OCTAVIUS STEEL & CO. LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX

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OCTAVIUS STEEL & CO. LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX

ITAT, KOLKATA SPECIAL BENCH

  1. Dongzathang, President; R.P. Garg, Vice President & G. Chowdhury, J.M.

ITA No. 410/Cal/1993; Asst. yr. 1989-90

10th May, 2002

(2002) 21 CCH 0178 KolTrib

(2003) 78 TTJ 0170 (SB) : (2002) 83 ITD 0087 (SB)

Case referred to

CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC)

CIT vs. Groz-Beckert Saboo Ltd. (1979) 8 CTR (SC) 155 : (1979) 116 ITR 125 (SC)

Raja Ajai Varma vs. Assessing Authority (1964) 51 ITR 308 (All)

Circular No. 397 dt. 16th Oct., 1984

Counsel appeared:

G.N. Singh, for the Appellant as Amicus Curiae : A.S. Ukil, for the Respondent

ORDER

  1. CHOWDHURY, J.M. :

The Hon’ble President has constituted this Special Bench for deciding the following points :

“1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of ss. 2(47)(iv) and 45(2) of the Act, the assessee was rightly assessed to capital gains tax on a sum of Rs. 3,92,850 ?

  1. Whether, the assessee is liable to the capital gains tax on the above sum notwithstanding that the conversion of the capital asset into stock-in-trade took place prior to 1st April, 1985, the date from which both the sections came into force?”
  2. The facts involved in the present case are as follows. The assessee-company was holding a plot of leasehold land at 14 & 15, Old Court House Street, Kolkata. The land was held as investment. The middle portion of the land measuring 914 sq. mt. was transferred from the investment account and converted into assessee’s stock-in-trade during the accounting year ended on 31st March, 1983. On conversion the market value of the land was estimated by a chartered valuer. As per his report, the value of the converted land as on 1st April, 1982, was Rs. 27.29 lakh. A multi-storeyed building was constructed on the said land by the assessee. A portion of the building was transferred to United Bank of India by registered Deed of Conveyance during the accounting year ended on 31st March, 1989, relevant to the asst. yr. 1989-90.
  3. In the return of income the assessee had admitted the profit on the sale of building under the head “Business” at Rs. 12,65,376. According to the AO, provision of ss. 45(2)/2(47)(iv) of the Act was introduced w.e.f. 1st April, 1985. He was of the view that conversion of the land into stock-in-trade was a transfer within the meaning of s. 2(47)(iv) of the Act. According to s. 45(2) of the Act, the difference between the sale price and the market value of the land as on the date of conversion was assessable as business profit and the difference between such market value and the original cost of the land was assessable as capital gain under s. 45(2) of the Act. In the asst. yr. 1988-89 also the AO invoked the provisions of ss. 45(2)/2(47)(iv) of the Act in respect of such converted land into stock-in-trade and the difference between the market value of the land on the date of conversion and the original cost thereof was taxed under the head “Capital gains”. On similar ground this year also, the net capital gain was computed by the AO as under :

“Proportionate market value of the leasehold land on the date of conversion as per assessee’s statement:

i.e., 24643.20 X 2839500/45826.92 Rs. 15,26,927
Less : Proportionate cost of land :
35000 X 24643.20/45826.92 Rs. 18,821
Deemed capital under s. 45(2) Rs. 15,08,106″.
  1. On appeal, learned CIT(A) noticed the fact that so far as the earlier year is concerned, the first appellate authority allowed relief to the assessee on the ground that the conversion into stock-in-trade was made before 1st April, 1985, whereas the provision of s. 2(47)(iv) had taken into effect from 1st April, 1985. Therefore, such a conversion of capital asset into stock-in-trade was effected before 1st April, 1985. Hence, it could not be held as transfer. However, learned CIT(A) while deciding the present issue held that on a reading of s. 45(2), it was clear that emphasis is not on the date of transfer by way of conversion but on the date on which such stock-in-trade is sold or otherwise transferred. Admittedly, the stock-in-trade was sold in the present assessment year. Therefore, the capital gain is to be computed by the AO in this assessment year. Apparently, contrary view was taken by learned CIT(A) in the present assessment year and in the earlier assessment year i.e., asst. yr. 1988-89.
  2. It may be mentioned here that a part of the converted assets was sold in the earlier years and the issue came up before the Tribunal for the asst. yr. 1988-89, and the Tribunal held that both the business income and the capital gain should be charged in the assessment year in which the sale or transfer otherwise took place and for computation of capital gain, the matter was restored to the AO. After quoting s. 45(2), it observed in para 4 of its order in ITA No. 217(Cal) of 1990 dt. 21st Dec., 1993, as under :

