2015 (12) TMI 1797 - AT - Income Tax

Land sale treated as Long Term Capital Gain due to investment holding over 20 years; Assessee entitled to indexation benefits.

The Tribunal upheld the CIT(A)'s decision that the income from the sale of land should be treated as Long Term Capital Gain (LTCG) due to the land being ... Long Term Capital Gain - Business Income - Conversion of stock-in-trade into investment - Treatment in books of accounts as evidence of nature of asset - Option under Section 45(2) to convert capital asset into stock-in-trade - CBDT Circular No.4 of 2007 - test to distinguish stock-in-trade and investmentLong Term Capital Gain - Business Income - Treatment in books of accounts as evidence of nature of asset - Option under Section 45(2) to convert capital asset into stock-in-trade - CBDT Circular No.4 of 2007 - test to distinguish stock-in-trade and investment - Whether the profit on sale of the plot is taxable as long term capital gain or as business income - HELD THAT: - The Tribunal upheld the CIT(A)'s factual finding that the portion of land sold (Sectors B-G) was held as an investment and not as stock-in-trade. The appellate authority and the Tribunal relied on consistent accounting treatment from 1-4-2000 showing the land as investment, prior scrutiny assessments (AYs. 2006-07 and 2008-09) in which the department accepted that status, independent verification by an inspector that no construction had been carried out, recorded statements of purchasers, and the fact that plots held for development were separately shown as WIP. The Tribunal applied the principle that entries in the books of account and consistent treatment are a relevant and corroborative factor in determining the nature of an asset and accepted the applicability of CBDT Circular No.4 of 2007's test distinguishing stock-in-trade and investment. It further noted the statutory position that an assessee has the option under Section 45(2) regarding conversion between capital asset and stock-in-trade, and that once an asset is held as an investment in the books, the gain on its transfer is to be treated as capital gain unless contrary material is shown. In the absence of any contrary material brought on record by the Revenue, the Tribunal found no reason to disturb the CIT(A)'s conclusion that the gain on sale was a long term capital gain rather than business income. [Paras 2, 8, 9]The gain arising on sale of the plot is to be taxed as long term capital gain; the CIT(A)'s allowance is sustained.Final Conclusion: Revenue's appeal is dismissed; the Tribunal affirms that the profit on sale of the land for AY 2004-05 is long term capital gain and not business income. Issues Involved:1. Treatment of income from the sale of land as Long Term Capital Gain (LTCG) vs. Business Income.2. Entitlement to indexation benefits and concessional tax rate under Section 112 of the Income Tax Act.3. Validity of accounting treatment and entries in the books of accounts.4. Consistency in the treatment of land as an investment in previous assessment years.Issue-wise Detailed Analysis:1. Treatment of Income from Sale of Land as LTCG vs. Business Income:The primary issue was whether the income derived from the sale of land should be treated as Long Term Capital Gain (LTCG) or Business Income. The assessee, a partnership firm engaged in building construction and land development, claimed the income as LTCG, asserting the land was held as an investment. The Assessing Officer (AO) contended it should be treated as Business Income, arguing the land was purchased for business purposes. The CIT(A) observed that the land was consistently shown as an investment in the books of accounts from 1.4.2000 and held for over 20 years without any development, supporting the assessee's claim. The Tribunal upheld CIT(A)'s decision, noting that the land was shown as an investment in the balance sheets for AYs 2006-07 and 2008-09, and the AO had accepted this treatment in previous assessments.2. Entitlement to Indexation Benefits and Concessional Tax Rate under Section 112:The AO denied the assessee the benefits of indexation and the concessional tax rate under Section 112, as he treated the income as Business Income. However, the CIT(A) allowed these benefits, affirming the land was an investment and thus eligible for LTCG treatment. The Tribunal agreed, emphasizing that the land was held as an investment and not as stock-in-trade, making the assessee entitled to indexation and the concessional tax rate.3. Validity of Accounting Treatment and Entries in the Books of Accounts:The AO questioned the accounting treatment, suggesting the land should have been treated as stock-in-trade. The CIT(A) and the Tribunal found the accounting entries made on 1.4.2000 to show the land as an investment were valid. The Tribunal highlighted that the treatment of land as an investment was consistently maintained in the books of accounts and accepted in previous assessments. Judicial precedents, such as the Supreme Court's rulings in Sir Kikabhai Premchand and Bai Shirinbai K. Kooka, supported the assessee's right to treat an asset as an investment.4. Consistency in the Treatment of Land as an Investment in Previous Assessment Years:The Tribunal noted the consistency in the treatment of the land as an investment in the assessee's books of accounts and previous assessments. The AO had accepted this treatment in scrutiny assessments for AYs 2006-07 and 2008-09. The Tribunal emphasized the principle of consistency, stating that the department could not change the treatment of the land without any contrary evidence. The statements of the purchasers and the inspection report confirmed the land was non-agricultural and held as an investment.Conclusion:The Tribunal upheld the CIT(A)'s decision, affirming the land was held as an investment and the income from its sale should be treated as LTCG, entitling the assessee to indexation benefits and the concessional tax rate under Section 112. The appeal of the Revenue was dismissed.Order Pronouncement:The order was pronounced in the open court on 16th December 2015.