2011 (3) TMI 1592 - AT - Income Tax

Summary

Issues Involved:
1. Authorization to conduct business in immovable and movable properties.
2. Intention of the assessee company regarding real estate activities.
3. Classification of land sold as fixed assets or stock in trade.
4. Validity of the CIT(A)'s order and restoration of the Assessing Officer's order.

Summary:

Issue 1: Authorization to Conduct Business in Immovable and Movable Properties
The Department contended that the Commissioner of Income Tax (Appeals) erred by not appreciating that the assessee was lawfully authorized to conduct business in transactions involving all types of immovable and movable properties as per the memorandum of association.

Issue 2: Intention of the Assessee Company Regarding Real Estate Activities
The Department argued that the intention of the assessee company was to engage in real estate activities solely to earn profit, thus falling u/s 28 of the Income Tax Act, 1961, as normal business activities rather than capital gains. The Assessing Officer observed that the assessee pieced together land, made value additions, and sold it as a farm house, indicating a business endeavor. The assessee, however, maintained that the land was shown as fixed assets and not as stock in trade, and agricultural income from the land had been accepted in earlier years.

Issue 3: Classification of Land Sold as Fixed Assets or Stock in Trade
The Assessing Officer classified the profits from the sale of immovable property as 'profits & gains from business or profession' based on the memorandum of association. The assessee countered that the land was held as a capital asset for over 11 years, shown as fixed assets in the balance sheet, and agricultural income was consistently reported and accepted by the Department. The CIT(A) observed that the long period of holding indicated the purpose was not trading, and the surplus on sale was exigible to capital gains, not business profits.

Issue 4: Validity of the CIT(A)'s Order and Restoration of the Assessing Officer's Order
The Department sought to vacate the CIT(A)'s order and restore the Assessing Officer's order. The CIT(A) held that the farm land was a capital asset and the surplus on its sale was capital gains. The Tribunal upheld the CIT(A)'s decision, noting that the land was held as a fixed asset for over 11 years, sold in the same lots as purchased, and there was no intention to treat it as stock in trade. The Tribunal referenced the case of CIT Vs. Mohakampur Ice and Cold Storage, where similar facts led to the conclusion that profits were in the nature of capital gains.

Conclusion:
The appeal by the Department was dismissed, affirming that the land sold was a capital asset and the profits were capital gains, not business profits.