bring inthe original issues which were already decided by the CIT(A) and confirmed by theHon'ble Tribunal. The issue of taxabilityregarding the transfer in the case ofM/s.Essorpe Mills Limited was alreadyadjudicated by the Hon'ble ITAT, Chennai.There is no merit in the additional groundsof appeal which were already adjudicated bythe Hon'ble ITAT. The additional grounds ofappeal are dismissed.6. In result, the appeal is dismissed." 6. Aggrieved, by the order of the Commissioner of Income Tax(Appeals)-I, Coimbatore, the assessee (respondent herein),preferred an appeal before the Income Tax Appellate Tribunal 'D'Bench,Chennai(inshort“theTribunal”)inI.T.A.No.391/Mds/2015. decided by the CIT(A) and confirmed by theHon'ble Tribunal. The issue of taxabilityregarding the transfer in the case ofM/s.Essorpe Mills Limited was alreadyadjudicated by the Hon'ble ITAT, Chennai.There is no merit in the additional groundsof appeal which were already adjudicated bythe Hon'ble ITAT. The additional grounds ofappeal are dismissed.6. In result, the appeal is dismissed." 6. Aggrieved, by the order of the Commissioner of Income Tax(Appeals)-I, Coimbatore, the assessee (respondent herein),preferred an appeal before the Income Tax Appellate Tribunal 'D'Bench,Chennai(inshort“theTribunal”)inI.T.A.No.391/Mds/2015. 7. By an order dated 05.02.2016, the Tribunal, reversed theorder of the Commissioner of Income Tax (Appeals)-I, Coimbatorein respect of assessment year 2009-10 and allowed the appealfiled by the assessee (respondent herein), on the grounds thatsince the land was given as security for commercial expediencyto the sister concern, there was a business loss arising in thecourse of business. Since no amount was realized and theassessee-company suffered a loss for giving security to thesister concern, the same has to be allowed as business loss,while computing the taxable income, and accordingly modified theorders of the lower authorities, and directed the AssessingOfficer to compute the capital gains u/s 45(2) of the Act on thesale of land upto the date of conversion as stock-in-trade.Further, the Tribunal held that profit on sale of land as stock-in-trade, has to be computed as business loss, since, theassessee has not received any money on sale of the land.Therefore, capital gains computed upto the date of conversion ofland into stock-in-trade, has to be set off, against thebusiness loss computed on sale of the stock-in-trade. Atparagraph Nos.4 to 7, the Tribunal held as follows: “4. We have considered the rivalsubmissions on either side and also perusedthematerialavailableonrecord.Admittedly,theassessee-companywasdemerged by an order dated 15.9.2009. Beforedemerger, the assessee-company gave thelanded property to sister concern assecurity for the loans advanced by M/sGlobus Realtors Pvt. Ltd. The security wasgiven to M/s Globus Realtors Pvt. Ltd forcommercial expediency. In the course of itsbusiness activity, it appears that theassessee has also executed a power of attorney in favour of Shri V. Sivakumar,Managing Director of M/s Globus RealtorsPvt. Ltd. in respect of 5.075 acres of land.The power of attorney agent sold theproperty to enforce the security given bythe assessee to M/s Rasi Seeds (P) Ltd. Thequestion arises for consideration is whetherthe profit arising on sale of the land whileenforcing the security given by the assesseefor loan given to the sister concern namely,M/s Essorpe Holdings Pvt. Ltd, is assessablein the hands of the assessee or not? Asrightly pointed out by the ld. DR, thisTribunal in the earlier occasion by an orderdated 11.7.2013 examined this issue andfound that upto the date of conversion ofthe capital asset into stock-in-trade, theprofit has to be assessed as capital gainand after the conversion, it has to beassessed as business income. Accordingly,this Tribunal directed the Assessing Officerto compute the business income in respect ofthe stock-in-trade of the property. In viewof the above direction of this Tribunal, nodoubt, the profit on sale of the landedproperty has to be assessed only in thehands of the assessee and not in the handsof M/s Essorpe Holdings Pvt. Ltd. This orderof the Tribunal dated 11.7.2013 attainedfinality. 5. We have carefully gone through theprovisions of sec. 45(2) of the Act whichreads as follows:“Notwithstanding anythingcontained in sub-section (1),the profits or gains arisingfrom the transfer by way ofconversion by the owner of acapital asset into, or itstreatment by him as, stock-in-trade of a business carried onby him shall be chargeable toincome-tax as his income ofthe previous year in whichsuch stock-in-trade is sold orotherwise transferred by himand, for the purposes ofsection 48, the fair marketvalue of the asset on the date ofsuchconversionortreatment shall be deemed tobe the full value of theconsiderationreceivedoraccruing as a result of thetransfer of the capitalasset]”. In view of the above provision, the capitalgains on transfer of 5.075 acres of land asstock-in-trade has to be assessed as capitalgains in the hands of the assessee. 