Whether conversion of capital asset such as Floor Space Index into stock-in-trade of business carried out by assessee is to be deemed as 'transfer' u/s 2(47)

AHMEDABAD, JAN 06, 2014: THE issue before the Bench is - Whether conversion of capital asset such as Floor Space Index into stock-in-trade of business carried out by assessee is to be deemed as 'transfer' u/s 2(47). And the answer is NO.

Facts of the case

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 theatres 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. 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 debiting to the account of FSI Right A/c. The assessee had shown capital gain in its return of income for the AY 1993-94. However, the AO rejected the assessee’s claim. On appeal, CIT(A) allowed the appeal of the assessee. On further appeal, Tribunal had dismissed the said appeal.

On appeal, the HC held that,

++ the AO made out the case that it is an afterthought 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 AO 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 asset into SIT 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 taxability of such transaction is provided in section 45(2), reproduced above in 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 also provides 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 SIT 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 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 asset (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 DR are distinguishable of facts. 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). In view of the above discussions, we are in complete agreement with the view taken by the Tribunal that FSI 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. 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.