2012 (6) TMI 633 - AT - Income Tax

Income form sale of land - Business Income or Capital gains - assessee, engaged in the business of real estate, constructing flats, sale of land - Held that - In the present case, property has been committed to a trade and the assessee earned profit in the course of carrying on the business. Assessee never intended to be owner of the land in question and it was not a simple purchase and sale transaction. Rather, the assessee facilitated the development and sale of land in question apart from taking responsibility of getting the process of disputes with respect to the land settled expedited. Therefore, it is clear that the assessee was carrying on business with the above business objectives in mind. Hence, having regard to the nature of activities carried on by the assessee it has to be construed as trading activity of the assessee and the income emerged from this transaction has to be considered as income from business. Non-allocation of indirect expenditure other than interest to the projects under construction - 84% of the work of the company during the year related to the projects under construction - Revenue apportioned indirect expenditure to to Work-in-progress - Held that - Non allocation of the indirect expenses to the work-in-progress truly affects correct reflection of the profit and loss of the assessee-company. Being so, AO is justified in reallocating the indirect expenses to the capital project of the assessee. Depreciation of centring material - dis-allowance - Held that - The assessee claimed all this depreciation is relating to the project under construction. The project under construction being the capital asset, depreciation cannot be allowed - Decided in favor of Revenue

Issues Involved:
1. Taxability of income from the sale of land.
2. Nature of receipt of advance payment.
3. Allocation of indirect expenses to work-in-progress.
4. Disallowance of depreciation on centring material.

Issue-wise Detailed Analysis:

1. Taxability of Income from the Sale of Land:
The assessee, engaged in real estate and other businesses, filed a return of income disclosing long-term capital gains from the sale of land. The Assessing Officer (AO) disallowed the development expenses due to lack of evidence and assessed the income as business income instead of capital gains. The AO reasoned that the company could not claim long-term capital gains for a period before its incorporation and that the business activities indicated a trading intention rather than an investment. The Tribunal upheld this view, stating that the assessee was engaged in business activities with a profit motive, and the transaction was an adventure in the nature of trade, thus taxable as business income.

2. Nature of Receipt of Advance Payment:
The assessee received Rs. 4 crores as an advance for the sale of land, which it claimed was not taxable as the transaction was incomplete, and the amount was refundable. The AO, however, treated the entire sale consideration of Rs. 12.5 crores as accrued income. The Tribunal agreed with the AO, citing that the MOU was still enforceable, and the amount was a trading receipt. The Tribunal referenced several cases, including Chowringhee Sales Bureau (P.) Ltd. v. CIT and Punjab Distilling Industries Ltd. v. CIT, to support the view that the nature of the receipt, not the accounting entry, determines taxability. The Tribunal concluded that the entire amount should be considered business income, with potential deductions applicable in future years if the amount is refunded.

3. Allocation of Indirect Expenses to Work-in-Progress:
The AO allocated indirect expenses to the work-in-progress of projects under construction, arguing that 84% of the company's work related to these projects. The assessee contended that the expenses were correctly accounted for as revenue expenses. The Tribunal upheld the AO's decision, stating that non-allocation of indirect expenses to the projects under construction distorted the true profit and loss picture. The Tribunal emphasized that accurate financial reporting requires proper allocation of expenses, even if it deviates from the company's consistent accounting practices.

4. Disallowance of Depreciation on Centring Material:
The AO disallowed depreciation on centring material, considering it part of the work-in-progress. The assessee argued that the material was used for both contract work and project implementation. The Tribunal upheld the disallowance, noting the lack of evidence to support the claim that the centring material was used for revenue-generating activities. The Tribunal concluded that depreciation on assets used for capital projects cannot be allowed as a revenue expense.

Conclusion:
The Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal, affirming the AO's decisions on all issues. The stay petition filed by the assessee was also dismissed as infructuous.

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