2016 (6) TMI 1308 - AT - Income Tax

Profit on sale of land - capital gain or busniss income - intention of the partners at the time of purchase of the property - whether the investment made by the assessee in the land at Nolambur is a stock-in-trade or capital asset? - Held that - Entire circumstances and the material facts need to be taken into consideration to ascertain the intention of the partners at the time of purchase of the property. After considering all the facts available on record, including the payment made before the date of formation of partnership firm, this Tribunal is of the considered opinion that the land in question was intended to be treated as capital asset by the partnership firm. The assessee in order to generate funds for business might have entered into Memorandum of Understanding with another trader who is dealing in real estate. If the intention of the assessee is to deal in real estate, the assessee would have developed the land by itself. In the case before us, the assessee has not dealt with the land by itself. The land was in fact handed over to other trader in real estate for development. The matter would be entirely different if the assessee constructed the multistory building and developed the land. Since the land was simply handed over to other trader for development, this Tribunal is of the considered opinion that the land in question has to be treated as capital asset. Even though the partnership firm was formed 05.04.2005 and the land was registered in the name of the firm on 23.05.2005, the assessee has not commenced any business activities; no other land appears to have been purchased; no supplementary work was carried on by the assessee-firm in the subject land; no organized effort was made other than simply entering into Memorandum of Understanding with the builder. As all risks and rights relating to construction of building were vested with the builder and the assessee has not taken any risk in the construction and development of flats, this Tribunal is of the considered opinion that the profit on sale of the land in the hands of the assessee-firm cannot be treated differently than as it was treated in the case of Mrs. Saroj Agarwal. This Tribunal is of the considered opinion that the profit on sale of land has to be necessarily assessed as capital gain and not as business income. - Decided in favour of assessee

Summary

Issues:
Assessment of profit on sale of land as business income or capital gain.

Analysis:
The case involved appeals against the orders of the Commissioner of Income Tax (Appeals) for assessment years 2009-10 and 2011-12, concerning the treatment of profit on the sale of land. The main contention was whether the land should be considered a stock-in-trade or a capital asset. The appellant argued that the land was intended as an investment, not for trading, and the profit should be treated as capital gain. The Assessing Officer, however, classified the profit as business income due to the nature of the partnership firm's activities. The appellant highlighted that the land was purchased before the formation of the partnership firm and was treated as a fixed asset in the books. The Administrative Commissioner's order in a related case also supported treating similar transactions as capital gains.

The Tribunal analyzed the circumstances surrounding the land purchase, partnership formation, and subsequent development agreements. It noted that the intention of the partners at the time of purchase was crucial in determining the nature of the land. Despite the development agreement with a builder, the Tribunal found that the land was intended as an investment, as evidenced by the treatment in the books and lack of direct involvement in development activities. The Tribunal emphasized that a partnership firm can have both stock-in-trade and investment portfolios, and the mere act of entering into a development agreement does not automatically convert the land into stock-in-trade.

The Tribunal compared the case with the Administrative Commissioner's decision in a related matter, where similar land transactions were treated as capital gains. It highlighted that the appellant did not engage in business activities related to the land development and did not bear any construction risks. Consequently, the Tribunal concluded that the profit on the sale of land should be assessed as capital gain, overturning the lower authorities' classification as business income. The appeals of the assessee were allowed, directing the Assessing Officer to treat the profit on the sale of land as capital gain.