6. Now coming to the contention of theassessee that on sale of the property, theassessee has not received any amount,therefore, it has to be allowed as businessloss. It is not in dispute that M/s EssorpeHoldings Pvt. Ltd. is a sister concern ofthe assessee. The property in question wasgiven as security to M/s Globus RealtorsPvt. Ltd. for advancing loan to the sisterconcern M/s Essorpe Holdings Pvt. Ltd.Therefore, it is obvious that to promote thebusiness of sister concern, M/s EssorpeHoldings Pvt. Ltd, the assessee gave theland in question as security. While givingthe security, the assessee has also executedpower of attorney in favour Shri V.Sivakumar, Managing Director of M/s GlobusRealtors Pvt. Ltd. When the sister concerncould not repay the loan amount, theproperty which was given as security wassold by Shri V. Sivakumar and the saleconsideration was adjusted for repayment ofthe loan by M/s Essorpe Holdings Pvt. Ltd.In those circumstances, this Tribunal is ofthe considered opinion that since the landwas given as security for commercialexpediency to sister concern, there was abusiness loss arising in the course ofbusiness. Since no amount was realized andthe assessee-company suffered a loss forgiving security to the sister concern, thesame has to be allowed as business losswhile computing the taxable income. In viewof the above, this Tribunal is unable touphold the orders of the lower authorities.Accordingly, the orders of the lowerauthorities are modified and the AssessingOfficer is directed to compute the capital gains u/s 45(2) of the Act on sale of landupto the date of conversion as stock-in-trade. The profit on sale of land as stock-in-trade has to be computed as business losssince the assessee has not received anymoney on sale of the land. Therefore, thecapital gains computed upto the date ofconversion of land into stock-in-trade hasto be set off against the business losscomputed on sale of the stock-in-trade. 7. In the result, the appeal of theassessee is allowed."8. Aggrieved by the order of the Tribunal dated 05.02.2016,allowing the appeal filed by the assessee, Revenue, has filedthe instant tax appeal, before this Court, on the followingsubstantial questions of law: gains u/s 45(2) of the Act on sale of landupto the date of conversion as stock-in-trade. The profit on sale of land as stock-in-trade has to be computed as business losssince the assessee has not received anymoney on sale of the land. Therefore, thecapital gains computed upto the date ofconversion of land into stock-in-trade hasto be set off against the business losscomputed on sale of the stock-in-trade. 7. In the result, the appeal of theassessee is allowed."8. Aggrieved by the order of the Tribunal dated 05.02.2016,allowing the appeal filed by the assessee, Revenue, has filedthe instant tax appeal, before this Court, on the followingsubstantial questions of law: “(i) Whether on the facts andcircumstances of the case the ITAT iscorrect in holding that since the land wasgiven as security for commercial expediencyto sister concern, the sale considerationadjusted for repayment of loan be treatedas business loss ?(ii) Whether on the facts andcircumstance of the case, the ITAT iscorrect in ignoring the fact that once theland is mortgaged as security for loanliability, it should be considered ascapital asset and the loss suffered canonly be categorised as capital loss ?(iii) Whether on the facts andcircumstance of the case, the Tribunal wasjustified in allowing the business loss inthe hands of the assessee after deletingthe addition of business income in thehands of the sister concern which amountsto perversity ? (iv)Whetheronfactsandcircumstances of the case and in law, theAppellate Tribunal was justified inignoring the fact that there was willfulact of concealment on the part of theassessee ?" 