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 asset is converted into stock in trade. The A.O.'s exclusion of certain land areas for computation was deemed erroneous, and the Tribunal ruled in favor of considering all relevant land for setbacks. Consequently, the Tribunal dismissed the revenue's appeal and the assessee's cross-objection, affirming the CIT(A)'s order regarding the assessment year 2009-10.

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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.

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