2016 (3) TMI 1008 - AT - Income Tax

Tribunal rules on land cost inclusion in business income calculation

The Tribunal upheld the CIT(A)'s decision to include the cost of land used for civic amenities in the income from business calculation when a capital ... Computation of income from business u/s 45(2) when a capital asset converted into stock in trade - A.O. computed long term capital gain for conversion of capital asset into stock in trade as on the date of conversion and also computed income from business proportionately to the area of site sold during the year under consideration - Held that:- When a capital asset is converted into stock in trade, as per section 45(2) of the Act, it is certain that the assessee needs to compute long term capital gains as on the date of conversion and pay tax as and when such capital asset is sold. But, when it comes to calculation of capital gain as well as income from business, there won’t be any difference in the area of capital asset converted into stock in trade and stock in trade used for business purpose. In the present case on hand, on perusal of the calculations provided by the A.O., we find that the A.O. has made basic mistake in calculating the proportionate land area for the purpose of computation of income from business, by ignoring the land earmarked for internal roads, drains and other civic amenities. Though assessee could not receive any value for such earmarked land, which is mandatory for any developer to allow setback as per the prevailing laws regulating such activities. Therefore, we are of the opinion that the A.O. was not correct in adopting gross land for computing long term capital gain and only saleable land for the purpose of income from business. The CIT(A) rightly deleted the addition. We do not see any error in the order of CIT(A). Hence, we inclined to upheld the order of CIT(A) and direct the A.O. to allow the cost of 9,778 sq.yds. land which is earmarked for roads, drains, parks and other civic amenities for the purpose of computation of income from business. - Decided against revenue Issues:Computation of income from business u/s 45(2) of the Act when a capital asset is converted into stock in trade.Analysis:The appeal and cross-objection were directed against the order of CIT(A) pertaining to the assessment year 2009-10. The assessee declared long term capital gain from the sale of residential sites after converting agricultural land into non-agricultural purposes. The Assessing Officer (A.O.) invoked section 45(2) of the Income Tax Act, 1961, as he considered the conversion of capital asset into stock in trade. The A.O. computed long term capital gain and income from business, resulting in a total income higher than the declared amount.The assessee appealed before the CIT(A), arguing that the A.O. erred in the computation of long term capital gain and income from business by not considering the cost of land used for internal roads and civic amenities. The CIT(A) directed the A.O. to allow the cost of the land used for setbacks. The revenue challenged this decision, contending that the A.O. correctly calculated the capital gain and income from business. The CIT(A)'s decision was supported by the assessee.Upon review, the Tribunal focused on the computation of income from business when a capital asset is converted into stock in trade. The A.O. used different land areas for calculating capital gains and income from business, omitting the land designated for internal roads and civic amenities. The Tribunal found the A.O.'s approach erroneous, emphasizing that the land earmarked for setbacks should be considered in the income from business calculation. The Tribunal upheld the CIT(A)'s decision to delete the addition and directed the A.O. to include the cost of the land used for civic amenities in the income from business computation.Ultimately, the Tribunal dismissed the revenue's appeal and the assessee's cross-objection, supporting the CIT(A)'s order. The decision was pronounced on 11th Feb'16.