9. Mr.T.R.Senthil Kumar, learned counsel for the Revenue,briefly submitted the facts of the case, drew the attention ofthis Court to the relevant provisions of the Act and assailedthe order of the Tribunal, inter alia, as follows: (i) That the Tribunal has erroneously deleted the additionmade by the assessing officer in the quantum appeal. (ii) That the Tribunal has erred in holding that sincequantum addition made by the assessing officer on transfer wasdeleted by the Tribunal, there cannot be any concealment anddeleted the penalty accordingly. (iii) That the Tribunal has failed to consider that againstquantum appeal, for the assessment year 2009-10, Revenue has notaccepted the decision and filed an appeal in T.C.A.No.329 of2016. (iv) That the case of the assessee is a clear case ofconcealment of income. The Tribunal has erred by acceptingassessee's plea that no amount was realised, and that theassessee company suffered a loss for giving security to sisterconcern and the same has to be allowed, as business loss, whilecomputing the taxable income. (v) That the Tribunal has failed to consider that the sisterconcern EHPL had received loan from M/s.Globus Realtors P Ltd.,and utilized the same only for the purpose of businessinvestment. On the plea that assessee has not received any saleconsideration for the transaction of the land and that those wasbusiness loss, as claimed by the assessee, the same is notallowable for the reason that, assessee though had not receivedthe sale proceeds of the land directly, but utilized the saleproceeds to discharge the loan liability of its sister concerni.e. EHPL. Since the loan was used by the sister concern for itsown business purpose, and this business income has not beentaxed in the hands of the sister concern, during the assessmentyear 2009-10, allowability of business loss in the hands ofassessee is highly questionable. (vi) That the Tribunal has failed to consider that evenotherwise, though the assessee's land was converted into stockin trade, it was mortgaged/used as security for loan liability.Hence, it can only be considered as a capital asset. So theassessee's company, if at all, suffered only a capital loss, andit cannot be considered as a business loss. Since these factswere not taken into consideration, order of the Tribunal cannotbe sustained. (vii) That the Tribunal has failed to appreciate that duringthe period of original assessment, the then Assessing Officermade substantial assessment for the land transaction, in thehands of the assessee, as capital gain, and made protectiveassessment, in the hands of the sister concern i.e. EPHL asbusiness income. However, the Tribunal in its orderNo.2256/Mds/2012,76/Mds/2013,79/Mds/2013&C.O.No.108/Mds/2013, dated 11.07.2013, at para 13, has statedthat Assessing Officer made addition in respect of transfer of property, under the head business income, protectively. TheTribunal sustained addition, in the case of M/s.Essorpe MillsLtd., wherein substantial addition was made, and that theTribunal has dismissed the appeal of the Revenue, as well as theCross Objection, filed by the assessee. (viii) Since the Tribunal had deleted the addition ofbusiness income made, in the hands of the sister concernM/s.Essorpe Holdings P Ltd., in its own order dated 11.07.2013,then, consideration of business loss, in the hand of assessee,vide order No.ITA 391/Mds/2015, dated 05.02.2016, withoutconsidering the same as business income, in the hands of sisterconcern is perverse and thus, the assessee's willful act ofconcealing the transaction, warrants levy of penalty underSection 271(1)(c). (ix) That the Tribunal deleted the addition of businessincome made, in the hands of the sister concern M/s.EssorpeHoldings P Ltd., in its own order dated 11.07.2013, and now theTribunal, vide order in ITA No.391/Mds/2015, dated 05.02.2016,has allowed the business loss, in the hands of the assessee,without considering the business income in the hands of thesister concern, which according to the appellant is perverse andfor the aforesaid reasons prayed to set aside the order of theTribunal. 10. Learned counsel for the assessee (respondent herein),justifying the order of Tribunal, inter alia, stated as follows:(i) The Tribunal was right in giving a finding that the gainon transfer of the landed property, has to be assessed, in thehands of the assessee upto the date of conversion into stock-in-trade. According to the assessee, after conversion of theproperty into stock-in-trade, it has to be assessed as businessincome. (ii) Referring to paras 9 & 10, more particularly para 9 ofthe order of the Tribunal in I.T.A.No. 2256/Mds/2012 dated11.7.2013, contention has been made by the assessee that theTribunal was right in directing the Assessing Officer, tocompute the business income, in respect of stock-in-trade of theproperty, after considering the provisions of Section 45(2) ofthe Act. (iii) Before the Tribunal, contention has been made by theassessee that the property was a capital asset, till theassessment year 2007-08, and from assessment year 