2022 (7) TMI 393 - AT - Income Tax

Correct head of income - gain on sale of flats - Addition of business income OR LTCG - as per AO intention of the assessee from the beginning was to engage in the business activity of construction of flats and the profit earned from the sale of flats was income from business and not Long Term Capital Gains - CIT(A) while deciding the issue in favour of the assessee has given a finding that the six flats were sold in Nov 2012 and assessee had invested the capital gains for purchase of property at Goa for Rs.6.84 crores. The entire sale consideration received was invested within the same financial year - HELD THAT - Objection of the AO was that the flats that were sold was not for self use and were constructed only for earning income. He has noted that the property not being self use is not precondition as far as the provision of Section 54 of the Act are concerned. He has further given a finding that assessee had held property for 28 years and no evidence has been placed by the AO to demonstrate that the transaction of purchase of property was in adventure in the nature of the trade so as to be treated as business income. With respect to the objection of the AO that the possession of the property was not handed over and the sale has not been registered, he has given a finding that as per the provision of Section 54(2) of the Act, the important condition for claiming of exemption is the utilization of capital gain arising from the sale of old asset in the purchase of new residential house on or before the due date of filing of return of income. In case the assessee is unable to purchase the residential house before the due date of filing of return then the amount needs to be invested in Capital Gain Account Scheme and has to be utilized within the period stipulated therein. He thus while deciding the issue in favour of the assessee has given a finding that assessee has fulfilled the required conditions for claiming exemption u/s 54 of the Act, as the sale proceeds of the property sold were utilized for purchase of another property for which the entire required amount (capital gains) was invested and paid to the seller - further given a finding that the registration of the purchase transaction was also not mandatory for claiming exemption u/s 54 of the Act. He has further noted that assessee had produced the proof of investment by producing the receipts issued by the seller towards the purchase of the flats, assessee had also produced the copy of the letter issued by the seller to confirm the soft possession of the property. Considering the aforesaid facts, he deleted the addition made by AO. Before us, Learned DR has not pointed any fallacy in the findings of CIT(A). We therefore find no reason to interfere in the order of CIT(A) and thus the grounds of appeal of the Revenue are dismissed.

Summary

Issues:
1. Taxability of income as business income or capital gains.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) relating to the Assessment Year 2013-14. The dispute revolved around the treatment of income amounting to Rs.3,00,14,134/- as either business income or capital gains. The Revenue contended that the income should be treated as business income due to the nature of the transaction, while the assessee argued that it should be considered as capital gains under Section 54 of the Income Tax Act.

The Assessing Officer (AO) had initially treated the profit earned from the sale of six flats as business income, as the flats were sold for a total consideration of Rs.4,10,00,000/- and the investment in a new property was made through a real estate company where the Karta's son was a director. The AO concluded that the intention of the assessee was to engage in a business activity of construction of flats. However, the Commissioner of Income Tax (Appeals) disagreed with this assessment and ruled in favor of the assessee.

The Commissioner noted that the property had been held for a long period of 28 years and the transaction did not exhibit characteristics of an adventure in the nature of trade. The Commissioner also emphasized that the possession of the new property and registration were not prerequisites for claiming exemption under Section 54 of the Act. The assessee had invested the entire sale consideration in a new property within the same financial year, fulfilling the conditions for claiming exemption under Section 54.

The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), stating that there was no fallacy in the findings and dismissing the Revenue's appeal. The Tribunal found no reason to interfere in the order of the Commissioner, thereby affirming that the income in question should be treated as capital gains and not business income.

In conclusion, the Tribunal dismissed the appeal of the Revenue, confirming the treatment of the income as capital gains in accordance with the provisions of Section 54 of the Income Tax Act for the Assessment Year 2013-14.