The Supreme Court considered whether the transfer of development rights in land by the assessee was to be treated as a transfer of stock-in-trade resulting in business income or as a transfer of a capital asset giving rise to capital gains, and whether the provisions of Section 50C of the Income Tax Act, 1961 were applicable to such a transaction.

The assessee was engaged in the business of building and development of properties and had shown land and related expenditure as work-in-progress or inventory over several years. During the relevant period, the assessee entered into a memorandum of understanding for transfer of development rights in a portion of land. Subsequently, a development agreement was executed, wherein the consideration was erroneously mentioned at a higher figure, which was later corrected by a registered deed of rectification. The assessee had offered the income arising from the transaction to tax in an earlier assessment year as business income.

The Assessing Officer treated the transaction as a transfer of a capital asset and applied Section 50C by adopting the higher value reflected in the registered development agreement, making an addition accordingly. The Commissioner of Income Tax (Appeals) upheld the addition. However, the Income Tax Appellate Tribunal reversed the findings and held that the land constituted stock-in-trade and that the income had already been offered to tax in the earlier year. The High Court dismissed the Revenue’s appeal, holding that no substantial question of law arose.

The Supreme Court observed that the Assessing Officer had relied on factors such as absence of frequent transactions and negligible expenses to conclude that the transfer was of a capital asset. On the other hand, the Tribunal had mainly relied on the accounting treatment of the land as inventory in the balance sheets to hold the transaction as stock-in-trade, without examining other relevant factors.

The Court reiterated that the determination of whether a transaction constitutes a business transaction or a transfer of a capital asset cannot be based on a single factor. It requires consideration of multiple aspects, including the frequency and volume of transactions, the nature of the assessee’s business, treatment in the books of account, surrounding circumstances, and the intention of the assessee. Merely showing land as inventory in the books of account is not conclusive.

The Court further observed that the Tribunal failed to examine material aspects, including the actual receipt and refund of consideration and the effect of the rectification deed, and did not properly address the findings recorded by the Assessing Officer. The High Court also erred in treating the Tribunal’s findings as pure findings of fact without examining whether relevant factors had been duly considered.

Accordingly, the Supreme Court set aside the orders of the High Court and the Income Tax Appellate Tribunal and remanded the matter to the Tribunal for fresh consideration in accordance with law. The Tribunal was directed to re-examine all relevant factors and determine whether the transaction amounted to a sale of stock-in-trade or a transfer of a capital asset, without expressing any opinion on the merits of the case.

Source Link - https://api.sci.gov.in/supremecourt/2018/14869/14869_2018_4_1502_44215_Judgement_04-May-2023.pdf

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