2007-08, theproperty was converted into stock-in-trade, and that theassessee has not received any consideration, on transfer of theland to M/s Rasi Seeds (P) Ltd, and therefore, assessee wasright in claiming the same, as loss of business. (iv) That the Assessing Officer, though accepted thetransaction, as business transaction, refused to assess the loss https://hcservices.ecourts.gov.in/hcservices/ incurred on account of non-receipt of the sale consideration asbusiness loss and therefore, Tribunal was right in holding thatthe assessee had suffered business loss. (iii) Before the Tribunal, contention has been made by theassessee that the property was a capital asset, till theassessment year 2007-08, and from assessment year 2007-08, theproperty was converted into stock-in-trade, and that theassessee has not received any consideration, on transfer of theland to M/s Rasi Seeds (P) Ltd, and therefore, assessee wasright in claiming the same, as loss of business. (iv) That the Assessing Officer, though accepted thetransaction, as business transaction, refused to assess the loss https://hcservices.ecourts.gov.in/hcservices/ incurred on account of non-receipt of the sale consideration asbusiness loss and therefore, Tribunal was right in holding thatthe assessee had suffered business loss. (v) That in the case of M/s Essorpe Holdings Pvt. Ltd,Tribunal was right in holding that residual land sold was to betreated as capital asset, upto conversion into stock-in-tradeand after conversion, when the land, was actually sold, theincome arising from the sale of such land has to be consideredonly as business income. Since the land was given as security tothe sister concern, in the course of business activity forcommercial purpose, the loss suffered by the assessee, in thecourse of business activity, has to be allowed, as business loss. 11. Learned counsel for the assessee submitted that thesubject matter is covered by an earlier decision of this Courtand referred to a Hon'ble Division Bench (SMKJ & DKKJ) decisionof this Court in Commissioner of Income Tax Vs. Essorpe HoldingPvt. Ltd., reported in 2017 (6) TMI 1157 and prayed fordismissal of the tax appeal. 12. Learned counsel, further submitted that facts aresimilar and M/s.Essorpe Holding Pvt Ltd., was also a party tothe earlier decision of this Court, but the only variation isthat the assessment year in the said decision relates to 2011-12, and further submitted that except the variation in theassessment year, facts and submissions made, are similar, thelearned counsel for the respondent/assessee, requested thisCourt to apply the said decision, to the facts of the case, andprayed for dismissal of the instant appeal. 13. Heard the learned counsel appearing for the parties andperused the materials available on record. 14. There is no dispute by the Revenue that pleaded facts,submissions made by the contesting parties, issues raised inCommissioner of Income Tax Vs. Essorpe Holding Pvt. Ltd.,reported in 2017 (6) TMI 1157, are similar to the instant taxappeal No.841 of 2017. Placing on record the above, we deem itfit to extract, paras 7 to 27 from the aforesaid judgement, ashereunder: “7. Challenging the aforesaid orderpassed by the Tribunal, the Revenue has filedthe instant appeal before this Court, whichwas admitted on 26.07.2016, on the followingsubstantial questions of law :-“1. Whether on the facts of thecase, the Appellate Tribunal wasright in holding that the land was tobe treated as capital asset uptoconversion of it into stock in trade and liable for capital gain underSection 45(2) and when the assesseeactually sold the land the same is tobe assessed as “Business Income” forthe assessment year 2011-12 ? 2. Whether on the facts of the case, the Appellate Tribunal wasrightwithoutconsideringthe character of land which was qualifiedas stock in trade in the annualaccounts and balance sheet for theperiodended31.03.2010and31.03.2011 can be altered by a mereboard resolution ?” and liable for capital gain underSection 45(2) and when the assesseeactually sold the land the same is tobe assessed as “Business Income” forthe assessment year 2011-12 ? 2. Whether on the facts of the case, the Appellate Tribunal wasrightwithoutconsideringthe character of land which was qualifiedas stock in trade in the annualaccounts and balance sheet for theperiodended31.03.2010and31.03.2011 can be altered by a mereboard resolution ?” 