2008 (5) TMI 362 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are whether the amount received for the transfer of rights in land should be treated as business income or long-term capital gains.

Issue 1: Classification of income
The assessee claimed that the profit from the sale consideration of land should be considered as capital gains and not business income since the land was inherited and not purchased. However, the AO treated the sale proceeds as business income, stating that the land had been converted into stock-in-trade for profit. The AO relied on the definition of transfer under section 2(47) of the Act to support this classification. The CIT(A) upheld the AO's decision, noting the intention of the landowner to earn profits through a partnership firm's construction activities on the land.

Issue 2: Partnership arrangement
The partnership deed of the firm involved in the construction project revealed that the assessee, as a co-owner of the land, had entered into an arrangement where the land was used for business purposes. The CIT(A) observed that the assessee's involvement in the construction venture indicated a clear intention to earn profits from the land. The Tribunal concurred with the lower authorities that the surplus arising after the conversion of the land into stock-in-trade should be treated as business income. However, the Tribunal found the date of conversion to be arbitrary and directed the AO to re-compute the income based on the fair market value as of a specific date.

Conclusion
The Tribunal allowed the appeal of the assessee for statistical purposes, directing the AO to re-calculate the income considering the specific date of conversion into stock-in-trade. The Tribunal rejected the argument that the income from the land should not be treated as business income due to the separate treatment of income from the partnership firm. The decision emphasized the intention of the landowner to engage in profit-making activities through the partnership arrangement, leading to the classification of the surplus as business income.