ORDER
Per Chander – This appeal by the assessed is directed against the order of the CIT (A)-III, New Delhi dated 7-10-1988 relating to assessment year 1985-86. Though the issue in appeal is one, it has different facts for consideration and the assessed has projected them as under :
“1. That the CIT (Appeals) erred on facts and in law in upholding the addition of Rs. 19,21,649 to the results of the Building Projects Division thereby converting loss of Rs. 8,95,173 into a profit of Rs. 10,26,476.
2. That the CIT (A) erred in facts and in law in not appreciating the legal effect of the action of the appellant converting the capital assets, i.e., land into stock-in-trade, and entering the same at market value in the books of account on the date of commencing the real estate business.
3. That the CIT (A) erred in facts and in law in upholding reduction of Rs. 23,74,888 from the value of work-in-progress to arrive at the income of the appellant in the Building Projects Division.”
For examination of the issues in appeal, in their entire perspective the factual background of the case is required to be kept in close focus. This is as under.
2. The assessed is a private limited company incorporated under the Indian Companies Act, 1913 on 20th day of July, 1955. The Memorandum of Association of the Company records various objects for which the company is established. These, inter alia, are to carry on the business of canners and preservers, growers and dealers of fruit, vegetable, herbs medicines, etc. It is also entitled as per these objects to carry on the business of canners and preservers, growers and dealers of fruit, vegetable, herbs medicines, etc. It is also entitled as per these objects to carry on the business of treating, flavouring, coloring, manufacturing, processing, purchasing and selling and exporting and importing in any manner frozen foods of all description. These objects are recorded seriatim and are quite explicit. Object 8A reads as under :
8A (i) : To purchase, take on lease or in exchange or otherwise acquire any lands and building, or flats or any part of the buildings or rights whether in proposed building or in an existing building wheresoever situate, and any estate or interest in, and any rights connected with, any such lands and buildings and to develop and turn to account any such land acquired by the company or in which the company is interested, and in particular by laying out and preparing the same for building purposes, constructing, altering, pulling down, decorating, maintaining, furnishing filling up and improvising building and by planting paving draining, farming cultivating, letting off building lease or building-agreement, and by advancing money to an entering into contracts, agreements and arrangements of all kinds with owners, buildings, tenants, agents and others.
The assessed was, thus, engaged in the processing and canning of fruits and vegetables at Okhla, New Delhi for export overseas. On 18th January, 1980 the Board of Directors of the Company decided to explore the possibilities of taking up the activity of property dealing and development, construction of building and sale of superstructures and other allied activities. In a meeting of the Board of Directors of the assessed-company held on 14th March, 1980 in its registered office, the directors noted that the above possibilities were enquired into and it appeared that it would be advisable to start these activities in stages. The Board perused, in this connection, the opinion of M/s Anand Das Gupta and Sagar, Advocates and Solicitors wherein if was expressed that the company has the necessary power to carry on the proposed objects in its Memorandum of Association. Accordingly a Resolution was passed on 14th March, 1989 that the company do commence the business of real estate and dealers and developers of property, builders, acquirers, buyers, etc. It was further resolved that the company do divide its activities and accounts in the following Divisions :
(i) Processed Foods Division;
(ii) Building Projects Division; and
(iii) Registered Office Division.
It was further resolved that three separate banking accounts of the company be, and is hereby opened with Canara Bank, Okhla Industrial Estate, New Delhi with the following title :-
(i) The Midland Fruit and Vegetable Products (India) Pvt. Ltd. (Registered Office Account);
(ii) The Midland Fruit and Vegetable Projects (India) Pvt. Ltd. (Processed Foods Division Account); and
(iii) The Midland Fruit and Vegetable Products (India) Pvt. Ltd. (Building Projects Division Account).
Before these resolutions were passed sanction for reconstruction from DDA had been obtained.
