2012 (7) TMI 212 - AT - Income Tax

Profits from the sale of the property - AO treated it to be as business income pointing to the object clause of the partnership deed which include objects such as carrying on business as dealer, contractor, proprietor and the dealer in land, building, shops - assessee treated it as Long Term Capital Gain - Held that - As the partners have resolved to discontinue the business after 1994 and replace the same with the objective of investment in the real estate or other investment in which the benefits of receiving the income from such investment as well as appreciation in the investment is more. During the said period of the business activity, the assessee had undertaken only one project. Thereafter, the assessee has not done any activity except for purchasing the property at Khetwadi with 72 tenants in November, 1997 - as decided in CIT vs. Suresh Chand Goyal 2007 (1) TMI 90 (HC) that an isolated transaction or activity can also be part of business, but to consider the question of business, there must be regular activity of purchasing and selling. Considering the statement of total income shows that in treating the business income, the A.O. himself has accepted (a) index cost of acquisition and (b) exemption u/s.54EC. The A.O. cannot blow hot and cold in the same breath - in favour of assessee.

Summary

Issues Involved:
1. Classification of income from the sale of property as "business income" or "long term capital gain."

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Property:
The primary issue in this case was whether the income from the sale of a property should be treated as "business income" or "long term capital gain." The Revenue challenged the order of the CIT(A) which directed the Assessing Officer (A.O.) to treat the income of Rs. 5,71,33,487/- as "income from long term capital gain" instead of "business income."

Facts and Arguments:
- The assessee filed a return of income for the A.Y. 2007-08, declaring the profits from the sale of a property at Khetwadi, Mumbai, as "Long Term Capital Gain."
- The A.O. argued that the main object of the partnership, as per the deed dated 17.04.1986, included dealing in land and buildings, thus the sale should be considered a business activity.
- The assessee contended that the property was purchased for investment and rental income, not for business purposes, and had been held for nine years without any development activity.
- The A.O. rejected the assessee's submissions, relying on judgments from the Hon'ble Supreme Court and the Hon'ble Bombay High Court, concluding that the activity was in the nature of business.

CIT(A) Findings:
- The CIT(A) noted several points supporting the assessee's claim:
- No business activity was carried out for nine years.
- The firm did not maintain regular books of accounts or disclose any business income.
- There was no evidence of the property being held as stock in trade.
- The partners were an elderly couple, unlikely to pursue sustained business activity.
- No borrowal of funds or payment of interest, except a small LIC loan.
- The sale agreement specified no prior development agreements for the property.
- The criteria for business activity, such as volume, frequency, and continuity, were absent.
- Based on these facts, the CIT(A) directed the A.O. to assess the income as "long term capital gain."

Revenue's Appeal:
- The Revenue argued that the assessee was in the business of developing and selling properties and that the transaction should be treated as business income.
- The assessee's counsel countered, emphasizing that the property was held as an investment for rental income, and previous assessments had accepted the rental income as "income from house property."

Tribunal's Decision:
- The Tribunal reviewed the facts and submissions, noting that the business activity was discontinued in 1994, and the property was held for nine years without any development.
- The A.O. had inconsistently accepted the indexed cost of acquisition and exemption u/s.54EC while treating the income as business income.
- The Tribunal cited relevant case law, including CIT vs. Suresh Chand Goyal and Asha Housing Enterprises vs. DCIT, supporting the assessee's position.
- The Tribunal upheld the CIT(A)'s findings, concluding that the income should be taxed as "long term capital gains" and dismissed the Revenue's appeal.

Conclusion:
The Tribunal affirmed the CIT(A)'s decision to treat the income from the sale of the property as "long term capital gain" rather than "business income," based on the facts and circumstances of the case, and dismissed the Revenue's appeal. The judgment emphasized the importance of the intention behind holding the property and the absence of business activity over an extended period.