No Capital Gain Tax on Conversion of Land held as Stock, Transferred upon HUF-partition: Karnataka HC
July, 20th 2020
The Karnataka High Court held that the land held as stock, transferred upon HUF-partition, doesn’t tantamount to conversion into “capital asset” for the purpose of imposing a capital gain tax under the Income Tax Act, 1961
The assessee-Individual, C. Ramaiah Reddy was engaged in real estate business. The assessee filed return of income declaring total income of Rs.1,37,71,300/-. The case was selected for scrutiny and a notice under Section 143 (2) of the Act was issued. The assessee in the profit and loss account had shown the purchase and sale of sites and net profit of Rs. 1,13,18,182/- was shown and was declared as income from the business.
The land received by the assessee under the family arrangement was treated as stock in trade in his books and was sold in previous years. A query was made to the assessee by the AO that capital gains on the sale of such properties are attracted under section 45 (2) of the Act and since no capital gains were offered to tax, therefore, the assessee was asked to clarify why such capital gains were not computed. The assessee was further asked to furnish the original cost of acquisition of land along with purchase deeds.
TheA.O.. by an order held that once family partition takes place, the asset which comes in the share of the assessee partake the character of the assets in the hands of the assessee as capital gains and therefore, conversion of capital assets into stock in trade and capital gains attract the provision of Section 45 (2) of the Act.
The A.O. determined the total income of Rs. 8,61,37,451/- after making addition of Rs.6,78,41,691/- on account of long-term capital gains under section 45 (2) of the Act on sale of lands and other assets.
The assessee filed an appeal before CIT (A) who dismissed the appeal of the assessee.
The division bench of Justice Alok Aradhe and Justice M. Nagaprasanna while rejecting the AO’s view held that land received by assessee-individual upon the partition of HUF (both assessee and HUF engaged in real estate business) as stock-in-trade and not a capital asset and hence, provisions of 45(2) (capital gains on the conversion of capital asset into stock-in-trade) not applicable.
The bench further stated that “it is well settled in law that the tribunal is a fact-finding authority and a decision on the facts of the tribunal can be gone into by the high court only if a question has been referred to it, which says that the finding of the tribunal is perverse,” as explained in the case of Sudarshan Silks and Sarees v. CIT.
The bench clarified that the character of assets received on partition did not change, and “there is no provision in the Act to indicate that assets received on partition are capital assets, as no deeming provisions have been enacted by the Legislature”