3. In view of the decision taken by the Board of Directors of the Company to start separate Divisions for processed foods and building projects, it was considered essential that certain changes be made in the fixed assets position of the company by transferring certain fixed assets of the company to the stock-in-trade of “Building projects Division”. The directors, therefore, decided to transfer the assets from the processed food division to the registered office division at book value. After revaluation these assets were then transferred to the building projects Division. It was also decided “to temporarily suspend food processing activities in the present factory shed and to reorganise the same in another place”. Thus, the land and property of the company at Ishwar Nagar, Okhla Industrial Estate, New Delhi was transferred from the fixed assets in the Processed Foods Division through the Registered Office Division to stock-in-trade of the building projects division with the purpose of developing, dealing and doing all acts relating to the commercial exploitation of this property in all its aspects. The properties decided to be so transferred were got valued from an approved valued as on 14th March, 1980. The value of these assets was determined by the Approved Valuer at Rs. 25,88,240. The report of the Valuer is on record from pages 21 to 24 of the paper book. The assessed follows financial year as the previous year. The above changes were reflected in the final accounts of the assessed-company for the financial year ending 31-3-1980 relevant for the Asst. year 1980-81. From the balance sheet for that year at page 16 of the paper book, it appears that an amount of Rs. 23,74,888.49 was reflected as capital reserve and the note to this balance-sheet described it as the difference between the book value and market value as determined. The ITO who framed the assessment for the assessment year 1980-81 has recorded his observations on this development as under :
“During the previous year the Board of Directors decided to diversify the business activities by going into the venture of real estate, i.e., Land development, construction of building and sale of superstructure and allied activities. A copy of the resolution of the Board of Directors in support of this decision has been filed. The company had invested certain sums in land and building at Okhla, and value thereof was being shown each year in the companys Balance-sheet. The w. d. v. as on 1st January, 1970 on the land and building was Rs. 2,13,351. Pursuant to the above decision of the Board of Directors to enter into venture of real estate the company decided to hand over these assets to Building Project Deptt., a Department created for this purpose. Thus in the Balance Sheet in this accounting year the value of the said land and building of Okhla were converted from investment of assesseds stock-in-trade. The value shown in the Trading account in the form of opening stock of land and building Rs. 25,88,240. This valuation is supported by a report of the valuer, Col. O. P. Anand of defense Colony, dated 14th March, 1980. Account adjustments are found to have been made in the Balance Sheet. The question regarding the taxability of amount of difference between the value of stock-in-trade as per new Trading Account and the value as per the last years Balance Sheet prior to the conversion of the property from investment to stock-in-trade has been carefully examined. Relying on two decisions of the Supreme Court i.e. CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 and CIT v. Hind Construction Ltd. [1972] 83 ITE 211, the assessed company has pointed out that the difference of Rs. 23,74,889 again attracts neither capital gains tax nor otherwise in view of the definitions of capital gain given in section 2(47) etc. It has been argued that for a transfer two parties are required i.e., one seller and the other purchaser and no one can sell any thing to oneself. It has been contended that merely because of the conversion of the value of assets lying in the form of investment to stock-in-trade cannot in itself make a transaction for computation of any profit or even capital gain. The contention of the assessed has been considered.”
4. For the year under appeal, the return of income was filed on 30th Sept., 1985 declaring loss of Rs. 23,68,428. The IAC (A) noted that during the year the assessed-company had two types of business activities, namely, processing of food and vegetables and food products and building and construction of commercial flats. The assessed has prepared separate Profit & Loss Account and Balance-Sheet for these two activities and had also submitted a consolidated profit and Loss Account and Balance Sheet. In the building projects Division, the assessed had sold certain flats for consideration of Rs. 49,95,891. In this Division the assessed had shown a net loss of Rs. 8,95,173. According to the IAC (A) this loss had occurred on account of revaluation of stock-in-trade effect by the assessed in the financial year 1979-80, relevant to the assessment year 1980-81. According to him, “the revaluation of stock-in-trade done by the assessed is an exercise to increase the cost of construction so that profits from this Division can be recorded”. He held the opinion that since the Building Projects Division was a part of the assessed-company, there was no justification to increase the value of stock-in-trade. The value of stock-in-trade, according to him, should be the same as book value of these assets as on the date of transfer i.e. 14-3-1980. He, therefore, took the original cost of stock-in-trade i.e. the book value of the land and buildings at the time of transfer for determining the profits on sale of flats. In this process, according to him, the total cost of the Building Projects Division came to Rs. 55,85,105. The total saleable area was 48149.37 sq. ft. The area sold during the year was 32475.92 sq. ft. The unsold area was 15673.45 sq. ft. Thus, according to him, the value of the closing stock of the Building Projects Division came to Rs. 18,18,048. Taking these figures into consideration and after allowing other expenses incurred in this Division, there was net profit of Rs. 10,26,476. Thus instead of loss of Rs. 8,95,173 declared by the assessed, the assessing officer determined net profit at Rs. 10,26,476. The net result of this was that a sum of Rs. 19,21,649 (Rs. 10,26,476 plus Rs. 8,95,173) was added to the total income of the assessed for the year under appeal. This assessment was framed on 10-3-1988 and was, inter alia, challenged on the above grounds before the ld. CIT (A).
5. The ld. CIT (A) recorded the submissions of the assessed made before him but agreed with the IAC (A) without assigning much of his own reasons. Hence, the present appeal, and the type of grievance projected by the assessed in the three grounds of appeal recorded by us supra.
