Property transaction gains treated as business income despite assessee's challenge under adventure in nature of trade doctrine

ITAT Pune dismissed the assessee's appeal challenging treatment of property transaction gains as business income. The tribunal upheld CIT(A)/NFAC's order, ruling that continuous purchase and sale of properties with intention to resell at profit constitutes adventure in nature of trade. Relying on precedent, the tribunal found activities with trappings of trade fall within business income scope, even without traditional commerce elements. The assessee's adoption of Vivad se Vishwas Scheme did not affect this classification.

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The core legal questions considered by the Tribunal in this appeal are:

1. Whether the assessment order treating the entire sale consideration from the sale of immovable properties as business income is valid and in accordance with law, or whether it violates principles of natural justice.

2. Whether the income arising from the sale of immovable properties held by the assessee should be treated as long-term capital gains (LTCG) under the Income-tax Act, 1961, or as business income.

3. Whether the assessee is entitled to claim indexation benefits and deduction of cost of acquisition and transfer expenses from the sale consideration in computing taxable income.

4. Whether the assessee can maintain two portfolios-one for investment and another for trading-and thereby segregate income arising from sale of properties accordingly.

Issue-wise Detailed Analysis

Issue 1: Validity of Assessment and Principles of Natural Justice

Relevant Legal Framework and Precedents: The assessment was conducted under the provisions of the Income-tax Act, 1961, with notices issued under sections 143(2) and 142(1). Principles of natural justice require that the assessee be given an opportunity to present submissions and evidence before adverse findings are made.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee did not file any submissions during the assessment proceedings despite statutory notices. The Assessing Officer proceeded to treat the entire sale consideration as business income based on recurring issues established in earlier assessments. The Tribunal found no infirmity in the procedure followed, given the assessee's non-response and prior history of similar treatment.

Key Evidence and Findings: The assessee's failure to respond to notices and the recurring nature of the issue across assessment years justified the Assessing Officer's approach.

Application of Law to Facts: The Tribunal held that the assessment was not illegal or violative of natural justice as the assessee had ample opportunity but chose not to engage in the proceedings.

Treatment of Competing Arguments: The assessee's ground challenging the legality of the assessment was dismissed due to lack of procedural infirmity.

Conclusion: The assessment order was valid and did not violate principles of natural justice.

Issue 2: Nature of Income - Business Income vs. Long-Term Capital Gains

Relevant Legal Framework and Precedents: The Income-tax Act distinguishes between business income and capital gains. Long-term capital gains arise on transfer of capital assets held for more than 24 months (for immovable property). The question is whether the transactions are "adventure in the nature of trade" or genuine capital asset sales. The Tribunal relied on precedents including the Delhi Tribunal decision in Young Indian vs. ACIT (2022), which held that any activity akin to business or adventure in the nature of trade falls within business income. The Madhya Pradesh High Court decision in CIT vs Jawahar Development Association (1981) was also relied upon, which held that purchase made solely for resale at profit with no intention to hold or use the property is an adventure in the nature of trade.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had been consistently treated as engaged in trading of properties in multiple assessment years, including those settled under the Vivad Se Vishwas Scheme. The properties sold in the instant year were held for approximately 7 to 12 years, but the Tribunal found that the assessee had not demonstrated a genuine intention to hold the properties as investments separate from trading activities. The assessee's claim of maintaining two portfolios-investment and trading-was not substantiated with evidence.

Key Evidence and Findings: The assessee's prior history of treating similar transactions as business income, acceptance of tax liabilities under Vivad Se Vishwas Scheme for multiple years, and lack of material to prove separate portfolios were critical. The properties were shown as investments in the balance sheet, but the Tribunal found this was not determinative given the overall conduct.

Application of Law to Facts: The Tribunal applied the principle that intention and conduct determine the nature of income. Since the assessee was continuously engaged in purchase and sale of properties and had not established separate investment portfolios, the income was rightly treated as business income.

