2011 (8) TMI 725 - HC - Income Tax

Sale of the property taxable under Capital Gains OR Business Income - Object of Partnership expanded to include development of property and sale of property - Held That - Sale of property was not to earn profit but to wipe out the liability of developing property. In span of 10 years only four sales were made, assessee also earning income by way of rents all this shows that they are not in business of sale and purchase of immovable property. Thus taxable as Capital Gains.

Summary

Issues:
Assessment of income from the sale of property under 'capital gains' or 'income from business'.

Analysis:
The case involved three appeals by the revenue challenging the Tribunal's order upholding the assessee's claim that income from property sale should be assessed as 'capital gains' and not 'income from business'. The partnership firm, initially consisting of two individuals, expanded to include family members. The firm purchased property and constructed a commercial complex, later selling portions of it. The Assessing Officer treated the income as business income, which was confirmed by the appellate Commissioner. The Tribunal, however, noted a gap between the first and subsequent sales, attributing the latter to partners' financial problems. The Tribunal concluded that the sales were not part of trading activity but were to meet capital needs for the business. The revenue challenged this decision.

The tax effect for the relevant assessment years exceeded Rs. 4,00,000 cumulatively, allowing the revenue to file appeals despite individual year thresholds. The assessee's business primarily involved selling grocery items, but the partnership deed expanded to include property development and sale. The purchased properties were developed due to the threat of eviction, with sales proceeds used to clear debts incurred during development. The remaining property was let out, and the firm continued its business activities. The Tribunal found that the infrequent sales were not for profit but to settle liabilities. The Court agreed, emphasizing that the firm was not in the business of property sale and purchase, despite it being mentioned in the partnership deed. The sales were deemed not income from business. The Tribunal's decision was upheld, dismissing the revenue's appeals.

In conclusion, the Court upheld the Tribunal's decision that the income from property sales by the assessee was not to be treated as income from business but as capital gains. The Court found no justification to interfere with the Tribunal's order, ruling in favor of the assessee and against the revenue. The appeals were dismissed.