2023 (4) TMI 732 - AT - Income Tax

Entitled for deduction u/s 54B - Correct head of income - consideration received on account of sale of property - business income or capital gains income - CIT(A) allowed the claim of the assessee and held that the income from the sale of the property is to be treated as long-term capital gains and further allowed the cost of improvement, indexation and also allowed the deduction u/s 54B - HELD THAT - The case of the assessee was selected for limited scrutiny to examine the claim of deduction/exemption out of capital gains earned by the assessee. There was not any mandate to the AO to examine the issue relating to the nature of the income earned by the assessee as to whether the same was treated as business income or capital gains and there is no allegation of the AO that the assessee is otherwise not entitled for deduction u/s 54B - No merit in the appeal of the Revenue.

Summary

Issues involved:
1. Whether the consideration received on the sale of property should be treated as business income or capital gains income.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax(Appeals) concerning the treatment of income from the sale of a property. The Revenue contended that the Assessing Officer had treated the entire sale consideration as business income, while the assessee claimed it to be capital gains income. The key issue revolved around determining the nature of income arising from the sale of the property.

The facts of the case revealed that the assessee had purchased land as an investment, entered into a joint development agreement (JDA) with a developer, and received a percentage of the sale consideration of flats developed on the land. The Assessing Officer considered this income as business income, contrary to the assessee's claim of it being capital gains. The assessee argued that the land was always treated as a capital asset, and entering into a JDA did not change its nature. The assessee further contended that the Assessing Officer disallowed deductions and treated the entire sale consideration as business income.

Before the CIT(A), the assessee presented evidence supporting the treatment of the land as a capital asset, including indexed cost of improvement. The CIT(A) upheld the assessee's claim, stating that the property was held as a capital asset, not stock-in-trade, and allowed deductions under the Income Tax Act. The CIT(A) concluded that the income from the sale of the property should be treated as long-term capital gains.

The Tribunal noted that the case was selected for limited scrutiny regarding deduction/exemption from capital gains under section 54B of the Act. The Tribunal emphasized that the Assessing Officer's scrutiny was limited to this aspect and not to determine whether the income was business income or capital gains. As there was no mandate to examine the nature of income, the Tribunal dismissed the Revenue's appeal, stating that the assessee was entitled to the deduction under section 54B. Consequently, the appeal of the Revenue was dismissed, affirming the treatment of the income as capital gains.

In conclusion, the judgment clarified the distinction between business income and capital gains income arising from the sale of property, emphasizing the importance of the nature of the asset and adherence to the provisions of the Income Tax Act regarding deductions and exemptions.