2021 (7) TMI 658 - AT - Income Tax

Correct head of income - whether or not the surplus arising from the sale of land constitutes capital gains or business income ? - as contended that the finding of the Assessing Officer that the assessee himself had divided the land into pieces is contrary to the facts as the layout of the said land was approved by local authority much before the acquisition by the appellant - HELD THAT - It is settled position of law that to determine whether a particular transaction is an adventure in the nature of trade or investment, the test to be applied is intention of the party at the time of acquisition of the property as held by the Hon ble Supreme Court in the case of G. Venkataswami Naidu Co. 1958 (11) TMI 5 - SUPREME COURT If there is any material on record to indicate that the intention of the party is only to re-sell the asset for profit, no doubt it is a stock in trade. In the present case, the land was sold after the gap of decade and there was no material to show that the appellant had acquired the land only with the intention to re-sell the land for profit. The assessee is undoubtedly entitled to hold two different portfolios in respect of the same kind of asset i.e. stock in trade and investment. In the facts and circumstances of the present case, it does not indicate that the purchase of land was made with the intention to re-sell. In the present case, undisputedly the appellant had made a distinction between those lands which are stock in trade and those lands which are held by investment - none of the factors considered by the AO can militate against the claim of the appellant that it is an investment and the profit arising out of the sale of this land is assessable to tax under the head capital gains . Therefore, the orders of the lower authorities are hereby reversed and set-aside. Thus, the grounds of appeal raised by the assessee are allowed.

Issues Involved:
1. Whether proper approval was taken before converting limited scrutiny into complete scrutiny.
2. Classification of income from the sale of land as business income or capital gains.
3. Consideration of the assessee’s intention, period of holding, and consistency in treating similar transactions.
4. Denial of exemption under Section 54F of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Proper Approval for Converting Limited Scrutiny into Complete Scrutiny:
The appellant argued that the CIT(A) erred in stating that the issue of whether proper approval was taken before converting limited scrutiny into complete scrutiny was an administrative measure and could not be taken up. However, this specific ground was not elaborated upon in the judgment.

2. Classification of Income from Sale of Land:
The primary issue was whether the income from the sale of land should be treated as business income or capital gains. The appellant, engaged in the business of builders and land developers, had declared the income as capital gains, while the Assessing Officer (AO) treated it as business income. The AO's rationale included:
- The appellant’s engagement in the business of land dealing.
- Previous transactions of land purchase and sale treated as business income.
- Division of land into 21 plots and sale to different parties, indicating business intent.
- No agricultural activity on the land, despite being shown as a fixed asset in the balance sheet.

The CIT(A) upheld the AO's findings, referring to multiple judgments, asserting that the land was held as a business asset, thus classifying the income as business profits.

3. Consideration of Intention, Period of Holding, and Consistency:
The appellant contended that the land was purchased as an investment in 2005, shown as a fixed asset in the balance sheet, and sold after a decade, indicating an investment intent rather than a business transaction. The appellant maintained a distinction between stock in trade and investment, supported by the fact that no borrowed funds were used for the land acquisition. The appellant argued that the land layout was approved by local authorities before acquisition, contradicting the AO's claim of dividing the land for business purposes.

The Tribunal agreed with the appellant, emphasizing that the intention at the time of acquisition is crucial. The land was held for a long period, and the appellant had consistently treated it as an investment in the books of account. The Tribunal referred to the Supreme Court judgment in G. Venkataswami Naidu & Co. vs. CIT, which supported the view that the intention at acquisition determines the nature of the transaction.

4. Denial of Exemption under Section 54F:
The AO denied the exemption under Section 54F, which pertains to capital gains reinvested in residential property, based on the classification of the income as business profits. The Tribunal, however, reversed this decision, given that the income was determined to be capital gains.

Conclusion:
The Tribunal concluded that the appellant had adequately demonstrated the land was held as an investment, not stock in trade. The orders of the lower authorities were reversed, and the income from the sale of land was classified as capital gains, allowing the exemption under Section 54F. The appeal filed by the assessee was allowed, and the grounds of appeal were upheld. The judgment emphasized the importance of the intention at the time of acquisition and the consistency in treating the asset in the books of account.

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