2005 (5) TMI 542 - AT - Income Tax

Summary

Issues Involved:
1. Whether the gain on sale of land is assessable as capital gains or business income.
2. Allowance of expenses incurred on development during assessment years 1983-84 to 1993-94.
3. Allowance of payments made to two tenants towards compensation charges.
4. Charging of interest under sections 234A and 234B.
5. Determination of Fair Market Value (FMV) of the property as on 25-3-1996 by reverse indexation.

Detailed Analysis:

1. Assessability of Gain on Sale of Land:
The primary issue was whether the gain on the sale of land should be treated as capital gains or business income. The Assessing Officer (AO) treated the transaction as an adventure in the nature of trade, thereby assessing the gain as business income. The CIT(A) held that the land was an investment until 25-3-1996 and converted into stock-in-trade on that date. The Tribunal agreed with the CIT(A) that the land was held as a capital asset up to 25-3-1996 and converted into stock-in-trade on that date. The Tribunal noted that the assessee's intention was to hold the property as an investment, as evidenced by the long holding period of 16 years, the lack of development activity, and the reflection of the property as an investment in the books of account. The Tribunal concluded that the gain should be assessed partly as capital gains up to 25-3-1996 and partly as business income thereafter.

2. Allowance of Development Expenses:
The assessee claimed expenses incurred on development during the assessment years 1983-84 to 1993-94. The CIT(A) did not allow these expenses. The Tribunal dismissed this ground as it was not pressed by the assessee's representative.

3. Allowance of Compensation Payments:
The assessee claimed payments made to two tenants, M/s. Lotus Trading Co. and M/s. G.K. Enterprises, as compensation charges. The CIT(A) disallowed these payments, finding them non-genuine. The Tribunal agreed with the CIT(A), noting that the payments were not deposited in the bank accounts of the alleged recipients and were not substantiated with credible evidence. The Tribunal upheld the disallowance of these compensation payments.

4. Charging of Interest under Sections 234A and 234B:
The assessee contested the charging of interest under sections 234A and 234B. The Tribunal noted that this issue is consequential and directed the AO to accord consequential relief, if any, to the assessee.

5. Determination of FMV by Reverse Indexation:
The revenue contested the determination of FMV of the property as on 25-3-1996 by reverse indexation, as done by the CIT(A). The Tribunal directed the AO to permit the assessee to obtain a valuation report from a government-approved valuer regarding the valuation of the property as on 31-3-1996 and to determine the FMV in accordance with the law.

Conclusion:
The Tribunal partly allowed the assessee's appeal and partly allowed the revenue's appeal, directing the AO to compute the capital gain by working out the FMV as on 31-3-1996 and to consider the valuation report from a government-approved valuer for determining the FMV. The Tribunal upheld the CIT(A)'s findings on the assessability of gain on sale of land and the disallowance of compensation payments. The issue of charging interest under sections 234A and 234B was directed to be consequential.