Land shown as stock-in-trade was taxed as business income; capital-gain exemption and brokerage deduction failed on TDS default.

Land consistently recorded as closing stock and supported by objects covering purchase, development and sale of land was treated as stock-in-trade, so the surplus on sale was taxable as business income rather than long-term capital gain. The exemption claim failed because capital-gain treatment was not available and, in any event, the land fell within municipal limits, bringing it within the definition of capital asset under section 2(14)(iii) of the Income-tax Act, 1961. Brokerage expenditure was also disallowed under section 40(a)(ia) for failure to deduct tax at source, as no material rebutted the TDS default finding.

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Issues: (i) Whether the surplus arising from sale of the land was taxable as business income or as long-term capital gain; (ii) whether the assessee was entitled to exemption on the sale proceeds treating the land as agricultural land not falling within the definition of capital asset; (iii) whether the brokerage payment disallowance under section 40(a)(ia) was sustainable.

Issue (i): Whether the surplus arising from sale of the land was taxable as business income or as long-term capital gain.

Analysis: The land had consistently been shown in the books as closing stock and the assessee's constitutional documents showed that its main objects included purchase, development and disposal of land and plots. The holding period and valuation at cost did not, by themselves, establish investment character. The nature of the assessee's business, the manner of accounting, and the treatment of the land over the years indicated that the asset was held as stock-in-trade.

Conclusion: The surplus was rightly assessed as business income and not as long-term capital gain, in favour of Revenue.

Issue (ii): Whether the assessee was entitled to exemption on the sale proceeds treating the land as agricultural land not falling within the definition of capital asset.

Analysis: Once the receipt was held to be business income, the claim of exemption on the footing of capital gain did not survive on merits. In any event, the land was found to fall within the municipal limits, so it could not be excluded from the definition of capital asset under section 2(14)(iii) of the Income-tax Act, 1961.

Conclusion: The claim of exemption was not allowable, in favour of Revenue.

Issue (iii): Whether the brokerage payment disallowance under section 40(a)(ia) was sustainable.

Analysis: The brokerage expenditure was disallowed for failure to deduct tax at source. No material was produced to rebut the finding that the assessee was not exempt from the TDS requirement in relation to the payment.

Conclusion: The disallowance was sustained, in favour of Revenue.

Final Conclusion: The assessment of the land-sale surplus as business income was upheld, the exemption plea failed, and the brokerage disallowance remained undisturbed, resulting in dismissal of the appeal.

Ratio Decidendi: Where an assessee consistently treats land as closing stock and its objects show dealings in land and plots, the surplus on sale is taxable as business income even if the land is held for a long period; exemption based on capital-gain treatment cannot then be claimed.

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