2016 (4) TMI 1049 - AT - Income Tax

Assessee's Sale of Flat and Plots Classified as Business Income

The Tribunal ruled in favor of the assessee, determining that income from the sale of flat and plots should be classified as business income rather than ... Business income vs capital gains - assessment of profits from real estate project as business income - completed contract method - invocation of section 50C - remand for verificationBusiness income vs capital gains - completed contract method - assessment of profits from real estate project as business income - Profit on sale of one flat and two plots to be assessed as business income and not as capital gains. - HELD THAT: - The Tribunal found on the materials that the assessee was engaged in construction and real estate promotion, that earlier years' returns and the Siliguri Municipal Corporation enlistment confirmed promoter/developer status, and that the assessee followed the completed contract method so that closing WIP in respect of flats/plots was nil as on 31.3.2005. Revenue had not controverted these findings before the Tribunal. The Tribunal held that revenue could not change its stance for the same project merely because closing stock was nil in the books or because there was no sale in the immediately preceding year. Consequently the profits from sale of the flats and plots must be treated as business income. The Tribunal also observed that the AO's estimation of fair market value was without basis and the CIT(A)'s reliance on that estimation was not sustained. [Paras 2]Assessee's receipts from sale of the flat and plots are business income; therefore capital gains treatment is not applicable and the AO's estimated valuations are not confirmed.Invocation of section 50C - Application of section 50C to determine sale consideration does not arise in the facts of this case. - HELD THAT: - The Tribunal held that the direction to apply stamp valuation under section 50C was not warranted because the properties were held as stock-in-trade of a developer and not as capital assets. The Tribunal noted that the amendment to section 43CA (and related application of stamp valuations to stock-in-trade) applies only from assessment year 2014-15 and is not relevant to the assessment year under appeal. The Tribunal relied on the Madras High Court decision in CIT v. Thiruvengadam Investments P Ltd (as indicated in the order) to support that properties treated as business assets preclude invocation of section 50C for the year under appeal. [Paras 2]Section 50C valuation is not to be applied for determination of consideration in this assessment year; the AO shall not adopt stamp valuation under section 50C for these sales.Remand for verification - Expenditure on purchase of construction materials (Rs. 4,60,858) set aside to AO for verification and decision on genuineness; to be allowed if found genuine. - HELD THAT: - The Tribunal, having accepted that the assessee is a real estate developer and that the claimed expenditure relates to the project, found it appropriate in the interest of justice to remit the issue to the AO. The AO is directed to verify the bills and vouchers submitted by the assessee and, if found genuine, to allow the expenditure as a deduction. The Tribunal therefore did not decide the disallowance on merits but remitted the matter for fresh verification. [Paras 3]Issue remanded to the AO to verify vouchers and decide the allowability of the construction-materials expenditure; ground allowed for statistical purposes.Remand for verification - Labour charges (Rs. 1,49,140) set aside to AO for verification of genuineness based on muster rolls and supporting evidences. - HELD THAT: - The Tribunal examined the muster rolls and ledger entries and rejected the CIT(A)'s conclusion that signatures indicated fabrication. Finding prima facie that labourers had affixed thumb impressions and that the documents warranted verification, the Tribunal remitted the issue to the AO to verify the genuineness of the labour payments and to decide the claim on the basis of evidence filed. The Tribunal therefore did not adjudicate the disallowance on merits but directed fresh inquiry. [Paras 4]Issue remanded to the AO to verify the muster rolls and related evidence and decide on allowability of labour charges; ground allowed for statistical purposes.Final Conclusion: The appeal is partly allowed: the Tribunal holds that the sales of the flat and plots are business income (not capital gains) and that section 50C valuation is not to be applied for this assessment year; the AO's arbitrary estimations are not confirmed. Claims for construction materials and labour charges are remitted to the AO for verification and decision; the appeal is disposed of partly in favour of the assessee and partly remitted for factual verification. Issues Involved:1. Classification of income from the sale of flat and plots of land as capital gains versus business income.2. Disallowance of expenditure for purchase of construction materials.3. Disallowance of expenditure on labor charges.Issue-wise Detailed Analysis:1. Classification of Income from Sale of Flat and Plots of Land:- Facts: The assessee, engaged in share trading and real estate business, declared the sale of flat and plots as business income. The AO reclassified this as capital gains without deducting the cost of acquisition, arguing that the real estate activity was not carried out by the assessee.- Assessee's Argument: The assessee contended that the profits from the sale of flat and plots, part of the 'Neel Kamal Apartment' project, should be treated as business income. The assessee followed the 'completed contract method' and had consistently declared such sales as business income in previous years.- AO's Stand: The AO doubted the genuineness of the sales and estimated the fair market value, treating the gains as capital gains.- CIT(A) Decision: The CIT(A) upheld the AO's decision but directed the AO to determine the fair market value of the flat and plots for accurate capital gains calculation.- Tribunal's Decision: The Tribunal found that the assessee had been consistently treated as a real estate promoter and developer, and the sale proceeds should be considered business income. The Tribunal rejected the AO's estimation of fair market value and ruled that the provisions of section 50C of the Act, applicable to capital assets, do not apply to business assets. The Tribunal allowed the assessee's appeal on this ground.2. Disallowance of Expenditure for Purchase of Construction Materials:- Facts: The AO disallowed Rs. 4,60,858/- claimed by the assessee for construction materials, questioning the purpose of the expenditure.- Assessee's Argument: The assessee provided details and bills for the expenditure, stating it was for boundary wall and pavement construction related to the sold plots.- CIT(A) Decision: The CIT(A) upheld the disallowance, doubting the reliability of the evidence provided.- Tribunal's Decision: The Tribunal directed the AO to verify the bills and vouchers and allow the expenditure if found genuine. The appeal was allowed for statistical purposes.3. Disallowance of Expenditure on Labor Charges:- Facts: The AO disallowed Rs. 1,49,140/- claimed for labor charges, questioning the genuineness of the expenditure.- Assessee's Argument: The assessee provided muster rolls with thumb impressions of laborers as evidence of genuine expenditure.- CIT(A) Decision: The CIT(A) upheld the disallowance, observing that the muster rolls seemed to be signed by one person.- Tribunal's Decision: The Tribunal found the CIT(A)'s observation unjustified and directed the AO to verify the genuineness of the labor charges. The appeal was allowed for statistical purposes.Conclusion:The Tribunal ruled in favor of the assessee on the classification of income from the sale of flat and plots as business income and directed the AO to verify the genuineness of the disallowed expenditures for construction materials and labor charges. The appeal was partly allowed for statistical purposes.