2005 (12) TMI 451 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from the sale of land as capital gains or business receipts.
2. Validity of the Assessing Officer's conclusion that the assessee indulged in an adventure in the nature of trade.
3. Application of section 45(1) read with section 2(47)(v) of the Income Tax Act, 1961.
4. Determination of whether the land was converted into stock-in-trade.
5. Consideration of the assessee's intention and conduct in the transaction.

Detailed Analysis:

1. Classification of Income from Sale of Land:
The primary issue was whether the sale consideration of Rs. 71,13,670 should be taxed as capital gains or as business receipts. The assessee claimed the land as a capital asset and reported the profit as long-term capital gain. The Assessing Officer, however, concluded that the assessee indulged in an adventure in the nature of trade and taxed the income as business income.

2. Validity of Assessing Officer's Conclusion:
The Assessing Officer argued that the assessee converted the capital asset into stock-in-trade in the assessment year 1994-95 and thus, the income should be taxed as business income. The Officer highlighted that the developer, M/s. Vinayak Developers, was a partnership firm with close relatives of the assessee as partners, and there was no absolute transfer of the plot of land, indicating an adventure in the nature of trade.

3. Application of Section 45(1) Read with Section 2(47)(v):
The CIT(A) concluded that the transfer of land was complete when the possession of the immovable property was handed over to the flat owners, fulfilling the requirements of section 2(47)(v) of the I.T. Act. The CIT(A) held that the transaction should be taxed under the head "Capital gains" as the assessee retained ownership rights and the transfer was recognized in the tripartite agreements with the flat owners.

4. Determination of Conversion into Stock-in-Trade:
The CIT(A) rejected the Assessing Officer's view that the land was converted into stock-in-trade. It was noted that the assessee continued to show the land as a capital asset in wealth tax and income tax returns, and there was no evidence of conversion into stock-in-trade. The CIT(A) emphasized that the developer brought its own funds for construction, indicating no joint venture or business activity by the assessee.

5. Consideration of Assessee's Intention and Conduct:
The CIT(A) relied on the Delhi High Court's decision in CIT v. B.K. Bhaumik and the Supreme Court's decision in Janki Ram Bahadur v. CIT to determine that the assessee's intention at the time of the transaction was crucial. The CIT(A) found that the assessee's conduct was consistent with realizing capital investment rather than engaging in a business venture.

Conclusion:
The ITAT upheld the CIT(A)'s decision, agreeing that the assessee did not engage in an adventure in the nature of trade. The transaction was classified under "Capital gains" as per section 45(1) read with section 2(47)(v) of the I.T. Act. The appeals of the revenue were dismissed, confirming that the sale consideration should be taxed as capital gains.