The Core Legal Question
Whether, upon conversion of land held as a capital asset into stock-in-trade, the Assessing Officer can lawfully adopt the fair market value (FMV) for computing capital gains under Section 45(2), while simultaneously adopting the book value / original cost for computing business income on sale of such stock-in-trade — thereby applying two different values to the same asset under the same statutory provision.
Facts
The assessee company was allotted 38,212 sq. meters of land at Manesar by HSIIDC for development of an IT/ITES project, with a small residential and commercial component. The land was originally held as a capital asset.
Construction commenced in 2008. However, due to a severe slowdown in the IT/ITES sector, the project's commercial viability was adversely impacted. Despite this, the assessee was contractually and statutorily compelled to continue construction as per HSIIDC policy — failing which the allotment would have been cancelled if 75% construction was not completed within the stipulated period.
During the relevant assessment year, only part of the project was completed — comprising Tower D and Tower E — while the balance construction was deferred. In view of the changed commercial circumstances, the assessee converted 50% of the land into stock-in-trade, retaining the remaining 50% as a capital asset.
On the date of conversion, the FMV of the land was equal to its original cost — there being no appreciation in land value. The assessee therefore recorded the conversion at cost, consciously not claiming indexation, as it would have resulted in a long-term capital loss which was not practically adjustable.
Sales During AY 2012-13
Tower E
1,20,000 sq. ft. sold
90.6% completion (Percentage Completion Method)
Tower D
39,037 sq. ft. sold
93.3% completion (Percentage Completion Method)
Aggregate consideration: ₹42.17 crore
Income recognised and offered to tax as business income: ₹38.41 crore
Action of the Assessing Officer
The AO invoked Section 45(2), holding that conversion of land from capital asset into stock-in-trade constitutes a “transfer”. He determined that land amounting to ₹9.32 crore stood converted during the year and computed a Long-Term Capital Gain of ₹7.34 crore by adopting FMV at the time of conversion.
However, while computing business income from sale of the constructed area, the AO did not adopt the same FMV as cost of stock-in-trade — instead continuing to apply the book value / original cost of the land. This resulted in:
For Capital Gains
Adopted FMV as deemed consideration → enhanced capital gains of ₹7.34 crore
For Business Income
Adopted book value as cost → no corresponding reduction in business profits
The net effect was an artificial inflation of total taxable income — the same appreciation was effectively taxed twice.
Statutory Scheme of Section 45(2)
Section 45(2) is a special, self-contained provision which:
Treats conversion of a capital asset into stock-in-trade as a deemed transfer.
Defers taxation of capital gains to the year of actual sale of such stock-in-trade.
Deems the FMV on the date of conversion as both the full value of consideration for capital gains and the cost of acquisition for computing business income on sale.
The provision mandates symmetrical and integrated application of FMV. The FMV on the date of conversion is the single pivot figure — simultaneously the deemed sale consideration for capital gains and the deemed cost for business income.
Findings of the CIT(A)
The CIT(A) held that once FMV is adopted for capital gains under Section 45(2), the same FMV must necessarily be adopted as cost of stock-in-trade for computing business income. The AO's hybrid approach — FMV for capital gains, book value for business income — was not sanctioned by law and defeated the legislative intent of Section 45(2).
The CIT(A) further noted the internal logic of the provision:
Accordingly, the entire addition was deleted by the CIT(A).
Tribunal's Analysis and Decision
The Tribunal upheld the CIT(A)'s order, observing:
Mistake apparent on record
The error committed by the AO was a mistake apparent on record, involving incorrect application of a clear statutory provision.
Section 45(2) cannot be applied in parts
FMV adopted at conversion must be carried forward consistently for both capital gains and business income computation. Selective application is impermissible.
CIT(A) acted within powers under Section 251(1)
No remand was required as the issue was purely legal and computational, with no dispute on facts.
Revenue's plea for remand rejected
The remand plea was rejected particularly as the same Assessing Officer had accepted the assessee's method in subsequent assessment years — making the Revenue's position inconsistent.
Ratio Decidendi
Under Section 45(2), the fair market value adopted at the time of conversion of a capital asset into stock-in-trade must be consistently applied both for computation of capital gains and for determining the cost of stock-in-trade for business income. Dual or selective valuation is impermissible in law.
Final Outcome
- ✓Revenue's appeal dismissed
- ✓Deletion of capital gains addition upheld
DCIT Circle 4(2) Delhi v. Cyberwalk Tech Park Pvt. Ltd. — ITA No. 448/Del/2024 — AY 2012-13 — 06.02.2026
Practical Takeaway
- ▸When converting a capital asset to stock-in-trade, obtain a proper FMV valuation on the date of conversion and document it carefully.
- ▸The same FMV must be used consistently — as deemed sale consideration for capital gains and as the opening cost for business income. There is no option to mix and match.
- ▸If the AO adopts FMV for capital gains but denies it as cost for business income, challenge the assessment — this results in impermissible double taxation of the same appreciation.
- ▸If FMV equals original cost (no appreciation), the conversion results in nil capital gains — and the assessee need not claim indexation if it would create an unabsorbable capital loss.
- ▸The AO's acceptance of the assessee's method in subsequent years is a strong argument against a different treatment in the year under appeal.