Commissioner of Income Tax vs Swastick Textile Mills Ltd.

S.M. Jhunjhunuwala. J.

By this reference u/s 256(1) of the Income Tax Act. 1961, made at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following questions of law to this court for opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had converted the land into their stock-in-trade ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the purpose of determining the cost on the date of conversion, the market value of the asset as on that date has to be taken into account in regard to any sale of the land effected thereafter ?"

The assessee is a public limited company incorporated on October 22, 1946, with the object of acquiring the business carried on in the firm name and style of "P. Kashinath and Co." (for short, referred as "the firm"). The firm was carrying on the business of textile processing and had acquired a factory in the year 1939. In the year 1946, the firm decided to shift its factory from Parel to Chembur and since a considerable area of land was required by the firm, it negotiated for purchase of land situated adjacent to the land already held by the firm and agreed to purchase land admeasuring 1,30,000 sq. yards from the then Government of Bombay. The firm had intended to use the land so agreed to be purchased for construction of houses for its employees as well as for expansion of its industrial undertaking. Since the business of the firm was taken over by the assessee-company at about the same time, the assessee-company became entitled to the land agreed to be purchased by the firm subject, however, to the conditions and stipulations which were then imposed by the then Government of Bombay. The purchase of land by the assessee-company was completed and in the year 1966, the Government of Maharashtra gave possession of land admeasuring 95,487 sq. yards only (for short, "the said land") to the assessee-company. The said land was under Village Panchayat and it was claimed that the Village Panchayat did not permit the use thereof except for residential purposes. For various reasons, the assessee-company could not utilise the said land for the purpose for which it was originally acquired.

On or about November 4, 1971, the assessee-company approached the Government of Maharashtra for grant of permission to sell the said land which permission the Government did grant. Thereupon, on December 28, 1971, a resolution of the board of directors of the assessee-company was passed for sale of the said land at such price as could be obtained but not below Rs. 70 per sq. yard. This was followed by another resolution passed at the general body meeting of the assessee-company on July 26, 1974.

The said land when originally acquired was shown as a "fixed asset" in the balance-sheet of the assessee-company. However, after permission to sell the same was obtained from the Government of Maharashtra and the necessary resolutions as aforesaid were passed, the same was shown as a "current asset" of the assessee-company in the balance-sheet of the assessee-company for the subsequent years. Certain journal entries recording this change were made in the books of account of the assessee-company. This was done on September 30, 1974.

In the assessment year 1974-75, the assessee-company claimed that the said land was converted into stock-in-trade and was brought into the books of account of the assessee-company at the market rate prevalent on the date of conversion. During the accounting years relevant to the assessment years 1974-75 and 1975-76, some portion of the said land was sold and the assessee-company offered for assessment the excess amount realised on such sale over the value on which it was brought into the books of the assessee-company on the date of conversion into stock-in-trade, claiming that the excess represented the business profit of the assessee-company. The Income Tax Officer did not accept the claim of the assessee-company since according to the Income Tax Officer, the said land was not converted into stock-in-trade by the assessee-company. The Commissioner of Income Tax (Appeals), in appeal, also gave a finding that the said land was not converted into stock-in-trade and concurred with the Income Tax Officer. The Tribunal, on further appeal by the assessee-company, accepted the case of the assessee-company and held that although originally the purchase of the said land was in the nature of a "capital investment", the assessee-company had decided to change its original intention and converted it into a commercial or trading asset. It is in these circumstances, at the instance of the Revenue, that the present reference has been filed for the opinion of this court.

In the facts of the case, it is not in dispute that the said land when purchased was intended to be used by the assessee-company for construction of houses for its employees as well as for expansion of its industrial undertaking. There appears to be no doubt that originally the purchase of the said land was in the nature of "capital investment". However, the subsequent events which had taken place, namely, the permission which the assessee-company sought from the Government for sale of the said land, the grant of permission by the Government permitting the assessee-company to sell the said land, the resolutions passed by the board of directors of the assessee-company as also at the general body meeting of the shareholders of the assessee-company and the book entries which the assessee-company made in its books of account establish that the assessee-company did convert this initially a "capital asset" into a "current asset" some time in the year 1974. Law does recognise conversion of a "capital asset" into a "trading asset" and in this case, we are not concerned with the intention of the assessee-company in converting the said initially "capital asset" into a "trading asset" at a later date as that controversy is not borne out by the questions referred to this court for opinion. The question is whether, in the facts of the case, the Tribunal was justified in holding that the assessee-company had converted the said land into its stock-in-trade and in view of the facts stated hereinabove, we are of the opinion that the Tribunal was justified in so holding.

Accordingly, we answer the first question in the affirmative, that is, in favour of the assessee-company and against the Revenue.

In view of our answer to the first question, since the second question has become academic, we decline to answer the same.

There shall be no order as to costs.