TaxTMI 
TaxTMI 
2026 (8) TMI 486
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....relevant assessment year (AY) is 2017-18. Though by the present appeal the Appellant-Revenue has raised nine questions of law, however, learned counsel on behalf of the Appellant-Revenue has restricted his challenge only in respect of question of law No. 1, which is reproduced below:- i. Whether on the facts and circumstances of the case and in law, the tribunal has erred in allowing the assessee's appeal on the issue of treatment and taxation of Capital Gain on sale of flats under consideration as business income? 2. Briefly the facts are as follows:- (i) The Respondent-Assessee is in the business of buying properties and leasing out those properties on a long-term basis for earning rental income. The Respondent-Assessee developed a real estate project in South Bombay at CS No. 406, Babulnath Cross Lane, Pandita Ramabai Marg, Near Wilson College, Mumbai-400007, and the completed project was eventually named as 7, Marine Drive (hereinafter referred to as the "Project"). For the relevant AY, the Respondent-Assessee e-filed their original Return of Income (ROI), declaring total income at Rs. 12,84,53,100/-, and the same was processed under Section 143(1) of the Act. A ....
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....ings, houses, bungalows, factories, sheds, recreational clubs and facilities including golf courses, sports and social clubs, trade premises, plant, machinery, public buildings, lands, farms or any other kinds of assets, estates or property, immoveable rights or chose in action" relying on such "Other Objects", the AO reached to the conclusion that the proceeds from the sale of the flats in the Project were to be treated as 'Business Income'. The AO also held that the Respondent-Assessee did not have the intention of letting out the flats, and further on a perusal of the books of accounts of the Respondent-Assessee, held that a sum of Rs. 4 crores was credited to the account of the Respondent-Assessee on 29th November 2013 from a prospective buyer, soon after the Respondent-Assessee received the OC on 5th September 2013. The AO also held that the Respondent-Assessee had applied for water connection on 30th October 2013, and the water connection was made available on 8th February 2014, and he thus held that no person who had the intention to put a building on rent would offer for sale prior to water connection and basic amenities being made. He also held that the Investigation Wi....
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....erest in the land. These concessions can hardly be afforded to lessee's of the flats. Thus vide Declaration dated 10.06.2014, the company had precluded any possibility of leasing out the flats and it appears that the whole point of including a separate provision of letting out flats in 7, Marine Drive in the Memorandum of Association of the company was to avail the advantage of offering receipts from sale of flats as Capital Gains instead of business income and claiming indexation thereto thus reducing the tax liability through ingenuine means. 6.7. Further, during the course of investigation information has been called from Mitsubishi Elevators India Pvt Ltd and Alfa Façade Systems Put Ltd. It was examined that Mitsubishi Elevators Pvt Ltd was tasked with installation of two elevator units (P1 & P2) in the building, Alfa Facade Systems Put Ltd was tasked with providing and fixing of aluminium windows in the building. From the details submitted by Mitsubishi Elevators Pvt Ltd, it is amply clear that the work of the P2 elevator continued well into 2015 though the work of P1 elevator was completed in 2013 itself. From the details submitted by Alfa Faça....
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....ound not acceptable on following ground:- 8.1 The intention of the assessee is not to let out the apartments of 7 Marine Drive. In-fact the assessee has acquired the land and constructed Building thereon for selling out the apartments in said Building. Although, the assessee has set out the objects in MOA as investor but its intention was from the beginning to sale the flats for earning good profits. The investigation wing has carried out throughout investigation to determine the actual object of Assessee Company. In this regard it was examined that the company has made around 40% of contractor's payments after FY 2013-14; even after receiving occupancy certificate (OC) on 05.09.2013. Further, the assessee has constructed 7 luxurious Duplex Apartment in said Building and after acquiring the OC, the process of selling out properties was immediately started. The enquiries also supported that the elevator and windows work was majorly done in 2015. The assessee has also carried out various expenses after receiving OC. Thus the actual object of the assessee was never to lease out the properties. By showing from income from Capital gain the assessee has availed the advantage of ....
