2012 (5) TMI 145 - HC - Income Tax

Deemed capital gains AO treated the sale of plots as sale of capital assets and determined the deemed capital gain from sale as per the provisions of section 50C assessee contented the income from the said transaction is liable to be treated as income from profits and gains of business -Tribunal treated it as stock in trade Revenue appeal Held that - no grievance to the observations of the Tribunal that in the balance sheet also the land has been disclosed as stock in trade and Stock in trade has been excluded from the definition of capital asset - it is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income - the profit motive in entering a transaction is not decisive, for an accretion to capital does not become taxable income merely because an asset was acquired in the expectation that it may be sold at a profit- there is nothing to show that the assessee desired to controvert the property into some other use - appeal is dismissed stating provisions of section 50C are not applicable with respect of sale of land as sale of land was not capital asset - against revenue.

Issues Involved:
1. Whether the sale of land by the assessee was of a capital asset or stock in trade.
2. Applicability of Section 50C of the Income Tax Act to the sale of land.
3. Determination of the nature of income from the sale of plots-whether it should be treated as capital gains or business income.

Issue-wise Detailed Analysis:

1. Whether the sale of land by the assessee was of a capital asset or stock in trade:
The respondent, a private limited company engaged in real estate and construction, declared a total income of Rs.38,79,703/-. The dispute pertains to the sale of plots totaling Rs.79,84,200/-. The Assessing Officer treated this sale as a sale of capital assets, invoking Section 50C to determine deemed capital gains. However, the Commissioner of Income Tax (Appeals) found that the assessee had always purchased land as stock in trade, not as a capital asset, as corroborated by the balance sheet. The Tribunal upheld this finding, noting no contrary material to dispute the assessee's claim that the plots were held as stock in trade.

2. Applicability of Section 50C of the Income Tax Act to the sale of land:
Section 50C applies to the transfer of capital assets. The Tribunal concluded that Section 50C does not apply to the sale of plots held as stock in trade, as income from such transactions is computed under the head "income from business." The Tribunal's finding that the plots were stock in trade was not disputed by the Revenue as being perverse or against the material on record.

3. Determination of the nature of income from the sale of plots-whether it should be treated as capital gains or business income:
The Revenue argued that the assessee's primary income was from the sale of constructed properties, suggesting that the sale of plots should be treated as capital gains. However, the Tribunal, relying on various judicial pronouncements, held that whether an asset is stock in trade or a capital asset is a question of fact. The assessee, being a builder, treated the land as stock in trade, which aligns with its business activities. The Tribunal's conclusion that the sale of plots was a business transaction and not a capital asset sale was based on relevant considerations and supported by the balance sheet.

Judicial Pronouncements Considered:
- Venkataswami Naidu & Co. Vs. Commissioner of Income-tax (1959) 35 ITR 594: The Supreme Court held that determining the character of an isolated transaction depends on various factors, including the nature of the commodity and the quantity purchased and resold.
- Mohammed Meerakhan Vs. Commissioner of Income-tax (1969) 73 ITR 735: The Supreme Court emphasized that the character of a transaction must be determined based on the totality of circumstances.
- Janki Ram Bahadur Ram Vs. Commissioner of Income-tax (1965) 57 ITR 21: The Supreme Court held that whether a transaction is an adventure in the nature of trade is a mixed question of fact and law.

Conclusion:
The Tribunal and the Commissioner of Income Tax (Appeals) correctly concluded that Section 50C does not apply to the sale of plots held as stock in trade. The income from such transactions should be treated as business income, not capital gains. The Tribunal's findings were based on relevant considerations and supported by the balance sheet, and there was no substantial question of law warranting interference under Section 260A of the Income Tax Act. The appeal was dismissed, affirming that the sale of land was not a capital asset.

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