2007 (12) TMI 549 - HC - Income Tax

Hotel Sale as Capital Income: Court Affirms ITAT's Ruling on Property Sold in Plots Post-Closure, Not Business Income.

THE COMMISSIONER OF INCOME TAX, THE JOINT COMMISSIONER OF INCOME TAX Versus HOTEL SREERAJ

The HC dismissed the revenue's appeal, affirming the ITAT's decision that the sale of hotel premises, post-closure, as small plots constituted capital ... - Issues involved: Determination of whether the sale of hotel premises by converting it into small plots after closing the hotel business amounts to business income or capital income.Summary:The appeal was filed by the revenue challenging the order passed by the Income Tax Appellate Tribunal regarding the nature of income from the sale of hotel premises. The assessee-Firm had run a hotel in Bangalore for several years before closing it and selling the premises by converting it into small plots to different persons. The assessing officer initially accepted the return showing the sale consideration as capital gains. However, the Commissioner of Income Tax re-opened the case and held that the transaction amounted to business income, based on the intention of the assessee in selling the property. The Tribunal, after considering the arguments, held that the sale was not in the nature of business and upheld the assessing officer's decision. The High Court noted that the main business of the Firm was running a hotel, not property development for profit, and therefore concluded that the sale did not constitute business income. Citing a precedent, the Court ruled in favor of the assessee, dismissing the appeal filed by the revenue.This judgment clarifies the distinction between business income and capital income in the context of property transactions following the closure of a business. The decision emphasizes the importance of assessing the intention and primary business activities of the taxpayer in determining the nature of income generated from such transactions.