2010 (4) TMI 272 - HC - Income Tax

Long Term Capital Gain - adventure in the nature of trade or sale of capital asset - taxability of the income declared by the assessee-respondent on the sale of ancestral property, known as Leela Bhawan , situated at Patiala - The question is whether the activity of sale of land is a trading activity or it is long term capital gain. - On account of subsequent activities of converting his residential property into a commercial property leaving 42% of area for roads by hiring the services of a property dealer, the Assessing Officer held that the capital assets were converted into Stock-in-trade . Held that in the instant case there was no such material which may constitute the basis to hold that the assessee-respondent has converted or treated the capital asset as stock-intrade attracting the application of Section 45(2) of the Act - the assessee-respondent has maximised his realisation by sale of his ancestral capital asset which has been incorrectly held in the nature of trade by the Assessing Officer. decided in favor of assessee

Summary

Issues:
1. Taxability of income declared on the sale of ancestral property as long term capital gain.
2. Whether the sale of land constitutes a trading activity or long term capital gain.
3. Conversion of capital asset into stock-in-trade.

Analysis:
1. The judgment deals with the taxability of income declared by the assessee on the sale of ancestral property known as 'Leela Bhawan'. The assessee declared long term capital gain and claimed deductions under Sections 54EC and 54F of the Income-tax Act, 1961. The Assessing Officer initially considered it as a trading activity, but the CIT(A) reduced the long term capital gain amount. The Tribunal analyzed various judgments, including those of the Supreme Court, to determine the nature of the transaction.

2. The main issue revolved around whether the sale of land by the assessee constituted an adventure in the nature of trade or sale of a capital asset. The Tribunal considered the historical significance of the property, the intention behind the sale, and the conversion of residential property into commercial property. It was held that the property did not convert into stock-in-trade, and the Assessing Officer's presumption was unfounded. The Tribunal emphasized that the property was an ancestral capital asset and not a trading asset, citing relevant case laws to support its decision.

3. The Tribunal specifically addressed the conversion of the capital asset into stock-in-trade. It noted the history of the property, the approvals obtained for commercial use, and the authorization for sale. The Tribunal concluded that there was no material to support the conversion of the capital asset into stock-in-trade. It referenced previous judgments to establish that mere development and sale of plots from a property did not automatically classify it as a trading activity. The Tribunal overturned the CIT(A)'s decision and affirmed that the property in question retained its status as a capital asset.

In conclusion, the High Court dismissed the revenue's appeal, stating that the property remained a capital asset and was not converted into stock-in-trade. The Court rejected the revenue's arguments and upheld the Tribunal's decision based on the specific facts and legal principles applied in the case.