2018 (8) TMI 1938 - AT - Income Tax

Correct head of income - capital gain or business income - sale of land in stock-in trade as converted into capital asset - HELD THAT - The assessee has converted his stock-in trade in to capital asset and sold out the said asset after its conversion the gains arising therefrom is therefore required to be taxed as long-term capital gain and not as business income as held by the AO. Since the assessee has re-converted the stock-in trade in to capital asset as on 01.04.2010 we find that the there is no bar in law for re-conversion of business assets into capital asset and vice versa. No judicial pronouncement has been cited before us to controvert this view. Since the asset in question sold has been considered as capital asset in the books of accounts which are the evidence on record in form of book entries to substantiate the facts unless proved otherwise. Therefore capital asset is sold the gains from which will be assessable as long-term capital gain. No merit in the view of CIT (A) that holding period for capital asset should be counted during the duration when it was held as capital asset. In our considered view it is the period for which the assets is held by the assessee and its title is not relevant to determine the period of holding. As per definition as given in section 2 (42A) of the Act according to which the holding period as owner of asset is to be considered for computation of period for the purpose of capital gains u/s. 45 - land in question is to be treated as long term capital asset for the purpose of computation of long-term capital gain and is required to be taxed and assessed as long-term capital gain. We therefore modify the order of lower authorities and hold that surplus arising of 1, 62, 67, 160/- is as long-term capital gain and be assessed accordingly. Consequently the assessee will be entitled to set-off of brought forward long-term capital loss. Accordingly we direct the AO to allow deduction on account of indexation after verification of records.

Issues Involved:
1. Classification of the impugned land as a business asset or capital asset.
2. Treatment of surplus from the sale of land as business income or long-term capital gain.
3. Determination of the holding period of the asset.
4. Eligibility for indexation of the cost of the capital asset.
5. Entitlement to set off brought forward long-term capital loss against the long-term capital gain.

Issue-wise Detailed Analysis:

1. Classification of the Impugned Land:
The primary issue was whether the land sold by the assessee should be classified as a business asset or a capital asset. The assessee initially purchased the land on 03.12.2005 and held it as a capital asset until 01.04.2008, when it was converted into stock-in-trade. On 01.04.2010, the land was re-converted into a capital asset before being sold on 16.09.2010. The assessee contended that the land should be treated as a capital asset based on the entries in the books of accounts, which are considered evidence under the Evidence Act 1872. The Tribunal agreed with the assessee, noting that the land was consistently shown as a capital asset in the balance sheets and wealth tax returns for the relevant years.

2. Treatment of Surplus from Sale:
The assessee reported the surplus from the sale of the land as a long-term capital gain. However, the AO treated it as business income. The Tribunal found that the land was held as a capital asset for significant periods and that the conversion to stock-in-trade and back to a capital asset was genuine. The Tribunal emphasized that the holding period, rather than the nature of the title, determines the classification of the asset. Consequently, the surplus was to be treated as long-term capital gain.

3. Determination of the Holding Period:
The holding period of the asset was crucial in determining whether the gain was short-term or long-term. The Tribunal noted that the land was held from 03.12.2005 to 16.09.2010, exceeding the 36-month threshold for long-term capital assets under Section 2(42A) of the Act. The Tribunal held that the holding period should consider the entire duration the asset was held, regardless of its classification as a capital asset or stock-in-trade at different times.

4. Eligibility for Indexation:
The AO denied the benefit of indexation, arguing that the asset was treated as stock-in-trade. The Tribunal disagreed, stating that there is no provision in the Act that denies indexation even if the asset is considered a business asset at some point. The Tribunal directed the AO to allow the indexation benefit after verifying the records.

5. Entitlement to Set Off Brought Forward Long-Term Capital Loss:
The assessee claimed a set-off of brought forward long-term capital loss against the long-term capital gain from the sale of the land. The AO rejected this claim, treating the surplus as business income. The Tribunal, however, held that since the surplus was to be treated as long-term capital gain, the assessee was entitled to set off the brought forward long-term capital loss of ?16,40,564. The Tribunal directed the AO to allow this set-off accordingly.

Conclusion:
The Tribunal concluded that the land should be treated as a long-term capital asset, and the surplus from its sale should be taxed as long-term capital gain. The assessee was entitled to the benefits of indexation and the set-off of brought forward long-term capital loss. The appeal of the assessee was allowed, and the AO was directed to make necessary adjustments in accordance with the Tribunal's findings. The order was pronounced in the open court on 31-08-2018.

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