8. Learned Senior Standing Counsel forthe appellant Revenue would submit that theAssessing Officer taxed the entire saleconsideration as “income from business” andnot under the head “capital gains” from thesale of a building. Consequently, theassessee's claim of long term capital loss,on the sale of zero percent non-redeemablepreference shares of M/s. EML, was notallowed to be set off, since the saleconsideration on 10.150 acres of land wastaxed under the head of 'business income' andnot under the head of 'capital gains'. TheCommissioner of Income Tax (Appeals) in ITANo. 50/14-15, has upheld the action of theAssessing Officer on the issue of short termcapital gain, on sale of building and denialof setting off, the long term capital loss.Hence, reversing the order of theCommissioner by the Appellate Tribunal is notproper and so prayed to allow the presentappeal, filed by the Revenue. Learned counselfurther submitted that the asset wasconverted into stock in trade on 28.12.2007in the hands of M/s.Essorpe Mills Limited andEssorpe Holdings Private Limited, gotdemerged subsequently on 01.01.2009, as perthe order of this Court. The fact that thecharacter of land, which was qualified asstock in trade in the annual accounts andbalance sheet, for the period ended31.03.2010 and 31.03.2011 can be altered by amere board resolution, has not beenconsidered by the Tribunal. Therefore, theorder of the Tribunal is unsustainable in law. The application of Section 45(2) waslimited only to EML and not EHPL. Therefore,the order of the Tribunal is liable to be setaside, on the said questions of law, raisedby the assessee. 9. It is also submitted that both thecompanies, EML and EHPL, have the same Boardof Directors and so the Board's resolutiondated 01.04.2010 has got no legal sanctityand when the audited accounts of the EHPL forthe period 31.03.2010 and 31.03.2011 arealready available with the Revenue, whichevidence that the land to an extent of 5.075acres was held as stock in trade only and theBoard's resolution is only a colourabledevice, to avoid taxation. The sale of 5.075acres of land has to be brought to tax as'business income' only and not under 'capitalgains'. Therefore, allowing the benefit ofSection 45(2) of the Act, to the assesseeEHPL, has no application to the facts of theinstant case. The benefit of Section 45(2) ofthe Act can be given to the owner of theland, namely, EML and by virtue of demergeron 01.01.2009, EHPL had taken over the landmeasuring 5.075 acres as stock in trade forthe purpose of carrying out real estatebusiness and hence it has to be rightlyassessed as business income and not ascapital gains. Therefore, the order of theTribunal has to be set aside and thesubstantial questions of law framed by thisCourt, are to be answered in favour of theRevenue. 10. Per contra, learned counsel for theassessee would submit that the land inquestion was originally treated as investmentand converted into stock in trade from28.12.2007, by the Transferor company EML.The said conversion being accepted by theRevenue, the legal consequences of conversionof land/investment into stock in trade, areas under :- “Under Section 45(2) there isa deemed transfer and capital gainbeing the difference between themarket value and the cost ofacquisition becomes chargeable on 10. Per contra, learned counsel for theassessee would submit that the land inquestion was originally treated as investmentand converted into stock in trade from28.12.2007, by the Transferor company EML.The said conversion being accepted by theRevenue, the legal consequences of conversionof land/investment into stock in trade, areas under :- “Under Section 45(2) there isa deemed transfer and capital gainbeing the difference between themarket value and the cost ofacquisition becomes chargeable on the date of conversion. But thesection postpones the charge of taxto the date of actual transfer/saleof such stock in trade. The capital gains accruing onconversion of the land in stock intrade has been determined in thehands of EML and the computationhas not been questioned by thedepartment. This capital gain asper Section is to be charged to taxon the date of sale or transfer ofthe stock in trade. But thispostponed levy does not alter thecharacter of the converted asset,which will be a stock in tradeafter conversion, as Section 45(2)itself recognises.” 