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.... 7.7 crore in the project in financial year 2014-15 after receipt of occupancy certificate. The analysis of payment made to major contractors shows that after financial year 13-14 payment was made to tune of Rs. 6.87 crore, which is around 40% of total payments. Therefore, the project was not ready for renting out as on date of issue of occupancy certificate i.e. 05.09.2013. The discussion has also made in preceding Para that the assessee had following the provision too in its "other object" to carry out the business of construction and developing of building etc. Thus disclosing the amount spent on construction as "Investments in Land and Building" under the head "Non-current Investments" and not as Inventory which is typical in case of Builder/Developer does not help to the assessee that he is working as an Investor. (iii) Being aggrieved by the aforesaid assessment order dated 30th December 2019 passed by the AO, the Respondent-Assessee preferred an appeal before the CIT(A), primarily assailing the findings of the AO in respect of the treatment of the income earned by the Respondent-Assessee from the sale proceeds of flats in the Project as 'Business Income' and not ....
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....f one lift was completed after a long period of receipt of OC. The Ld. AO has also given a factual finding that the appellant had received the advances against sale of flats within 3 months of receipt of OC. 7.4.3 Section 2(13) of the Act stipulates that "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The expression 'business' defined in sec 2(13) of the Act does not merely include any trade, commerce or manufacture but is elastic and wider to include the adjunct adventure in the nature of trade, commerce etc. Thus the legislature has made a conscious inclusion to expand the scope of business to include certain actions akin to 'business' in addition to normal business. 7.4.4 The facts available on records, reveal that the land for the project under consideration was bought on 31.01.2008. The project was commenced on 25.02.2010 and the Occupation Certificate (OC) was received on 05.09.2013. The appellant has not denied the fact that they have incurred huge expenses in respect of said project even after receipt of OC. It's not a case that the appellant had purchased the land and cons....
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....dmitted fact that the appellant did not sale the land purchased in the year 2008 as such, but constructed 7 luxurious flats on the same which have definitely improved the quality of the land purchased and made it more re-saleable. One of the other tests discussed by the Hon'ble Supreme Court was whether the transactions of purchase and sale were repeated. In the present case, neither the land purchased in the year 2008 was sold as such, nor even after improving the same by constructing 7 luxurious flats thereupon sold in single transaction. It is admitted facts that 6 out of 7 flats constructed were sold to different parties at different times, i.e. transactions of sales were repeated. These characteristics definitely suggest that the sale of flats under consideration were "adventure in the nature of trade" 7.4.7 The other aspect is huge profit/gain arising out of sale of impugned flats. From the impugned assessment order, it is observed that the Ld. AO has given a finding that the total cost of the project, including land cost, was Rs. 40,93,26,150/- and the 6 flats (Out of total 7 flats constructed) were sold at Rs. 169,08,44,099/-. Hence it is evident that the appellant....
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....d acceptable in those assessment years where no assessment/re-assessment was abated and no incriminating material was found during the course of search in respect of said issue. However, it is an admitted fact that in the present assessment year the assessment was abated as the time limit for issuing the notice u/s 143(2) of the Act did not expire as on the date of initiation of search. While framing assessment u/s 153A rws 143(3) of the Act in any case where the assessment was abated, the powers of the Ld. AO is unfettered and he can use any material or facts in his possession while framing the assessment. It is a settled law, that the power of the CIT (Appeals) is co-terminus with that of the Ld. AO. The provisions of sec 251(1) of the Act specifically confers the powers to CIT(A) of enhancement of assessment. The extent of such powers conferred on the CIT(A) has been subject matter of the judicial scrutiny. It is settled law that the CIT(A) has plenary powers in disposing of an appeal and scope of his power is coterminous with that of Assessing officer. Hence, the CIT(A) can do what an Assessing Officer can do. The Hon'ble Supreme Court in the case of CIT vs. Kanpur Coa....
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....said flats. The ITAT also held that the Respondent-Assessee had consistently shown the assets under consideration as an investment in its audited financial statements, and that there was no change in its treatment by the Respondent-Assessee from the time of acquisition of land and construction of the flats in the said Project. The ITAT also held that even for the prior AYs 2014-15 and 2015-16, the Department had accepted the income from sale proceeds of the flats in the Project as 'Capital Gains', and therefore, in the absence of any differentiating factors in the present AY, the Department could not change the position to taxing the income as 'Business Income' as opposed to 'Capital Gains'. The ITAT also placed reliance on the decision of the Gujrat High Court in the case of Pari Mangaldas Girdhardas Vs. CIT 1977] 6 CTR 647 (Guj.) to hold that by applying the tests as formulated by the Gujrat High Court in the aforesaid decision, as to whether an Assessee can be said to be carrying on business, it can be inferred in the facts of the present case that the Respondent-Assessee does not carry on business. Considering the aforesaid legal position and the facts of the case, the ITAT rea....
