Supreme Court: Transfer of Development Rights of Land is Transfer of Capital Assets and Not Transfer of Stock in Trade

Supreme Court: Transfer of Development Rights of Land is Transfer of Capital Assets and Not Transfer of Stock in Trade

The Supreme Court while quashing the judgment and order passed by the Bombay High Court and the Income Tax Appellate Tribunal (ITAT) has observed in the present case that the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade.

The two judge’s bench of Justices M.R. Shah and B.V. Nagarathna, observed that in order to adjudicate a particular transaction which is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade as well as nature of transaction over the years are required to be examined.

The brief background of the case was that the Respondent (taxpayer)- Glowshine Builders and Developers Pvt. Ltd. entered into an agreement with one M/s Kirit City Homes Pvt. Ltd. for the sale of development rights in a property at Vasai. During the assessment, it was noticed by the Assessing Officer (AO) that sale receipts were not disclosed while filing the return.

In response, the Respondent stated that the transaction was duly offered to tax in Assessment Year 2008-09, and claimed that it had entered into a rectification deed with the said party, whereby the value of the development rights was reduced. Regarding the applicability of the provision of Section 50C of the Income Tax Act, 1961, the Respondent stated that it had sold its stock in trade and not the assets. The AO, however, made the addition by treating the same as short-term capital gains in the hands of the Respondent.

The Income Tax Appellate Tribunal (ITAT), held that when the Respondent had shown the cost of land along with related expenditure as work in progress/inventory since 1999-2000, the AO had accepted the nature of business of Respondent. Therefore, ITAT concluded that what was sold by Respondent was part of its inventory and not a capital asset. The High Court also dismissed the appeal filed by the Revenue against the decision of ITAT, by holding that none of the questions proposed by the Revenue are substantial questions of law.

After considering the submissions, the Apex Court found that in the present case, the AO treated the transaction as capital assets, whereas, the ITAT reversed the said findings and held that the transaction was stock in trade.

The bench found that the AO had specifically recorded the findings on examining the balance sheets for the Assessment year 2006-07 to 2009-10 that there was not even a single sale during all these years and that there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade.

However, the ITAT after examining the opening and closing balance for the AY 1996-97 to 2007-08 observed that in multiple years, inventory was shown in the balance sheet, and without even discussing the claim of the Respondent agreed that the transaction in question is the sale of ‘stock in trade’, noted the bench.

In this context, the bench observed that “the ITAT neither dealt with the findings given by the AO nor verified/examined the total sales made by the assessee during the relevant time and during the previous years. Merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade.”

The Court emphasized that as per the settled position of law in order to examine whether a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade, nature of transaction over the years etc., are required to be examined.

From the order passed by the ITAT, the Court was of the view that the ITAT had without examining any of the relevant factors confirmed that the transaction was transfer of stock in trade.

Therefore, the bench remarked that the ITAT had failed to consider that once an amount is received and recorded in the books of accounts, it should be treated as income in the hands of the recipient, unless it is shown to be refunded or returned.

Accordingly, the Court quashed the judgment passed by the High Court and remitted the matter back to the ITAT to consider the appeal afresh in accordance with law and on its own merits, while taking into consideration whether the transaction in question is the sale of capital assets or sale of stock in trade and other aspects.