11. Further, learned counsel appearingfor the assessee would submit that demergerfrom EML to EHPL should not be considered assale or transfer. If such demerger isconsidered as sale or transfer, the entireamount should have been assessed in the handsof EML itself. Therefore, the provisions ofSection 45(2) will become applicable sincethe land is sold by the assessee. Theprovisions of Section 45(2) is a chargingsection for capital gains. It will apply,whenever a land, which originally treated asinvestment and later converted into a stockin trade, is sold or transferred. Further, hesubmitted that it is not the case of theRevenue that the converted land was sold ortransferred earlier. Hence, the charge ofcapital gains was rightly levied at the timeof sale of land by the assessee. Hence, theTribunal was correct in holding thatprovisions of Section 45(2) is applicable tothe case of assessee. Learned counsel for theassessee company would submit that theassessee took the land as stock in trade andwhen the land was sold also it was treated asstock in trade and the entire saleconsideration of Rs.15 crores was assessedunder the head profits and gains of business,which is over and above the capital gains,levied under Section 45(2). When the land was converted as stock in trade, then the cost ofacquisition of the stock in trade, is themarket value on the date of conversion. Thedecisions in the case of Commissioner ofIncome Tax v. Groz-Beckert Saboo reported in116 ITR 125 SC and the case of Commissionerof Income Tax v.Ambadi Enterprises reportedin 243 ITR 431 Mad., have been relied by theassessee. As per the decisions, when theassessee had taken the property on demergeras stock in trade, the cost of acquisition ofsuch property should be taken at the marketvalue, as on the date of conversion.Therefore, notwithstanding levy of capitalgains under Section 45(2), the land soldshould be taken as stock in trade, treated asstock in trade and sold as stock in trade.The interim Board Resolution of the assesseereconverting the land from stock in tradeinto investment, was not accepted by theAssessing Officer, Commissioner of Income Tax(Appeals) and the Income Tax AppellateTribunal. In fact, the Assessing Officer,while giving effect to the order of theTribunal, has treated the entire saleconsideration of the land, Rs.15 crores, asbusiness income as per the directions ofCommissioner of Income Tax (Appeals). Thesaid portion of the order has not beenaltered in the decision of the Tribunal andthe same has become final. Under Section 45(2) of the Act, under which capital gains aredeemed to accrue at the time of conversion ofinvestment into stock in trade, the actuallevy is postponed to the time of actualtransfer or sale. So, levy of capital gainsunder Section 45(2) is only levy of capitalgains, which has been already accrued butonly the time of its levy is postponed.Merely because capital gains under Section 45(2) is charged, it does not mean it altersthe character of the asset converted. Suchconverted asset continues to be only as stockin trade, despite levy of capital gains underSection 45(2). 12. It is further submitted that theRevenue has misunderstood the import ofSection 45(2) because it relates to capitalgains conversion of investment, into stock in trade but postpones the charge of tax to thetime, such stock in trade is sold ortransferred. Once converted into stock intrade, the asset will continue to be treatedas stock in trade, as mentioned in thesection itself. Application of provision ofSection 45(2) will not reconvert theconverted stock in trade, back into aninvestment. Consideration of sale of suchconverted asset will always be assessed asprofits of business. Further, learned counselfor the assessee would reply to the groundsraised by the Revenue that the land wasreceived as stock in trade and sold in stockin trade. Capital gains under Section 45(2)which accrued on conversion is now levied atthe time of sale. Application of statutoryprovision of Section 45(2) cannot be ignored.Levy of capital gains under Section 45(2) isin addition to and does not affect the entiresale price of the land being treated asbusiness income. The land in question wasreceived as stock in trade and treated asstock in trade and entire sale considerationis assessed under the head business income.The land was not treated as investment. Inview of the above, learned counsel for theassessee submitted that the grounds raised bythe Revenue is misconceived. 13. Further, as per Section 45(2), thecapital gains accrued on conversion ofinvestment into stock in trade and only thetaxation is postponed to the time when thestock in trade is transferred or sold. It isnot disputed by the Revenue that demerger isnot a sale or transfer, as otherwise thecapital gains should have been levied at thetime of demerger. Therefore the capital gainscomputed under Section 45(2) at the time ofconversion on 28.12.2007 has been properlybrought to tax when the land was sold by theassessee. Levy of capital gains under Section45(2) is not a benefit but an additional levyover and above the assessable of the entiresale consideration of land as businessprofits. On sale of an investment