Capital gains on conversion of capital asset into stock-in-trade and then claiming reinvestment benefit under section 54F

Facts:

Assessee was in possession of gifted property by his father. He converted the same into stock-in-trade in the FY 2012-13 by converting into plots and sold 4 of the plots during FY 2015-16. Separately he also sold 2 more plots which were acquired by him. He returned capital gains for the 4 sold plotted property taking the fair value of the converted stock-in-trade as at FY 2012-13 (its pro-rata effect of 4 plots) minus the indexed cost of acquisition + also offered the capital gains on the other two plots which was held as a capital asset.The proceeds of the sold 2 capital asset amounts were deposited in the capital gains scheme. The difference between the actual sale consideration of the 4 plots and the fair value of the converted stock-in-trade value as of FY 2012-13 was offered as business income. Subsequently he claimed benefit of Section 54F towards reinvestment (by withdrawing the capital gains scheme amount partly and partly from the sale proceeds of the plotted 4 property) in residential property arising out of both the capital gains offered. Case of the revenue was assessee was into plotting and selling of property so the entire income was to be treated as business income and thus no reinvestment benefit under section 54F would be possible on the capital gains of the plotted 4 unit portion. This was reversed by the CIT(A) who upheld the stand of the assessee which squarely fell in the ambit of Section 45(2). On higher appeal by the revenue -

Held against the revenue that the computation of the assessee was correct and he cannot be denied benefit of Section 54F. For the limited purpose of re-verification of the capital gains computation on the conversion of stock-in-trade portion alone the case was directed to the AO to confirm the same and thereafter if found correct to allow the stand of the assessee.

Ed. Note: The case explains a detailed application of Section 45(2).

Case: Asstt. CIT v. Venkataramana Reddy 2023 TaxPub(DT) 5137 (Hyd-Trib)