S. 50C Not Apply To Asset held as Stock-In-Trade

The Commissioner of Income-tax (Appeals) and the Tribunal on analysis of the facts of the case have reached to the conclusion that section 50C has no application as it was a case of transfer of plots which was stock in trade. An income earned from such transaction is liable to be taxed as income from business activity.

Allahabad High Court

INCOME TAX APPEAL DEFECTIVE No. – 1 of 2012

 Commissioner Of Income Tax-II

V/s.

M/S Kan Construction And Colonizers (P) Ltd.

Order

The above appeal has been preferred under section 260A of the Income Tax Act and is directed against the judgement and order dated 19th of August, 2011 passed by the Income Tax Appellate Tribunal, Lucknow Bench B, Lucknow in ITA No.288/LKW/2011.

The dispute relates to the assessment year 2006-2007. In the memo of appeal, the following substantial questions of law have been proposed:-

1. “Whether on the facts and the circumstances of the case, the Tribunal was correct in not appreciating the fact that the assessee has sold capital asset (land) and not stock in trade.

2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in not appreciating the fact that the provisions of section 50C are applicable against the sale of land (Capital Asset).

3. Whether on the facts and the circumstances of the case the tribunal was correct in not applying the provision of sec. 50C of the I.T. Act, 1961 where the sale-purchase, transfer of ownership & property even of the stock is affected through a registered sale deed bringing the transition under the purview of sec. 50C unlike other transactions of sale-purchase of stocks which are generally not a subject matter of registration before the competent authority under the Registration Act.”

The background facts may be noticed in brief. The respondent i.e. the assessee, a private limited company is engaged in the business of real estate and construction. It has filed its return of the income declaring the total income at Rs.38,79,703/-. In the assessment proceedings under section 143 (2) of the Act, the Assessee had shown the following sales at different sites:-

1. Sale of offices at KAN Chambers Rs.3,25,07,000/-

2. Sale of flats at woodland apartments Rs.1 ,04,25,000/-

3. Sale of shops at Mega Mall Rs.1 ,57,50,000/-

4. Sale of offices at Mega Mall Rs. 80,00,000/-

5. Sale of plots Rs. 79,84,200/-

Total Rs.7,46,66,200/-

 The dispute in the present appeal is confined with regard to the sale of plots for a total sum of Rs.79,84,200/-. The Assessing Officer by his order dated 12th of December, 2008 treated the above sale transaction as sale of capital assets and accordingly determined the deemed capital gain from sale of plots as per the provisions of section 50C of the Act. The matter was carried by the assessee in appeal before the Commissioner of Income Tax (Appeals)-II Kanpur. It was contended that deemed capital gains under the provisions of section 50C was wrongly added as the sale of plots was not capital assets but was by way of business transaction. In other words, the income from the said transaction is liable to be treated as income from profits and gains of business. To put it differently, the contention in short was that section 50C could not invoked by the Assessing Officer. The Appellate Authority found that the Assessee Company had never purchased any land as a capital asset and has always purchased land as stock in trade. The said fact is further fortified from the balance sheet of the assessee. Consequently, he accepted the aforesaid contention of the assessee in this regard and held that the provisions of section 50C could not be invoked on the facts of the present case. The Revenue carried the matter in further appeal before the Income Tax Appellate Tribunal, Lucknow Bench, Lucknow in ITA No.288/LKW/2011, unsuccessfully. Endorsing the findings of the First Appellate Court, the Tribunal held that Section 50C of the Act would have no application where transfer of immovable property is on account of sale of stock in trade income. Such income is computed under the head income from business. It has been found that there is no contrary material on record to controvert the contention of the assessee that the plots of land sold were held by the assessee as stock in trade. Questioning the legality and validity of the aforestated two orders the Revenue has filed the present appeal on the questions reproduced in the earlier part of the judgment.

Heard Sri Shambhu Chopra, learned counsel for the department, in support of the appeal and Sri S.D. Singh for the assessee company. Reiterating the stand of the Assessing Officer as mentioned in the assessment order the learned counsel for the Revenue disputes the correctness of the order of Tribunal holding that the Section 50C of the Act is not applicable. He submits that the assessee company is although engaged in the business of real estate and construction but from the returned figures of income it is but obvious that it is deriving income mainly from the sale of constructions in the shape of shops, offices, apartments and chambers. Attention of the Court was invited towards the disclosed sales of these items as found mentioned in the assessment order. Out of total sale of Rs.7,46,66,200/-, the sale of plots is only a small fraction of it i.e. at Rs.79,84,200/-. Reliance was placed by him on certain decisions relating to sale of land and capital gains which will be referred at the appropriate place.