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....the question whether the act of sale of apartments by the assessee is 'an adventure in the nature of trade' or 'income from capital gains' can be decided in light of the tests laid down by various judicial precedents. These tests act as a yardstick for determination and taxability of income. 38. As on the date of acquisition of land, the intention of the assessee was to hold that land, construct the apartment and lease them out which is evident from the MOA formed at the time of its incorporation. Even on initial acquisition of the building i.e. at the time of receipt of occupancy certificate on 05.09.2013, the intention of the assessee was to lease the apartments which are evident from the altered MOA. 39. As is clear from the records, the first sale post initial acquisition of land was made after a lapse of approximately 6.5 years from that date and 10 months after the receipt of occupancy certificate. This conduct of the assessee does not resemble of a builder and developer as no prudent businessman would hold his inventory for such a long period of time that too without making any conscious efforts in the form of advertisement and marketing. Even after the fir....
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....e purchase of land and only one project was conducted on such land which was sold apartment by apartment spanning over a number of years and out of which even today one apartment remains unsold. 44. Even the Hon'ble Bombay High Court in the case of Ashok Kumar Jalan (supra) held that the transaction, must have some trappings of a business nature before it can be considered as an adventure in the nature of trade, such as bulk purchase, advertising for its sale, similar other profitable ventures, no likelihood of retaining purchased item for one's own use, etc. In the present case, none of these features have been established by the Department and are further demonstrated by the assessee in light of the decision of Hon'ble Gujarat High Court. There is no such evidence which proves that assessee acted as a businessman and not as an investor. 45. On perusal of documents submitted by the LD CIT DR it is observed that all these documents were executed after the broker informed the assessee that the it is unable to find any suitable tenants. The reasoning given by the broker for his inability to find tenants vide his Vetter dated 29.10.2013 was that the apartments built ....
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....mmovable properties and for these purposes to purchase, take on lease or otherwise acquire and hold any lands or Buildings_of any tenure or description wherever situated, or rights or interests therein or connected therewith, to prepare building sites, and to construct, re-construct, pull down, renovate, alter, improve, decorate and furnish and maintain flats, maisonettes, dwelling houses, shops, offices, blocks, buildings, industrial estates, works and conveniences of all kinds, and sell the same on ownership basis, installment basis, hire purchase basis or lease basis and transfer such building to cooperative society, limited companies or association of persons or individual as the case may be, to lay out roads, pleasure garden, recreation, grounds, auditoriums, theatres, and sports pavilion, to plant, Drain or otherwise Improve land Building or any part thereof." Other Incidental or Ancillary Objects to the Main Object Clause: "6. To acquire, buy, obtain, hire, take on lease and sell, dispose of, let on hire, give on lease, develop, improve upon level and otherwise deal in land, quarries, metal ores, mines, coal mines and forests, farms, gardens and other immov....
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....vestor looking to earn income from rental and appreciation in the value of assets held by it. In view of above facts we hold that conduct of the assessee is more like to earn the lease rent from the property and not to exploit these properties as business assets. Assessee has not undertaken any other projects of similar nature which could even remotely indicate that the assessee had intention and mindset of a businessman looking to earn profits by taking risks and engaging in multiple activities at once. 47. Moreover, the position that the assessee's activities are in the nature of an investor and it is not acting as a builder and developer was accepted by the revenue in the course of regular assessment proceedings u/s 143(3) of the Act for A.Y. 2014-15 and A.Y. 2015-16. It is true that the principle of res judicata does not apply to income tax proceedings as each assessment year is treated as a distinct unit, but that does not mean consistency in manner in which assessment proceedings are conducted should be ignored especially when there are no material changes in the facts and circumstances of the case. The authorities are not permitted to take a different view in subseq....
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....ng construction thereon. The entire purchase was funded by the members of the AOP. No interest-bearing loan was taken for the purpose of purchase of said property and construction thereon. No change in land user of the property was affected in order sell the aforementioned property. It is not the case of the Department that when initially the assessee AOP purchased the land and took possession thereof on 19-01-1994, the buyers were identifiable and thus the whole purpose of purchase and subsequent construction was for the purpose of selling the same and not earning any rental income. Accordingly, in view of the facts and circumstances cited above, in our considered view, the said sale of property would be taxable as capital gains and not business income, and we find no infirmity in the order of Id. CIT(A)." [Underline supplied by us] 49. Based on the facts of the case discussed above, evidences produced before us, we reversing the order of the Id CIT(A) direct the AO to treat the proceeds received on sale of properties as income from 'Capital Gains'. Accordingly, the Appeal filed by the assessee is allowed. 50. The assessee has also filed additional groun....
