2011 (5) TMI 1047 - AT - Income Tax

Summary

Issues Involved:
1. Whether the land sold by the assessee should be treated as stock-in-trade or long-term investment.
2. Whether the profit from the sale of land should be taxed as business income or long-term capital gain.
3. Whether the assessee was required to file a wealth tax return for the land sold.

Summary:

Issue 1: Treatment of Land as Stock-in-Trade or Long-Term Investment
The Assessing Officer (AO) argued that the land sold by the assessee should be treated as stock-in-trade, as the main object of the assessee company is to deal in properties. The AO noted that the land was part of the business activity and not a long-term investment. The AO highlighted that the land was shown as stock-in-trade in the company's Memorandum of Association (MOA) and Articles of Association (AOA), and the assessee did not provide evidence that the land was used for agriculture before its purchase. The AO concluded that the land was acquired with the intention to resell it at a profit.

Issue 2: Taxation of Profit from Sale of Land
The AO treated the profit from the sale of land as business income instead of long-term capital gain, arguing that the land was part of the company's business activity. The AO calculated the profit as follows: Cost of Land Rs. 11,02,580/-, Sale consideration Rs. 87,00,000/-, Profit Rs. 75,97,420/-. The AO added this amount to the assessee's income as business income.

Issue 3: Requirement to File Wealth Tax Return
The AO contended that if the land was treated as an investment, the assessee was required to file a wealth tax return. The fact that the assessee did not file a wealth tax return indicated that the land was not treated as an investment.

Findings of the Commissioner of Income Tax (Appeals):
The Commissioner of Income Tax (Appeals) noted that the land sold was part of the fixed assets of M/s Lynx Estates P. Ltd., which amalgamated with the assessee company. The land was purchased in the nineties and declared as part of fixed assets in the returns filed by M/s Lynx Estates P. Ltd. The agricultural income from the land was accepted by the Department every year. The Commissioner observed that the land was used for agricultural purposes, as evidenced by the Khasra Girdawari and the sale deed. The Commissioner concluded that the land was a long-term investment and not stock-in-trade, and the profit from its sale should be treated as long-term capital gain.

Tribunal's Decision:
The Tribunal upheld the order of the Commissioner of Income Tax (Appeals), noting that the assessee had returned agricultural income from the land year after year, which was accepted by the Department. The land was shown as fixed assets, and agricultural activity was one of the ancillary objects of the company. The Tribunal found no evidence of frequent buying and selling of land by the assessee. The Tribunal concluded that the land was a long-term investment, and the profit from its sale should be treated as long-term capital gain. The appeal filed by the Revenue was dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the decision that the land sold by the assessee was a long-term investment, and the profit from its sale should be treated as long-term capital gain, not business income. The assessee was not required to file a wealth tax return for the land sold.