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INVESTMENT IN LAND AS OWNERS, LAND DEVELOPERS IS CAPITAL ASSET – ON TRANSFER INCOME OR LOSS SHALL FALL UNDER HEAD “CAPITAL GAINS”. |
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INVESTMENT IN LAND AS OWNERS, LAND DEVELOPERS IS CAPITAL ASSET – ON TRANSFER INCOME OR LOSS SHALL FALL UNDER HEAD “CAPITAL GAINS”. |
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Relevant important provisions related to capital gains and business income Section 2 (meaning of capital asset, short-term capital asset, long-term capital asset, short-term capital gains, long-term capital gains. Computation of capital gains S. 45, 48, 55 and other provisions. Provisions relating to business income. Judgments considered:
Investment in landed property is usually for long period. Investment in landed property is generally very long-term investment. Particularly in case of investment in land acquisition and holding of land is for long period and is therefore, an adventure in nature of commerce as opposed to adventure in nature of trade. Land is generally ‘capital asset’, unless it is purchased for trading purposes and is held as stock-in-trade. If there are no regular trading activity of buying and selling land, then only it cannot be described as stock-in-trade. In case of stock-in-trade one of criterion of success in business is stock turnover ratio that is number of times stock bears to turnover. This aspect cannot be applied in case of landed property because in case of landed property stock-turnover ratio with a period of one year is generally not much meaning full. The gestation period of steps for acquisition to ready for sale is usually very long. In case of landed properties, criterion of success is return on investment over different period of holding and such different periods are over a long period of time. Therefore, as a general rule, and considering ground realities, investment in land is usually on account of investment and not as stock-in-trade. Many people treat or convert land as stock-in-trade when commencement of construction is started with a view to selling buildings constructed on such land, however, such conversion is not at all necessary and is not desirable. Conversion or treatment as stock-in-trade may not be proper: In fact conversion of land, which was acquired long ago and held as investment, into stock-in-trade or treatment as stock-in-trade is not correct or proper representation of the nature of assets. This is for the following reasons: Even selling land after improvement by way of development of land, and plotting in suitable area is a long-term activity and is not in nature of trading. Activity of construction of buildings is further step after development of land and this is also a long-term activity and is not in nature of trading. Construction is an addition to land and improvement of capital asset. Selling constructed buildings is also a long-term activity and is not like a trading activity. The investor, even if he himself is constructing buildings with intention to hold some and sell some or sell entire construction area, cannot be considered as trader in land and construction. The business of construction of buildings on own land is also an adventure in nature of commerce and not adventure in nature of trading. The construction is for improving and making value addition on land and is commercially expedient for value addition and realisation of capital by selling land or proportionate share in land with buildings constructed on land. Therefore, generally land and buildings are not stock-in-trade. Therefore, land and buildings are investments and capital asset. Even if business – gains fall under head ‘capital gains’: Acquisition, holding, developing and selling landed property may be an organised and systematic activity and a business. Such business is definitely adventure involving probability of risks and rewards earning income or suffering losses. As discussed earlier investment in landed property is generally for long period. In fact in short- term there may not be gains and even income equal to interest may not be earned. Therefore, investment in landed property is adventure in nature of commerce and not adventure in nature of trade. Income can fall under different heads: Income from any property or capital asset and also any activity relating thereto can fall under different heads of income. For example recurring income like rent can fall under head income from house property or business. Maintenance charges, interest on security deposits or advances received from tenants and deployed elsewhere can fall under head ‘other sources’ or ‘income from business’ depending on all facts and circumstances. However, when a capital asset is transferred income from transfer of capital assets shall fall under head ‘capital gains’. It is worth to mention that even in case of capital assets owned, used and depreciated under income-tax Act by allowing deduction of depreciation under section 32 is to be computed under the head ‘capital gains’. A capital asset can be related or not to business or profession. If the assets transferred is a capital asset, the head of income shall be ‘capital gains’. Case of JOGANI & DIALANI LAND (supra.): Is a case related with head of income on transfer of land which was held as capital asset/ investment and not as stock-in-trade. In this case there was sale of non-agricultural land which was held as long Term Capital asset and shown as investment in accounts and balance sheet. Assesse was also engaged in business of land development and building construction and held some other assets like land and constructions, buildings as stock-in-trade. AO treated gains on transfer of land held as investment also as business income. On appeal of assesse the CIT(A) and on further appeal by revenue, the Tribunal both have come to a concurrent finding of fact on examination of the record, that 2.10 lakhs sq. mtrs of land has been held by the Respondent as investment as revealed and is evident from the books of account, balance sheet of the Appellant and the treatment given to it in its accounts. This finding of fact was further confirmed by the visit of the Inspector who was deputed by the AO to verify the correctness of the Respondent's claim that the 2.10 lakhs sq. mtr of land was being held as an investment as no construction activity was carried out on the same. On appeal of revenue the honourable High Court observed that the submission made on behalf of the Appellant / revenue completely ignores the fact that, it is always open to an assessee to hold the same class of assets as investment and also as stock-in-trade. There is no bar in law for a person dealing in land to also have investment in land. Thus, it was held that there is no substance in the above submission of revenue and therefore issue was decide against revenue. Observations of author: About order and judgment: The concurrent findings of CIT(A) and Tribunal have been affirmed by the honourable High Court. Author hopes that revenue will not un-necessarily indulge into litigation by challenign judgment of High Court. About construction: In observations in judgments it is also noted that “The finding of fact was further confirmed by the visit of the Inspector who was deputed by the AO to verify the correctness of the Respondent's claim that the 2.10 lakhs sq. mtr of land was being held as an investment as no construction activity was carried out on the same”. From this it seems that assesse had two type of portfolios of land one being investment in land on which construction is not carried and another being plot of land on which construction is carried out. The assesse choose to treat land as stock-in-trade when construction activity was started. This might be policy of assesse, however, as discussed earlier, it is not necessary to convert land into stock-in-trade . Assesse could keep land as investment even after construction is started. Construction, if carried on own account and held for sale subsequently can be considered as additions and improvement to land and total income can fall under head ‘capital gains’. However depending on facts and circumstances, some part of construction activity can fall under head business or other sources. For example, if construction is undertaken as a contractor, or it is undertaken on behalf of customers, then in some situations it can fall under head business or other sources. However, gains on transfer of land or proportionate share in land still remain gains on transfer of capital asset unless the assesse had converted or treated land as stock-in-trade.
By: CA DEV KUMAR KOTHARI - April 30, 2019
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