In reply, Shri S.D. Singh, learned counsel for the assessee company submitted that the two authorities below have examined the matter and have rightly reached to the conclusion that the sale of plots was business activity of the assessee company; the plots were in the shape of stock in trade and they were not capital assets. This being so, the profit and gains from the sales of plots is liable to be taxed as profit and gains from business and not as capital gains. In other words, the plots of land sold by the assessee company were at no point of time capital asset. Elaborating the argument, he submitted that whether an asset is stock in trade or capital asset is principally a question of fact or at the most a mixed question of fact and law but is not a substantial question of law. With the help of certain precedents of the Apex Court, he while elaborating the argument submitted that it is not a rule of thumb to find out as to whether a particular transaction is a business transaction or is in the nature of capital sale.

Considered the respective submissions of the learned counsel for the parties and perused the record. At the very outset, it may be noted that the only question involved is whether the profit and gains which accrued to the assessee company out of the sale of land is to be treated as capital gains or is gains out of business transaction. It may be mentioned here that in the appeal the Revenue has not disputed the finding of Tribunal, that the land in question was stock-in¬trade, on the ground of being perverse or against the material on record. The Tribunal has categorically found as a fact that “there is no material to controvert this contention of the assessee that the plots of land sold were held by the assessee company as stock in trade.” This finding in our considered opinion is sufficient to dispose of the appeal.

However, it is desirable to consider the various judicial pronouncements cited by the learned counsel for the parties to bring home the point in their favour.

To begin with, it is apt to notice the Apex Court’s judgment in Venkataswami Naidu & Co (G.) Vs. Commissioner of Income-tax, (1959) 35 ITR 594, a decision relied upon by the learned counsel for the assessee. It has been laid down that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction which comes before courts in tax proceeding, it would not be expedient to make any attempt to evolve such a rule or formula. Generally, there would not be difficulty to decide whether a given transaction is an adventure in the nature of trade or not but there are cases where the line of distinction is thin. Several factors are to be taken into account to come to a definite conclusion for determining the character of transaction such as (1) the nature of commodity purchased and resold, and (2) in what quantity was it purchased and resold. If the commodity purchased is generally subject matter of trade, and if it is purchased in a very large quantity, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. After making certain observations, the judgment proceeds to consider the foreign precedents. It considered somewhat similar case Cayzer, Irvine and Co. Ltd. Vs. Commissioners of Inland Revenue, (1942) 24 Tax Cases, 491 where land purchased and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset. It has been laid down therein that the intention was to hold the land not as an investment but as a trading asset and in order to develop it and to market it. It was also held that the transaction was an adventure in the nature of trade, though the property purchased and sold was land.

In Mohammed Meerakhan (P.M.) Vs. Commissioner of Income-tax, (1969) 73 ITR 735, it has been held that it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. In this case, the Apex Court endorsed the view treating the land as stock in trade and valuing it according to the normal accountancy practice.

Next, reliance was placed on Janki Ram Bahadur Ram Vs. Commissioner of Income-tax, (1965) 57 ITR 21 wherein it has been held that the question whether the profit in transaction has arisen out of an adventure in the nature of trade is a mixed question of fact and law. At the relevant point of time, if the transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated, or repaired and sold, or is converted into a different commodity and sold. The magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. The decision was rendered at a time when the capital gains were not taxable under the Income-tax Act.

In the above background it was observed that it is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. It was further observed that the profit motive in entering a transaction is not decisive, for an accretion to capital does not become taxable income merely because an asset was acquired in the expectation that it may be sold at a profit. It was a case of single transaction of purchase of a jute pressing factory by the assessee who was dealing in scrap. Subsequently, the said pressing factory was sold and sale transaction was held by the Apex Court as capital receipt. In view of the finding that there is nothing to show that the assessee desired to controvert the property into some other use. The assessee also did not employ any workers to restart it. All these factors weigh heavily to hold that the transaction of purchase and sale was towards full and final settlement of loan amount in the nature of capital transaction.

Section 2 (14) of the Income-tax Act defines the capital asset which reads as follows:-

“S.2(14) – ‘capital asset’ means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.

Explanation. – For the purposes of this sub-clause, ‘jewellery’ includes—

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;]

[(iii) agricultural land in India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;]

[(iv) 6 -1/2 per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government;]

[(v) Special Bearer Bonds, 1991, issued by the Central Government;]

[(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government;]”

Section 50C also uses the word “capital asset.” For applicability of section 50C one of the essential requirements is that an asset should be capital asset.

