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2019 (11) TMI 630 - AT - Income TaxIncome earned from sale of development rights in respect of a partially constructed project - Correct head of income - Capital Gain or Business Income - HELD THAT - Undisputedly, the assessee is engaged in the business of developing real estate. It is also the claim of the assessee that it is developing or has developed various other housing projects and the development rights of the subject property was also acquired for development purpose. Commissioner (Appeals) himself has stated that in respect of some other housing projects developed by the assessee, the receipts and expenses have been routed through Profit Loss account and the income has been offered subsequently as business income. Assessee s claim that development rights acquired were for the purpose of business requires consideration. While concluding that the income from sale of development rights is capital gain, since, neither Commissioner (Appeals) nor the AO have properly appreciated the submissions of the assessee and examined all the attending facts and materials relating to the issue and have merely harped upon the accounting treatment given by the assessee at the time of purchase of the development right, we are inclined to restore the issue to the file of the Assessing Officer for denovo adjudication after due opportunity of being heard to the assessee. Since, the applicability of section 50C and claim of indexation on cost of improvement is dependent upon the ultimate outcome of the nature and character of the income received by the assessee, whether business income or capital gain, we also restore these issues to the AO for denovo adjudication depending upon his decision on the nature and character of the income received from sale of development right. Consequently, grounds raised are allowed for statistical purposes.
Issues Involved:
1. Whether the income earned from the sale of development rights in respect of a partially constructed project should be assessed under the head "Capital Gain" or as "Business Income". 2. Applicability of provisions of section 50C of the Income Tax Act, 1961. 3. Determination of the sale value as per stamp duty valuation without referring the matter to the valuation officer. 4. Grant of indexation benefit in respect of the cost of improvement. Issue-Wise Detailed Analysis: 1. Nature of Income – Capital Gain vs. Business Income: The primary issue is whether the income from the sale of development rights should be classified as "Capital Gain" or "Business Income." The assessee, engaged in the business of real estate development, purchased development rights and later sold them. The Assessing Officer (AO) classified the income as "Capital Gain," noting that the development rights were initially recorded as an investment in the Balance Sheet and not as stock-in-trade. The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld this view, emphasizing that the development rights were treated as a capital asset, not a business asset. The Tribunal, however, noted that the assessee's intention and the nature of the business should be considered. The Tribunal observed that the assessee's consistent treatment of similar transactions as business income and the nature of the business warranted a re-examination of the classification. Thus, the issue was remanded to the AO for a fresh adjudication. 2. Applicability of Section 50C: Section 50C of the Income Tax Act pertains to the valuation of capital assets for the purpose of calculating capital gains. The AO applied Section 50C, using the stamp duty value as the deemed sale consideration. The CIT(A) agreed, stating that Section 50C applies since the asset sold was not a business asset. The Tribunal noted that the applicability of Section 50C depends on whether the income is ultimately classified as capital gains or business income. Therefore, this issue was also remanded to the AO for reconsideration based on the final classification of the income. 3. Determination of Sale Value Without Reference to Valuation Officer: The assessee contended that the AO failed to refer the valuation of the property to the Departmental Valuation Officer (DVO) as required under Section 50C(2) when the assessee disputes the stamp duty valuation. The CIT(A) held that the AO is not obligated to refer the matter to the DVO unless the assessee specifically requests it. The Tribunal did not provide a separate ruling on this issue but implied that it should be reconsidered in light of the final determination of the nature of the income. 4. Indexation Benefit for Cost of Improvement: The assessee claimed indexation benefits for the cost of improvement incurred in the assessment year 2011-12. The AO and CIT(A) rejected this claim, stating that the expenses were mere advances and not actual construction costs. The Tribunal instructed the AO to re-examine this claim in the context of the final classification of the income as either business income or capital gains. Conclusion: The Tribunal remanded the case to the AO for a fresh adjudication on all issues, emphasizing the need to consider the nature of the business, the consistent treatment of similar transactions, and the proper classification of the income. The applicability of Section 50C and the claim for indexation benefits are to be reconsidered based on the final determination of whether the income is classified as business income or capital gains. The appeal was allowed for statistical purposes.
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