AO Cannot Adopt FMV for Capital Gains while using Book Value for Business Profits: ITAT Clarifies S. 45(2) scope [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal (ITAT) has clarified the scope of Section 45(2) of the Income Tax Act, ruling that the Assessing Officer cannot adopt the fair market value (FMV) of land for computing capital gains while simultaneously using its book value for calculating business profits.

The dispute arose when the company, Cyberwalk Tech Park Pvt Ltd, converted 50% of its land in Manesar into stock-in-trade during AY 2012–13. While invoking Section 45(2), the AO computed capital gains based on fair market value but calculated business profits based on book value, resulting in a mismatch. He added ₹7.34 crore as long-term capital gains.

The Revenue contended that CIT(A) should not have outrightly deleted the addition. Instead, the matter should have been remitted back to the AO for re-examination and verification of the computation method. Also stressed that the AO was not given an opportunity to revisit or clarify the valuation approach.

On the other hand assessee argued that CIT(A) has no power to remit the issue back to the Assessing Officer and pointed out that in later assessment years (AY 2013–14 and AY 2014–15), the same Assessing Officer accepted the accounting method adopted by the assessee.

After hearing both sides, the tribunal noted that CIT(A) had correctly applied Section 251(1) powers and that the AO’s error was “apparent on record.” It also observed that in subsequent years, the same AO accepted the company’s accounting method.

The bench of S. Rifaur Rahman (Accountant Member) and Anubhav Sharma (Judicial Member) held that although the Assessing Officer adopted fair market value (FMV) at the time of conversion of land into stock-in-trade, he failed to apply it consistently when computing business profits.

It was also said that once FMV is fixed at conversion, it must also serve as the cost of acquisition for business income. By reverting to book value, the Assessing Officer created an inconsistency, which was a clear mistake on record.

Accordingly, the appeal was dismissed.

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