From the ratio of the various judicial pronouncements referred to above, it can be culled out that whether sale of land is sale of capital asset or stock in trade is essentially a question of fact. There is no rule of thumb to address the said issue. Several principles have been evolved in the judicial decisions, but although are more in the nature of guidelines. The question has to be answered in each case having regard to the circumstances of that case. There may be factors both for and against a particular point of view. The Court has to answer the question on a consideration of all of them in a process of evolution. The inference has to be drawn on a cumulative consideration.

Coming to the facts of the present case, the assessee is a builder. Construction of buildings is its business. The assessee has sold number of buildings referred to above, with regard to which there is no dispute. The dispute is with regard to the sale of plots. Investment in purchase and sale of plots by a builder who is indulged in selling buildings is ancillary and incidental to his business activity. It is a matter of record that the assessee has treated the land as stock in trade which finds corroboration from its balance sheet. Stock in trade has been excluded from the definition of capital asset. According to the Webster’s New International Dictionary, the ‘stock-in-trade’ is “a. The goods kept for sale by a shopkeeper. b. The fittings and appliances of a workman.” In other words, the stock-in-trade includes all such chattels as are required for the purposes of being sold or let to hire on a person’s trade. According to Stroud’s judicial dictionary, 4th Edition, Volume 5 page 2623 “stock-in-trade comprises all such chattels as are required for the purposes of being sold, or let to hire on a person’s trade. In Additional Commissioner of Income-tax Vs. Puttu Coal Pvt. Ltd., (1983) 140 ITR 740 (Bombay), the assessee was money lender, who purchased a ship in satisfaction of his major portion of outstanding loan. The ship was considered as stock in trade of the assessee’s money lending business. It is apt to consider the decisions relied by the learned counsel for the department. Reliance was placed on Himatlal Govindji Vs. Commissioner of Wealth Tax, (1977), 106 ITR 658, a case under the Wealth Tax Act decided by Gujarat High Court. Issue therein was whether the land in question was agricultural land within the meaning of section 2(e)(i) of Wealth Tax Act on the valuation date. The second case relied upon is Commissioner of Income-tax Vs. Gemini Pictures Circuit Private Ltd., 220 ITR 43, wherein the Apex Court considered the question as to whether the land is agricultural or not and the criteria to determine the land as agricultural land with reference to section 45 of the Income-tax Act. The last case is Mahaveer Enterprises Vs. Union of India and others, (2000) 244 ITR 789 wherein the Rajasthan High Court considered the question of capital gains with reference to sale of land. The issue was whether the land was agricultural land or not. None of the relied upon decisions have any application to the facts of the present case as they were rendered in a different factual matrix and the legal issues involved therein were altogether different than the one engaged in the present case. The issue addressed in these cases relates to when the income from sale of land will be treated as agricultural income, exempt under the Act, not involved in the case in hands. In this appeal the Court is required to address the issue as to whether the sale transaction of land on the facts of the present case is capital receipt or revenue receipt. Therefore, the relied upon cases by the learned counsel for the department are distinguishable on facts and law as well. These decisions do not help the department any further.

The Commissioner of Income-tax (Appeals) and the Tribunal on analysis of the facts of the case have reached to the conclusion that section 50C has no application as it was a case of transfer of plots which was stock in trade. An income earned from such transaction is liable to be taxed as income from business activity. Alternatively, the finding recorded by the Tribunal which is last fact finding court, in this regard is essentially a finding of fact or at the most is a mixed question of fact, but it is not a substantial question of law to warrant the interference under section 260A of the Income Tax Act.

The view taken by the Tribunal is on terra-firma. The inference drawn by the Tribunal is based on relevant consideration.

At the end, the learned counsel for the appellant had prayed time to file a copy of balance sheet and sought adjournment. The said request was made at the fag-end of the argument. The memo of the appeal does not contain any ground. It contains ‘statements of facts’, ‘substantial question of law’ and ‘prayer’. No grievance appears to have been raised therein with regard to misreading of balance sheet either by the Tribunal or by the Commissioner of Income-tax (Appeals). There being no grievance to the observations of the Tribunal that in the balance sheet also the land has been disclosed as stock in trade, the prayer for time to file copy of the balance sheet was declined.

There is no merit in the appeal. The appeal is dismissed by holding that on the facts of the present case, the Tribunal has rightly held that the provisions of section 50C are not applicable with respect of sale of land as sale of land was not capital asset.

Order Date :- 9.4.2012

(a)     in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b)     in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;]

[(iv)     6 -1/2 per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government;]

[(v)       Special Bearer Bonds, 1991, issued by the Central Government;]

[(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government;]”

Section 50C also uses the word “capital asset.” For applicability of section 50C one of the essential requirements is that an asset should be capital asset.

