INCOME TAX ACT, 1961

Section 14

Head of income - Income earned from sale of development rights in respect of a partially constructed project - 'Capital gain' or 'business income' -

Assessee was engaged in business of undertaking contract work relating to development of real estate projects. He purchased development rights of a project and the same were sold by him during year under consideration. On sale of such development rights, he received certain amount, which was treated by him as income from business and credited to Profit & Loss account. However, AO observed, at the time of purchase of development rights of the subject project, the assessee showed it as an investment in Balance Sheet and it was not routed through the Profit & Loss account as stock-in-trade. Thus, he concluded that the development rights were purchased towards investment and not for business purpose and therefore, the sale of such development rights was in the nature of capital receipt and the same would be assessed under the head capital gain'. Further, CIT(A) also confirmed the order of the AO. Held: Merely because at time of purchase of development rights, assessee had not routed it through Profit & Loss account, it could not be the sole determining factor in deciding whether it should be treated as investment or stock-in-trade. It is well settled that accounting treatment given in the books of account is not sacrosanct. In fact, CIT (A) himself stated that in respect of some other housing projects developed by the assessee, the receipts and expenses were routed through the Profit & Loss account and the income was offered subsequently as business income. Further, while concluding that the income from sale of development rights was capital gain, since, neither AO nor the CIT(A) properly appreciated the submissions of the assessee and merely harped upon the accounting treatment given by the assessee at the time of purchase of the development rights, therefore, the issue was restored to the AO for de novo adjudication.