By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punja bi, Bhadresh Doshi Chartered Accountants
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Section 28(i), read with section 45-Where assessee converts ancestral land into smaller plots and after providing road, parking space etc., sells the same over a period of years, then the assessee’s claim that he converted the said land (capital asset) into stock-in-trade is to be accepted and consequently the income arising from the sale of such land is to be taxed as business income.
FACTS
The assessee had inherited ancestral land from his parents in and around year 1992 which he held as investment till 1999 and in the year 1999 the same was converted by him into stock-in-trade with the intention to develop and sub-divide the said land into smaller plots in order to sell them to the various buyers.
The assessee’s case was that the activity of plotting and selling the plots of land was real, substantial, systematic and organised activity and the income arising out of such activity was business income.
The AO did not accept the claim of the assessee of conversion of land into stock-in-trade and treating the same as capital asset of the assessee, he held that the profit arising from sale of land during the year under consideration was chargeable to tax in the hands of the assessee as capital gain.
Accordingly, the stamp duty value of the land was taken by the AO as the sale consideration as per section 50C and after reducing the indexed cost of acquisition of the land, long-term capital gain was brought to tax in the hands of the assessee.
The CIT (A), however, accepted assessee’s claim that the income arising from the sale activity was chargeable to tax as business income.
On revenue’s appeal
HELD
It was noted from records that the two bigger plots of land inherited by the assessee in the year 1992 were claimed to be converted by him into stock-in-trade in the year 1999 with the intention to sub-divide the same into small plots of land of different sizes and sell the same to various buyers.
The claim of the AO that the assessee had not filed returns in the assessment year in which such conversion took place and consequently had not informed the Department regarding conversion was not to be accepted as income of those earlier years were not taxable, and therefore, returns were not filed.
The claim of the assessee was also duly supported by expenditure incurred over a period on levelling of the land, plotting etc. and even the plan showing the layout of different sizes of small plots including the provision made for road, parking space etc. which was filed by the assessee before the authorities below.
Also all the plots of land were sold by the assessee to different parties in assessment years 2003-04, 2005-06 and 2007-08 respectively..
Going by this intention, CIT(A) had rightly held that the land held as capital asset was converted by the assessee into stock-in-trade in the year 1999 of the business of plotting and selling the land and the profit arising from sale of land therefore was chargeable to tax as his business income.
Accordingly, the impugned order of the CIT (A) deleting the addition made by the AO on account of long-term capital gains is upheld and the appeal filed by the revenue is dismissed.
