2014 (5) TMI 743 - AT - Income Tax

Tribunal's Decision: Income Classification, Business Claim Dismissed, Expense Deductions, Security Deposits Inclusion

The Tribunal upheld the classification of income from the sale of constructed area/allotted flats as short-term capital gains (STCG), dismissed the ... Business income treated as STCG – Profit from sale of constructed area/allotted flats – Held that:- CIT(A) was rightly of the view that the constructed area/allotted flats received by the assessee as consideration from the developer against transfer of its immovable property were in the nature of capital assets and the profit arising from the sale thereof was chargeable to tax in the hands of assessee as capital gain and not business income - the assessee has also not been able to put forth any contention or material to show that the surrender of constructed area /allotted flats to the developers constituted business activity of the assessee – the order of the CIT(A) is upheld – Decided against Assessee. Deduction of various expenses – Held that:- The deduction on account of expenses incurred by the assessee on cost of improvement of the assets sold or in connection with the transfer of capital assets only can be allowed - assessee has contended that some of the expenses claimed by the assessee are falling in this category – thus, the matter is remitted back to the AO for verification of the claim – Decided in favour of Assessee. Amount added on account of security deposits adjusted - Surrender of constructed area /allotted flats to the builder – Held that:- CIT(A) himself took note of the fact that the security deposit was received by assessee in lieu of 1950 sq. ft. area – he overlooked the fact that the amount of security deposit received by the assessee was adjusted against the sale consideration receivable against the area of 5270 sq.ftl including the area of 1950 sq. ft surrendered during the year under consideration and what the assessee actually received was only Rs.49,86,500 - The assessee thus had not received the amount of security deposit over and above constructed area of 8635 sq ft. and since the said security deposit was adjusted against the area of 1950 surrendered by the assessee, the consideration received by the assessee was only to the extent of 8435 sq. ft built up area, the value of which was already declared by the assessee while computing the LTCG arising from the sale of land - the addition made by CIT(A) by way of enhancement is not sustainable – Decided in favour of Assessee. Enhancement of amount – Held that:- CIT(A) observed that security deposit of Rs.25,00,000 was received by assessee from the developer as per the development agreement on the condition that the assessee would have an option to adjust the same by surrendering the constructed area of 1950 sq.ft. allotted to it - The rate for surrendering the area of 1950 sq. ft in the case of adjustment of security deposit thus was fixed at the time of execution of development agreement and there was no case of making any enhancement on the part of CIT(A) by adopting the higher rate at which other constructed areas was surrendered by the assessee to the developer – thus, the addition made by the CIT(A) is set aside – Decided in favour of Assessee. Issues Involved:1. Classification of income from sale of constructed area/allotted flats as business income or short-term capital gains (STCG).2. Deduction of expenses incurred by the assessee.3. Consideration of Rs.25,00,000/- as part of sale consideration.4. Enhancement of income by Rs.23,13,000/- by the CIT(A).5. Enhancement of income by Rs.4,27,050/- by the CIT(A).6. Classification of gains from transfer of land along with flats as long-term capital gains (LTCG).Detailed Analysis:1. Classification of Income:Issue: Whether the profit arising from the sale of constructed area/allotted flats should be taxed as business income or short-term capital gains (STCG).Judgment: The Tribunal upheld the authorities' view that the constructed area/allotted flats received by the assessee as consideration from the developer were capital assets. The profit arising from their sale was chargeable to tax as capital gains and not business income. The Tribunal dismissed the assessee's contention, affirming that the surrender of constructed area/allotted flats did not constitute a business activity.2. Deduction of Expenses:Issue: Whether the expenses incurred by the assessee should be allowed as deductions.Judgment: This issue is consequential to the classification of income. Since the income was held to be chargeable as STCG, deductions could only be allowed for expenses incurred on the cost of improvement or in connection with the transfer of capital assets. The Tribunal restored this issue to the Assessing Officer (AO) to verify and decide in accordance with the law.3. Consideration of Rs.25,00,000/-:Issue: Whether the amount of Rs.25,00,000/- on account of security deposits should be included in the sale consideration.Judgment: The Tribunal noted that the amount of Rs.25,00,000/- was already offered by the assessee as income for AY 2005-06 and was incorrectly added by the AO for AY 2004-05. The Tribunal upheld the assessee's stand that the amount was chargeable to tax in AY 2005-06, not in AY 2004-05. The enhancement made by the CIT(A) on this issue was based on a wrong presumption, and the Tribunal deleted this enhancement.4. Enhancement by Rs.23,13,000/-:Issue: Whether the CIT(A) was justified in enhancing the income by Rs.23,13,000/-.Judgment: The Tribunal found that the enhancement was made on the wrong presumption that the security deposit was received in addition to the constructed area/allotted flats. The security deposit was actually adjusted against the sale consideration, and the assessee did not receive it over and above the constructed area. The Tribunal deleted the enhancement made by the CIT(A).5. Enhancement by Rs.4,27,050/-:Issue: Whether the CIT(A) was justified in enhancing the income by Rs.4,27,050/-.Judgment: The Tribunal observed that the security deposit of Rs.25,00,000/- was received with the option to adjust it by surrendering 1950 sq.ft. constructed area. The rate for this adjustment was fixed at the time of the development agreement. There was no basis for the CIT(A) to adopt a higher rate for enhancement. The Tribunal deleted the enhancement made by the CIT(A).6. Classification of Gains from Transfer of Land:Issue: Whether the gains from the transfer of land along with flats should be classified as long-term capital gains (LTCG).Judgment: For AY 2006-07, the Tribunal followed its conclusion from AY 2005-06, upholding the authorities' action in treating the profit as STCG. The Tribunal dismissed the assessee's ground on this issue.Conclusion:The appeals were partly allowed. The Tribunal upheld the classification of income as STCG, restored the issue of expense deductions to the AO for verification, and deleted the enhancements made by the CIT(A) regarding the security deposit and additional sale consideration.