Asset Holding Pattern Decides Taxability of Land Sale Profit as Capital Gain or Business Income: Madras HC [Read Order]

The Madras High Court has held that the nature of profit earned from sale of land whether taxable as “Capital Gains” or “Business Income”, depends on the assessee’s asset holding pattern, intention and conduct, and not merely on the quantum of profit or the objects clause in the Memorandum of Association.

Justices Dr. Anita Sumanth and Mummineni Sudheer Kumar said that “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.”

In the matter of GWL properties, the Income tax department appealed before the Madras high court.

It challenged the decision of the Income Tax Appellate Tribunal ( ITAT ) which held that the profit on sale of lands held by the assessee should be considered under the head ‘Capital Gains’ only and not as business profits of the assessee.

The assessee filed its income tax return and offered Rs.9,87,12,654/- as capital gain. Later, the Assessing officer issued a notice stating that the amount ought to have been assessed as business income and hence reopened the assessment by issuance of notice under Section 148 of the Act.

According to the assessee, they are engaged in the activity of manufacturing and trading, IATA approved cargo agent and customs house agent, and was not carrying on the business of purchase and sale of properties. Therefore, any income earned from sale of property would be assessable only under the head ‘capital gains’ and would have no incidence of business activity.

The department alleged that the property development figured as a line of activity in the financials. Hence, the consideration of Rs.10,02,60,000/- for sale of 22.28 acres of land in the relevant financial year was brought to sale as profits and gains of business.

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The court noted the CBDT circular No. 4/2007 which says that “....... CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.

Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in- trade.”

The bench noted the circular mentioned above and said that, since assets held as investments and as freehold land have been clearly and definitively differentiated, the same methodology that is accepted with regard to shares would also apply to the current issue.

The court viewed that revenue accepted the accounting methodology and related facts. Therefore there is no error in the decision of the tribunal. Accordingly, the tax appeal was dismissed.

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