2015 (9) TMI 953 - AT - Income Tax

Treating the built up area of a property as stock-in-trade instead of part of the capital asset - Disallowance of benefit of indexation on capital gains - Held that - The assessee had not sold any part of the property except the above mentioned two flats, that he had rented out his share of property to have constant rental income,that the income earned by the assessee was capital gains and not income from business or trade, that the assessee had parted his right to the extent of 50% of the land, that building could not have been constructed separately without its base on the land,that the land under the building could not be used separately, the cost of construction of the area would be equal to 50% of the market value of the land plus value of additional FSI if any,that he was entitled to proportionate claim of deduction for cost of construction, that assessee was also eligible for indexation as per the provisions of the Act. We find that in the case under consideration the assessee had sold two units and was having rental income from the remaining flats he was offereing the rental income under the head house property income . The assessee was not carrying out any business,that the built up area was not stock in trade and that he was entitled to the benefit of inflation index - Decided in favour of the assessee.

Summary

Issues Involved:
1. Treatment of built-up area as stock-in-trade versus capital asset.
2. Nature of income from the sale of built-up area: Business Income vs. Long Term Capital Gain.
3. Eligibility for indexation and beneficial tax rate on capital gains.

Analysis of Judgment:

1. Treatment of Built-Up Area as Stock-in-Trade vs. Capital Asset:
The primary issue was whether the built-up area received by the assessee from the developer should be treated as stock-in-trade or as a capital asset. The assessee contended that the built-up area was part of the compensation for the transfer of land and should be treated as a capital asset. The Assessing Officer (AO) and the First Appellate Authority (FAA) held that the built-up area was stock-in-trade and that the assessee had carried out business activities. However, the Tribunal found that the basic ingredients of business were missing in the transaction. The Tribunal concluded that the built-up area received by the assessee should not be treated as stock-in-trade but as part of the compensation for the transfer of the plot of land.

2. Nature of Income from the Sale of Built-Up Area:
The AO treated the sale of the built-up area as business income, arguing that the assessee's activities constituted an adventure in the nature of trade. The FAA upheld this view. However, the Tribunal disagreed, noting that the assessee had sold only a few flats and retained others, renting them out, which indicated an investment rather than a business activity. The Tribunal cited precedents, including the cases of Vasavi Pratap Chand and Jaitrikanand Rao, to support its decision that the income from the sale of the built-up area should be treated as Long Term Capital Gain (LTCG) and not as business income.

3. Eligibility for Indexation and Beneficial Tax Rate:
The AO and FAA disallowed the assessee's claim for indexation and the beneficial tax rate on the grounds that the income was business income. The Tribunal, however, held that since the built-up area was a capital asset and not stock-in-trade, the assessee was entitled to the benefit of indexation and the beneficial tax rate on capital gains. The Tribunal emphasized that the compensation received, whether in cash or kind, was part of the compensation for the transfer of the plot of land and thus qualified for LTCG treatment.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both assessment years, ruling that the built-up area received from the developer was a capital asset and not stock-in-trade. Consequently, the income from the sale of the built-up area was to be treated as LTCG, and the assessee was entitled to the benefits of indexation and the beneficial tax rate. The Tribunal's decision was based on the facts and circumstances of the case, as well as relevant legal precedents.