Recent Judgement:Real Estate Developer - Sale of land held as stock-in-trade to be treated as business income and not capital gains

Income tax - real estate developer - sale of land held as stock-in-trade to be treated as business income and not capital gains: ITAT

MUMBAI, MAY 18, 2010: IN case of land transactions there appears to be a trend to escape from paying tax by forming a partnership firm. In this case also, the issue is whether the partnership firm constituted by the assessee with four other persons was constituted only for the purpose of tax evasion, and whether once it is held that firm was bogus then the profits accrued on transfer of land held as stock in trade is to be assessed as "business profits".

Facts fo the case

Assessee, a builder, acquires rights over one plot located at Ghat-Koper. He enters into partnershipv(PF) with four other persons on 17.04.2003 and retires from the firm after 7 days after receiving his share of profit and development expenses. AO takes the view that the creation of PF was a camouflage and the real purpose was tax evasion. Before the CIT(A) the assessee argues that whatever has been received by the assessee on retirement is taxable as capital gain but the taxable event will arise only when he sold the properties received by him on retirement.

Revenue filed appeal before the ITAT which has held that,

++ The device of constituting partnership firm with the assessee as one of its partners and then his retirement after 11 days on the basis of retirement deed, the stamp papers for which were purchased simultaneously with the formation of the partnership firm, do go to show that the assessee was not genuinely inducted in and then removed from the firm as partner in the said firm. On the other hand the reality of the transaction which can be viewed by the naked eyes is that the assessee agreed to sell development right in Ghatkopar plot to the four persons.

++ In order to extinguish or defer the genuine tax liability on account of such transaction of sale, a circuitous route was adopted by which the assessee was to first join the partnership firm and then retire from it within few days leaving the development right in Ghatkopar plot with the firm for the agreed consideration. We, therefore, hold that the assessee was neither genuinely inducted in nor actually retired as partner from the firm;

++ It is trite that any profit or gain on the transfer of stock in trade is regarded as business income and there is no question of assessing any part of it under the head `Capital gains'.

++ Under such circumstances and further considering the fact that the assessee himself showed income of Rs 30,61,451 as assessable under the head `Profits and gains of business or profession', the entire income from this transaction is to be regarded as "business income" and no part of it can be taxed under the head `Capital gains'.

Revenue's appeal partly allowed.

(In the case of DLF Universal Limited (2010-TIOL-16-ITAT-DEL-SB) it was held that partnership firm was bogus and the profits on transfer of land bank were held to be capital gains and not business profits - Editor's Note)