From the ratio of the various judicial pronouncements referred to above, it can be culled out that whether sale of land is sale of capital asset or stock in trade is essentially a question of fact. There is no rule of thumb to address the said issue. Several principles have been evolved in the judicial decisions, but although are more in the nature of guidelines. The question has to be answered in each case having regard to the circumstances of that case. There may be factors both for and against a particular point of view. The Court has to answer the question on a consideration of all of them in a process of evolution. The inference has to be drawn on a cumulative consideration.

Coming to the facts of the present case, the assessee is a builder. Construction of buildings is its business. The assessee has sold number of buildings referred to above, with regard to which there is no dispute. The dispute is with regard to the sale of plots. Investment in purchase and sale of plots by a builder who is indulged in selling buildings is ancillary and incidental to his business activity. It is a matter of record that the assessee has treated the land as stock in trade which finds corroboration from its balance sheet. Stock in trade has been excluded from the definition of capital asset. According to the Webster’s New International Dictionary, the ‘stock-in-trade’ is “a. The goods kept for sale by a shopkeeper. b. The fittings and appliances of a workman.” In other words, the stock-in-trade includes all such chattels as are required for the purposes of

being sold or let to hire on a person’s trade. According to Stroud’s judicial dictionary, 4^th Edition, Volume 5 page 2623 “stock-in-trade comprises all such chattels as are required for the purposes of being sold, or let to hire on a person’s trade. In Additional Commissioner of Income-tax Vs. Puttu Coal Pvt. Ltd., (1983) 140 ITR 740 (Bombay), the assessee was money lender, who purchased

a ship in satisfaction of his major portion of                outstanding loan. The ship was
considered as stock in trade of the assessee’s money lending business.

It is apt to consider the decisions relied by the learned counsel for the

department. Reliance was placed on Himatlal Govindji Vs. Commissioner of Wealth Tax, (1977), 106 ITR 658, a case under the Wealth Tax Act decided by Gujarat High Court. Issue therein was whether the land in question was agricultural land within the meaning of section 2(e)(i) of Wealth Tax Act on the valuation date. The second case relied upon is Commissioner of Income-tax Vs. Gemini Pictures Circuit Private Ltd., 220 ITR 43, wherein the Apex Court considered the question as to whether the land is agricultural or not and the criteria to determine the land as agricultural land with reference to section 45 of the Income-tax Act. The last case is Mahaveer Enterprises Vs. Union of India and others, (2000) 244 ITR 789 wherein the Rajasthan High Court considered the question of capital gains with reference to sale of land. The issue was whether the land was agricultural land or not. None of the relied upon decisions have any application to the facts of the present case as they were rendered in a different factual matrix and the legal issues involved therein were altogether different than the one engaged in the present case. The issue addressed in these cases relates to when the income from sale of land will be treated as agricultural income, exempt under the Act, not involved in the case in hands. In this appeal the Court is required to address the issue as to whether the sale transaction of land on the facts of the present case is capital receipt or revenue receipt. Therefore, the relied upon cases by the learned counsel for the department are distinguishable on facts and law as well. These decisions do not help the department any further.

The Commissioner of Income-tax (Appeals) and the Tribunal on analysis of the facts of the case have reached to the conclusion that section 50C has no application as it was a case of transfer of plots which was stock in trade. An income earned from such transaction is liable to be taxed as income from business activity. Alternatively, the finding recorded by the Tribunal which is last fact finding court, in this regard is essentially a finding of fact or at the most is a mixed question of fact, but it is not a substantial question of law to warrant the interference under section 260A of the Income Tax Act.

The view taken by the Tribunal is on terra-firma. The inference drawn by the Tribunal is based on relevant consideration.

At the end, the learned counsel for the appellant had prayed time to file a copy of balance sheet and sought adjournment. The said request was made at the fag-end of the argument. The memo of the appeal does not contain any ground. It contains ‘statements of facts’, ‘substantial question of law’ and ‘prayer’. No grievance appears to have been raised therein with regard to misreading of balance sheet either by the Tribunal or by the Commissioner of Income-tax (Appeals). There being no grievance to the observations of the Tribunal that in the balance sheet also the land has been disclosed as stock in trade, the prayer for time to file copy of the balance sheet was declined.

There is no merit in the appeal. The appeal is dismissed by holding that on the facts of the present case, the Tribunal has rightly held that the provisions of section 50C are not applicable with respect of sale of land as sale of land was not capital asset.

(Prakash Krishna, J)            (Ashok Bhushan, J)

Order Date :- 9.4.2012 LBY

NF