2012 (5) TMI 798 - AT - Income Tax

Addition made in the Income - Assessee received as security deposit (Cost of equipment) in respect of supplies deep-freezers/freezers/fridges to various vendors - Sale proceeds of land - to be treated as business income or under capital gains. Addition made in the Income - As per agreement entered into between the assessee and the vendors the assessee supplies them with deep-freezers/freezers/fridges of sizes as per requirement of the Vendors concerned after taking from them full cost of the equipment as Security Deposit - HELD THAT - Since the co-ordinate bench in the case of High Range Foods (P) Ltd. 2011 (2) TMI 1117 - ITAT COCHIN has already taken a view on identical issue by following the said decision we hold that the deposits collected from vendors cannot be considered as the income of the assessee so long as the agency agreement continues. Accordingly we set aside the order of Ld CIT(A) on this issue in the hands of both the assessees and direct the AO to delete the addition made on this issue in the hands of both the assessees herein. Sale proceeds of land - to be treated as business income or under capital gains - Tribunal has held in the case of High Range Foods (P) Ltd, (supra) that the intention of the assessee at the time of purchasing the land would decide the nature of income arising on its sale i.e. if an assessee purchases a land in order to hold it as a Capital asset then the gain arising on its sale shall be assessed as Capital gain . On the other hand if the intention was to hold it as stock in trade then the profit arising on its sale would be assessed as Income from business . Accordingly we set aside the order of the Ld. CIT(A) on this issues and restore the same to the file of the AO with the direction to examine the issue afresh in the light of principles discussed by the co-ordinate bench of Tribunal in the case of High Range Foods (P) Ltd supra and decide the issue accordingly. In the result the appeals filed by both the assesses are treated as allowed for statistical purposes.

Summary

Issues:
1. Whether freezer deposits received from dealers should be assessed as income of the assessee.
2. Whether the gain from the sale of land should be assessed as business income.

Analysis:

Issue 1: Freezer Deposits
- The assessees, engaged in the ice cream business, collected deposits from vendors for supplying freezers. The deposits were refundable on termination of the agreement, with a deduction for wear and tear. The AO treated these deposits as income, confirmed by the CIT(A).
- However, the Tribunal, based on precedent, held that until the agreement ends, these deposits cannot be considered income. The Tribunal emphasized that the deposits were not treated as income in the books and were associated with a liability. Various legal cases supported this view.
- Following the precedent, the Tribunal set aside the CIT(A) order, directing the AO to delete the additions of the deposit amounts from the assessees' income.

Issue 2: Gain from Sale of Land
- The assessees sold land and declared the gain as capital gains. The AO considered it business income based on the business clause in their Memorandum. This decision was upheld by the CIT(A).
- Citing a previous case, the Tribunal emphasized that the intention at the time of purchase determines the nature of income upon sale. If the land was acquired as a capital asset, the gain is capital gains; if for trading, it's business income.
- As the facts needed further verification, the Tribunal remanded the issue to the AO to re-examine based on the principles from the previous case. The assessees were to be given a chance to present their case.
- Consequently, the Tribunal allowed the appeals for statistical purposes, setting aside the CIT(A) orders on both issues.

This judgment highlights the importance of assessing income based on the nature of transactions and intentions, providing guidance on the treatment of deposits and land sale gains in the context of business activities.