2015 (1) TMI 50 - AT - Income Tax

Assessability of profit on sale of development rights in land - Business income or capital gain Applicability of section 50C - Whether while assessing the income under the head income from short term capital gain , the provisions of section 50C of the Act are applicable - Held that - The assessee was a civil contractor and was also earning income as commission agent - assessee had entered into an agreement for the development of the property - the assessee had some rights in the property and the extinguishment of the said rights give rise to the transfer of the asset in the hands of the assessee and such transfer is assessable as income from capital gain in the hands of the assessee - However, the provisions of section 50C of the Act are not applicable as the same are to be applied only where there is transfer of land or building or both - there were only development rights in the said land available to the assessee and such transfer of development rights does not establish the case of the Revenue that it amounts of transfer of land or building or both - The provisions of section 50C of the Act are attracted in specific cases and are not applicable - the income arising in the hands of the assessee on sale of development rights by adopting the sale price at ₹ 1,05,00,000/- and adopting cost price of ₹ 44,00,000/- is to be computed in the hands of the assessee to the proportion of his shareholding the AO is directed to compute and include the same in the hands of the assessee under the head income from short term capital gain . CIT(A) failed to include the income from business in the hands of the assessee - the expenses claimed by the assessee i.e. office establishment expenses, provision for compensation to litigation are not to be allowed as expenses - the provision for compensation to litigants have not been allowed by the CIT(A) - assessee rightly admitted that there is an error in the order of CIT(A) while computing the income in the hands of the assessee the AO is directed to re-compute the income Decided partly in favour of revenue.

Summary

Issues:
Assessability of profit on sale of rights in land as business income or capital gain.

Analysis:
1. The Revenue challenged the CIT(A)'s order regarding the treatment of profit on the sale of rights in land under section 143(3) of the Income-tax Act for the assessment year 2008-09.
2. The Revenue raised concerns about the classification of the profit as 'Business income' instead of 'Capital Gain' due to the absence of the land transaction in the books of accounts and the applicability of Rule 46A of the IT Rules.
3. The sole issue raised was whether the profit on the sale of rights in land should be assessed as business income or capital gain.
4. The case involved a development agreement for land sold below market value, triggering section 50C of the Act. The Assessing Officer added the short-term capital gain to the assessee's income, considering it concealed income.
5. The assessee argued that the transaction was part of their real estate business, supported by their business activities and tax returns. The CIT(A) agreed that the transaction was business income but failed to include it in the assessee's income calculation.
6. The Revenue contested the CIT(A)'s decision, highlighting inconsistencies in the assessee's income declaration and the application of section 50C due to undervaluation.
7. The assessee emphasized the business nature of the transaction, clarifying the purchase of development rights and the absence of funds for land acquisition, citing relevant case law.
8. The main issue was the assessability of the sale proceeds from the development rights, considering the assessee's business activities and income sources.
9. The two aspects of the issue were whether the gain was business income or short-term capital gain and the applicability of section 50C in assessing the income.
10. Definitions of 'capital asset' and 'transfer' under the Act were crucial in determining the nature of the transaction and the applicability of section 50C.
11. Section 50C applies to land or building transfers, not development rights. The Tribunal ruled that the income from the sale of development rights should be treated as short-term capital gain, not subject to section 50C.
12. The CIT(A) erred in not including the business income in the assessee's calculation and disallowing certain claimed expenses, which the Tribunal found unjustified.
13. The Tribunal directed the Assessing Officer to recalculate the income based on their decision, acknowledging errors in the CIT(A)'s order.
14. The Revenue's appeal was partly allowed, concluding the case on October 30, 2014.