2023 (1) TMI 266 - AT - Income Tax

Correct head of income - income from transfer of AMABAI HEP Project - 'income from business' or under the head 'short term capital gains - according to the A.O there is transfer of property as per section 2(47) of the Act and the gains from the transaction are liable to be assessed u/s 45 - As the assessee has held the capital asset for less than 36 months immediately preceding the date of its transfer, the gain was brought to tax as short term capital gains. CIT(A) has held that the gains are taxable under the head 'income from business' and not under the head 'short term capital gains . HELD THAT - As per CIT-A the- profits and gains arising from such transfer of interest in the subject project is liable to be assessed under the head 'income from business' as the appellant is in the business of execution and development' of such projects and the interest in the project was transferred/assigned to RMMTL in the course of business of the appellant. Accordingly, the Assessing Officer is directed to assess the gains as income from business instead of short term capital gains The reasoning assigned by the ld. CIT (A) is cogent and we find no infirmity with the findings and the decisions rendered by the ld. CIT (A). Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Taxability of income arising from the transfer of "AMABAI HEP Project" in A.Y. 2010-11.
2. Classification of gains from the transfer as either "income from business" or "short-term capital gains."

Issue-wise Detailed Analysis:

1. Taxability of Income Arising from the Transfer of "AMABAI HEP Project" in A.Y. 2010-11:

The primary issue was whether the income from the transfer of the "AMABAI HEP Project" should be taxable in the assessment year (A.Y.) 2010-11. The assessee argued that the income should be recognized in A.Y. 2012-13, considering the test of transfer of significant risk and rewards. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] determined that the income was taxable in A.Y. 2010-11 based on the Memorandum of Understanding (MOU) executed on 30-10-2009.

The A.O. noted that the assessee had entered into an agreement for the transfer of the project on 30-10-2009 and received 90% of the consideration. The A.O. concluded that the significant risks and rewards associated with the project had been transferred during the year itself, making the gains from the transaction liable to be assessed under section 45 of the Income-tax Act, 1961.

On appeal, the CIT(A) observed that the appellant had initiated steps for the project development during FY 2007-08 and incurred substantial expenditure. The project was sold to R.M. Mohite Textiles Pvt. Ltd. (RMMTL) for Rs. 4.87 crores, out of which Rs. 4.37 crores was received during the year. The CIT(A) concluded that the significant risks and rewards of ownership were transferred to the buyer upon signing the MOU and receiving 90% of the consideration, thus recognizing the revenue in the year of signing the MOU.

2. Classification of Gains from the Transfer as Either "Income from Business" or "Short-term Capital Gains":

The second issue was whether the gains from the transfer should be classified as "income from business" or "short-term capital gains." The A.O. treated the gains as short-term capital gains since the capital asset was held for less than 36 months before its transfer.

The CIT(A) disagreed with this classification, noting that the appellant was engaged in the business of developing Hydro Power projects. The expenditure incurred on the project was shown under "inventories" in the appellant's books. The CIT(A) emphasized that the transfer involved the rights for executing the project, not the land itself. Therefore, the provisions of section 2(47) and section 53A of the Transfer of Property Act, which deal with the transfer of immovable property, were not applicable.

The CIT(A) concluded that the profits and gains from the transfer should be assessed under the head "income from business" since the appellant was in the business of executing and developing such projects. The gains were thus taxable as business income, not as short-term capital gains.

Conclusion:

The appeal was dismissed, and the order of the CIT(A) was upheld. The gains from the transfer of the "AMABAI HEP Project" were taxable in A.Y. 2010-11 under the head "income from business" based on the transfer of significant risks and rewards upon signing the MOU and receiving 90% of the consideration. The reasoning provided by the CIT(A) was found to be cogent and without infirmity.