Sale of Residential Buildings under Sec-44AD

[giri gattupalli]

Respected Sir,

One of my client is in construction business. He purchases vacant site and get them registered in favour of him and he constructs house and sells to customers and register in favour of them. During F.Y 2025-26 he sold 5 house properties for sale consideration of Rupees approximately One crore and fifty lakhs and register in favour of them. He is registered under GST and turnover has been disclosed in GST returns.

Please advise me that for the purpose of Income tax return filing the above business can be covered u/s 44 AD or whether it is covered under Capital gain. Please advise.

[Sanjeev Agarwal]

On the facts stated, the activity should ordinarily be treated as business income and not capital gains.

The client is purchasing vacant sites, constructing residential houses on those sites and thereafter selling and registering the completed houses in favour of customers. The nature and sequence of transactions indicate that the properties are acquired and developed with the intention of sale in the ordinary course of business. Accordingly, the land and constructed houses would generally constitute stock-in-trade/business inventory, and the resulting profit would be taxable under "Profits and Gains of Business or Profession."

The fact that the vacant sites and subsequently constructed houses were registered in the client's own name does not by itself convert them into capital assets. The relevant consideration is the intention and character of holding and the overall nature of the activity.

Therefore, the Rs. 1.50 crore approximately received from sale of the five houses should, prima facie, be considered business turnover, rather than sale consideration giving rise to capital gains.

Section 44AD

If the client is an eligible assessee and the activity satisfies the conditions of section 44AD, the presumptive taxation provisions of section 44AD may be considered. There is no general exclusion merely because the business involves construction and sale of residential houses.

However, before adopting section 44AD, the following should be verified:

1. Constitution and residential status of the assessee;

2. Exact nature of the construction/development activity;

3. Whether the sites were acquired with the intention of resale;

4. Whether similar activity has been carried on regularly;

5. Treatment of land/houses in the books as stock-in-trade or investment; and

6. Cash and non-cash receipt details for determining the applicable turnover limit.

The GST turnover supports the factual position that the client is carrying on a business, but GST treatment by itself does not determine the head of income under the Income-tax Act.

Preliminary view: Strong - Business income; section 44AD can be considered subject to eligibility. Capital-gain treatment would generally not be appropriate on the facts stated.

AI Summary

Presumptive taxation for residential construction sales requires distinguishing business income treatment from capital gains treatment.
Income-tax treatment of receipts from a business that acquires vacant sites, constructs residential houses, and sells them to customers is in issue. The query considers whether the activity may be covered by presumptive taxation under section 44AD or should fall under the capital gains framework. The business is GST-registered and has disclosed turnover from the residential property sales in its GST returns.