2018 (6) TMI 351 - AT - Income Tax

Sale of development rights as adventure in the nature of trade - capital gains - entitled to claim deduction under section 54F - CIT s powers to enhance an assessment - Held that - CIT(A) was not only changing the head of income but was also enhancing the assessment, since income which is assessed in the hands of assessee as per direction of CIT(A) had worked out at ₹ 49,41,225/- as against income assessed by the Assessing Officer under the head Long Term Capital Gain at ₹ 48,75,610/-. The second aspect is rate of tax. In case income is assessed under the head Long Term Capital Gain, the rate of tax is lower than the rate applied when the income is being assessed as business income. In view thereof in not giving an opportunity or any show cause notice of enhancement as required under section 251(2) the order of CIT(A) suffers from infirmity and the same cannot be sustained. After assessing income as Long Term Capital Gain, AO proposed to assess income as income from other sources, as per his comment in the remand report, which was confronted to the assessee; but when the income was assessed as business income, no notice whatsoever, was given by CIT(A). Accordingly, we hold that the enhancement made by CIT(A) does not survive. Thus, we reverse the order of CIT(A). The income was assessed in the hands of assessee as income from Long Term Capital Gain. CIT(A) has decided the issue of entitlement of claim under section 54F and held the assessee to be eligible for said claim. Revenue is not in appeal against the order of CIT(A). Accordingly, we direct the Assessing Officer to allow claim of assessee under section 54F - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of sale of development rights as adventure in the nature of trade versus capital gains.
2. Denial of deduction under section 54F of the Income Tax Act.
3. Power of the Commissioner of Income Tax (Appeals) regarding enhancement of income without giving a show cause notice.

Detailed Analysis:

1. Treatment of Sale of Development Rights:
The primary issue was whether the sale of development rights should be treated as an adventure in the nature of trade or as capital gains. The Commissioner of Income Tax (Appeals) (CIT(A)) treated the sale as business income, contrary to the assessee's claim and the Assessing Officer's (AO) assessment of it as capital gains. The CIT(A) concluded that the transaction was in the line of business of the firm where the assessee was a partner, and the intention was to develop the plot, not to hold it as a capital asset. Thus, the income from the sale of development rights was treated as business income, and the AO was directed to adopt the same after allowing the cost of acquisition without the benefit of indexation.

2. Denial of Deduction under Section 54F:
The assessee claimed a deduction under section 54F of the Act for the investment in a new residential property. The AO denied this deduction on the grounds that the sale deed for the new property was not registered, and the balance amount was still due. The CIT(A) held that if the income was to be assessed as long-term capital gains, the assessee would be entitled to the deduction under section 54F. The CIT(A) noted that the registration of the document after two years and the possession being received later did not disqualify the assessee from claiming the deduction.

3. Power of CIT(A) Regarding Enhancement of Income:
The CIT(A) enhanced the income by treating the sale of development rights as business income without giving a show cause notice to the assessee, which is required under section 251(2) of the Act. The assessee argued that the CIT(A) did not have the power to enhance the income by discovering a new source of income without providing a reasonable opportunity to show cause. The Tribunal agreed with the assessee, noting that the CIT(A)'s action of changing the head of income and enhancing the assessment without a show cause notice was not correct as per the provisions of the Act. The enhancement made by the CIT(A) was thus invalidated.

Conclusion:
The Tribunal reversed the order of the CIT(A), holding that the enhancement of income without a show cause notice was not sustainable. The income was to be assessed as long-term capital gains, and the assessee was entitled to the deduction under section 54F of the Act. The appeal of the assessee was allowed, and the AO was directed to allow the claim under section 54F.