2008 (10) TMI 261 - AT - Income Tax

Long-term or short-term capital gain (LTCG or STCG) - Sale of land - conversion of stock-in-trade into capital assets - Period of holding for the purpose of capital gain to include the period during with assets were held as stock in trade or not? - HELD THAT - As rightly held by the AO as well as by the learned CIT(A) capital asset is defined in s. 2(14) as property of any kind held by the assessee whether or not connected with his business or profession but the same does not include inter alia any stock-in-trade consumable stores or raw materials held for the purpose of his business or profession. In the present case the property in question i.e. land was held by the assessee company upto 31st March 2002 as the stock-in-trade for the purpose of its business and this being so we are of the view that the period for which the said property was held by the assessee company as stock-in-trade of its business could not be reckoned for ascertaining as to whether it was a long-term capital asset or a short-term capital asset within the meaning given in ss. 2(29A) and 2(42A) as the same was not held by it as a capital asset. It is only when the same was converted by the assessee company into investment i.e. w.e.f. 1st April 2002 that the same was held by it as capital asset and as the same was held by it for not more than 36 months immediately preceding the date of its transfer i.e. 12th Dec. 2002 it was a short-term capital asset as defined in s. 2(42A) and the capital gain arising from the sale thereof was chargeable to tax as short-term capital gain as defined in s. 2(42B). In that view of the matter we find no infirmity in the order of the ld CIT(A) upholding the action of the AO in treating the profit arising from the sale of the said property as short-term capital gain and upholding the same we dismiss this appeal filed by the assessee. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Whether the profit arising from the sale of land should be treated as short-term capital gain or long-term capital gain.

Issue-wise Detailed Analysis:

1. Treatment of Profit from Sale of Land:

The core issue in this appeal is whether the profit arising from the sale of land should be treated as short-term capital gain or long-term capital gain. The assessee, a company, filed its return of income declaring a total income of Rs. 1,78,64,668, which included long-term capital gain from the sale of land. The land was initially purchased in the financial year 1998-99 and was shown as stock-in-trade in the balance sheets up to 31st March 2002. On 1st April 2002, the land was converted into an investment and subsequently sold on 12th December 2002.

The Assessing Officer (AO) treated the profit as short-term capital gain, arguing that the land was held as a capital asset only for about 9 months before its sale. The AO relied on the definition of 'short-term capital asset' under Section 2(42A) of the Income Tax Act, which states that a capital asset held for not more than 36 months immediately preceding the date of its transfer is a short-term capital asset. The AO also referenced decisions from the Hon'ble Bombay High Court and Gujarat High Court to support this view.

The assessee contended that the period during which the land was held as stock-in-trade should also be considered for determining whether it was a long-term or short-term capital asset. The assessee argued that the property should be considered a long-term capital asset from the date of acquisition, even though it was initially held as stock-in-trade.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the land was held as stock-in-trade for business purposes until 31st March 2002 and only became a capital asset on 1st April 2002. The CIT(A) reasoned that the nature of the asset and its intended utilization determine whether it is a capital asset or a business asset. The CIT(A) concluded that since the land was held as a business asset until its conversion to an investment, the period of holding as a capital asset was less than 36 months, making it a short-term capital asset.

Upon appeal to the Tribunal, the Tribunal agreed with the AO and CIT(A), emphasizing that the definitions of 'long-term capital asset' and 'short-term capital asset' under Sections 2(29A) and 2(42A) respectively, require the asset to be held as a capital asset for the requisite period. Since the land was held as stock-in-trade until 31st March 2002, it was not a capital asset during that period. The Tribunal concluded that the period of holding as a capital asset began only on 1st April 2002, and since the land was sold within 9 months, it was a short-term capital asset.

Conclusion:

The Tribunal upheld the decision of the AO and CIT(A) that the profit arising from the sale of the land should be treated as short-term capital gain. The appeal filed by the assessee was dismissed.