Income from Sale of Land held as Stock in Trade taxable under Business Income When Expenses incurred shown under WIP: ITAT [Read Order]

The Surat Bench of the Income Tax Appellate Tribunal (ITAT), held that income from Sale of land held as stock in trade taxable under business income when expenses incurred shown under Work In Progress (WIP).

The assessee,Swastik Enterprisesis a partnership firm, engaged in the business of construction and development of property. The assessee filed its return of income for the A.Y. 2014-15 declaring income of long term capital gain of Rs. 8 lakhs.

The Assessing Officer on perusal of balance sheet, found that the assessee had shown WIPof Rs. 89 lakhs and in preceding and WIP in current year at Rs. 1 crore. The plot of land was held by assessee firm as stock in trade and not as an investment. In the show cause notice, the Assessing Officer asked the assessee as to why the profit on sale of such land may notbe taxed under the head “business income” in place of “capital gain”.

The assessee-frim had himself categorized the asset as business asset. The Assessing Officer held that the assessee is trying to put in that the asset is a capital asset. The formation of partnership with objects of doing business in real estate and reflecting the asset as business WIP are major factors which cannot be ignored.

Aggrieved by the treatment of capital gain as business income, the assessee filed appeal before the CIT(A). The CIT(A) held that the long holding period and absence of any activity for division of land into smaller plots, so the intention of assessee to hold the land for investment for its own business or for appreciation and reversed the action of Assessing officer and directed the Assessing Officer to treat the surplus earned on the sale of plot as ‘capital gain ‘in place of ‘business income’.

A Bench comprising Pawan Singh, Judicial Member and Dr Arjun Lal Saini, Accountant Member observed that “When the expenses were incurred, it was shown at WIP, however, when the asset is sold, the partners claimed that it was as investment only and not business asset, which cannot be allowed. Thus, in our view the CIT(A) erred in treating / directing the assessing officer to treat the gain on sale of asset of firm as capital gain in place of business income.”

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