2005 (6) TMI 221 - AT - Income Tax

Chargeable as capital gain - Income from sale of shops computed under the head 'profits and gains of business and profession' Or 'capital gain' - Property for the purpose of trade or for investment - rental income - whether in computation of income from house property annual value should be reduced by the amount of brokerage paid - HELD THAT - From the facts of the case, it becomes clear that assessee's intention was to hold the property as investment and not as a stock-in-trade. No prudent trader would sit on stock for so long. Also facts in the cited cases which have been relied upon by the Assessing Officer are clearly distinguishable from the facts of the present case. As already discussed, the assessee is engaged in running of hotel and cinema hall, he acquired the SCOs and kept it as investment for a long period of nine years before selling of in the relevant years. The CIT(A) also found that the SCOs were acquired by paying advance and the balance was paid in instalments and possession taken over. we have mentioned regarding submissions of the assessee that in the assessment year 1994-95, the Assessing Officer has also treated the income from sale of SCOs as capital gain, whereas in the years under appeal he has changed his opinion regarding character of the transactions and also brought it under the head 'business income'. Even on this plea, the assessee finds support that principle of res judicata does not apply to income-tax proceedings but to deviate from it, there should be change in the facts and circumstances, as observed in the case of CIT v. Dalmia Dadri Cement Ltd. 1969 (11) TMI 16 - PUNJAB AND HARYANA HIGH COURT . Therefore, we are of the considered view that the CIT(A) was justified in directing the Assessing Officer to compute the income arising from sale of SCOs under the head 'capital gain' after necessary indexation. We uphold her order and do not find any merit in the common ground raised by the revenue in all the three appeals. The ground stands rejected. Conversely, it can be inferred that ALV is not to be disturbed which is coming out as a result of computation, as per formula u/s 23. Also the plea of the ld. AR regarding overriding title cannot be accepted as no obligation has been cast on the assessee to pay brokerage. Brokerage is one time expenditure for procuring the tenant. It is up to the assessee whether he needs the services of a broker or not. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Hence, on this account also, the plea of the assessee fails. Also the assessee's alternative plea that the brokerage should be allowed to be deducted from the business income is not tenable in law, as the said brokerage as not paid for the purpose of its existing business. Law provides only the expenditure incurred wholly and exclusively for the purposes of business. Hence on this account also, the plea of the assessee fails. Accordingly, we set aside the order of the CIT(A) in this regard and restore that of the Assessing Officer, by accepting the ground of the revenue. The appeal stands partly allowed. In the result, I.T.A. Nos. 533 and 535 are partly allowed and I.T.A. No. 534 is dismissed.

Summary

Issues Involved:
1. Classification of income from the sale of shops as 'capital gain' vs 'income from business and profession'.
2. Charging of interest under sections 234B and 234C of the IT Act.
3. Deletion of addition on account of brokerage.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shops:
The primary issue was whether the income from the sale of Shop-cum-Offices (SCOs) should be treated as 'capital gain' or 'income from business and profession'. The assessee, engaged in the business of running a hotel and cinema hall, declared the income from the sale of SCOs as capital gains. The Assessing Officer (AO) treated it as business income, citing that the transactions were an adventure in the nature of trade, relying on cases such as Regent Estates Ltd. v. CIT, Mrs. D.M. Alexander v. CIT, and G. Venkataswami Naidu & Co. v. CIT.

The CIT(A) reversed the AO's decision, treating the income as capital gains, referencing cases like CIT v. H. Holck Larsen and Michael A. Kallivayalli v. CIT. The Tribunal upheld the CIT(A)'s decision, noting that the assessee held the property as an investment for nine years, not as stock-in-trade, and the main business was not real estate. The Tribunal emphasized that the character of a transaction depends on the facts and circumstances, including the intention at the time of acquisition and the conduct of the assessee, aligning with principles from CIT v. Dr. Indu Bala Chhabra.

2. Charging of Interest under Sections 234B and 234C:
For the assessment year 1995-96, the CIT(A) directed the AO not to charge interest under sections 234B and 234C, referencing the decision in CIT v. Ranchi Club Ltd. The Tribunal noted the absence of explicit mention of interest in the assessment order but acknowledged the revenue's claim that it was part of ITNS-150. The Tribunal directed the CIT(A) to verify the records to determine if interest was charged and act accordingly.

3. Deletion of Addition on Account of Brokerage:
For the assessment year 1998-99, the AO disallowed Rs. 16.54 lakhs claimed as brokerage paid for rental income. The CIT(A) allowed the deduction, considering it a direct charge on rental income. The Tribunal disagreed, stating that section 23(1) does not expressly allow such deductions for computing annual letting value (ALV). The Tribunal highlighted that brokerage is a one-time expenditure and not an obligation affecting the income's nature. Consequently, the Tribunal set aside the CIT(A)'s order and restored the AO's decision, disallowing the brokerage deduction.

Conclusion:
The Tribunal's judgment addressed the classification of income from the sale of SCOs, upheld the CIT(A)'s decision on treating it as capital gains, directed verification for charging interest under sections 234B and 234C, and restored the AO's decision on disallowing brokerage deduction. The appeals were partly allowed and partly dismissed based on these determinations.