2020 (10) TMI 354 - AT - Income Tax

Deduction u/s 54 - AO has treated the amounts received by the assessee as business receipts, solely for the reason that the amounts were received in instalments - decision of CIT(A) in holding that the amounts received by the assessee is assessable as long term capital gains - HELD THAT - The undisputed facts remain that the assessee is the owner of land and he has transferred the same to the developer, M/s Shriram Properties Ltd under a Joint Development Agreement. It is a fact that the assessee has not carried on any venture or business activity by so transferring the land. On the contrary, it is M/s Shriram Properties Ltd, which is carrying on business activity. The role of the assessee is restricted to transferring the land and receiving the consideration. There is no dispute with regard to the fact that the land was held by the assessee as capital asset only. Hence the transfer of land would give rise to capital gains only as per the provisions of the Act. As happened that the consideration for transfer of land was so fixed that the assessee would be receiving 2.64% of the sale consideration of flats that are going to be constructed. Hence the assessee would be receiving amounts as and when the flats are sold. As rightly observed by Ld CIT(A), the receipt of consideration over a period on sale of a capital asset does not change the true nature of transactions from capital gains to business. Irrespective of timing of receipt of sale consideration, the transfer of a capital asset would give rise to capital gains only. CIT(A) was justified in holding that the amounts received by the assessee is assessable as long term capital gains. Amounts received by the assessee is assessable as long term capital gains. We also notice that the there was no occasion for the AO to examine the claim for deduction u/s 54 of the Act, since he had assessed the receipts as business income. Accordingly, we find merit in the contentions of the Ld D.R. Accordingly, we restore the issue of claim for deduction u/s 54 - Appeals of the revenue are treated as partly allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the revenue received by the assessee from the developer of a residential project should be assessed as Capital Gains or Business Income.
2. Whether the assessee is entitled to a deduction under Section 54 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Revenue Received (Capital Gains vs. Business Income):

The primary issue in these appeals is whether the revenue received by the assessee from the developer should be assessed as capital gains or business income. The assessee's father owned certain lands and entered into a development agreement with a developer. After the father's death, the legal heirs, including the assessee, entered into a new development agreement with the developer. The assessee opted to receive 2.64% of the revenue from the sale of the residential apartments.

The Assessing Officer (AO) assessed the amounts received by the assessee as business income, arguing that the assessee was engaging in an adventure in the nature of trade because he received revenue year after year upon the sale of apartments. The AO also noted that the possession of land was handed over to the developer before March 2010, when the project started.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the amounts received by the assessee should be treated as long-term capital gains. The CIT(A) noted that the transaction was essentially a transfer of co-ownership property by entering into a Joint Development Agreement (JDA) and could not be treated as an adventure in the nature of trade. The CIT(A) also observed that the other co-owners of the land had declared their receipts as long-term capital gains, which had been accepted by their respective assessing officers.

The Income Tax Appellate Tribunal (ITAT) agreed with the CIT(A), stating that the receipt of consideration over a period on the sale of a capital asset does not change the nature of the transaction from capital gains to business income. The ITAT emphasized that the assessee was the owner of the land and had transferred it to the developer, and that the land was held as a "capital asset." Therefore, the amounts received by the assessee should be assessed as long-term capital gains.

2. Deduction under Section 54 of the Income-tax Act, 1961:

The assessee claimed a deduction under Section 54 of the Income-tax Act, 1961, against the long-term capital gains for investment made in a house property. However, the AO did not examine this claim because he assessed the receipts as business income.

The ITAT acknowledged that there was no occasion for the AO to examine the claim for deduction under Section 54 since he had assessed the receipts as business income. Consequently, the ITAT restored the issue of the claim for deduction under Section 54 to the file of the AO for examination.

Conclusion:

The ITAT upheld the CIT(A)'s decision that the amounts received by the assessee should be assessed as long-term capital gains and not as business income. The ITAT also restored the issue of the assessee's claim for deduction under Section 54 to the AO for examination. Thus, the appeals of the revenue were treated as partly allowed for statistical purposes.