“In our opinion the section is unambiguous. The capital gain is attracted in the case of an asset converted from asset to stock-in-trade for the purpose of capital gains, at the point of conversion but at the point of sale or transfer capital gains will be computed and included on the basis of difference between the cost of the capital asset and the market price or value on the date of conversion. And the difference between the market value on the date of conversion and the sale value would be the business income. This has nothing to do with the law applicable on the date of conversion. Both the capital gains and business income would be charged in the assessment year when the sale or otherwise transfer took place. In view of the above, we are of the opinion that the order of the learned CIT(A) should be reversed on this point. However, for justice we feel that in the matter of computation of capital gains i.e., determination of value at the time of conversion should be properly looked into as the learned CIT(A) did not discuss the issue because he had granted full relief to the assessee. We are restoring the matter to the file of the AO who would compute the same after giving opportunity to the assessee.”

  1. The present appeal came up for hearing before another Division Bench originally for asst. yr. 1989-90. The Bench referred the matter before the Hon’ble President for constitution of a Special Bench on consideration of the facts that the two Supreme Court decisions in the case of CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) and in the case of CIT vs. Groz-Beckert Saboo Ltd. (1979) 8 CTR (SC) 155 : (1979) 116 ITR 125 (SC) as well as the fact that the amended section was to take effect from asst. yr. 1985-86, and the effect of the CBDT Circular No. 397 dt. 16th Oct., 1984 [sic—Circular No. 387, dt. 6th July, 1984—Ed.] [(1984) 43 CTR (TLT) 3 : (1985) 152 ITR (St) 34] had not been considered and not brought to its notice. The Special Bench was constituted in the background of the aforesaid facts.
  2. In spite of service of notice, no one appeared on behalf of the assessee before the Special Bench. Mr. A.S. Ukil, learned Departmental Representative appearing on behalf of the Revenue has brought to our notice the provisions of s. 2(47)(iv) of the Act whereby the meaning of the word “transfer” was extended to cover a case of conversion of an asset by the owner thereof into stock-in-trade. These provisions came into effect from 1st April, 1985. Further, our attention was drawn to s. 45(2) of the Act which also came into effect from 1st April, 1985, by which the profits or gains arising from the transfer by way of conversion by the owner of the capital asset into stock-in-trade, 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. According to learned Departmental Representative, the object of the legislation of the s. 45(2) is to be taken into account i.e., to charge the gain to tax when such stock-in-trade is sold or otherwise transferred. Only because conversion had taken place earlier to 1st April, 1985, that cannot be a bar for charging capital gains tax when the asset, in fact, was transferred during the previous assessment year i.e., in the asst. yr. 1989-90. According to learned Departmental Representative the decisions of the Supreme Court in the case of Bai Shirinbai K. Kooka (supra) and in the case of Groz-Beckert Saboo Ltd. (supra) are not applicable in the present circumstances of the case because these cases relate to assessment year prior to insertion of ss. 2(47)(iv)/45(2) of the Act w.e.f. asst. yr. 1985-86.
  3. At the request of the Bench, Mr. G.N. Singh, Advocate appeared to assist the Court as amicus curiae. According to Mr. Singh, the conversion took place during the year ended on 31st March, 1983. Construction was completed during the year ended on 31st March, 1985. The deeming provisions contained in s. 45(2) were not in existence even at the time of construction. Therefore, when the conversion took place before 1st April, 1985, s. 45(2), has no application since the same came into effect from 1st April, 1985. According to Mr. Singh, the word “transfer” in relation to a capital asset includes the conversion of capital asset into stock-in-trade only w.e.f. 1st April, 1985, when the amendment came into effect under s. 2(47) of the Act. In nutshell the submission of Mr. Singh is that since the conversion took place before 1st April, 1985, the provision of s. 45(2) cannot be applied even if the actual transfer of the converted stock-in-trade by a registered sale deed is taken effect after 1st April, 1985.
  4. We have heard the learned Departmental Representative and the amicus curiae. We have also perused the material on record. Sec. 4 of the IT Act is the charging section by which income of a person is charged in respect of total income of the previous year, unless any other situation has been provided by any provision of this Act. Total income of an assessee is the aggregate amount of income of an assessee from whatever source derived and as arises, accrues or is received in the previous year as is computed under the relevant provisions of the Act. Income includes capital gains arising on transfer of a capital asset. Sec. 45 deals with capital gains. Sub-s. (1) of s. 45 of the Act originally provides for the charging to tax the capital gains. According to this sub-section, any profits or gains arising from transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head, “Capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. By virtue of this provision capital gain has been treated as deemed income of the previous year in which the transfer is taken place. Sec. 45(2) reads as under :

