By TIOL News Service

BENGALURU, OCT 14, 2016: THE issue is - Whether when stock in trade is excluded from capital assets definition, provisions of Sec 54F would still apply on its transfer. NO is the verdict. 

Facts of the case

The assessee is an individual. AO initially while considering the aspects as to whether the benefit of Section 54F would be available to the assessee, had observed that the assessee is already a owner of more than one residential house, a show cause notice dated 20.12.2011 was issued to the assessee proposing to disallow the exemption claimed U/s.54F of Rs,1,72,00,000/-. In response to this, the assessee's AR vide his letter dated 21.12.2011 stated that the income from house property offered is in respect of stockin- trade. Hence, the assessee was entitled to deduction U/s 54F. The Revenue's position was that exemption U/s.54F was not to be given in case of applicability of any of the conditions contained in proviso (a) or (b) of section 54F. The assessee's own declaration in his Return of Income is an admission of fact that he owned these residential houses at the time of sale of the original asset. The claim of these properties to be as stock in trade is an after thought and immaterial as the criterion laid down in Section 54F is 'should not be the owner of more than one residential house'.

On further appeal, Tribunal held that the flats constructed by the assessee, which were the assessee's stock-in-trade of business carried on by the assessee, are meant for sale and cannot assume the character of 'residential house' owned by the assessee. There is no evidence on record to show that the stock-in-trade of the assessee was treated as residential house owned by the assessee. On the other hand, it is clear from the accounting treatment that all the seven flats were treated as stock-in-trade. The income from these flats is offered to tax under the head 'income from house property' because of the specific provisions of Section 22 read with Sec.14. Such treatment of income by the assessee cannot be treated as an act by which the assessee has considered the seven flats as residential house owned by him. We are, therefore, of the view that denial of the claim of the assessee for deduction U/s.54F of the Act is unassailable. The AO is, therefore, directed to give the deduction as claimed by the assessee.

Held that,

++ the contention raised on behalf of the Revenue was that even if it is stock-in-trade of business, the same would also get included to apply proviso to Section 54F resultantly disentitling the person to get set off of the capital gain whereas the counsel appearing for the assessee submitted that stock-in-trade is not a capital asset and therefore, cannot be considered for the purpose of giving effect to the provisions of Section 54F much less the proviso therein and in his contention the Tribunal has rightly held that the benefit u/s 54F would be available to the assessee. We may record that there cannot be a second opinion on the point that the capital gain should arise out of the transfer of capital asset. This shows that any stock in trade by profession is excluded from the definition of capital asset and in these circumstances the contention of Revenue is that stock in trade is also included for applicability of Section 54F in our view, cannot be accepted. We may also add that under the heading of Capital gains, Section 45 provides that any profits or gains arising from the transfer of capital asset can be considered as capital gain. Therefore, when one considers the gain or exclusion from the set off of the gain it should be related to the capital assets. When the property was not shown as capital assets but was shown as stock in trade, naturally the view taken by the Tribunal cannot be said to be erroneous. Under the circumstances, we do not find any substantial questions of law would arise for consideration as sought to be canvassed. The appeal is meritless. Hence, the issue is dismissed.

(See 2016-TIOL-2467-HC-KAR-IT)