2023 (2) TMI 53 - AT - Income Tax

Correct head of income - treatment of surplus fund out of the sale of properties - business income as treated by the Assessing Authority or the capital gain as claimed by the assessee - whether the Assessing Authority justified to treat the transaction under the different head of income? - HELD THAT - The assessee claimed it as gain arising out of transfer of capital asset. On the other hand, the AO treated it as business receipts arising from real estate business. Assessee laid great stress on intent of the assessee. Considering the fact that the properties in quantum were held for considerable longer period of time, it is not the case where the properties have been sold within a short span of time after their acquisition. Coupled with the fact that the assessee is not engaged into any systematic real estate business activity. Thus hold that the authorities below erred in treating the transaction as real estate business transaction under the facts and circumstances of the present case - we hereby direct the AO to delete the impugned addition. Thus, grounds raised by the assessee are allowed.

Issues Involved:
1. Whether the surplus from the sale of properties should be treated as business income or capital gains.
2. Calculation of gains on the sale of properties.

Issue-wise Detailed Analysis:

1. Treatment of Surplus from Sale of Properties:
The core dispute revolves around whether the surplus from the sale of properties should be classified as business income or capital gains. The assessee claimed the surplus as capital gains, arguing that the properties were held as investments without any intention to trade. The Assessing Officer (AO), however, treated the surplus as business income, asserting that the assessee was engaged in the business of real estate.

The AO's decision was based on the observation that the assessee had constructed multiple floors on the properties post-purchase, which indicated a business activity rather than an investment. The AO divided the purchase cost among the constructed floors to compute the business income.

The assessee contended that the properties were held for periods ranging from 15 months to 71 months, demonstrating an investment intent rather than frequent trading. The assessee also cited several judicial precedents to support the claim that properties held for investment purposes should yield capital gains, not business income.

The Tribunal considered the intent of the assessee, the holding period of the properties, and the lack of systematic real estate business activities. It concluded that the properties were indeed held as investments and not for business purposes. The Tribunal directed the AO to treat the surplus as capital gains, following binding precedents and emphasizing the intent and holding period as crucial factors.

2. Calculation of Gains on Sale of Properties:
The AO recalculated the gains by dividing the purchase cost among the constructed floors, resulting in a higher taxable amount under business income. The assessee disputed this calculation, maintaining that the properties were held as investments and the gains should be computed under capital gains.

The Tribunal found that the AO's method of dividing the purchase cost was inappropriate given the investment nature of the properties. The Tribunal directed the AO to accept the capital gains as declared by the assessee, which were based on the actual holding period and investment intent.

Conclusion:
The Tribunal allowed the appeal, holding that the surplus from the sale of properties should be treated as capital gains, not business income. The Tribunal emphasized the importance of the assessee's intent, the holding period of the properties, and the lack of systematic real estate business activities. The Tribunal directed the AO to delete the impugned addition and accept the capital gains as declared by the assessee. The appeal was allowed in favor of the assessee.

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