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....the sale thereof had to be treated as 'Business Income' as opposed to 'Capital Gains', as sought to be contended by the Respondent-Assessee. He also sought to place reliance on the findings rendered by the AO and the CIT(A) in respect of the aforesaid addition. In so far as the assessments for prior years were concerned, i.e., AY 2014-15 and AY 2015-16, he submitted that the same were unabated assessments, and therefore even though in those years, the Department had accepted income from the sale of flats in the Project as 'Capital Gains' and not 'Business Income', the same would not apply to the present AY as no search was conducted in those years, where incriminating material was found to come to another view. He therefore submitted that the impugned order passed by the ITAT ought to be set aside. 6. Per contra, Mr Sashi Tulsiyan appearing on behalf of the Respondent-Assessee submitted that the impugned order passed by the ITAT was passed on a correct appreciation of the facts and law. The thrust of his argument was on the ground that the MOA of Respondent-Assessee clearly set out the 'Objects' for which it was formed. The said 'Objects' is as follows:- "To own and let....
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....its conclusion of taxing the income earned by the Respondent-Assessee from the sale of the flats in the Project as 'Capital Gains' instead of 'Business Income' by applying the correct principles of law. The forgoing discussion will aid the aforesaid conclusion we have reached. 8. At the outset, we are in agreement with the submission made on behalf of the Respondent-Assessee that in the earlier years, i.e., AY 2014-15 and AY 2015-16, the Department had accepted the taxability of income earned from the sale of flats in the Project as 'Capital Gains' and not as 'Business Income'. Both the assessment orders dated 23rd December 2016, and 23rd December 2017 passed for AY 2014-15 and AY2015-16 respectively have attained finality, in as much as the Department has not carried them forward before any appellate authority. In the present AY also, the same pattern continues, and learned counsel on behalf of the Appellant-Revenue has been unable to point out any distinguishing fact in the present AY to justify the change of treatment of income under a different head by the Appellant-Revenue. We are also inclined to reject the argument of learned counsel on behalf of the Appellant-Revenue tha....
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....tements of the Respondent-Assessee, wherein the land and building were capitalized and treated as investments, and also the fact that the asset was held by the Respondent-Assessee for a very long duration. It is on the basis of the aforesaid facts that the ITAT has rightly come to the conclusion that the conduct of the Respondent-Assessee, was not in the nature of an adventure of trade which could be assessed as 'Business Income'. In the facts of the present case, the intention of the Respondent-Assessee was always to lease out the flats, and there was never an intention to carry on business of sale of the aforesaid flats. In fact, the timeline of the sequence of events as reproduced in the ITAT's impugned order and also in paragraph 2(iv) above, which we once again reproduce, will throw light on the fact that in fact the Respondent-Assessee was formed in the year 2003, and the land was acquired on 31st January, 2008. The commencement of construction started on 25th February, 2010 and there was a change in the MOA of the Respondent-Assessee to let out the property as part of the main object on 17th February, 2011. It is only in the 'Ancillary Objects' that the objects were shown as....
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....the first sale happened only after the acquisition of land, after six and half years, and in fact, the subsequent sale of the other 5 flats was made over a period of 3 different AYs, which again goes on to show that the Respondent-Assessee was not acting as a businessman, but was conducting its affairs as an investor who had to sell its assets due to lack of availability of prospective tenants in the market. This further establishes that that the Respondent-Assessee always held the asset as an investment. 10. Further, the ITAT has also correctly relied upon the assessment orders passed for the earlier AYs, i.e., AY 2014-15 and AY 2015-16 to hold that the Department had accepted the position of taxability of income of the Respondent-Assessee as 'Capital Gains', and in the present AY, even though a search was conducted, there was no incriminating material found by the Department which could give rise to the conclusion that the treatment of income ought to be treated as 'Business Income' opposed to the earlier AYs. The ITAT in fact has also placed reliance on the discussion that during the search proceedings no incriminating material was found, and hence the assessment for the pres....