“45(2) Notwithstanding anything contained in sub-s. (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 s. 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.”

  1. On a plain reading of the aforesaid section, it is clear that this provision was enacted for computing capital gains in respect of transfer of converted asset into stock-in-trade of a business. It has been provided therein that such profit arising from the transfer by way of conversion as stock-in-trade 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.
  2. Sec. 45(2) starts with a non obstinate clause. Therefore, the provision of s. 45(2) supersedes all the other provisions. Under this sub-s. (2) of s. 45, it is clear that capital gain shall be charged in the previous year in which such stock-in-trade which is known to be so only after conversion, is sold or otherwise transferred. Admittedly, the transfer of stock-in-trade in the present case was effected by way of registered Deed of Conveyance during the present assessment year. Therefore, in our opinion, the first appellate authority was justified in holding that capital gain is to be computed in the previous year even though that conversion was effected before 1st April, 1985. This sub-section supersedes provision of sub-s. (1) and provides for charging of capital gain in the year when the converted stock-in-trade is sold or otherwise transferred by him. For the purpose of s. 48 also this section has provided the method for computing capital gain in such circumstances, i.e., the fair market value of the asset on the date of such conversion shall be deemed to be the full value of the consideration received or accruing as a result of transfer of capital asset. We do not find any ambiguity in the said provision. Under s. 2(47)(iv) which provision also came into effect from 1st April, 1985, when an asset is converted by the owner as stock-in-trade of business, such conversion is to be treated as transfer. Corresponding amendment was made in s. 45 of the Act for computing capital gain arising out of such transfer. In the present case the asset was converted into stock-in-trade before 1st April, 1985. Even assuming that before 1st April, 1985, such conversion cannot be said to be transfer within the meaning of s. 2(47)(iv) of the Act but admittedly, after 1st April, 1985, the extended meaning of the word “transfer” is applicable in respect of such conversion. However, capital gain cannot be computed unless the such stock-in-trade is sold or otherwise transferred. The gain arises only on sale or transfer otherwise. It does not amount to giving retrospective effect to the statutes but applying the law applicable on the date of taxable event i.e., sale of converted assets.
  3. The Gauhati High Court in the case of Ashutosh Banik vs. CIT (1981) 20 CTR (Gau) 101 : (1981) 132 ITR 544 (Gau) held as under :

“A statute is retrospective when it takes away or impairs any vested right acquired under the existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect of transactions or considerations already past. But a statute is not retrospective because a part of the requisition for its action is drawn from a time antecedent to its passing.”