6. The ld. counsel for the assessed submitted before us that conversion of the capital assets into stock-in-trade by the assessed for use in its Building Projects Division was considered from all its aspects by the assessing officer for the Asst. year 1980-81 and the conversion was not only noted but accepted also. Therefore, by virtue of the ratio decidendi of the judgment of the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 for the purpose of determining the profits on sale of goods in which such converted property is used is to be taken at its market value on the date of conversion. Reliance for this proposition was also placed upon the judgment of the Supreme Court in the case of CIT v. Hantapara Tea Co. Ltd. [1973] 89 ITR 258. The ld. counsel for the assessed argued that the authorities below have wrongly interpreted the amendments to section 2(47) and section 45(2) of the Act. It was argued that since conversion was done in the accounting period relevant to the assessment year 1980-81 and the sale has taken place in the accounting period relevant to the Asst. year 1985-86, the amended provisions did not apply to the case of the assessed in the manner attempted to be applied by the authorities assessed in the manner attempted to be applied by the authorities below. It was emphasised that the emended law will apply to conversion that take place on or after 1-4-1985. Therefore, the assessing authority erred in not accepting the commercial results declared on sale of flats as computed in the trading and profit and loss account filed before him. Since, the change was effected only taking the amended law into account, albeit, erroneously, the orders of the authorities below are not in accordance with law. These may be set aside with the directions that results declared by the assessed on the of the market value of the converted property as on the date of conversion taken in the Asst. year 1980-81 be accepted.
7. The revenue opposed these submissions and supported the orders of the authorities below with the submissions that the definition of the word transfer as per section 2(47) (iv) of the Act read with section 45(2) justified the action of the authorities below. Therefore, there is no case made out for an interference in these orders. The appeal may be dismissed.
8. We have given careful consideration to the rival submissions. We have also very carefully considered the relevant provisions of law. Before we come to consider the statutory law to which the parties have adverted to, we would like to state the settled law on this issue by the Courts. The Honorable Supreme Court in the case of Bai Shirinbai K. Kooka (supra) laid down the law that assessable profits on the sale of converted property was the difference between the sale price and the market price on the difference between the sale price and the market price on the date when conversion of the property into stock-in-trade of the business took place and not the difference between the sale price and the price at which the converted property was originally purchased by the assessed. This ratio was further reiterated by the Supreme Court in the case of Hantapara Tea Co. Ltd. (supra). The Supreme Court in the case of CIT v. Groz-Beckert Saboo Ltd. [1979] 116 ITR 125 after considering the above two judgments which were delivered on the basis of relevant provisions of the Income-tax Act, 1922 pronounced the law after considering the provisions of the IT Act, 1961 as under :
It is now well settled that where an assessed converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost to the assessed.
9. Now we have a close look at the statutory provisions of law. Section 2(47) was substituted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-85. Clause (iv) of sub-section (47) provides that transfer in relation to a capital asset to include :
(iv) In a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;
Taxation Laws (Amendment) Act, 1984 inserted sub-section (2) to section 45 w.e.f. 1-4-1985. The substituted sub-section (2) reads as under :
“(2) Notwithstanding anything contained in sub-section (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 as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him shall, for the purposes of section 48, the fair market value of the assets on the date of such conversion of 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.”
10. Now, when we come to section 48, we find that it provides mode of computation and deductions and lays down that the income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely,
“(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto;
11. It is well settled that retrospectivity cannot be attributed to any provision in the statute unless it is expressly provided by the Legislature. This is so because certain rights acquired cannot be taken away lightly without the mandate of the Legislature. In the light of this proposition of law when we examine the judge made law and the statutory law as projected supra, we find that the authorities below erred in proceeding in the manner they did. This is so because when the assessed converted the assets it took case to determine their market value from an approved valuer. This market value was Rs. 25,88,240. Out of this, the assessed took the amount of Rs. 23,74,888 as the cost as the difference between the book value and market value. When the assessments for the assessment year 1980-81 was going on this issue was considered by the assessing officer and he not only accepted the conversion but also the market value of the assets converted. Having so accepted the conversion and the basis in so far as the market value is concerned, it is not open to the revenue, either suo motu or on the strength of the statutory provisions as referred to above to contend that that market value shall not be taken into consideration while considering the profits from the sale proceeds of the flats constructed with and or on the basis of the converted properties. There is no warrant for such an action in the amended provisions of law which are apparently applicable w.e.f. 1-4-85 and to conversion that took place on or after 1-4-85. The conversion that have taken place prior to that date and which had been considered and accepted by the authorities of the revenue cannot be called in question merely because these provisions have come on the statute book.
12. It is abundantly clear that on the basis of the market value adopted by the assessed in the Asst. year 1980-81 the commercial results for the flats sold during the year were declared. In so far as these results are concerned, the assessing authority accepted them but for tinkering with the market value which was to be taken on the date of conversion and which, in fact, was considered and accepted in the assessment order for 1980-81. Therefore, the whole exercise done by the IAC (A) was not warranted either on facts or in law. We, therefore, set aside the orders of the authorities below and direct the IAC (A) to accept the commercial results declared on the sale of flats/sheds since he had not otherwise questioned the results. Ordered accordingly. Appeal allowed.