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Urgent-why not to treat ltcg as pgbp?

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)

15 December 2012

Dear all,

Please give your expert advices on my this query.

Our one client which is a REAL ESTATE COMPANY had bought some land 10 years ago. They shown it as a INVESTMENT (instead of STOCK in TRADE). Now, they have sold the same investment in Previous Year (2011-12) and filled ITR on the basis of LONG TERM CAPITAL GAIN.

Now, the case is in scrutiny and INCOME TAX DEPARTMENT is asking, "WHY NOT TO TREAT THE ABOVE LTCG AS PROFIT AND GAIN FROM BUSINESS"?

Kindly, reply with facts and supportings, how to respond IT DEPARTMENT for their query?

Thanks with expectations.

Regards,

Abhimanyu Bind

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8 Replies

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 15 December 2012

In case of real estate developers the term real estate refers to land & buildings.

Hence the contention of the dept is correct to treat the profit as business income & not as LTCG. Refer the GN institute issued by the institute for better understanding.

https://220.227.161.86/25896asb15443.pdf

1 Like

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)
Replied 15 December 2012

Sir,

Company was in existance when it brought the land. They continusly shown the brought land as investment in their accounts since they have brought the land and never used it for business purpose.

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 15 December 2012

you will have to prove this to the satisfaction of the AO. The revenue shud get satisfied that the land is being held as an investment. and the assesse i not avoiding to pay tax @ 30% rather than 20%

1 Like

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)
Replied 15 December 2012

Thank you very much for your valuable comments, Sir.

Ravi Kumar Mahaur (CA-FINAL) (202 Points)
Replied 15 December 2012

Originally posted by : Giridhar S Karandikar

Was the real estate company in existence 10years when the land was brought. If the REC came into existence after purchaseing the land & the company is not using that land for business purpose, then it would be classified as an investment. However if the REC is using the land for its business then it shud be considered as stock & the sale on the land would be considered as an business income & not as LTCG.

In case of real estate developers the term real estate refers to land & buildings.

Hence the contention of the dept is correct to treat the profit as business income & not as LTCG. Refer the GN institute issued by the institute for better understanding.

https://220.227.161.86/25896asb15443.pdf

the link you have provided above is the perspective of ICAI. But this case is related to Income tax. I have not see such 10yrs kinda condition in income tax. According to me the land that hold by REC is stock-in-trade and on the sale of same it will be taxable as business income. That means the AO is correct.

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)
Replied 15 December 2012

Yes Ravi,

Even I have the same opnion but still trying to find ways as its our job to save our clients

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 17 December 2012

Dear Ravi, ICA does not issue any GN, AS or any other refernece material whihc is contrary to the provisions of any law such as Co's Act, I-T Act.

The GN for Real estate issued by the ICAI, is in accordance with the normal provisions requried to be followed by the asssessee consdiering the provison of the I-T Act.

The I-T Act as well as the GN states that the land & buildings in case of RED's shud be treated as stock. I am also of the same view. However if the assessee is carrying on teh business of real estate and purchases land, but he's not using the same for the purpsoe of busniess as stated by Abhimanyu, then the auditor has to prove this fact to the satisfaction of the AO to save the assessee from the tax liability.

1 Like

Ravi Kumar Mahaur (CA-FINAL) (202 Points)
Replied 17 December 2012

Mr. Giridhar

The GN for Real estate issued by the ICAI, is in accordance with the normal provisions required to be followed by the asssessee considering the provisions of the I-T Act.

The GN issued by the ICAI is w.r.t accounting in Real Estate business transactions.

If you have already worked with such kind a case/problem than please give a reference of such a case.