2022 (10) TMI 1159 - AT - Income Tax

Correct head of income - Transaction of sale of land at Nagpur - Business Income Vs. Capital Gain - HELD THAT - The assessee has used its capital to purchase the said land and what is recovered is the said capital. The transaction cannot be treated to be an adventure in the nature of trade since the transaction of sale was forced upon the assessee due to circumstances which are enlisted hereinabove. This transaction cannot be classified as an adventure in the nature of trade. It was not a transaction which was actively intended at the time of acquisition of land. The judgments of courts relied upon Assessee is squarely applicable to the facts of the case on hand. The Ld. DR of the Assessee has not brought on record any contra decision or shown that the decisions relied upon by the Assessee and as relied upon by the CIT (A) are over ruled - DR has neither raised any additional argument other than what the AO has stated and already dealt with by the CIT (A) in an elaborate order nor stated as to why the findings and reasoning of CIT(A) is incorrect either on facts or in law. We uphold the order of CIT(A) on this ground and hold that the Assessee has rightly offered the gain on sale of Nagpur land under the head Capital Gain . Long Term v. Short Term Capital gain - HELD THAT - We are of the opinion that the date of finality of contract is the date of this AGM resolution dated 24/09/2007 passed by the Vendor Company and not the date of MOU as submitted by Assessee. Although as stated by CIT(A) in his order, the MOU grants right of termination only to the Assessee, yet a company operates through resolutions and hence, the date when the AGM resolution was passed, the contract became binding on the Vendor Company giving unfettered rights to the Assessee here to purchase the property. Hence, we direct the AO to take the said date of resolution being 24.09.2007 as the date of when the property can be said to be held by the Assessee for the purpose of section 2(42A) of the Act and compute the long term capital gain accordingly. To that extent, the order of the CIT(A) stands modified. This ground is partly allowed. Project Completion Method Vs Percentage Completion Method - CIT(A) allowed the appeal of the Assessee upholding the validity of the Project Completion Method - HELD THAT - Merely because percentage completion is a better method as per AO, does not make project completion method as invalid. The choice as to which accounting method to be followed is with the Assessee - AO has not rejected the books of accounts or invoked section 145 of the Act before rejecting the accounting method followed by the Assessee. The decision of Bombay High Court in the case of Aditya Builders 2015 (9) TMI 1304 - BOMBAY HIGH COURT is squarely applicable to the facts of the case here. More importantly, the entire exercise is tax neutral as the Assessee has offered the income of the project under project completion method in A.Y.s 2013-14 to 2017-18 as detailed which is accepted by the Revenue. Hence, we uphold the order of CIT (A) in this ground and dismiss this ground of the Revenue.

Summary

Issues Involved:
1. Classification of income from the sale of land as "Capital Gain" vs. "Income from Business and Profession."
2. Determination of the nature of capital gain as "Long Term Capital Gain" vs. "Short Term Capital Gain."
3. Validity of "Project Completion Method" vs. "Percentage Completion Method" for computing taxable income.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Land:
The primary issue was whether the income from the sale of land should be classified as "Capital Gain" or "Income from Business and Profession." The Assessee, a real estate developer, had purchased land in Nagpur for development but sold it due to various legal and procedural impediments. The Assessee classified the gain as "Long Term Capital Gain," while the Assessing Officer (AO) treated it as "Business Income," arguing that the land was shown as "Stock in trade" in the balance sheet and the Assessee was in the business of real estate development.

The CIT(A) reversed the AO's decision, stating that the land was acquired for development and not for trading. The CIT(A) emphasized that the land was reclassified as "investment" before its sale and that the Assessee had not engaged in trading of land. The Tribunal upheld the CIT(A)'s decision, noting that the land was purchased with the intention of development and not sale, and the sale was an isolated transaction due to unforeseen impediments. The Tribunal concluded that the gain should be taxed under the head "Capital Gain."

2. Determination of Nature of Capital Gain:
The second issue was whether the gain should be classified as "Long Term Capital Gain" or "Short Term Capital Gain." The Assessee argued that the holding period should be calculated from the date of the Memorandum of Understanding (MOU) dated 14.07.2006, while the AO contended that it should be from the date of the Sale Deed on 31.12.2007.

The CIT(A) accepted the Assessee's argument, stating that the MOU created enforceable rights and thus should be considered the date of acquisition. However, the Tribunal modified this view, directing that the date of the AGM resolution by the Vendor Company on 24.09.2007, which finalized the contract, should be considered the date of acquisition for computing the holding period. This decision was based on the principle that the holding period should be determined from when the Assessee had enforceable rights over the property.

3. Validity of Project Completion Method:
The final issue was whether the "Project Completion Method" used by the Assessee for computing taxable income from its real estate project "Amarante" was valid. The AO rejected this method, substituting it with the "Percentage Completion Method," resulting in an addition to the Assessee's income.

The CIT(A) upheld the Assessee's use of the "Project Completion Method," and the Tribunal agreed, stating that the choice of accounting method lies with the Assessee, provided it is consistently followed. The Tribunal noted that the AO had not rejected the Assessee's books of accounts or invoked section 145 of the Income Tax Act before rejecting the accounting method. Additionally, the Tribunal highlighted that the exercise was tax neutral as the Assessee had offered the income in subsequent years, which the Revenue had accepted.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on all grounds, affirming that the income from the sale of land should be classified as "Capital Gain," the gain should be considered "Long Term Capital Gain" based on the AGM resolution date, and the "Project Completion Method" for computing taxable income was valid.