ITAT to consider sale of capital assets or sale of stock in trade in land transfer tax case: Supreme Court

In a recent judgement, the Supreme Court has quashed and set aside the order passed by the High Court and the Income Tax Appellate Tribunal (ITAT) in a case related to the transfer of development rights. The apex court remanded the matter back to the ITAT to consider the appeal afresh in light of the observations made by the court and to take into account the relevant factors while considering the transaction as stock in trade or sale of capital assets or business transaction.

The bench comprising Justice MR Shah and Justice BV Nagarathna, observed that the ITAT has not considered the relevant aspects while considering the transaction in question as stock in trade and has not taken into account the relevant factors required to be considered by the ITAT. Therefore, the matter is required to be remanded to the ITAT to consider the appeal afresh in light of the observations made by the court and to take into account the relevant factors while considering the transaction.

The case relates to the treatment of the transaction as capital assets by the assessing officer. However, the ITAT reversed the said findings and held that the transaction was stock in trade. The assessing officer had recorded the findings based on examining the balance sheets for AY 2006-07 to 2009-10 that there was not even a single sale during all these years and that the transaction in question was the only transaction, i.e., transfer of development rights in respect of land. 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 AY 1996-97 to 2007-08 observed that inventory was shown in the balance sheet in multiple years, without discussing the claim of the assessee and held that the transaction in question was the sale of stock in trade. The ITAT has not dealt with the findings given by the assessing officer nor verified/examined the total sales made by the assessee during the relevant time and during the previous years.

The bench observed that merely recording inventory in the books of accounts would not make the transaction stock in trade. As per the settled position of law, multiple factors like frequency of trade and volume of trade, nature of transaction over the years, etc., are required to be examined to determine whether a particular transaction is the sale of capital assets or business expense.

The bench further noted that even if the claim made by the assessee is accepted, including the assertion that Rs. 15,94,06,500/- was shown in the tax return in the earlier AY i.e., 2008-09, the differential amount of Rs. 10,69,79,146/- on account of reduction in sale consideration of development rights was to be assessed in the current year as either capital gain or business income.

Date of Decision: May 04, 2023

Commissioner of Income Tax Mumbai vs Glowshine Builders & Developers Pvt. Ltd.