2015 (12) TMI 1292 - HC - Income Tax

Sale of flats - assessable as an adventure in the nature of trade OR long term capital gain - Held that - The Court finds that merely because the Assessee approached the builder for constructing the flats on the portion apart from the already constructed portion, would not make the transaction an adventure in the nature of trade. All that the Assessee had received from the sale of the flats was a residential flat of the value of ₹ 5,32,855 and ₹ 4 lakhs in cash as a result of the agreement entered into with the builder. As explained by this Court in Shanti Banerjee (deceased) by LRs (2015 (11) TMI 1213 - DELHI HIGH COURT ) where the construction and sale of the flats do not change the character of the asset and there was no material to show that the Assessee ever had the intention to exploit the plot as a commercial venture, the transaction cannot be characterized as an adventure in the nature of trade leading to the resultant receipt as business income in her hand. The fact that the Assessee got a flat on the rear second floor apart from the original constructed portion on the ground floor made no difference to the nature of the transaction. The AO, the CIT (A) and the ITAT have proceeded on an erroneous legal premise that the agreement entered into by the Assessee with the builder and the consequent sale of the flats by the builder on behalf of the Assessee was an adventure in the nature of the trade. - Decided in favour of the Assessee and against the Revenue

Summary

Issues:
1. Characterization of income as business income or long-term capital gain.

Analysis:
The appeal before the Delhi High Court involved the characterization of income under the Income Tax Act, 1961. The appellant, an elderly lady, entered into agreements for construction of additional area on her property. The Assessing Officer treated the amount received by the appellant as business income, considering the activity as an adventure in the nature of trade. The AO held that the profit from the sale of flats should be assessed under the head "profit from business." The CIT (A) upheld this decision. However, the High Court disagreed with this characterization. The Court noted that the appellant received a flat and cash as a result of the agreement with the builder, which did not change the character of the asset. Referring to previous decisions, the Court concluded that the transaction was not an adventure in the nature of trade, and the receipt should not be treated as business income. The Court found that the authorities proceeded on an erroneous legal premise and ruled in favor of the appellant.

The Court highlighted that the mere fact that the appellant approached the builder for constructing flats on a different portion of land did not make the transaction an adventure in the nature of trade. The Court emphasized that the nature of the asset did not change, and there was no evidence to suggest that the appellant intended to exploit the plot commercially. The Court cited relevant case law to support its decision, emphasizing that the receipt from the sale of flats should not be considered business income. The Court criticized the authorities for their incorrect legal premise and ruled in favor of the appellant.

In conclusion, the Delhi High Court answered the question framed in the negative, favoring the appellant and ruling against the Revenue. The Court acknowledged the appellant's lengthy legal battle and ordered the Revenue to compensate her with a sum of Rs. 50,000 as costs. The appeal was allowed in favor of the appellant, providing relief after years of litigation.