2021 (2) TMI 534 - AT - Income Tax

Correct head of income - surplus on sale of land as short term capital gain or business income treated by the assessee - Setting off business loss against the profit of the firm which included profit on sale of plot which was trading asset of the assessee only - As per assessee inadvertently/on account of typographical error that the said asset was shown as fixed asset in the balance sheet of earlier years ignoring the documentary evidences produced to the effect that it was trading asset only - HELD THAT - The impugned land was purchased on 16/7/2013. This date is clearly after the amendment in the partnership deed bringing into the deed that the assessee was also dealing in the business of real estate developer. In these circumstances when the said land was sold the revenue authorities have tried to thrust upon the assessee that the said sale of land resulted in short-term capital gain. This has been done solely on the ground that assessee has classified the said land as fixed asset. It is settled law that description in the books of account is not the determinative of the true nature of the transaction. The fact that the partnership deed has been duly amended bringing into account the fact that assessee was dealing in the business of real estate developer prior to the purchase of land and that the tax audit report also showed the assessee to be in the said business cannot be ignored. The assessee's plea that it was an inadvertent mistake to classify the same as fixed asset has to be accepted. No cogent reason has been brought on record by the authorities below to dispute the facts as recorded above. Except for mentioning about the assessee's classification in earlier year authorities will have not at all commented upon the assessee's explanation that the said purchase of land happened after the assessee started the business of dealing in land and real estate and the fact that auditor in the auditor's report did mention the same as the assessee's business. In this view of the matter authorities below action has no legs to stand. The gain is directed to be treated as business income with the necessary consequences. Accordingly set aside the orders of authorities below and decide the issue in favour of the assessee.

Summary

Issues:
- Classification of surplus on the sale of land as short term capital gain instead of business income.
- Treatment of brought forward business loss against capital gain.

Issue 1: Classification of surplus on the sale of land

The case involved an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the classification of surplus earned on the sale of land as short term capital gain instead of business income. The Assessing Officer based the classification on the grounds that the land was shown as a fixed asset in the balance sheet for earlier years. The Assessing Officer argued that since the land was not converted into stock-in-trade and was classified as a capital asset, the gain should be treated as short term capital gain. However, the assessee contended that the partnership deed had been amended to include real estate business activities before the land purchase, indicating a business intent. The ITAT held that the description in the books of account does not solely determine the nature of the transaction. The amendment in the partnership deed and the business activities mentioned in the tax audit report supported the assessee's claim that the land sale should be treated as business income. The ITAT found no valid reason to dispute the assessee's explanation and directed the gain to be treated as business income.

Issue 2: Treatment of brought forward business loss

The Assessing Officer disallowed the set-off of brought forward business loss against the surplus on the sale of land, treating it as short term capital gain. The Assessing Officer invoked section 73A(2) of the Income Tax Act, stating that brought forward business loss cannot be set off against capital gain. The Assessing Officer considered the classification of the land as a fixed asset in the balance sheet for earlier years as a deliberate attempt to evade taxation. Despite the assessee's explanation that it was an inadvertent mistake, the Assessing Officer imposed a penalty for furnishing inaccurate particulars of income. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision. However, the ITAT, after considering the facts and the amended partnership deed indicating a real estate business, ruled in favor of the assessee. The ITAT set aside the orders of the authorities below and allowed the appeal, directing the surplus on the sale of land to be treated as business income.

In conclusion, the ITAT Mumbai ruled in favor of the assessee, directing the surplus earned on the sale of land to be treated as business income instead of short term capital gain. The ITAT emphasized that the description in the books of account does not conclusively determine the nature of the transaction, considering the amended partnership deed and business activities mentioned in the tax audit report. Additionally, the ITAT held that the Assessing Officer's disallowance of the set-off of brought forward business loss against the capital gain was not justified, given the circumstances of the case.