Capital asset character, holding period, and project completion method were upheld on the facts of the land sale dispute.

The Tribunal applied the real-nature test to hold that the Nagpur land was capital asset rather than trading stock, because it had been acquired for development and proposed leasing, development never commenced due to legal impediments, the sale was isolated, and the land had been reclassified as investment. It also held that long-term capital gains treatment depended on when enforceable rights in the property arose under section 2(42A); the MOU date was rejected and the vendor company's AGM resolution on 24.09.2007 was treated as the effective date of holding, so the statutory holding period was satisfied. The assessee's consistently followed project completion method was upheld because the books were not rejected and section 145 was not invoked.

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Issues: (i) whether the gain on sale of the Nagpur land was taxable as business income or as capital gain; (ii) whether the gain on sale of the land was long-term capital gain or short-term capital gain and the correct date from which the holding period was to be computed; and (iii) whether the assessee could follow the project completion method instead of the percentage completion method.

Issue (i): whether the gain on sale of the Nagpur land was taxable as business income or as capital gain

Analysis: The relevant inquiry was whether the land was acquired and held as trading stock or as a capital asset. The surrounding facts showed that the land had been purchased for development and proposed leasing, the development never commenced because of legal and procedural impediments, the transaction of sale was isolated, the land stood reclassified as investment, and the Revenue did not dislodge these factual findings. The mere fact that the assessee was engaged in real estate development or that the land had earlier been reflected as stock-in-trade was not . The Tribunal applied the settled principle that the character of the receipt depends on the attendant facts and the true intention and function of the asset in the assessee's hands.

Conclusion: The gain was rightly assessable under the head capital gain and not as business income.

Issue (ii): whether the gain on sale of the Nagpur land was long-term capital gain or short-term capital gain and the correct date from which the holding period was to be computed

Analysis: For the purpose of section 2(42A), the decisive question was when the assessee first came to hold an enforceable right in the property on a de facto basis. The Tribunal accepted that mere registration of the conveyance was not the only relevant consideration, and that the holding period could begin when rights under the transaction became effective. However, on the facts, the Tribunal did not accept the MOU date as the operative date of holding and instead treated the vendor company's AGM resolution dated 24.09.2007 as the point when the contract became binding on the vendor and the assessee acquired enforceable rights. On that basis, the period of holding crossed the statutory threshold for a long-term capital asset.

Conclusion: The receipt was to be taxed as long-term capital gain, though the date of holding was taken as 24.09.2007 rather than the MOU date.

Issue (iii): whether the assessee could follow the project completion method instead of the percentage completion method

Analysis: The assessee had consistently followed the project completion method, and the Revenue had not rejected the books of account or invoked section 145 before seeking to substitute the percentage completion method. The method adopted by the assessee was held to be a recognised and valid method of accounting, and mere preference for an alternative method did not justify substitution by the Assessing Officer. The Tribunal also noted that the tax effect was neutral because the project income had already been offered in later years.

Conclusion: The assessee's adoption of the project completion method was upheld and the Revenue's challenge failed.

Final Conclusion: The Revenue's challenge failed on the character of the land sale and on the accounting method, but succeeded only to the limited extent of shifting the commencement of the holding period to 24.09.2007, resulting in only a partial modification of the first appellate order.

Ratio Decidendi: For income-tax purposes, the character of a transaction as capital or trading depends on the totality of circumstances and the real nature of the asset in the assessee's hands, while holding period under section 2(42A) is computed from the date when enforceable rights in the property are acquired, not necessarily from registration of conveyance.

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