2022 (3) TMI 1029 - AT - Income Tax

Land purchase treated as capital asset, not business income. Appeal partly allowed.

The appellate tribunal overturned the lower authorities' decision and held that the land purchased by the assessee was rightly treated as a capital asset. ... Correct head of income - Capital Gains or Business Income - AO held that the land was purchased for the purpose of carrying on business and not as an investment - HELD THAT:- It is seen that the assessee purchased the land in the financial year ending 31-03-2006. Development expenses were also incurred in that year. Before the close of the year ending on 31.3.2006, the assessee came to know about a litigation going-on on this plot. Development cost incurred from August, 2005 to October, 2005, was before the assessee coming to know of the litigation on the plot. The assessee did not undertake any business activity. Before close of the very first year itself, the assessee declared the cost of purchase of land and development expenses as `Investment’ under the head `Fixed Assets’ in its balance sheet. The position continued to remain the same in its balance sheets on 31-03-2007, 31-03-2008, during which the assessee continued to declare such Plot as `Investment’. The assessee could manage to sell the property by involving the other party to the litigation on the same property, namely, Maruti Builders and Developers, signing as a ‘Consenting Party’. Thus it is clear that the assessee continued to treat such land as Investment ab initio, by showing it under the head `Fixed assets’ in its balance sheets from year to year and not as ‘Stock in trade’, which position has not been disputed by the AO in any of the earlier years. Land purchased by the assessee in the year 2005 has rightly been treated as Capital asset by the assessee, income from whose transfer is liable to be taken under the head `Capital Gains’ and not as Business Income. Issues:1. Confirmation of addition of Rs. 5.00 lakhs2. Treatment of long term capital gain as business incomeAnalysis:1. The first issue regarding the confirmation of addition of Rs. 5.00 lakhs was not pressed by the ld. AR and hence dismissed as 'not pressed'.2. The second issue revolves around treating the long term capital gain of Rs. 4,13,324/- returned by the assessee as 'Business income' amounting to Rs. 22,81,610/-. The assessee, a partnership firm, purchased a piece of land for Rs. 19,53,390/- in 2005 and incurred development expenses of Rs. 2.00 lakhs. Upon transfer of the land, the assessee declared long term capital gain. However, the AO treated it as business income, stating that the land was purchased for business purposes. The CIT(A) upheld the AO's order. The Tribunal, after considering the facts, concluded that the assessee consistently treated the land as an investment in its balance sheets over the years and did not engage in any business activity related to the land. The Tribunal held that the land was rightly treated as a capital asset, and the income from its transfer should be under the head 'Capital Gains', overturning the lower authorities' decision. The appeal was partly allowed, restoring the assessee's viewpoint on this issue.Judgment:The appellate tribunal, after thorough consideration of the facts and circumstances, overturned the lower authorities' decision and held that the land purchased by the assessee was rightly treated as a capital asset. The income from the land's transfer was deemed to be under the head 'Capital Gains' and not 'Business Income'. Consequently, the appeal was partly allowed in favor of the assessee.