  1. This was a case of a gift of house property by the husband to the wife in 1954 and the income from this house property was sought to be assessed under ss. 27/64(iii) of IT Act, 1961 which came into effect from 1st April, 1962. It was challenged on the ground that transfer was before the Act came under force and assessment of income from such property amounted to retrospective effect to transaction occurred much before the coming into force. It was rejected by the High Court by observing as under :

“From the above observations there is no doubt that there is no question of giving retrospective effect to s. 64(iii) or s. 27 in the instant case. There is also no need for questioning the title or ownership of the spouse. The sections only provide for a principle of computation and taxing the income in the hands of the transferor.”

  1. We may usefully refer to the decision of the Supreme Court in the case of Philip John Plasket Thomas vs. CIT (1963) 49 ITR 97 (SC). In this case the question as for assessment of income of wife from admission in a firm and income accruing after 1937 from a firm formed before 1937 and before the introduction of s. 16(3) in 1937 was answered by the Court as under:

“Sub-s. (3) of s. 16 of the Act was introduced in 1937. For the purpose of its application it is immaterial whether partnership was formed before or after 1937, and whether the transfer was affected before or after that date. However, the sub-section deals only with income arising after its introduction. It clearly aims at following an individual’s attempt to avoid or reduce the incidence of tax by transferring his assets to his wife or minor child, or admitting his wife as a partner or admitting his minor child to the benefits of the partnership, in a firm in which such individual is a partner.”

Similarly, in Raja Ajai Varma vs. Assessing Authority (1964) 51 ITR 308 (All), the Allahabad High Court dealing with s. 4A of the U.P. Agrl. IT Act, which was similar to s. 16(3) of the 1922 Act, observed :

“On a plain reading of the section there is little or no scope for the contention that the income for the assessment year after the insertion of s. 4A in 1953, from the assets transferred before 1953 by the assessee, would not stand to be included in the assessment of the transferor who otherwise satisfies the conditions of this section. This section, prima facie, has no concern with the date of the transfer of the assets but only with the income of the transferred assets in the relevant year of assessment. The section casts its net wide enough to embrace in its sweep income from assets which may have been transferred before the enactment of Act XIV of 1953.”

  1. The Circular No. 397, dt. 16th Oct., 1984 (supra) reads as under:

“Capital Gains—Section 45

9.1. Under the existing provisions, profits or gains arising from the transfer of a capital asset effected in the previous year are taken to be the income of the previous year in which the transfer took place and are chargeable to income-tax under the head ‘Capital gains’.

9.2. The Amending Act has inserted a new sub-s. (2) in s. 45 of the Act to provide that the profits and 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 charged to tax under the head “Capital gains” in the year in which such stock-in-trade is sold or otherwise transferred by him. The new sub-section further provides that, for the purposes of computing the capital gain in such cases, the fair market value of the capital asset on the date on which it was converted or treated as stock-in-trade shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

To illustrate :

Suppose the cost of the asset is Rs. 20,000. The asset is converted by the owner as stock-in-trade on 1st June, 1984, and taken to his stock at the market value of Rs. 70,000. The asset is sold on 1st Aug., 1985 for Rs. 80,000.

Capital gain of Rs. 50,000 (subject to admissible deductions) will be liable to tax in the asst. yr. 1986-87. The business profit of Rs. 10,000 arising on the sale of the asset will be liable to tax as part of the business income for the asst. yr. 1986-87. (The accounting year of assessee has been taken to be the financial year).”

It clarifies that the capital gain in cases of converted assets in closing stock would be chargeable in the year when such converted asset is actually sold as stock-in-trade. In other words, not in the year of conversion, but year of actual sale.

  1. In the two cases before the Supreme Court, the decision was that on conversion there is no profit as no one can make profit out of himself. That situation is now taken care of by introducing s. 45(2). It provides for taxation where the converted stock-in-trade is sold and the difference between the market value on the date of conversion and actual cost is the capital gain. That is what has been assessed by the AO. Accordingly, the order of the first appellate authority is upheld and both the questions are decided against the assessee.
  2. In the result, the appeal is dismissed.

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