2022 (5) TMI 1214 - AT - Income Tax

Gain on sale of plot - capital Income or business income - assessee is engaged in the business of real estate on part-time basis - HELD THAT - By merely showing the aforesaid pieces of land as stock-in-trade in own books does not substantiate that the assessee is real estate agent, when the totality of facts gives a different picture. The assessee s real estate business did not have a Firm Name, Proprietorship Name or business address, from where he has been conducting business after office hours. The assessee has not mentioned anything about his Firm name in the return of income nor is the Firm name mentioned in the letter dated 15/09/2007 addressed by SPIL to the assessee. Also, it is a commonly known facts that real estate agents normally earn commission on purchase and sale of land and not business income on sale of entire property, which again supports the view that the assessee is not a real estate agent. Further, for a real estate agent, it is not common to buy the piece of land in his own name and then selling the same to his own employer. Rather, real estate agents earn commission income, which the assessee has never earned throughout his professional career though he claims to be a real estate broker. It is common for a real estate agent to maintain office, cash book, bank book, ledger accounts, vouchers, bills, copy of bank statements etc. which are all missing in the instant set of facts, which leads to the inescapable conclusion that the assessee is not a real estate agent. Whether the assessee can be said to have engaged in adventure in the nature of trade ? - As the assessee has engaged in the transaction to make profit, although the transaction was entered into at the request of his employer, SPIL. Hence, from an analysis of facts, it is apparent that the assessee has entered into a transaction with the intent to sell land at a profit by undertaking the necessary steps to convert their land use from non-agricultural to agricultural, which in our considered view would qualify as an adventure in the nature of trade . We are of the considered view that the transaction undertaken qualifies as adventure in the nature of trade and hence provisions of section 50C would not apply to the instant set of facts. We therefore hold that Ld. CIT(A) has not erred in facts and in law in holding that the present transaction qualifies as adventure in the nature of trade and hence section 50C does not apply. Disallowance of interest expenses claimed and set off of earlier year's brought forward business loss - Having held that the aforesaid transaction qualifies as an adventure in the nature of trade , we are of the view that assessee is entitled to claim interest expenses on account loan taken to give effect to the transaction and also set off of earlier year's brought forward business loss as per law. We are therefore of the view, that Ld. CIT(A) has not erred in facts and in law in holding that assessee is entitled to claim interest expenses on loan taken and allowing set off of earlier year's brought forward business loss - In the result, Ground Nos. 2 and 3 of Department s appeal are dismissed.

Issues Involved:
1. Deletion of addition made under section 50C of the IT Act by treating income from the sale of lands as business income instead of capital gains.
2. Deletion of disallowance of interest expenses claimed.
3. Direction to allow set-off of earlier year's brought forward business loss.

Detailed Analysis:

1. Deletion of Addition under Section 50C:
The primary issue is whether the income from the sale of land should be treated as business income or capital gains. The assessee, an employee of Sun Pharmaceuticals Industries Limited (SPIL), facilitated a land transaction for SPIL. The Assessing Officer (AO) treated the sale as a transfer of a capital asset and applied section 50C, taxing the full value consideration of Rs. 4,39,29,600/- as short-term capital gain. The AO's reasoning was that the assessee was not engaged in the business of a real estate agent and had capitalized on an opportunity to earn a supernormal profit.

In contrast, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's argument that the transaction was an adventure in the nature of trade, intended for resale at a profit. The CIT(A) observed that the assessee had no intention to hold the land for personal enjoyment and had purchased it solely for resale to SPIL. The CIT(A) quashed the AO's application of section 50C and directed the sale consideration to be adopted at Rs. 36,50,001/- as per the sale agreement.

The Tribunal upheld the CIT(A)'s decision, agreeing that the transaction was an adventure in the nature of trade. The Tribunal cited various judicial precedents, including the Supreme Court decision in G. Venkataswami Naidu & Co. v. CIT, which supports the view that if an asset is bought with the intention of resale at a profit, it qualifies as a business transaction. The Tribunal concluded that the provisions of section 50C do not apply to this transaction.

2. Deletion of Disallowance of Interest Expenses:
The second issue concerns the disallowance of interest expenses amounting to Rs. 4,26,000/-. The CIT(A) allowed the interest expenses related to the transaction, holding that since the sale of land was an adventure in the nature of trade, the assessee was eligible to claim all related expenses supported by necessary evidence. The AO was directed to allow 59% of the interest paid to Quality Investment Pvt. Ltd., corresponding to the portion of the loan used for the land purchase.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee is entitled to claim the interest expenses on the loan taken to facilitate the transaction.

3. Direction to Allow Set-off of Earlier Year's Brought Forward Business Loss:
The third issue involves the set-off of brought forward business loss amounting to Rs. 1,24,283/-. The CIT(A) directed the AO to verify the claim and allow the set-off as per law, noting that the loss represented payment of interest on the loan borrowed for acquiring the land.

The Tribunal agreed with the CIT(A), holding that the assessee is entitled to set off the earlier year's brought forward business loss against the current year's business income.

Conclusion:
The Tribunal dismissed the Department's appeal on all grounds, upholding the CIT(A)'s decisions. The transaction was deemed an adventure in the nature of trade, thus excluding the application of section 50C. The assessee was allowed to claim interest expenses and set off earlier year's brought forward business loss. The order was pronounced in the open court on 13-04-2022.

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