2000 (10) TMI 203 - AT - Income Tax

Summary

Issues Involved:
1. Classification of profit from sale of land as business profit or capital gains.
2. Determination of the value of sales for calculating profit on the sale of land.

Issue-wise Detailed Analysis:

1. Classification of Profit from Sale of Land:

The primary issue in the assessee's appeal (ITA No. 631/PN/93) is whether the profit from the sale of land should be classified as business profit or capital gains. The assessee contended that the profit should be treated as capital gains, as the land was shown as a capital asset in the balance sheet. The land was originally purchased by the firm M/s. Shah Vallabhadas Harilal, which was dissolved, and the land was taken over by the assessee as a capital asset.

The Assessing Officer, however, treated the profit as business income, considering the following factors:

(1) The land was divided into plots as per the approved lay-out plan.

(2) The land was not agricultural land.

(3) The land was not required for the firm's business purposes.

(4) The land was treated as a trading asset by the firm.

(5) Taxes paid on the property were debited to the P&L account, indicating it was a trading asset.

(6) The land was purchased with the firm's funds and held as a trading asset.

(7) The land was not feasible for the firm's business purposes, indicating an intention to resell.

The CIT(A) upheld the Assessing Officer's decision, concluding that the entire activity was an adventure in the nature of trade, citing the Supreme Court's judgment in P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735.

Upon appeal, the assessee argued that the land was purchased as a capital investment and sold only to repay bank loans. The assessee relied on various judicial precedents, including CIT v. Kasturi Estate (P.) Ltd. [1966] 62 ITR 578 (Mad.), CIT v. National Properties Ltd. [1978] 113 ITR 793 (Cal.), and others, to support the claim that the profit should be treated as capital gains.

The Tribunal considered the rival submissions and noted that the land was shown as a capital asset in the balance sheet for several years and was sold to discharge a bank loan. The Tribunal referred to the principles laid down in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) and other relevant cases, concluding that the land was a capital asset in the hands of the assessee and the profit from its sale should be treated as long-term capital gains.

The Tribunal distinguished the case from P.M. Mohammed Meerakhan v. CIT, noting that the facts were different, and there was no evidence to suggest that the land was purchased with an intention to resell at a profit.

Based on the above analysis, the Tribunal directed the Assessing Officer to treat the profit on the sale of 21 plots as long-term capital gains.

2. Determination of the Value of Sales for Calculating Profit on the Sale of Land:

The issue in the Revenue's appeal (ITA No. 757 Pune 1993) was whether the Assessing Officer was justified in adopting the value fixed by the Sub-Registrar for stamp duty purposes as the market value of the plots sold by the assessee.

The CIT(A) held that the Assessing Officer had not provided any evidence other than the value fixed by the Registering Authorities to support the market value of the plots. The CIT(A) concluded that the value shown in the transfer documents should be taken into consideration for determining the profit on the sale of land, as there was no evidence to show that the assessee had received any amount over and above what was declared in the transfer documents.

The Tribunal upheld the CIT(A)'s decision, citing the decisions of the Punjab & Haryana High Court in Chamkaur Singh v. State of Punjab and the Orissa High Court in Gourang Naik v. State of Orissa AIR 1992 Orissa 232, and declined to interfere with the CIT(A)'s findings.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal, directing the Assessing Officer to treat the profit on the sale of 21 plots as long-term capital gains. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to adopt the value shown in the transfer documents for determining the profit on the sale of land.