2023 (12) TMI 223 - HC - Income Tax

Capital gains from property sale taxed in hands of AOP members, not AOP itself

THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus M/s SHREE AMI OFFICE OWNERS ASSOCIATION

THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus M/s SHREE AMI OFFICE OWNERS ASSOCIATION - TMI Issues Involved:1. Taxability of income from the sale of property in the hands of the members of the assessee versus the assessee itself.2. Classification of income from the sale of property as Capital Gain versus Business Income.3. Appropriate Assessment Year for taxing the income from the sale of property.Summary:Issue 1: Taxability of Income from Sale of PropertyThe High Court addressed whether the income earned from the sale of the property, Vision House, should be taxed in the hands of the members of the assessee (an Association of Persons, AOP) or the assessee itself. The Tribunal upheld the CIT (Appeal)'s finding that the members were the real owners of the property. The funds for the purchase and construction were provided by the members, and the AOP issued shares and an allotment certificate to the members, granting them rights in the property. The development and BU permissions also listed the members as owners. Consequently, the income was liable to be taxed in the hands of the members in proportion to their holdings.Issue 2: Classification of Income as Capital Gain or Business IncomeThe CIT (Appeal) and the Tribunal both held that the income from the sale of the property should be classified as Capital Gain rather than Business Income. The CIT (Appeal) found no evidence that the purchase and sale of the property were intended for profit-making as a trading transaction. The AOP was not engaged in an organized business activity of purchasing and selling property. Therefore, the transaction was rightly offered as capital gains by the members for the Assessment Year 2008-09.Issue 3: Appropriate Assessment YearThe Tribunal and the CIT (Appeal) concluded that the income from the sale of the property should be taxed in the Assessment Year 2008-09. The final conveyance deed was executed, and possession was handed over to the buyer on 22.05.2007, which fell within the financial year 2007-08. The agreement to sell and part payment in the previous financial year (2006-07) did not constitute a transfer of property. The Tribunal cited precedents where an agreement to sell without possession does not equate to a transfer under Section 2(47) of the Income Tax Act.Conclusion:The High Court found no substantial question of law arising from the Tribunal's order. The appeal was dismissed, affirming that the income from the sale of Vision House was taxable as capital gains in the hands of the members for the Assessment Year 2008-09. The AOP was not considered the owner of the property post-allotment to its members.