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2015 (10) TMI 2173 - AT - Income TaxSale of premises - Long Term Capital Gain OR Business Income - assesse submitted that the assessee has let out this 7th floor at Span Centre since its construction and income from house property since beginning has been offered for taxation as Income from house property which has been also assessed by Revenue u/s 143(3) of the Act read with Section 143(2) of the Act for assessment year s 2004-05,2005-06 and 2006-07 - Held that - The contention of the assessee that it hardly matters how the same is reflected in its books of accounts is erroneous as the law postulate burden on the assessee to reflect the change from stock of unsold stock to Investment . The assessee being in the business of Builders and offering the income thereof as business income, any unsold stock of flat will be presumed to be business trading asset and assessable as such. The assessee has also shown the same as trading business asset in its books of accounts as WIP from year to year till 31-3-2006. The assessee has manifested its intention to convert the said trading business asset into Investment in its books of accounts on 1-4-2006 when the book entry was passed and hence the said asset at best can be held to be Investment w.e.f. 01-04-2006. The contention of the assessee that it has shown income from rent of these unsold flats as Income from house property and hence the sale proceeds of the said flat shall be chargeable to tax as Income from Capital Gain is again erroneous. Hon ble Bombay High Court has held in the case of CIT v. Sane and Doshi Enterprises in (2015 (4) TMI 882 - BOMBAY HIGH COURT) that in case of real estate developers , income from rent from unsold stock has to be assessed to tax as Income from House Property . The assessee has also rightly offered to tax income from rent as Income from House Property but that will not change character of the asset from business trading asset ie WIP to investment unless the assessee manifest its intention by taking steps to change the character of the said asset by amending its books of accounts and also bringing the same on record with Revenue which in the instant case was done by the assessee on 01-04-2006. We, therefore, upheld the order of Assessing Officer and reverse the order of CIT(A). hence, The gain from sale of 7th Floor, Span Centre was rightly brought to tax by assessing officer as Income from business or alternatively, even if it is assumed that the assessee treatment of the said asset as investment is accepted for genuine purposes then also the same was done on 01-04-2006 and the asset was sold thereafter immediately within the assessment year 2007-08 and hence the asset was held for less than 36 months as Investment as such and the gain arising thereof on sale of such asset shall be chargeable to tax as Income from Short Term Capital Gain but the same cannot be brought to tax as Income from Long Term Capital Gain - Decided in favour of revenue. Disallowance of expenditure incurred on cost of improvement of property while computing the capital gain - CIT(A) allowed the claim - Held that - hese assets are not towards the cost of the improvement of the property as there is no improvement in the property itself by installing Air Conditioners, Work Station, Office Tables, Working Tables, Meter Room, Electrical Fitting, Bathroom Toilet Fittings, Smoke Detectors, Pantry etc. However, since the assessee has acquired these assets during the assessment year under reference and the sale consideration of the said premises include the price towards these assets so acquired, it will be just and fair that the sale consideration of ₹ 3,14,60,000/- is reduced by this amount to arrive at the net sale consideration(after excluding recoupment of this expenditure of ₹ 5,00,000.00) so that no prejudice is caused to the assessee. We, therefore, find no reason to interfere with the order of CIT(A) and the same is hereby upheld but subject to our holding in the preceding para s that the income from sale of the flat at 7th floor, Span Centre shall be charged to tax as income from business - Decided against revenue.
Issues Involved:
1. Classification of income from the sale of premises: Long Term Capital Gain vs. Business Income. 2. Allowability of expenditure incurred on the cost of improvement of property while computing Long Term Capital Gains. Issue-wise Detailed Analysis: 1. Classification of Income from Sale of Premises: Long Term Capital Gain vs. Business Income The primary contention revolves around whether the consideration from the sale of the 7th floor of Span Centre should be treated as Long Term Capital Gain or Business Income. The Revenue argued that the assessee consistently treated the work in progress/cost of unsold flats as business trading stock in previous years, reflecting it as Work in Progress (WIP) in the balance sheet. The Revenue contended that the sudden reclassification of the 7th floor from WIP to Investment in the financial year 2006-07 was an afterthought aimed at avoiding tax liability. The assessee countered that the 7th floor was treated as an investment since the financial year 1999-2000, and the income from renting out this property was consistently offered as 'Income from House Property'. The assessee maintained that the intention was to hold the property as an investment, not as stock in trade, and hence the income from its sale should be treated as Long Term Capital Gain. The CIT(A) sided with the assessee, emphasizing that the intention to hold the property as an investment was evident from the long-term lease agreements and the consistent treatment of rental income as 'Income from House Property'. The CIT(A) held that the nomenclature in the books of accounts, though relevant, was not conclusive if the facts suggested otherwise. However, the Tribunal observed that the assessee, being in the business of property development, consistently treated the unsold flats as business trading assets in the books of accounts. The Tribunal noted that the conversion of the 7th floor from WIP to Investment just before its sale was an attempt to avoid higher tax liability. The Tribunal upheld the Assessing Officer's view that the income from the sale should be treated as Business Income. Alternatively, even if treated as an investment, the conversion date of 01-04-2006 meant the asset was held for less than 36 months, thus qualifying as Short Term Capital Gain, not Long Term Capital Gain. 2. Allowability of Expenditure Incurred on Cost of Improvement of Property The second issue pertained to the allowability of Rs. 5,00,000/- incurred on acquiring assets like air conditioners, workstations, and other fittings from the tenant, Raft Software Pvt. Ltd., while computing the Long Term Capital Gains. The Assessing Officer disallowed this expenditure, arguing that the assessee had already claimed statutory deductions for repairs and maintenance in earlier years. The assessee contended that the expenditure was for acquiring assets left behind by the tenant, which should either be considered as cost of improvement or deducted from the sale consideration. The CIT(A) allowed the deduction, holding that the expenditure was capital in nature and embedded in the sales consideration. The Tribunal, however, clarified that the assets acquired did not constitute an improvement to the property itself. Nonetheless, since the sale consideration included the price of these assets, the Tribunal deemed it fair to reduce the sale consideration by Rs. 5,00,000/- to avoid prejudice to the assessee. Thus, the Tribunal upheld the CIT(A)'s decision but reaffirmed that the income from the sale should be treated as Business Income. Conclusion: The Tribunal concluded that the income from the sale of the 7th floor of Span Centre should be treated as Business Income, reversing the CIT(A)'s order. Alternatively, if treated as an investment, the gain would be classified as Short Term Capital Gain. Regarding the expenditure on improvements, the Tribunal upheld the CIT(A)'s decision to reduce the sale consideration by Rs. 5,00,000/-. Final Order: The appeal of the Revenue was partly allowed, with the income from the sale of the 7th floor to be taxed as Business Income or Short Term Capital Gain, and the expenditure on improvements to be deducted from the sale consideration.
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