2016 (7) TMI 401 - HC - Income Tax

Profit on sale of property - Nature of income - Business income v/s capital gain - Held that - All along the said property has been held by the assessee as its capital asset and at no stage it was converted into its stock in trade. On similar set of facts and circumstances, the assessing officer, in assessee s own case for the assessment year 1990-91, had assessed the profit from similar activity as capital gains. In the light of the above facts hold that the profit from the sale of property, in this shall be treated as capital gain. - Decided against revenue

Summary

Issues:
1. Interpretation of Section 45(2) of the Income Tax Act.
2. Treatment of business income as capital gain.
3. Consistency in treatment of property as capital asset.

Analysis:
1. Interpretation of Section 45(2) of the Income Tax Act:
The central issue in this case revolves around the interpretation of Section 45(2) of the Income Tax Act, which deals with the conversion of a capital asset into stock-in-trade. The Tribunal upheld the order of the Commissioner of Income Tax (Appeals) based on the understanding that Section 45(2) requires a deliberate act of conversion by the owner, rather than presuming automatic conversion. The Tribunal found that the appellant consistently treated the property in question as a capital asset in its books of accounts and balance sheets, without converting it into stock-in-trade. This interpretation was crucial in determining the tax treatment of the income derived from the sale of the property.

2. Treatment of business income as capital gain:
The core contention in the appeal was whether the income generated from the sale of the property should be classified as business income or capital gain. The Tribunal considered the history of the property, noting that it was purchased as an encumbered property and continuously treated as a fixed asset by the appellant. The property was developed and sold under joint venture agreements, with the income initially assessed as long-term capital gain. The Tribunal emphasized that the property was never converted into stock-in-trade and was consistently held as a capital asset by the appellant. Consequently, the Tribunal concluded that the profit from the sale of the property should be treated as capital gain, aligning with the treatment in previous assessments for similar activities.

3. Consistency in treatment of property as capital asset:
Another significant aspect of the judgment was the emphasis on the consistent treatment of the property as a capital asset by the appellant over several financial years. The Tribunal highlighted the details provided by the appellant, including balance sheets from multiple years, to demonstrate that the property was always held as a capital asset and never converted into stock-in-trade. This consistency in treatment played a pivotal role in the decision to classify the income from the property sale as capital gain. The Tribunal noted the assessing officer's previous assessment for a similar activity in the appellant's case, further reinforcing the importance of maintaining consistency in the treatment of assets for tax purposes.

In conclusion, the judgment delves into the nuanced interpretation of tax laws, specifically focusing on the conversion of capital assets into stock-in-trade and the consequential tax implications. The decision underscores the significance of consistent treatment of assets and the application of relevant provisions of the Income Tax Act in determining the appropriate tax treatment for income derived from asset transactions.