2016 (7) TMI 532 - AT - Income Tax

Loss on sale of land - Business Loss or Capital Loss - Held that - Revenue has not disputed the fact that the assessee in its books of account right from beginning has shown the land as stock in trade. During the scrutiny assessment proceedings for the assessment year 2005-06 the Assessing Officer accepted that the assessee is engaged in land development business and no query was raised for treating the land as stock in trade. The principle of consistency in treating the land as stock in trade has to be followed. The ld. AR of the assessee has placed on record a copy of the Memorandum and Article of Association of M/s. T.K. Infrastructure Pvt. Ltd., a sister concern of the assessee. A perusal of Memorandum & Articles of Association show that one of the main objects of the company was land development. The proprietor of the assessee firm is one of the promoter Director of the aforesaid company. Thus, the findings of the Assessing Officer that the assessee is not engaged in the land development business are not based of proper appreciation of the facts. The present land transaction may be the first transaction of the assessee firm but the sister concern of the assessee is already engaged in similar business. Therefore, it cannot be said that the assessee was not connected in any way with land development activities. The second ground for making addition by Assessing Officer was that the co-owner of the assessee in its return of income has declared loss as capital loss. As has been stated earlier that a close scrutiny of Development Agreement clearly shows that the assessee had entered into Development Agreement for construction of residential and commercial building on the land in question. The co-owner of the assessee may have shown the loss arising from sale of Development Rights as capital loss inadvertently or out of ignorance, but it would not bind the assessee to give the same treatment in its books of account, when the facts on record distinctly indicate that the Development Rights were acquired by assessee as business venture. We do not find any infirmity in the findings of Commissioner of Income Tax (Appeals) admitting the claim of the assessee on this issue. Hence, no interference is called for in the impugned order. - Decided against revenue

Summary

Issues Involved:
Determining whether the loss on sale of Development Rights over land is a 'Business Loss' or 'Capital Loss' for the assessment year 2006-07.

Analysis:
1. Background: The appellant, a firm engaged in wholesale trading, claimed a business loss of ?67,22,876 on the sale of Development Rights over land. The Assessing Officer categorized the loss as 'Long Term Capital Loss,' disputing the appellant's classification.

2. Revenue's Argument: The Department contended that the appellant was not involved in land development business and failed to demonstrate any development activities on the land. They emphasized that the co-owner treated the loss as 'Capital Loss,' suggesting inconsistency in the appellant's treatment.

3. Assessee's Defense: The appellant maintained that the land was treated as stock-in-trade from the beginning, supported by relevant documents and past assessments. They highlighted the intent to develop the land for commercial purposes, as evidenced by the Development Agreement and capitalization of expenses related to land development.

4. Tribunal's Decision: After reviewing the case and documents, the Tribunal concluded that the Assessing Officer erred in categorizing the loss as capital loss. The Development Agreement clearly indicated the appellant's intention for commercial development. The Tribunal emphasized the consistent treatment of the land as stock-in-trade and the involvement of a sister concern in land development activities.

5. Key Findings: The Tribunal noted that the co-owner's treatment did not bind the appellant, given the clear business intent established through the Development Agreement and accounting practices. The Tribunal upheld the Commissioner of Income Tax (Appeals) decision, dismissing the Revenue's appeal for lack of merit.

6. Conclusion: The Tribunal affirmed the loss on the sale of Development Rights as a 'Business Loss,' based on the appellant's consistent treatment of the land as stock-in-trade and the documented intent for commercial development. The appeal of the Revenue was consequently dismissed, and the original order was upheld.