2026 (1) TMI 758 - HC - Income Tax

Profit on sale of land treated as capital gain, not business income, due to fixed-asset holding and lack of trading

Dominant issue: whether profits on sale of land are capital gains or business profits. Court applied accounting classification, manner of holding, ... Correct head of income - profit earned by the assessee on sale of land - ‘capital gains’ or ‘business profits’ - any incidence of business activity - Scope of Circular No.4/2007 dated 15.06.2007 making a distinction between a 'capital asset' and a 'trading asset' - Assessing Authority noted that property development figured as a line of activity in the financials - principles to determine whether the transaction was an adventure in the nature of trade - subject land had been acquired many years ago by the assessee as industrial land and had been reflected in the financials of the company as such, without any development. HELD THAT:- There is no category of assets under the head ‘investments’ in the financials for year ending 31.3.2001, prior to amalgamation. This category of assets is found only in the financials for year ending 31.03.2002 onwards and according to the assessee, only the assets that devolved upon it post amalgamation with Shaw Wallace are classified as ‘investments’. The land for development has thus been identified as a separate block of assets distinct and different from the freehold land, which is the original asset base of the assessee comprising fixed assets purchased over the years. We see no necessity to integrate the two, as such integration would be contrary to the treatment that has been accorded by the assessee, both in the accounts as well as by conduct. The Department has not raised any suspicion in regard to the accounts of the assessee. Accounts reveal that the assessee holds fixed assets, including freehold land, being land purchased over the years and held as is, without any development. Post amalgamation with Shaw Wallace, it acquired parcels of land which it held as a separate inventory, under the head ‘investments’. The subject land admitted, falls within the category of fixed assets held by the assessee for several decades. The Department does not dispute the factual position that the assessee had engaged in similar sales for the year prior to, and post the present assessment year, viz., for AY 2003-04 and 2005-06 as well. For AY 2003-04, the return filed by the assessee offering the sale consideration under the head ‘capital gains’ has been accepted in the assessment made under scrutiny vide order dated 28.02.2006. The Assessing Authority has dealt with the sale of two sheds at Ambattur Industrial Estate bearing Nos.A9 and D18 and the sale consideration of those properties at Rs.50.00 lakhs and 45.00 lakhs respectively. He had put forth a proposal for adopting the valuation of the Registering Authority at Konnur which was countered by the assessee seeking reference to the valuation cell. Ultimately, the assessment was completed adopting the fair market value as set out in the valuation report of the Valuation Officer. Hence, this is not an issue that has passed muster in a routine manner, but one where the Assessing Authority has specifically applied his mind, finding the classification by the assessee and the tax treatment thereof, acceptable. For A.Y.2005-06 as well, the assessee had treated the sale consideration likewise, as capital gain. Circular No.4/2007 dated 15.06.2007 issued by the CBDT makes a distinction between shares held as stock-in-trade and as investment, and the different tax treatment to be accorded to the two categories, and supports the present case. The error committed by the CIT(A) is in not noting that the assessee had sold off only a portion of those parcels of land that were held by it as fixed assets, and in respect of which there had been no development. The classification as a capital asset, was not merely on the ground of the accounting treatment, but also in the manner of holding of the asset, and the intention and conduct of the assessee over the years. That apart, he erred in stating that the assessee had engaged in such sales in a routine and regular manner. There is no evidence to support such a conclusion. Decided in favour of assessee. Issues: Whether the profit on sale of land by the assessee for AY 2004-05 is assessable only as capital gains or is assessable as business profits.Analysis: The Court reviewed the factual matrix including the assessee's accounts, the post-amalgamation classification of assets into freehold land and investments, the disclosure of land as fixed assets held for decades, and prior assessments where similar sales were treated as capital gains. The legal framework applied includes the statutory definitions and tests distinguishing capital assets and trading assets, Section 45(2) (deemed consideration on conversion), and the guidance in CBDT Circular No.4/2007 permitting recognition of dual portfolios (investment and trading). The Tribunal's fact-finding on the nature of the subject land — held as long-standing fixed assets, sold without development, and not part of an established land-development business — was examined and found to be unchallenged by the Revenue. The Court applied established tests (volume, frequency, continuity, regularity) and the principle that substance prevails over form to conclude that the sale was a transfer of a capital asset and not an adventure in the nature of trade.Conclusion: The appeal by the Revenue is dismissed; the profit on sale of the subject land is to be assessed as capital gains (decision in favour of the assessee).Ratio Decidendi: Where land held as a long-standing fixed asset and sold without development is shown and treated in accounts as a capital asset and the cumulative factual matrix (volume, frequency, continuity, regularity and conduct) does not establish an organized land-development/trading activity, proceeds on sale are assessable as capital gains rather than business income.