1994 (10) TMI 87 - AT - Income Tax

Summary

Issues Involved:
1. Classification of the land as a capital asset or business asset.
2. Bifurcation of sale consideration into capital and business receipts.
3. Allowability of claimed expenditures as business expenses.

Issue 1: Classification of the Land as a Capital Asset or Business Asset

The primary issue was whether the land sold by the assessee to MTNL was a capital asset or a business asset. The Assessing Officer treated the entire receipt from the sale as a composite capital receipt, whereas the CIT (Appeals) considered it as business income. The assessee argued that the land constituted a capital asset and not stock-in-trade, thereby qualifying for deductions under section 48(2) of the Income-tax Act, 1961. The Tribunal examined the nature of the rights transferred and concluded that the assessee's rights were primarily developmental, not proprietary. The assessee did not acquire ownership rights but only the right to develop the land, which was considered a business activity. Thus, the entire receipt from the sale was treated as business income.

Issue 2: Bifurcation of Sale Consideration into Capital and Business Receipts

The second issue was whether the sale consideration could be bifurcated into capital receipt and business receipt. The assessee had bifurcated the amount received from MTNL into Rs. 900 per sq. meter as capital receipt and Rs. 400 per sq. meter as business receipt. The Tribunal held that the entire amount was a composite business receipt as the dominant intent was to develop the land and derive profit from such developmental activities. The Tribunal emphasized that the right to develop the property was the primary right conferred to the assessee, and other rights were incidental to facilitate developmental activities. Therefore, the bifurcation proposed by the assessee was not permissible.

Issue 3: Allowability of Claimed Expenditures as Business Expenses

The assessee claimed expenditures amounting to Rs. 47,28,554 as business expenses, which were not fully allowed by the CIT (Appeals). The Tribunal found that the Assessing Officer had not considered these expenditures in the right perspective. The Tribunal directed the Assessing Officer to re-examine the allowability of these expenditures to determine if they were incurred in the interest of the business and could be allowed as business expenses according to the law. The issue was thus set aside for fresh examination by the Assessing Officer.

Conclusion

The Tribunal upheld the CIT (Appeals) order treating the entire receipt from the sale of land as business income and not allowing bifurcation into capital and business receipts. However, it directed a fresh examination of the claimed expenditures to determine their allowability as business expenses. The appeal of the assessee was partly allowed.