2023 (10) TMI 849 - AT - Income Tax

Revision u/s 263 - gain / loss on sale of property - Correct head of income - treatment of income from Capital Gain as Income from Business by PCIT - HELD THAT - The assessee has sub-divided the land into parts to fetch a higher market price on the sale of the same and at the same time the Revenue also could not bring on record any evidence to prove that the assessee held the capital asset as stock in trade and the purchase and sale of property was with a view to earn profits through trading transactions. AO after making necessary enquiries and thorough examination / verification of the documents and the computation statement submitted by the assessee accepted the net long term capital gains offered by the assessee in his revised return of income. Further, it is noted that the Ld. Pr. CIT ought to change the character of the income i.e., from capital gains to business income As in the case of CIT vs. Kasturi Estates (P) Ltd 1965 (10) TMI 7 - MADRAS HIGH COURT has clearly held that when the asset is held as a capital asset by the assessee, where the intention of the assessee is to derive higher profits by dividing it into plots cannot alter the nature of income earned by the assessee. Also relying on the case of A. Mohammed Mohideen 1988 (11) TMI 95 - MADRAS HIGH COURT and also SNF (India) Pvt Ltd 2023 (6) TMI 219 - ITAT VISAKHAPATNAM we are of the considered opinion that the direction given by the Ld. Pr. CIT to the Ld. AO to re-do the assessment by invoking the provisions of section 263 of the Act is not in sustainable in law. As assessee is not engaged in systematic series of transactions of purchase and sale of land but, however has divided the land into plots only to derive higher profits in the nature of capital gains and has offered the same while filing the revised return of income which was also not disputed by the Ld. AO. Appeal of the assessee is allowed.

Summary

Issues:
The judgment involves an appeal against the order of the Principal Commissioner of Income Tax, Vijayawada under Section 263 of the Income Tax Act, 1961 for the Assessment Year 2016-17.

Treatment of Income from Capital Gain:
The dispute in the case revolves around the treatment of income from Capital Gain as Income from Business by the Principal Commissioner of Income Tax.

The Assessee filed a return of income for the AY 2016-17 declaring total income, including agricultural income. The case was selected for limited scrutiny regarding the correctness of capital gains/loss on property sale. The Assessee initially offered income from other sources, but later revised the computation to show long term capital gains on the sale of a vacant site. The Assessing Officer (AO) initiated penalty proceedings under section 271(1)(c) for alleged concealment of income and under section 271D for violation of section 269SS. Subsequently, the Principal Commissioner issued a notice under section 263, setting aside the assessment order and directing a re-assessment.

The Assessee challenged the Principal Commissioner's order on the grounds that the AO had properly examined and verified the capital gains issue. The Assessee argued that the land sale was not an adventure in trade but a realization of capital investment. The Assessee relied on legal precedents to support this argument.

The Tribunal analyzed the facts and legal precedents. It noted that the Assessee had subdivided the land to enhance its market value, not for trading purposes. The Tribunal cited the Madras High Court's ruling that ownership of land does not constitute a trade. It also referred to a previous Tribunal decision supporting the Assessee's position. The Tribunal concluded that the Principal Commissioner's direction to re-do the assessment was not legally sustainable. Therefore, the Tribunal set aside the Principal Commissioner's order under section 263 and ruled in favor of the Assessee.

In conclusion, the Tribunal allowed the Assessee's appeal, finding in favor of the Assessee regarding the treatment of income from Capital Gain as Income from Business.