2009 (1) TMI 866 - AT - Income Tax

Tribunal rules on tax treatment of plot sale income, deems it business income, partially allowing appeal.

The Tribunal upheld the tax treatment of income from the sale of plots as business income, considering it an adventure in the nature of trade. Regarding ... - Issues Involved:1. Taxability of income from the sale of plots under the head 'income from capital gains' or 'income from business.'2. Addition of Rs. 45 lakhs as unexplained cash credit under Section 68 of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Income from Sale of Plots:The primary issue was whether the income from the sale of housing plots should be taxed as 'capital gains' or as 'income from business.' The assessee, a retail trader in automobile spare parts, purchased land in 1997 along with his wife and son. The land was converted into housing plots and sold in the financial year 2004-05. The assessee declared the income as long-term capital gains, claiming a long-term capital loss after indexation. However, the Assessing Officer (AO) treated the transaction as an 'adventure in the nature of trade' and taxed it under 'income from business,' relying on the decisions of the Andhra Pradesh High Court in CIT v. M. Krishna Rao and the Supreme Court in G. Venkataswami Naidu & Co. v. CIT.The CIT(A) upheld the AO's decision, noting that the layout plan and the conditions for sanction indicated an intention to engage in trade. The assessee argued that the land was held as an investment and sold to secure a better price, citing the Rajasthan High Court's decision in CIT v. Sohan Khan. The Tribunal, however, found that the circumstances-such as the immediate application for layout approval after purchase and the absence of evidence to show the land was used for other purposes-indicated a business intention. The Tribunal concluded that the transaction was an adventure in the nature of trade, and the income should be taxed as business income.2. Addition of Rs. 45 Lakhs as Unexplained Cash Credit:The second issue involved the addition of Rs. 45 lakhs credited in the assessee's capital account, which the AO added under Section 68 of the Income Tax Act. The assessee claimed this amount was a repayment of funds previously drawn from his business concern, 'Ramesh Auto Agencies,' and deposited back into his capital account. The AO rejected this explanation, noting the narration 'sale of land' in the capital account and the lack of personal books of account to substantiate the claim.The CIT(A) upheld the AO's decision, emphasizing the onus on the assessee to prove the source of the credit. The assessee argued that the narration was an inadvertent mistake and provided a sworn statement and personal bank account details to support his claim. The Tribunal noted that the tax authorities focused on the 'sale of land' narration and the lack of evidence for the earlier withdrawals' redeposit. The Tribunal also considered the possibility of the assessee engaging in business activities related to land, given the pattern of withdrawals and deposits.Applying the principle of judging evidence by human probabilities, the Tribunal concluded that while the entire amount could not be taxed, a reasonable estimate of the profit element should be made. The Tribunal estimated a profit of 10% on the Rs. 45 lakhs, amounting to Rs. 4,50,000, and directed the AO to assess this profit instead of the entire Rs. 45 lakhs.Conclusion:The Tribunal upheld the AO's decision to tax the income from the sale of plots as business income, treating the transaction as an adventure in the nature of trade. For the unexplained cash credit, the Tribunal estimated a profit element of Rs. 4,50,000 on the Rs. 45 lakhs and directed the AO to tax this amount, providing partial relief to the assessee. The appeal was thus partly allowed.