convertedinto stock in trade, two independent taxesare levied :i. Capital gains accruing on the date of conversion, omitted to be charged at the timeof conversion, is brought to tax underSection 45(2) at the time of a actual sale /transfer of the stock in trade. ii. Independent levy of capital gainsunder Section 45(2), the entire saleconsideration of stock in trade will beassessed under the head business income. Thecost of acquisition for the stock in tradewill be the market value of the land as onthe date of conversion. This method of computation has been adoptedin computing profit, on sale of half portionof 5.075 acres, in the hands of thetransferor EML, which has been accepted bythe Revenue. 14. Learned counsel appearing for theassessee company, invited our attention tothe giving effect order dated 24.07.2015passed by the Deputy Commissioner of IncomeTax, Corporate Circle-2, Coimbatore, passedpursuant to the order of the Income TaxAppellate Tribunal dated 15.05.15 (withoutprejudice to the submission made on themerits of the case) and submitted thatwhatever be the substantial questions of law,for which answer is sought for, under Section260A of the Income Tax Act, 1961 in theGiving Effect Order, the Assessing Officerhimself has granted the reliefs, as prayedfor. 15. Learned counsel for the assesseesubmitted that in view of the above, there isno substantial questions of law involved inthe appeal and hence the order of theTribunal is perfectly valid and the appeal isliable to be dismissed. 16. Heard Mr. T.R. Senthil Kumar,learned Senior Standing Counsel for theappellant Revenue and Mr.Vijayaraghavan,learned senior counsel for the respondentassessee and perused the material availableon records. 17. The Assistant Commissioner of IncomeTax, Company Circle I(2), Coimbatore, passed an assessment order under Section 143(3) ofthe Income Tax Act, 1961 dated 31.03.2014 forthe assessment year 2011-12, by demanding ataxable income of Rs.34,02,73,275/- being thesale consideration received for transfer of5.075 acres of land, by including the incomereceived from other sources and determinedthetotaltaxableincomeofRs.34,49,89,695/-.Aggrievedbytheassessment order, the assessee company filedan appeal in I.T.A. No.50/14-15 before theCommissioner of Income Tax (Appeals)-1,Coimbatore. The Commissioner, dismissed theappeal, in so far it relates to the transferof land by the assessee company as theprovision of Section 45(2) of the Income TaxAct, 1961 is not applicable to the sale ofland, made by the assessee. Challenging theorder of the Commissioner dated 23.12.2014,the assessee went on appeal before the IncomeTaxAppellateTribunalinITANo.245/Mds/2015, stating that the land wasoriginally converted as stock in trade on01.04.2007 and so the profit on sale of landor the gain determined on the date ofconversion, under Section 45(2), should beassessed as capital gains and the balance asbusiness profit. 18. Further, the assessee pleaded thatSection 45(2) of the Income Tax Act 1961would apply to the present case. Therefore,by considering the submissions of theassessee as well as the representative of theRevenue department, the Tribunal has observedas follows :- “8. Therefore, in our opinion,the land was to be treated ascapital asset upto conversion of itinto stock in trade and theassessee is liable for capital gainon conversion of it as stock intrade and so the provisions ofSection 45(2) is applicable. Afterthe conversion of the land, whenthe land was actually sold, theassessing officer computed theentire sale consideration under thehead 'business income' he did notapply the provisions of Section 45(2) of theAct, which is not proper. Hence,the Assessing Officer was directedto compute the capital gains uptothe date of conversion into stockin trade, by applying provisions ofSection 45(2) of Act and thereafteron actual sale of the land i.e.difference between the value ofsale and stock in trade to beconsidered as 'business income' andto be assessed in this assessmentyear, accordingly.” 