2018 (3) TMI 893 - AT - Income Tax

Sale of property - nature of income - LTCG or busniss income - Held that - The company was initially formed for the purpose of running a LPG Bottling plant. Since formal approvals were not granted by the authorities, the assessee company could not commence the business. However, no business activities were carried out by the assessee during the year. Ultimately, the land was sold to West Bengal Government for a total sum of ₹ 8.51 crores which was sold in two parts and two deeds were executed in this regard. The assessee has calculated the income/loss from capital gain u/s 50C of the Act. All the investments including improvement made in the earlier years have been duly recorded in the balance sheet and have been accepted under assessment proceedings from time to time, as investments is not under dispute. Therefore the assessee s investment is treated as investment for the purpose of capital gain alongwith purchase cost and site development and the same has to be allowed under the head capital gain and in no stretch of imagination it can be an adventure in the nature of trade. For compensation paid to VLS capital Ltd as cost of improvement to be deducted from sale consideration for the purposes of Capital Gains - Held that - As the amount was borrowed from VLS Capital Ltd for setting up LPG Bottling plant where formal approvals were not accorded by the various authorities. Therefore, the project was discarded and the land was sold to West Bengal Government. The West Bengal Government, if has acquired the said land for the purpose of residential colony or whatever, is not a concern of the assessee and therefore, cannot be held to be an adventure in the nature of trade. Thus as relying on CIT Vs. Mithlesh Kumari 1973 (2) TMI 11 - DELHI High Court the interest part as deduction of ₹ 1.40 crore is directed to be allowed and deduction of ₹ 2 crores is rejected. Thus, on the second aspect of the issue, the same is partly allowed.

Summary

Issues:
1. Treatment of long-term capital gains as income from adventure in the nature of trade
2. Denial of indexation benefit to the assessee
3. Disallowance of compensation paid to VLS Capital Ltd as cost of improvement for capital gains calculation
4. Consideration of payment to VLS Capital Ltd as not genuine and disallowance

Issue 1: Treatment of Long-Term Capital Gains:
The Assessing Officer treated the income from long-term capital gains as arising from an adventure in the nature of trade due to various factors. The land was sold to the West Bengal Housing Board after being developed and consolidated, indicating a profit-making intention. The absence of agricultural operations on the land and reinvestment of sale proceeds further supported the view of trade adventure. The ITAT analyzed the facts and held that the intention was to earn a profit, thus assessing the income under the business income head.

Issue 2: Denial of Indexation Benefit:
The assessee claimed indexation benefit for the land sold, but the Assessing Officer denied it. The ITAT reviewed the investments made in the land since its purchase in 1995, including site development expenses. The assessee argued that the land was initially acquired for a different business purpose, and no business activities were conducted during the relevant year. The ITAT found that all investments were duly recorded, and there was no dispute regarding the cost of land or improvements. Consequently, the ITAT allowed the indexation benefit and treated the investment as capital gain.

Issue 3: Disallowance of Compensation to VLS Capital Ltd:
The disallowance of the compensation paid to VLS Capital Ltd as a cost of improvement for capital gains calculation was challenged. The ITAT examined the nature of the transaction and found discrepancies in the claims made by the assessee. It was concluded that the transaction with VLS Capital Ltd was not genuine, and the claimed expenditure was not allowed as a deduction.

Issue 4: Consideration of Payment to VLS Capital Ltd:
The ITAT analyzed the payment of ?3.40 crores to VLS Capital Ltd, which was claimed to be for releasing title deeds. However, it was found that the transaction was not genuine, and the claimed amount was not allowed as a deduction. The ITAT partially allowed the deduction of ?1.40 crores as interest paid, citing relevant case law to support its decision.

In conclusion, the ITAT partly allowed the appeal, allowing the investment in land to be treated as capital gain with indexation benefit and disallowing the claimed payment to VLS Capital Ltd. The judgment emphasized the genuine nature of transactions and the profit-making intention in determining the appropriate tax treatment.