2013 (6) TMI 724 - AT - Income Tax

Summary

Issues Involved:
The judgment involves determining whether the gain from the sale of two flats should be treated as capital gains or business income, and whether the benefit of indexation to the cost of land is applicable. Additionally, it addresses the contention of the assessee to bifurcate the income earned from the sale of flats into long term and short term capital gains.

Revenue's Appeal:
The revenue contended that the gain from the sale of two flats should be treated as business income, not capital gains, as the developer did not pay any amount to the assessee for the land or FSI. The revenue also questioned the justification of allowing indexation to the cost of land for arriving at short term capital gains.

Assessee's Cross Objections:
The assessee argued that the Assessing Officer's order was illegal and not in compliance with natural justice. The assessee further claimed that the capital gains from the sale of flats should be taxed separately as long term capital gains for the land and short term capital gains for the flats.

Facts of the Case:
The assessee inherited property and entered into a development agreement with a developer to construct a building on the land. The developer bore the construction cost and received the right to sell 50% of the constructed area. The assessee sold two flats to refund the security deposit, treating the income as long term capital gains. However, the Assessing Officer classified it as business income, as no money was paid for the land or FSI.

Decision and Reasoning:
The CIT(A) determined the income from the sale of flats as capital gains, considering the improvements made by the assessee. The CIT(A) allowed indexation to the cost of acquisition of land and treated the income as short term capital gains due to the flats not being retained for three years. The Tribunal found that the income was capital gains, not business income, and should be segregated into long term and short term capital gains based on the land and building components.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's cross objections for statistical purposes. The case was remanded to the Assessing Officer for fresh assessment, considering the observations made regarding the bifurcation of income into long term and short term capital gains and the treatment of land and building components separately.