2016 (1) TMI 939 - AT - Income Tax

Conversion of income as Stock in trade - capital gain or business income - Held that - Admittedly, the assessee, the owner of the capital asset converted the same into stock-in-trade in the year 2005. Though the assessee converted the investment as stock-in-trade, it offered the capital gains from the transaction in these two assessment years as income from capital gains. It is not correct. In our opinion, the Assessing Officer has to compute the income under two heads by applying sec. 45(2) though the assessee has raised a ground relating to applicability of provisions of sec. 45(2) before the CIT(A). The CIT(A) wrongly observed that the income generated from the development of IT Park to be considered as capital gains which is not appropriate. In our opinion, the entire issue has to be relooked by the Assessing Officer so as to apply the provisions of sec. 45(2) of the Act and he has to compute the income upto the date of conversion as income from capital gains and thereafter income has to be computed as income from business. The stand of the assessee right from the beginning and even now before us that capital asset in question are its investment and any gain on sale is capital gain and not business. This is not based on any sound principles. The assessee has converted the property as stock-in-trade in the year 2005 when it entered into an agreement with Project Engineer and from that date onwards the assessee s landed property is to be considered as stock-in-trade and income generated from the transfer thereafter has to be considered as business income only. To that extent, we remit this issue to the file of the Assessing Officer for re-computation of income as indicated above. Decided in favour of Revenue for statistical purposes.

Summary

Issues:
Appeals against orders of Commissioner of Income-tax (Appeals)-V for assessment years 2008-09 and 2009-10 involving a common issue.

Analysis:
The case involved the sale of a part of land by a Private Limited Company engaged in the business of dealing in cars. The Assessing Officer treated the income from the sale as 'income from business' based on various reasons, including the company's intention to exploit the land for profit, development activities, and agreements with Project Engineers. On appeal, the CIT(A) directed the income to be treated as capital gains, stating that the sale was due to a lull in the business and not a planned business activity. The Tribunal noted that the company had converted the property into stock-in-trade in 2005 when planning for an IT Park started, making the income generated from the sale a business income. The Tribunal remitted the issue to the Assessing Officer for re-computation under sec. 45(2) to separate income up to the conversion date as capital gains and thereafter as business income. The appeals of the Revenue were allowed for statistical purposes.

The Tribunal emphasized that the Assessing Officer should compute the income under both capital gains and business heads as per sec. 45(2) since the property was converted into stock-in-trade in 2005. The Tribunal disagreed with the CIT(A)'s view that the income should be considered as capital gains, stating that the entire issue needed reevaluation. The Tribunal clarified that the company's intention in 2005 to develop an IT Park converted the property into stock-in-trade, making the subsequent income from the transfer a business income. The Tribunal directed the Assessing Officer to recompute the income accordingly, separating it into capital gains and business income components.

Overall, the Tribunal's decision focused on the crucial aspect of the property's conversion into stock-in-trade in 2005, leading to the income from the subsequent sale being classified as business income. The case highlights the importance of correctly determining the nature of income based on the conversion of assets and applying the relevant provisions of the Income Tax Act for accurate computation.