2014 (2) TMI 744 - AT - Income Tax

Nature of Profit - Whether the profit on sale of this property is business profit or capital gain Held that - The basis adopted by the CIT(A) for holding that the profit on sale of land in question is assessable as business profit is not proper - Since the land in question was acquired by originally seven persons and later by five persons and these persons are not doing business together, it shows that atleast this property was not acquired by these persons as a business asset and the same was acquired as a capital asset for earning capital gain thus, the order of the CIT(A) reversed and the matter remitted back to the AO. Treatment of profits - Whether the profit on sale of land is to be distributed among the five co-owners in whose name the land was registered in equal proportion Held that - From the combined reading of the purchase-deed and rectification-deed it has to be held that the property was jointly held by five persons including these two persons - any agreement of these persons with two other persons for share of profit on sale of the land in question can be only out of post tax profit and not pre-tax profit - when the property is jointly owned by these five persons and sold by these five persons, profit on such sale has to be assessed equally in the hands of these five persons and after paying tax thereon as per law they can deal with the money remaining with them after such payment of tax in the manner they like but for the purpose of taxation of the profit on sale of the property - no deduction can be allowed on account of any payment to outsider because for the purpose of computing capital gain, only allowable deduction is cost of the property and cost of improvement and cost of transfer and no other deduction is allowable - Even if such profit is assessable is business income, then also from the sale proceeds, one can get deduction on account of cost of purchase and expenses incurred for that business and no deduction is allowable in respect of any payment which is given to outsiders as share of profit the order of the CIT(A) set aside and the matter remitted back to the AO Decided in favour of Revenue.

Summary

Issues Involved:
1. Classification of income from the sale of land as business income or short-term capital gains.
2. Applicability of Section 50C of the Income Tax Act.
3. Distribution of sale proceeds among co-owners according to the Memorandum of Understanding (MOU).

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Land:
The primary issue was whether the profit from the sale of land should be classified as business income or short-term capital gains. The Revenue argued that the land was a capital asset, while the assessees contended it was a business asset. The CIT(A) had decided in favor of the assessees, stating that the quick application for conversion to non-agricultural use and the sale within 2.5 years indicated the land was not purchased for investment. However, the Tribunal found that the basis adopted by the CIT(A) was not valid. The Tribunal noted that the land was originally acquired by seven persons, later reduced to five, who were not doing business together, indicating that the property was acquired as a capital asset for earning capital gain. The Tribunal reversed the CIT(A)'s order and restored the AO's decision, classifying the profit as short-term capital gains.

2. Applicability of Section 50C:
Section 50C of the Income Tax Act pertains to the adoption of stamp duty valuation as the sale consideration for the purpose of calculating capital gains. The AO had invoked Section 50C, adopting the stamp duty valuation of Rs. 8,56,89,700/- as the sale value, which was higher than the declared sale price. The assessees argued that Section 50C does not apply to business incomes. However, since the Tribunal classified the income as short-term capital gains, the provisions of Section 50C were applicable. The Tribunal upheld the AO's decision to adopt the stamp duty valuation for calculating the capital gains.

3. Distribution of Sale Proceeds Among Co-owners:
The third issue was whether the profit on sale of land should be distributed among the five co-owners equally or according to the percentages specified in the MOU (14% and 12% for the two assessees). The Tribunal examined the purchase deed, rectification deed, and MOU. It found that the property was jointly held by five persons with equal shares after the rectification deed. The Tribunal held that any agreement to share the sale proceeds with the two excluded persons could only be out of post-tax profit. For tax purposes, the profit on sale had to be assessed equally among the five co-owners. The Tribunal reversed the CIT(A)'s order and restored the AO's decision, which assessed the profit equally among the five co-owners.

Conclusion:
The Tribunal allowed both the Revenue's appeals and dismissed the Cross Objection filed by the assessee. The profit from the sale of land was classified as short-term capital gains, Section 50C was applicable, and the profit was to be distributed equally among the five co-owners.