2023 (1) TMI 311 - AT - Income Tax

Surplus earned on the sale of plot - capital gain OR business income - HELD THAT - The assess-firm has incurred expenses for boundary wall, paid incremental and FSI charges in the office of Surat Municipal Corporation, such expenses were incurred for the purpose of business. Such expenses were debited in the profit and loss account of the assessee-firm and not in the individual hand of the partners of assessee-firm. Surprisingly, the sale deed of the land was executed by partners of the assessee-firm. Again, no capital gain is shown in the hand of the partners for the reasons best known to them. Despite the fact the sale deed was executed by the partners, the capital gain is shown in the hand of assess-firm. The partners of the assessee-firm are acting in accordance with their whims and choice. Once, the land/ plot was introduced as a capital contribution, it loses its control from the hand of the partners of the assessee, as it became the asset of the assess-firm. Now, the partners are raising plea that the accountant of the firm has made wrong entry. No corrective step is shown to have been taken by the partners in showing such expenses in their personal account, as no such evidence is placed on record. Thus, the stand of partners is contrary. The formation of partnership was with the objects of doing business in real estate and such conduct is reflected as asset as business WIP are major factors which cannot be ignored. There is no clause in the partnership deed about making investment in the land and to earn capital gain only. When the expenses were incurred, it was shown at WIP, however, when the asset is sold, the partners claimed that it was as investment only and not business asset, which cannot be allowed. Thus, in our view the ld CIT(A) erred in treating / directing the assessing officer to treat the gain on sale of asset of firm as capital gain in place of business income. Thus, we reverse the order of ld CIT(A) and fully concur with the finding of assessing officer, with our aforesaid observation. Similarly, in none of the case, as relied by assessee, there was no dispute on the nature of asset. The facts in the present case is unique as initially it was introduced as capital contribution, development charges of FSI was paid in Surat Municipal Corporation, it was sold in individual capacity but capital gain was again shown in the hand of assess-firm, when such glaring fact was detected by assessing officer, the partner took the plea that accountant committed mistake, which was never corrected. In the result, the grounds of appeal raised by the revenue are allowed.

Issues Involved:
1. Treatment of sale of land as long-term capital gain versus business income.
2. Nature of the land as stock in trade or capital asset.
3. Validity of accounting entries in determining tax liability.
4. Application of legal precedents and case laws in the context of the dispute.

Issue-wise Detailed Analysis:

1. Treatment of Sale of Land as Long-Term Capital Gain vs. Business Income:
The revenue challenged the order of the CIT(A) for treating the sale of land as a long-term capital gain instead of business income. The Assessing Officer (AO) had initially classified the profit from the sale of land as business income, citing that the land was shown as Work in Progress (WIP) in the balance sheet, indicating it was a business asset. The CIT(A) reversed this, treating the land as a capital asset, emphasizing the long holding period and lack of business activity as indicators that the land was held for investment rather than business purposes.

2. Nature of the Land as Stock in Trade or Capital Asset:
The assessee argued that the land was introduced by the partners as a capital contribution and not as a business asset. The land was held for over ten years without any development or business activity, suggesting it was an investment. The AO, however, maintained that the land was a business asset, as it was shown as WIP in the firm's balance sheet, and the firm was constituted with the objective of real estate business. The CIT(A) supported the assessee's view, noting that the land was not developed or divided into smaller plots, indicating it was not held for business purposes.

3. Validity of Accounting Entries in Determining Tax Liability:
The AO argued that the accounting treatment of the land as WIP in the balance sheet was a clear indication of its nature as a business asset. The CIT(A) countered this, stating that accounting entries alone should not determine the tax treatment of an asset. The intrinsic nature of the transaction and the intention behind holding the asset should be considered. The CIT(A) cited legal precedents to support the view that book entries should not dictate tax liability if they do not reflect the true nature of the transaction.

4. Application of Legal Precedents and Case Laws:
The CIT(A) referred to several case laws to support the decision that the land should be treated as a capital asset. These included judgments where long-term holding and lack of business activity were considered indicators of investment rather than business assets. The AO and the revenue, however, argued that the nature of the asset should be determined based on its treatment in the firm's books and the objectives of the partnership deed, which indicated a business intent.

Conclusion:
The Tribunal ultimately sided with the revenue, reversing the CIT(A)'s order. It was held that the land was introduced as a business asset, reflected as WIP in the balance sheet, and expenses related to the land were incurred for business purposes. The Tribunal emphasized that the nature of the asset should be consistent with its treatment in the firm's books and the partnership's business objectives. The appeal by the revenue was allowed, and the gain on the sale of the land was treated as business income.

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