2017 (6) TMI 521 - HC - Income Tax

Property gains from long-held fixed assets cannot be taxed as business income without trading intent

The HC ruled in favor of the assessee on two key issues. First, regarding income classification from property development, the court held that gains from ... Nature of income from the development of immovable property - adventure in the nature of trade - profit from sale of such property is treated as business income or capital gains - Held that:- This was gain from improvement of the assessee’s property which the assessee held since 1965 and had all along shown in its books as fixed assets - there was no finding on the part of the AO that the assessee was involved in the business of real estate at any point of time - the intention to hold the property was not an adventure in the nature of trade - hence the transaction could not come within the ambit of adventure in the nature of trade - also the gain from sale of such property cannot be held as business income - Decided in favor of assessee Whether the Loan advanced can be treated as deemed dividend u/s 2(22)(e) - Held that:- deemed dividend is to be charged to income tax at the hands of the common shareholder but not at the hands of the recipient of money unless the recipient company is also the shareholder of the company from whom the amount has been received - Assessee had not furnished any explanation in respect of the intention of showing trading of share - AO has also not doubted the genuineness of the documents placed on record by the assessee - hence no disallowance can be made - Decided in favor of assessee Issues Involved:1. Nature of income from the development of immovable property.2. Treatment of loans as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act, 1961.3. Treatment of loss from purchase and sale of shares.Detailed Analysis:1. Nature of Income from Development of Immovable Property:The primary issue was whether the development of the assessee's immovable property constituted an adventure in the nature of trade, thus making the profit from the sale of flats taxable as business income, or if it should be treated as income from capital gains. The assessee had held the property since 1965 and entered into a development agreement in 1994, followed by supplementary agreements. The assessing officer treated the gain from the sale of flats as business income, arguing that the development agreement changed the character of the property to stock-in-trade. However, the Tribunal and the Commissioner of Income Tax found that the income should be treated as long-term capital gains, as the property was held as a fixed asset and the assessee was not involved in the business of real estate.The Court agreed with the Tribunal and the Commissioner, emphasizing that the determination of whether an activity is an adventure in the nature of trade involves a factual enquiry and analysis of the agreement. The Court cited several precedents, including G. Venkataswami Naidu & Co. vs. CIT, which provided factors for determining the nature of transactions. The Court concluded that the transactions did not constitute an adventure in the nature of trade, as the assessee had not engaged in property development as a business and had retained a substantial portion of the property for self-use.2. Treatment of Loans as 'Deemed Dividend':The second issue pertained to the treatment of certain loans obtained by the assessee from Rungta Engineering Co. Pvt. Ltd. as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act. The assessing officer treated a sum of Rs. 2,37,450/- as deemed dividend, arguing that the differential between the sums received and repaid constituted a loan. However, the Tribunal and the Commissioner found that deemed dividend should be taxed in the hands of the common shareholder, not the recipient company, unless the recipient is also a shareholder.The Court upheld this view, referring to precedents such as CIT vs. Universal Medicare Pvt. Ltd. and CIT vs. Ankitech Pvt. Ltd., which established that deemed dividend should be taxed in the hands of the shareholder. The Court agreed with the Tribunal and the Commissioner that the amount could not be taxed as deemed dividend in the hands of the assessee.3. Treatment of Loss from Purchase and Sale of Shares:The third issue involved the treatment of a loss of Rs. 25,30,396/- arising from the purchase and sale of shares, which the assessing officer disallowed, suspecting it to be a colorable device to evade tax. The Tribunal found that the assessing officer had not provided any material evidence to show that the transactions were fictitious. The Tribunal noted that the broker involved had been suspended, but this alone did not implicate the assessee.The Court agreed with the Tribunal's reasoning, stating that there was no substantial evidence to support the assessing officer's claim that the transactions were fictitious. The Court found no reason to interfere with the Tribunal's decision to allow the assessee's claim for the loss as a trading loss.Conclusion:The appeal was dismissed, with the Court affirming the Tribunal's and the Commissioner's findings on all three issues. The income from the development of the property was to be treated as long-term capital gains, the loans were not to be taxed as deemed dividend in the hands of the assessee, and the loss from the purchase and sale of shares was to be allowed as a trading loss. The Court found no substantial question of law that warranted interference with the impugned order.