2019 (12) TMI 1239 - AT - Income Tax

Nature of activity - Capital Gains/loss or income from business - sale of flats - stock in trade or investment - AO observed that sale of property has been done in a systematic, repetitive manner - HELD THAT - We find merit in the contentions of the assessee that if the intentions were to deal on a systematic and repetitive manner, then no businessmen will lock its funds for three years for his trading activities. Assessee, after selling these flats has not acquired any additional flats by re-investing the sale proceeds of these sold flats. Also the fact remains that the above assets are appearing under investments in the balance sheet of the assessee. The principle underlying the distinction between a capital sale and an adventure in the nature of trade were examined in Venkataswami Naidu Co (G) v. CIT 1958 (11) TMI 5 - SUPREME COURT where it was held that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. Also in Janki Ram Bhadur Ram v. CIT 1965 (3) TMI 19 - SUPREME COURT held that if the assessee, even at the time of acquisition had a clear intention to resell it, that would be material but not a decisive consideration. We are inclined to agree with the treatment given by the assessee in his return of income as gains/loss from sale of such flats under the head Capital Gains . - Appeal filed by the assessee is allowed.

Summary

Issues:
1. Classification of income from sale of investments in immovable properties as business income.
2. Initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income and concealing income.

Issue 1: Classification of income from sale of investments in immovable properties as business income

The assessee, engaged in dealing in shares, securities, and jewelry, sold three flats and a parking lot during the financial year 2012-13. The Assessing Officer (AO) treated the income from these sales as business income due to the systematic and repetitive nature of the transactions. The AO noted that the flats were sold within a short span after construction was completed, leading to the conclusion of repetitive business activity. The Commissioner of Income Tax (Appeals) upheld this view, emphasizing the bulk purchase of flats and the intention for profit evident from the purchase process. However, the assessee argued that the flats were held for over 36 months, qualifying as long-term capital gains, and that no reinvestment was made after the sales. The Income Tax Appellate Tribunal (ITAT) agreed with the assessee, considering the lack of reinvestment, the long holding period, and the appearance of the assets under 'investments' in the balance sheet. Referring to legal precedents, the ITAT concluded that the transactions should be treated as capital gains, overturning the CIT(A)'s decision.

Issue 2: Initiation of penalty proceedings under section 271(1)(c)

The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income and concealing income. The assessee's explanations regarding the nature of the transactions were not accepted by the AO, leading to the addition of income and subsequent penalty proceedings. However, the ITAT's decision to classify the income as capital gains instead of business income renders the penalty proceedings under section 271(1)(c) invalid. As the underlying income classification has changed, the basis for the penalty proceedings no longer holds, and the issue of penalty becomes irrelevant following the ITAT's decision on the classification of income.

In conclusion, the ITAT's judgment overturned the CIT(A)'s decision, classifying the income from the sale of flats and parking lot as capital gains rather than business income. This reclassification renders the penalty proceedings initiated by the AO under section 271(1)(c) invalid. The ITAT's detailed analysis considered the holding period, lack of reinvestment, and legal precedents to support the classification of income as capital gains, emphasizing the factual circumstances and intent behind the transactions.