Income from Sale of Land purchased for Business and shown as ‘Fixed Assets’ in Books by Firm shall be treated as ‘Capital Gain’: ITAT [Read Order]

The Pune bench of the ITAT has held that the income from the sale of land purchased by a partnership firm for the purpose of business and declared the same as fixed assets in the books shall constitute capital gain under the Income Tax Act, 1961.

The assessee, Hari Om Associates, a partnership firm, came into existence for undertaking construction and development work. A piece of land was purchased on 07-07-2005 for Rs.19,53,390/-. Development expenses of Rs.2.00 lakh were incurred on the said land. The assessee, on the transfer of this land in the year under consideration, offered long-term capital gain thereon. The AO held that the land was purchased for the purpose of carrying on business and not as an investment.

ITAT Vice President Mr. R S Syal observed that the assessee did not undertake any business activity. Before the 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’. In the year under consideration, the assessee could manage to sell the property by involving the other party in 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. In the given peculiar facts and circumstances of the case, I am of the considered opinion that the land purchased by the assessee in the year 2005 has rightly been treated as a Capital asset by the assessee, income from whose transfer is liable to be taken under the head `Capital Gains’ and not as Business Income. I, therefore, overturn the impugned order and restore the assessee’s point of view on this issue,” the Tribunal said.

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