2014 (11) TMI 680 - AT - Income Tax

Surplus amount on sale of property under Income from capital gains Business income or not u/s 54EC Rental income realized from the asset has been offered to tax under the head business income in earlier years and various expenses claimed against it - Held that - Assessee has acquired property namely, Sukanraj Centre in the year 1978 - the property was acquired and held by assessee for 30 years, which is sufficient to establish that property was capital asset only and not acquired for sale in the normal course of business - While acquiring the property assessee was having long term prospective, which is evident from schedule in which it was shown as land asset and not as land stock - The very nature of transaction i.e. whether trading or investment is decided at the time of acquisition of property - The treatment given by the assessee in the books of account is one of the most important factors that determines the nature of assets as to whether investment or stock-in-trade - From the very year of its acquisition i.e. 1978 assessee has consistently shown the property as investment rather than as stock-in-trade in K.C. Thappar Vs. CIT 1971 (8) TMI 29 - SUPREME Court it has been held that a particular asset owned as investment in the books as well as balance sheet, is one of the most relevant factor even though not conclusive to hold that assets were held by assessee as investment - merely because rental income earned on the property was shown as business income, the property so held as investment cannot be treated as a stock-in-trade of the business ignoring the fact that real estate business is separate from rental income . Claim of rental income as business income will not change the character of property so held as capital investment on which assessee has earned the rental income - The intention of the assessee since beginning was only to hold the capital asset for the purpose of exploiting the same and earning regular income from it revenue itself has accepted assessee s claim of land asset insofar as none of the earlier years, the AO has objected the treatment of property as land asset in the nature of capital investment. Claim for exemption u/s 54EC Held that - There was no infirmity in the order of CIT(A), that assessee has sold the long term capital asset which is held for investment purpose - The Hon ble Bombay High Court in the case of CIT Vs. Ace Builders 2005 (3) TMI 36 - BOMBAY High Court - exemption u/s 54EC is allowable on asset where it is depreciable or non-depreciable asset, therefore, exemption available to depreciable asset u/s 54EC cannot be denied by referring to fiction created u/s 50 - gain on sale of capital asset Sukanraj Center have rightly been treated as capital gain by CIT(A) Decided against revenue.

Summary

Issues Involved:
1. Classification of income from the sale of property as "Income from Capital Gains" vs. "Income from Business."
2. Eligibility for deduction under Section 54EC of the Income Tax Act.

Detailed Analysis:

1. Classification of Income from the Sale of Property:
The primary issue was whether the surplus amount of Rs. 3,03,11,697/- from the sale of property should be classified as "Income from Capital Gains" or "Income from Business." The Assessing Officer (AO) classified it as business income, arguing that the assessee was engaged in real estate development and had previously offered rental income from the property as business income. The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, noting that the property was acquired in 1978 and consistently shown as a capital asset in the balance sheet, not as stock-in-trade. The CIT(A) emphasized that the property was held for 30 years, indicating a long-term investment rather than an asset for resale in the ordinary course of business. The property was shown under "sundry land asset" since 1986, and the interest on borrowed funds for its acquisition was capitalized, not claimed as revenue expenditure. The CIT(A) concluded that the property was a capital asset, and the income from its sale should be treated as capital gains.

2. Eligibility for Deduction under Section 54EC:
The second issue was the eligibility for deduction under Section 54EC of the Income Tax Act. The CIT(A) allowed the deduction, noting that the property was a long-term capital asset held for investment purposes. The CIT(A) cited various judicial pronouncements, including decisions from the Hon'ble Supreme Court and High Courts, supporting the view that assets held as investments, even if acquired with borrowed funds, are eligible for capital gains treatment and the corresponding deductions. The CIT(A) also referenced the case of CIT Vs. Ace Builders, where it was held that exemption under Section 54EC is allowable on both depreciable and non-depreciable assets. The AO's contention that the property should be treated as a business asset and the resultant income taxed as business income was rejected.

Tribunal's Decision:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The ITAT agreed that the property was held as a long-term investment, not stock-in-trade, and the income from its sale should be classified as capital gains. The ITAT also affirmed the CIT(A)'s decision to allow the deduction under Section 54EC, noting that the property was a long-term capital asset and eligible for the exemption.

Conclusion:
The ITAT concluded that the surplus from the sale of the property should be treated as "Income from Capital Gains," and the assessee is entitled to the deduction under Section 54EC. The appeal by the Revenue was dismissed, and the CIT(A)'s order was upheld. The judgment emphasized the importance of the treatment of assets in the books of accounts and the intent at the time of acquisition in determining the nature of income from their sale.