Land Received In Lieu Of Business Loan Foregone, Is A Business Asset Not A Capital Asset: ITAT

The bench of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant Member) held that since the assignment of debt in favour of another entity in exchange of land, was an integral part of the assessee's business activity, any gain or loss arising on the subsequent sale of such a land would constitute business profits only.

The ITAT reiterated that it is the origin of the asset that would determine the nature of the asset and that the entries in the books of accounts are not determinative of the nature of income.

The assessee- M/s. TVS Finance & Services Ltd., is engaged in the business of leasing equipment, hire purchase financing, and bill discounting. The assessee assigned some of its outstanding receivables, valuing over Rs. 51 Crores, to M/s Piramal Financial Services Ltd. vide an assignment deed. M/s Piramal Financial Services settled the consideration partly by cheques and partly by transfer of certain parcels of land. The assessee thereafter sold the parcels of the land so acquired, claiming the gains on sale were assessable under the head 'Capital Gains'.

The Assessing Officer (AO) opined that since the land was a part of the assessee's business assets, the gain on sale of land was assessable as business income. Consequently, the indexation benefit was denied to the assessee and the gains were assessed as 'Business Income'.

Against the order of the AO, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee submitted before the CIT(A) that the land was acquired by the assessee in satisfaction of the debt and that the said land was never held by it as inventory. Thus, it averred that the land was a capital asset and therefore, the gain on its sale was assessable under the head 'Capital Gains'.

The CIT(A) observed that if the assets were received by the assessee in lieu of a business loan foregone, the assets so received would assume the character of business assets. Therefore, the CIT(A) held that since the vacant land came into the possession of the assessee in lieu of the loan foregone in the normal course of its finance business, the vacant land would assume the nature of a business asset and thus, it would yield business income as and when it is subsequently sold. The CIT(A), therefore, upheld the findings of the AO.

Against this, the assessee filed an appeal before the ITAT.

The ITAT observed that the assessee, as a part of its business, had assigned/sold its outstanding receivables to M/s Piramal Financial Services, in consideration of which it received certain vacant parcels of land. The Tribunal reckoned that for the assessee, the receivables constituted a business debt and thus, any loss or gain arising in settlement would be a business income or loss for the assessee.

The ITAT further noted that the assignment of debt in favour of another entity, partly in exchange of land, was an integral part of its business activity and therefore, any gain or loss arising on such an asset would constitute business profits only.

"The assignment of debt in favor of another entity partly in exchange of land was integral part of the business activities of the assessee and any gain / loss arising on such an asset should be viewed as business profits only. The situation is no different from a situation wherein the assessee in exchange of loan debts, repossesses the assets of the borrower and sell the same subsequently in discharge of loan assets. Any resultant gains / losses arising therefrom would be part of normal business activities of the assessee", the ITAT ruled.

The assessee M/s. TVS Finance submitted before the ITAT that in its books of accounts, the land was shown as a part of the fixed asset, therefore, the land must be considered as a capital asset.

Dismissing the contention of the assessee, the Tribunal referred to the decision of the Supreme Court in Commissioner of Income Tax versus Cocanada Radhaswami Bank Ltd. (1965).

The Apex Court in Cocanada Radhaswami Bank Ltd. (1965) had ruled that it is the origin of the asset that would determine the nature of the asset. Thus, if the asset came into being as a capital asset, it would continue to be a capital asset irrespective of how the proceeds from its sale were utilized. Similarly, if the origin of the asset was from a business source, it would continue to be a business asset irrespective of the fact that the asset was shown as a part of fixed asset.

While holding that entries in the books of accounts are not determinative of the nature of income, the Tribunal concluded that since the land was received by the assessee in lieu of a business loan foregone, the land would assume the character of a business asset, irrespective of its treatment in the books of accounts. Therefore, the gain on sale of such a land was assessable as business income.

The ITAT thus dismissed the appeal and upheld the order of the CIT(A).

Case Title: M/s. TVS Finance & Services Ltd. versus ACIT

Dated: 07.12.2022 (ITAT Chennai)

Representative for the Appellant: Mr. R. Vijayaraghavan, Advocate

Representative for the Respondent: Mr. D. Hema Bhupal, JCIT

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