19. The land in question was originallytreated as investment and was subsequentlyconverted as stock in trade from 28.12.2007by the Transferor company EML. The aforesaidconversion was accepted by the department.The department on scrutiny of the case of theassessee company, under Section 143(3) of theIncome Tax Act, 1961, assessed the income taxof the assessee for the entire saleconsideration of Rs.15 crores, under the headprofits and gains of business. The assessmentofficer has computed the sale of land under“business income” and therefore rejected theclaim of the assessee to compute the capitalgains under Section 45(2) of the Act. It isuseful to refer Section 45(2) of the IncomeTax Act, 1961, which reads as follows :“45(2)Notwithstandinganything contained in sub-section(1), the profits or gains arisingfrom the transfer by way ofconversion by the owner of a capitalasset into, or its treatment by himas stock-in-trade of abusiness carried on by him shall bechargeable to income-tax as hisincome of the previous year in whichsuch stock-in-trade is sold orotherwise transferred by him and,for the purposes of section 48, thefair market value of the asset onthe date of such conversion ortreatment shall be deemed to be thefull value of the considerationreceived or accruing as aresult of the transfer of the capital asset.” capital asset.” 20. In the assessment order, it has beenobserved by the Assessing officer that theassessee company has borrowed a sum ofRs.35.25 crores over a period from M/s.Globuse Realtors Pvt. Ltd. The aforesaidborrowings was secured by the property ofEML, with an understanding that the lenderscan enforce the sale of the land, in theevent the assessee was not able to repay theloan. The assessee invested part of theborrowings as preference shares in EML, whohas converted its entire land holding 10.150acres into stock in trade, as on 01.04.2007.Consequently, the entire land of 10.150acres, held by EML was deemed to have beentransferred under Section 45(2) and thecapital gains accrued on such conversioncomputed with the market value as on date ofconversion of the land being treated as fullvalue of consideration. The deemed capitalgains on the date of conversion amounted toRs.38,25,57,889/- for the entirety of 10.150acres and the same was chargeable to tax onthe actual sale of the said converted land.The real estate division of EML was demergedinto the assessee company, as per the Schemeof demerger approved by the High Court witheffect from 01.01.2009. Pursuant to theapproved scheme, the land held by EML wasdemerged and vested with the assessee. Afterdemerger, the assessee company had convertedthe land into investments from 01.04.2010 assupported by a resolution of the Board ofDirectors dated 01.04.2010. Thereafter, theassessee company disposed of the land to anextent of 5.075 acres through Power ofApproval (POA), for a sale consideration ofRs. 15 crores, with which the loanoutstanding amount was settled to theborrowers. The assessee has offered the gainon transfer of the entire 10.15 acres of landas long term capital gains and set it offagainst the long term capital loss incurredby the assessee. The assessing officerassessed the entire sale consideration asbusiness profit on the ground that the landwas shown as stock in trade. According to theassessee, the land demerged with EML to EPHL, is not a transfer, in view of the provisionsof Section 47(vid) of the Act, which reads asfollows :-“Transactions not regarded astransfer.47. Nothing contained inSection 45 shall apply to thefollowing transfers :-.....(vib) any transfer, in ademerger, of a capital asset by thedemerged company to the resultingcompany, if the resulting company isan Indian company; ”21. A part of the land measuring 5.075acres, out of the total extent of 10.150acres, were sold even before filing thedemerger application before this Court. Theaforesaid sale was not brought to the noticeof the High Court. The High Court of Madras,as per the Scheme of Demerger approved EMLdemerging with M/s. EHPL, transferring thereal estate division of EML to EHPL as agoing concern. As on 31.03.2010, the assesseecompany has shown the land in question asstock in trade and the same was laterconverted as Fixed Asset, by the BoardResolution. In the case of sale of 50% of thesame property, out of 10.150 acres of land,for the assessment year 2009-10 wasconsidered, by the co-ordinate Bench of theTribunal in the case of M/s. Essorpe MillsLtd., in ITA No. 2256/Mds/2012 dated11.07.2013, wherein it was held that the gainon transfer of property up to the date ofconversion into stock-in-trade has to beassessed under the head “capital gains” andthe gain in respect of property i.e. afterthe date of conversion into stock-in-tradehas to be assessed as business income. As theAssessing Officer computed the entire saleconsideration under the head long termcapital gains, he did not apply theprovisions of Section 45(2) of the Act.Therefore, the Assessing Officer shouldcompute the business income in respect ofstock-in-trade of the property, taking intoconsideration the provisions of section 45(2)of the Act, in accordance with law, after giving adequate opportunity of hearing to theassessee. 22. The provisions of Section 45(2) is acharging section for capital gains. It willap