2012 (12) TMI 518 - AT - Income Tax

Conversion of fixed asset into stock in trade - Business Income vs Capital Gain - Held that - Though the land was shown as investment in the balance-sheet at the time of acquisition, the assessee has converted it into stock in trade before entering into the development agreement on 25-4-2004. This fact is clear from the assessee s letter dated 6-12-2008 submitted before the AO in course of assessment proceedings. Therefore, the assessee having given stock in trade for development, the capital gains arising there from has to be charged to tax as per the provisions contained u/s 45(2). The assessee never had the intention of acquiring the land as an investment but to exploit it as business venture. When the assessee has entered into joint development agreement on 25-4-2004, the asset has already been converted into stock in trade and no more remains a capital asset. Therefore, it cannot be treated as a transfer u/s 2(47)(v). Thus no reason to interfere with the finding of the CIT (A) directing the AO to work out the short term capital gains on conversion of land held as investment in stock in trade and also the business income arising from sale of stock in trade separately - against revenue.

Summary

Issues Involved:
1. Characterization of income as capital gains or business income.
2. Conversion of investment into stock in trade.
3. Application of section 45(2) of the Income Tax Act.
4. Interpretation of joint development agreement.
5. Taxability of short-term capital gains.

Detailed Analysis:

Issue 1: Characterization of income as capital gains or business income
The Revenue contended that the order of the CIT (A) was incorrect as it failed to recognize the involvement of other parties in the property purchase, indicating a capital gains character rather than a business venture. The CIT (A) concluded that the income from the sale of Aspen land should be treated as short-term capital gains due to the conversion of investment into stock in trade. The Revenue argued that the CIT (A) did not consider the full facts of the case, leading to a perverse inference. However, the Tribunal upheld the CIT (A)'s decision, stating that the assessee's intention was to exploit the land as a business venture, not as an investment, thereby affirming the treatment of income as short-term capital gains.

Issue 2: Conversion of investment into stock in trade
The assessee explained that the land was converted into stock in trade, justifying the treatment of income as business income. The AO rejected this claim, stating that the asset should have been offered to tax under section 45(2) when converted into stock in trade. The CIT (A) found that the assessee had indeed converted the investment into stock in trade before entering into a joint development agreement, leading to the conclusion that the gain arising from the transfer should be taxed as short-term capital gains.

Issue 3: Application of section 45(2) of the Income Tax Act
The CIT (A) held that income from the conversion of investment into stock in trade should be taxed as per section 45(2), which specifies that such income is chargeable to tax in the year when the stock in trade is sold or transferred. The Tribunal agreed with this interpretation and directed the AO to compute the short-term capital gains arising from the conversion of land into stock in trade and the subsequent sale of the stock in trade separately.

Issue 4: Interpretation of joint development agreement
The Tribunal noted that the assessee had entered into a joint development agreement with other co-owners of the land, indicating a business intention rather than a mere investment. The Tribunal emphasized that the conversion of the asset into stock in trade before the agreement was a crucial factor in determining the tax treatment of the income generated from the subsequent sale of the developed property.

Issue 5: Taxability of short-term capital gains
The CIT (A) directed the AO to calculate the short-term capital gains on the conversion of land into stock in trade and the business income from the sale of the stock in trade separately. The Tribunal upheld this direction, affirming that the income should be taxed as short-term capital gains and business income based on the respective transactions and the application of relevant provisions of the Income Tax Act.

In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the CIT (A)'s decision regarding the tax treatment of the income generated from the conversion of investment into stock in trade and subsequent sale of the developed property.