Treatment of Competing Arguments: The assessee's argument that the properties were held as capital assets for investment and thus gains should be taxed as LTCG was rejected due to lack of evidence and contrary conduct in earlier years. The Tribunal also rejected the contention that opting for Vivad Se Vishwas Scheme implied acceptance of business income characterization, clarifying that it was a settlement mechanism but did not preclude contesting the issue.

Conclusion: The income from sale of properties was correctly treated as business income rather than long-term capital gains.

Issue 3: Deduction of Cost of Acquisition and Transfer Expenses

Relevant Legal Framework and Precedents: Section 48 of the Income-tax Act allows deduction of cost of acquisition and transfer expenses in computing capital gains. For business income, expenses incurred wholly and exclusively for business can be deducted.

Court's Interpretation and Reasoning: The Assessing Officer initially did not deduct cost of acquisition or transfer expenses from the sale consideration while treating it as business income. The Commissioner of Income Tax (Appeals) / NFAC directed deduction of cost of acquisition amounting to Rs. 2,18,69,120 and transfer expenses of Rs. 9,96,064 from the sale consideration of Rs. 4,01,10,000 before treating the balance as business income.

Key Evidence and Findings: The Tribunal noted the CIT(A)'s direction was reasonable and in line with principles of business income computation, allowing deduction of expenses incurred on acquisition and transfer.

Application of Law to Facts: Deduction of cost and expenses was appropriate even if income was business income, as these were necessary costs related to the property transactions.

Treatment of Competing Arguments: The assessee's claim for full indexation benefits was not accepted as the income was treated as business income, not capital gains.

Conclusion: Deduction of cost of acquisition and transfer expenses was rightly allowed before computing business income.

Issue 4: Claim of Maintaining Two Portfolios - Investment and Trading

Relevant Legal Framework and Precedents: It is settled law that an assessee may maintain two portfolios, one for investment and another for trading, and income from each can be treated differently. However, the burden lies on the assessee to prove such segregation.

Court's Interpretation and Reasoning: The Tribunal found that the assessee failed to produce any material evidence to substantiate the claim of maintaining two separate portfolios. The properties were shown as investments in balance sheets, but this alone was insufficient. The consistent treatment of similar transactions as business income in earlier years and the absence of any clear demarcation or accounting segregation led the Tribunal to reject this claim.

Key Evidence and Findings: No documentary or accounting evidence was produced to show separate portfolios. The prior years' assessments and settlements under Vivad Se Vishwas Scheme indicated continuous trading activity.

Application of Law to Facts: Without evidence, the claim of two portfolios cannot be accepted, and the income must be treated in accordance with the overall conduct and prior treatment.

Treatment of Competing Arguments: The assessee's reliance on judicial precedents supporting two portfolios was acknowledged but found inapplicable due to lack of factual proof.

Conclusion: The claim of maintaining two portfolios was rejected.

Significant Holdings

"Not only a business itself but also any activity akin to business would be an adventure in nature of trade and a single transaction may constitute same and alleged activity need not be allied to already existing. 'Business' may not mean carrying out trade or commerce or manufacture per se but any activity which has some trapping of a trade, commerce or manufacture would fall within ambit of expression 'in nature of trade or commerce'."

"Where purchase is made solely and exclusively with intention to resell at a profit and purchaser has no intention of holding property for himself or otherwise enjoying or using it, presence of such an intention raises a strong presumption that transaction is an adventure in nature of trade."

The Tribunal upheld the treatment of the entire sale consideration after deducting cost of acquisition and transfer expenses as business income, rejecting the assessee's contention that the gains should be treated as long-term capital gains.

The Tribunal also held that the assessment order was valid and not violative of natural justice principles, given the assessee's failure to participate in assessment proceedings and prior consistent treatment of similar transactions as business income.

The claim of maintaining two portfolios-investment and trading-was rejected due to lack of substantiating evidence.

Accordingly, all grounds raised by the assessee were dismissed and the appeal was rejected.

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