2022 (2) TMI 1453 - AT - Income Tax

Characterization of receipt - treatment of the sale proceeds from sale of unutilised industrial land allotted by KIADB to assessee - business profits and adventure in the nature of trade or capital gains - AR submitted that the land was plotted into small plots and provide approach road as assessee was not getting any buyer who could purchase 12 acres of land - HELD THAT - We note that assessee treated the land acquired as fixed asset by including it in the block of assets and not as current asset. In the present facts, the asset is acquired as capital asset for purposes of business carried on by the assessee, the intention at the time of purchase or acquisition and the intention at the subsequent point in time, through conduct and affirmative actions, reveal that the capital asset so purchased initially was converted or treated as stock-in-trade of the business carried on by the assessee. The legislature has in its wisdom envisaged such a situation and has brought on the Statue books the provisions of section 45(2) of the Act by virtue of the Taxation laws (Amendment) Act, 1984 w.e.f 1.4.1985 and there is now a statutory recognition that even asset initially acquired as investment can be subsequently converted into stock-in-trade. Apparently, none of the decisions cited by the Ld.AR considers the impact of the provisions of section 45(2) of the Act, which to our mind, make those decisions distinguishable. As per section 45(2), profits gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock in trade of business carried on by him, shall be chargeable to tax as income of the previous year in which such stock in trade is sold or otherwise transferred and for the purpose of section 48, the fair market value of the asset on the date of such conversion shall be deemed to be full value of consideration received or accruing as a result of the transfer of capital asset. Therefore, fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head capital gain . Further, sales realization of the stock-in-trade over such fair market value is required to be assessed as business income . Thus, we direct the Ld.AO to compute the income from the sale of land during the year under consideration as business income and also to grant benefit of section 45(2) to the assessee. Decided against assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Treatment of sale proceeds from unutilized industrial land as business profits versus capital gains.
3. Restriction of credit for Tax Deducted at Source (TDS).
4. Levy of interest under section 234B.
5. Levy of interest under section 234C.
6. Denial of indexation cost for the cost of acquisition.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appellant filed the appeal with a delay of 41 days due to the ill health of their counsel. The Tribunal condoned the delay, citing the Supreme Court's liberal approach in condonation matters, emphasizing that "substantial justice" should prevail over technicalities.

2. Treatment of Sale Proceeds from Unutilized Industrial Land:
The core issue was whether the proceeds from the sale of unutilized industrial land should be treated as business income or capital gains. The appellant argued that the land was held as a long-term capital asset and sold to repay a loan, thus qualifying for capital gains treatment. However, the authorities contended that the sale was an adventure in the nature of trade, as the land was plotted and sold in smaller plots for better realization, indicating a profit motive.

The Tribunal upheld the authorities' view, noting that the appellant's actions (such as plotting the land and constructing approach roads) demonstrated an intention to treat the land as stock-in-trade. The Tribunal referenced Section 45(2) of the Income Tax Act, which addresses the conversion of capital assets into stock-in-trade, and directed the AO to compute the income accordingly, treating the fair market value on the date of conversion as the consideration for capital gains and the subsequent sale proceeds as business income.

3. Restriction of Credit for Tax Deducted at Source (TDS):
The appellant claimed a TDS credit of Rs. 53,62,080 as per Form 26AS, but the authorities restricted it to Rs. 39,24,156 as per the original return. The Tribunal did not provide a detailed discussion on this issue, implying that the authorities' decision was upheld.

4. Levy of Interest under Section 234B:
The appellant contested the interest charged under Section 234B on the additional tax resulting from the reclassification of the sale proceeds as business income. The Tribunal did not specifically address this issue, suggesting that the interest levy was upheld as per the authorities' original assessment.

5. Levy of Interest under Section 234C:
Similar to Section 234B, the appellant argued against the interest charged under Section 234C. The Tribunal's silence on this issue indicates that the interest levy was maintained.

6. Denial of Indexation Cost for the Cost of Acquisition:
The appellant sought the benefit of indexation for the cost of acquisition while computing the business income from the sale of land. The Tribunal did not explicitly address this issue, but the overall dismissal of the appeal implies that the authorities' denial of indexation was upheld.

Conclusion:
The Tribunal dismissed the appeal, affirming the authorities' treatment of the sale proceeds as business income and upholding the associated interest charges and TDS credit restrictions. The Tribunal emphasized the application of Section 45(2) for the conversion of capital assets into stock-in-trade, directing the AO to compute the income accordingly.

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