2012 (11) TMI 930 - AT - Income Tax

Income from share sale treated as business income, not capital gains. No taxation without evidence. Revenue appeal dismissed.

Dy. Commissioner of Income Tax Circle-8(3), Mumbai Versus Sun Shine Realtors Pvt. Ltd.

Dy. Commissioner of Income Tax Circle-8(3), Mumbai Versus Sun Shine Realtors Pvt. Ltd. - TMI Issues Involved:1. Tax treatment of income from the sale of shares.2. Taxability of notional income.Issue-Wise Detailed Analysis:1. Tax Treatment of Income from the Sale of Shares:The Revenue contested the Commissioner (Appeals)'s decision to treat the income from the sale of shares as business income rather than capital gains. The assessee, a real estate developer, formed a joint venture with another developer, Naman, to bid for plots from MMRDA, resulting in the formation of three Special Purpose Vehicles (SPVs). The assessee held significant stakes in these SPVs and sold its shares in one SPV (NCPL) to K. Raheja Corp. Pvt. Ltd. shortly after the plots were allotted. The Assessing Officer initially treated the profit from this sale as capital gains, arguing that the assessee's activities did not constitute regular business. However, the Commissioner (Appeals) upheld the assessee's contention that the income should be treated as business income, given the nature of the assessee's business and the short duration between the allotment and sale of shares. The Tribunal agreed with the Commissioner (Appeals), noting that the assessee's activities were consistent with its business of real estate development and dismissed the Revenue's appeal on this ground.2. Taxability of Notional Income:The second issue concerned the taxability of notional income related to the sale of shares in the other two SPVs (NRPL and NPPL). The Assessing Officer argued that the shares were transferred at face value despite the plots' significant market value, suggesting that the assessee should have earned a higher profit. The Commissioner (Appeals) rejected this, stating that no notional income could be taxed unless it had accrued or been received. The Tribunal upheld this view, emphasizing that the transactions were governed by the joint venture agreements, which included specific clauses for share transfers in case of funding defaults. The Tribunal found no evidence of any additional unrecorded income and cited several case laws supporting the principle that only actual income received or accrued could be taxed. Consequently, the Tribunal dismissed the Revenue's appeal on this ground as well.Conclusion:The Tribunal upheld the Commissioner (Appeals)'s decisions on both issues, concluding that the income from the sale of shares should be treated as business income and that no notional income could be taxed in the absence of evidence of additional income. The Revenue's appeal was dismissed in its entirety.