2011 (8) TMI 325 - HC - Income Tax

Sale of the property by a dealer in real estate - Long Term Capital Gains or business income - the property held by the assessee, HUF was by way of an investment only and not as a stock in trade - It is not denied by the department that prior to the constitution of a partnership, the HUF was holding the property as an investment - In the circumstances,do not find any justification that by a reason of the assessee getting back properties, on a dissolution, the property usually held as as investment would undergo change in the character of the holding, as business income - Consequently, we have no hesitation in dismissing the tax case appeal - The tax case appeal stands dismissed. No costs.

Summary

Issues:
1. Whether the sale of the property by a dealer in real estate should be treated as capital gains?
2. Whether the property should be treated as a capital asset based on the capitalization of interest on borrowals?

Analysis:
1. The appellant, as a Kartha of the HUF, filed a return of income under "Long Term Capital Gains," which the Income Tax Department sought to consider as business income under Section 143 of the Income Tax Act, 1961.
2. The appellant appealed to the Commissioner of Income Tax Appeals and subsequently to the Tribunal, which noted that the ownership of the asset with the HUF was not disputed by the Revenue. The Tribunal referred to relevant precedents and allowed the appeal, leading to the Revenue's appeal to the High Court.
3. The partnership entered into by the appellant for property development was dissolved, and the properties were returned to the HUF. The HUF continued the business, and during the assessment year 1995-1996, declared the income under the head of capital gains.
4. The Assessing Officer concluded that the appellant was conducting real estate business based on the activities of the Kartha and his wife. However, the Commissioner of Income Tax (Appeals) and the Tribunal found that the property was held as an investment and not as stock in trade.
5. The Tribunal highlighted that the interest on borrowal for acquiring the property was capitalized in previous years, supporting the claim to treat the receipts as capital gains. The High Court upheld the Tribunal's findings, emphasizing that the property was held for investment purposes and not as a trading asset.

In conclusion, the High Court dismissed the tax case appeal, affirming that the property held by the appellant, HUF, was an investment and not a business asset. The court found no grounds to disturb the factual findings that the property was not treated as stock in trade, and the character of holding remained as an investment even after the dissolution of the partnership.