2014 (9) TMI 554 - HC - Income Tax

Treatment of income gain on sale of land treated as business income against LTCG - Whether the Tribunal had any material to come to the conclusion that, land sold by the assesses was stock-in-trade of the dissolved firm, hence assessable business income Held that - There is nothing to show that the assessee as also the erstwhile Smt. Amrutben Chheda had dissolved the firm with the intention to carry on the business of the firm in their individual capacities - The assessee and the former partner sold the land to a third party - They did not carry on the business of M/s. Laxmi Construction Co., the partnership firm i.e. of builders and/or contractors - the land was sold to a third party who incidentally might have been in the business of constructio. This was provided for in the dissolution deed itself which records in clause (3) that the parties have agreed to take over the plots of land as co-owners and as capital assets and they shall have co-ownership and as a test of conversion if applied, the assessee has indeed provided for conversion - the property does not seem to be stock-in-trade by the execution of the dissolution deed - there is no mode which provides for conversion of stock-in-trade into capital assets except by agreement of parties - the deed of dissolution achieves that objective - In the case of Khatau Valabhdas, the Court was concerned with the division of stock-in-trade i.e. grocery products - the business of the partnership was of builders/contractors and not of buying and selling the land and the partners at the material time were not engaged in any construction activity and no such construction was being carried out on the land - A building was to be put up on the land purchased by the erstwhile partnership firm but the land remained vacant and nothing is done on the land or to the land so as to show it as stock-in-trade and not treat it as capital assets share of the assessee - the Tribunal had no material to come to the conclusion that the land sold by the applicant/ assessee was stock-in-trade and the Tribunal was not justified to treat it as business income Decided in favour of assessee.

Issues Involved:
1. Whether the gains on the sale of land should be treated as business income or long-term capital gains.
2. Whether the land sold by the assessee was stock-in-trade of the dissolved firm, thus assessable as business income.

Detailed Analysis:

Issue 1: Treatment of Gains on Sale of Land

Facts and Background:
The assessee, a partner in a firm, filed a return of income for the assessment year 1988-89, claiming long-term capital gains on the sale of land. The partnership firm was dissolved in 1985, and the land was sold in 1987. The assessee claimed the gains as long-term capital gains, while the assessing officer treated them as business income.

Tribunal's Findings:
The Tribunal concluded that the land was stock-in-trade of the dissolved firm and thus assessable as business income. It held that the land was intended for development and construction, maintaining its character as stock-in-trade even after the dissolution of the firm.

Court's Analysis:
The Court examined whether the partnership assets were converted into capital assets at the time of dissolution. The dissolution deed indicated that the partners agreed to take over the plots as co-owners and treat them as personal capital assets. The Court found that the property underwent a change in nature from stock-in-trade to capital assets, making it eligible for treatment as capital assets.

Conclusion:
The Court held that the Tribunal had no material to conclude that the land sold was stock-in-trade. The gains should not be treated as business income. However, the Court left open the question of whether the gains should be treated as long-term or short-term capital gains, to be decided by the department.

Issue 2: Nature of Land as Stock-in-Trade

Facts and Background:
The partnership firm purchased land intending to develop it but dissolved before any development occurred. The partners treated the land as personal capital assets post-dissolution. The assessing officer and the Commissioner of Income Tax (Appeals) treated the land as stock-in-trade, thus assessable as business income.

Tribunal's Findings:
The Tribunal found that there was no conveyance of the land to individual partners, maintaining its character as stock-in-trade. It held that the land was initially intended for development, and its nature did not change post-dissolution.

Court's Analysis:
The Court referred to the dissolution deed, which explicitly stated that the partners treated the land as personal capital assets. The Court emphasized that the nature of the property changed from stock-in-trade to capital assets upon dissolution, supported by the provisions of the deed and relevant legal precedents.

Conclusion:
The Court concluded that the Tribunal erred in treating the land as stock-in-trade. The property should be treated as capital assets, and the gains from its sale should not be assessed as business income.

Final Judgment:
The Court answered both questions in favor of the assessee, holding that the Tribunal had no material to conclude that the land was stock-in-trade and was not justified in treating the gains as business income. The Court left the determination of whether the gains are long-term or short-term capital gains to the department. The reference was answered accordingly, with no order as to costs.

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