2016 (9) TMI 292 - AT - Income Tax

Tribunal rules in favor of assessee on income characterization, remands long-term loss issue for further assessment

The Tribunal ruled in favor of the assessee, directing the deletion of the addition made by the Assessing Officer and allowing the appeal on the ... Treatment of profit earned on sale of land - business income OR capital gain - Held that:- Merely because no return was filed by the assessee in earlier years in absence of any taxable income, the character of land would not automatically get changed from ‘investment’ to ‘stock-in-trade’. The other allegation of the AO is also without any basis and legal substance wherein it was stated that the assessee firm was constituted for the main object of development and trading in immovable properties, therefore, the impugned land should also be necessarily characterised as part of stock-intrade. We find no basis for such a bald allegation. It is well settled law that a person can plan its affairs in such a manner so as to minimize its tax burden and there would be nothing wrong in it, so long as approach of a taxpayer is not bogus or false and no tax evasion is perpetuated. In the facts brought before us, nothing has been brought on record by the lower authorities to counter the factual assertions made by the assessee. The assessee has consistently kept these amounts as part of ‘investments’ since last so many years. No business at all has been done by the assessee firm. Its income has never been assessed under the head income from business. Nothing has been shown to indicate if the assessee ever treated the impugned land as part of the ‘stock-in-trade’ at any point of time in the past decade, and the assessment order has been passed merely on the basis of surmises and conjecture which have no place in the eyes of law. We do not find any justification on the part of lower authorities to re-characterise the income earned from sale of land as ‘income from business’. The assessee had rightly shown the same as ‘income under the head capital gains’. Benefit of set off of brought forward long term capital loss disallowed - Held that:- As submitted before us that though the return for A.Y. 2006-07 was filed on 30th October 2006 i.e. within the time limit extended by the Central Board of Direct Taxes vide its notification dated 24th July 2006, but the AO omitted to grant the benefit of set off of brought forward long term capital loss under some erroneous assumption of facts with regard to time limit of filing of return and actual date of file of return.We find that it is a matter of proper verification of facts and therefore, this issue is sent back to the file of the AO to verify the requisite facts with regard to actual date of filing of return and extended due date of filing of return and claim made by the assessee in the return of income filed in A.Y. 2006-07 with respect to carry forward of long term capital loss. Issues:1. Characterization of income earned on sale of land as business income or capital gain.2. Allowance of set off of long term capital loss for the assessment year 2006-07.3. Jurisdictional validity of orders passed under sections 143(3) and 263.Issue 1: Characterization of Income:The appeal dealt with whether the income from the sale of land should be treated as business income or capital gain. The Assessing Officer (AO) classified it as business income based on the firm's intention to deal in properties. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal found that the firm had consistently treated the land as an investment, with no development activities undertaken. The Tribunal concluded that the lower authorities' re-characterization of the income as business income was incorrect and lacked legal basis. The Tribunal ruled in favor of the assessee, directing the deletion of the addition made by the AO and allowing the appeal on this issue.Issue 2: Set Off of Long Term Capital Loss:The assessee challenged the denial of the benefit of setting off brought forward long term capital loss for the assessment year 2006-07. The Tribunal observed that the matter required factual verification regarding the actual date of filing the return and the extended due date for filing. Consequently, the issue was remanded back to the AO for proper examination and consideration of all relevant material. The assessee was granted the opportunity to provide necessary details and documents. The Tribunal allowed this ground for statistical purposes.Issue 3: Jurisdictional Validity of Orders:The additional ground raised by the assessee regarding the jurisdictional validity of the orders passed under sections 143(3) and 263 was not addressed by the Tribunal due to the relief granted on the merits of the case. With the consent of the parties, the Tribunal decided not to delve into this additional ground at that stage, deeming it irrelevant given the outcome of the appeal.In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal concerning the characterization of income earned on the sale of land and the set off of long term capital loss. The jurisdictional validity of the orders was not further examined due to the relief granted on other grounds.