2015 (4) TMI 634 - HC - Income Tax

Transfer of capital asset - capital gains v/s business income - whether appellate authorities were correct in holding that a sum of ₹ 6,37,00,726 received by the assessee for the purpose of finding a purchaser of the property of Mrs. Rubab Mohamed Ali Kazerani, at No. 1, Cubbon Road, Bangalore-01, which was sold for ₹ 11.87 crores and the owner paid ₹ 5.5 crores cannot be brought to tax under the head 'Business income' but should be brought to tax under the head 'Capital gains' ? - Held that - The memorandum of understanding entered into between the owner and the assessee is not an agreement of sale for transfer of a capital asset and it is not stamped or registered, any transaction which has the effect of transferring or enabling the enjoyment of any immovable property in the nature of a capital asset would fall within the definition of transfer and, therefore, the consideration they seek for such transfer constitutes capital gains. In the hands of the owner, the property, it is a capital asset. Then the amount of ₹ 5.5 crores received under the document by the owner would be liable to tax as capital gains. Now, the question before the court is not whether the ₹ 5.5 crores constitutes capital gains or not. The question is whether over and above ₹ 5.5 crores paid by the purchaser to the assessee would constitute capital gains. In that context, in the instant case, it is clear that the assessee had no intention to acquire a capital asset in lieu of transfer. His intention was only to identify a buyer for the property to bring about a sale transaction and any amount paid in excess of ₹ 5.5 crores is his profit minus the expenditure which he has incurred. It is clear from the recitals in the memorandum of understanding that even if the assessee is not able to get the purchaser who is willing to pay ₹ 5.5 crores 50,000 and pays less, the loss is to the account of the assessee. Only in the event of the purchaser is willing to pay more than ₹ 5.5 crores, that profit is his. Therefore, the transaction was entered into with a sole intention of making profits and gains from the aforesaid transaction and as such do not fall within the definition of capital gains. The assessee did not hold the capital asset. He did not transfer the capital asset, he only facilitated the transfer of capital asset from the owner to the purchaser. He took the risk. He identified the purchaser. Any amount paid in excess of ₹ 5.5 crores which the owner was expecting from the transaction was his margin of profit. - Decided in favour of the Revenue

Summary

Issues Involved:
1. Nature of Income: Whether the income from the transaction should be classified as "Capital Gains" or "Business Income."

Issue-wise Detailed Analysis:

Nature of Income:
The primary issue revolves around whether the transaction involving the transfer of a capital asset should be treated as yielding capital gains or business income for the assessee. The Revenue contended that the transaction was in the nature of trade and thus should be classified as business income. The assessee, however, declared the income under the head "Capital Gains."

Facts and Background:
The property in question, "Hepburn Hall," was owned by an individual who entered into a Memorandum of Understanding (MOU) with the assessee to identify buyers for the property. The assessee paid Rs. 5,50,00,000 to the owner and subsequently entered into another MOU with a purchaser, receiving Rs. 3,73,35,320 as an advance. The total sale consideration was Rs. 12,47,84,400, resulting in a profit of Rs. 6,97,84,400 for the assessee. The assessee declared this income as capital gains, which was initially accepted but later reassessed by the authorities as business income.

Arguments and Findings:

1. Revenue's Argument:
- The Revenue argued that the MOU was not an agreement to purchase the property but to identify a buyer, indicating no intention of investment. The terms of the MOU suggested that any amount above Rs. 5,50,00,000 was to be retained by the assessee, implying a business transaction.

2. Assessee's Argument:
- The assessee contended that the MOU constituted a transaction under section 2(47)(vi) of the Income-tax Act, 1961, which defines "transfer" in relation to a capital asset. The excess amount received was thus considered capital gains.

3. Tribunal's Findings:
- The Tribunal upheld the assessee's view, noting that the transaction appeared to be an isolated one with no history of similar operations. The holding period of over three years and the lack of property improvement suggested an investment rather than a business transaction.

4. High Court's Analysis:
- The High Court examined the nature of the transaction, the intention of the parties, and the relevant documents. It noted that the assessee's role was to identify a buyer and not to invest in or enjoy the property. The MOU's terms indicated that the assessee bore the risk of loss and retained any profit above Rs. 5,50,00,000, characterizing the transaction as an adventure in the nature of trade.
- The court referenced the Supreme Court's decision in G. Venkataswami Naidu & Co. v. CIT, which emphasized the importance of the initial intention behind a transaction. The High Court concluded that the assessee's intention was to make a profit from the transaction, not to invest in the property.

Conclusion:
The High Court held that the transaction was in the nature of trade and the income derived should be classified as business income, not capital gains. The court allowed the appeal, set aside the Tribunal's order, and restored the assessing authority's order. The substantial question of law was answered in favor of the Revenue, and the parties were instructed to bear their own costs. The authority was directed to give effect to the order after three months from the date of receipt of the order.