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....the Tribunal mainly relied is that those shares were purchased in the year 1941 but they were sold only in the year 1955. The Tribunal has also noted that, though at some stages these shares could have been sold at a much higher price than for which they were sold, the assessee did not choose to sell those shares. Locking up of shares for about 14 years must be held to be an unusual feature if those shares were the trading assets of the assessee. That circumstance is more consistent with the fact that those shares were investment shares. No explanation was offered for not dealing with those shares for about 14 years. It is least likely that a trader would retain his shares purchased by him in 1941 till 1955 though he had occasions to sell the same at a higher price earlier. It may be noted that, though, according to the assessee, the price of those shares was Rs. 50 per share in the year 1950, yet the assessee purchased 100 shares in 1950 at Rs. 75 per share. This is again indication that the assessee was not acquiring those shares as a trading activity. We fail to see why the shares of M/s. Karam Chand Thapar and Sons should have gone down in value in the years 1952-1953,....
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....the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. d)The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. e) The fifth test, normally a....
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....e Tax Vs. M/s. Shree Shreemal Builders Income Tax Appeal No. 205 of 2016, and the decision of the Kerela High Court in Principal Commissioner of Income-tax, (Central) Vs. Arun Majeed [2024] 165 taxmann.com 457 (Kerala), which are discussed below. 16. In the case of Commissioner of Income-tax, Bombay Central-I Vs. Administrator of the Estate of Shri E.F. Dinshaw (supra) an individual had purchased large tracts of land, which upon his demise were inherited by his legal heirs. Since the purchase of these tracts of land, different portions of the property were leased out to various persons against payment of ground rent for the purposes of constructing house properties. However, subsequently, agreements to sell were executed in respect of different portions of land. The AO in the aforesaid case had held that profit arising from sale of the portions of land would fall under 'Business Income'. Upon appeal, the ITAT however concluded that the income realized upon sale of the portions of land constituted 'Capital Gains' and not 'Business Income'. This Court in the facts of the case held that that it was clear there was no transaction involving the sale of the land during the lifetime of....
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.... over certain areas of the land. The sale of the land was not motivated by a desire to make a profit, but to protect the corpus and the resulting expenditure due to litigation. The finding of the Tribunal is also to the effect that there were no improvements on the land by way of laying out drainage, levelling or construction of roads. Though an area admeasuring about a hundred acres was repurchased, the Tribunal has recorded that this was hardly a purchase in the commercial sense since it was a repurchase of lands which were declared as surplus under the Urban Land Ceiling Act. Sixthly, the Revenue in the present case has not impugned the findings of fact recorded by the Tribunal either on the ground that they are based on no evidence whatsoever nor for that matter on the ground that the Tribunal has misdirected itself in law. The Tribunal in paragraph 17 of its decision has also noted that the expenditure or litigation expenses was treated by the Department on the capital account, declining to accede to the claim of the assessee that it should be set off against income from other sources. Having regard to the facts as found by the Tribunal, we have no hesitation in coming to the ....
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....ade but an capital asset/investment. Therefore the profit/gain on sale of the investment is taxable under the head "capital gains". (f) Therefore the view taken by the CIT(A) and upheld by the Tribunal, on these facts, is a possible view. Thus would not warrant interference in appeal. (g) Accordingly, the question as proposed does not give rise to any substantial question of law, hence not entertained. 18. Further, the Kerela High Court in the case of Principal Commissioner of Income-tax, (Central) Vs. Arun Majeed [2024] 165 taxmann.com 457 (Kerala), where the Respondent-Assessee ran a medical shop and was also a partner in certain other medical shops has held that merely because an assessee makes some profit in a particular transaction, it cannot be treated as an adventure in the nature of trade so long as the initial intention or a reason for investing money was to hold the property and utilise it for a different purpose. The relevant findings of the Court are reproduced below:- 10. Having answered the nature of the question, the Supreme Court in G. Venkataswami Naidu & Co. (supra) proceeded to do a detailed survey in the English and Indian precedent....
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....ularity or expected regularity from definite sources Then the learned judge proceeded to observe that income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital". In our opinion, it would be unreasonable to apply the test involved in the use of this pictorial language to the decision of the question as to whether a single or an isolated transaction can be regarded as an adventure in the nature of trade. In this connection we may with respect, refer to the comment made by Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v CIT that "it is clear that such picturesque similes cannot be used to limit the true character of income in general We are inclined to think that, in dealing with the very prosaic and sometimes complex questions arising under the Income-tax Act, use of metaphors, however poetic and picturesque, may not help to clarify the position but may instead introduce an unnecessary element of confusion or doubt. 16. As we have already observed it is impossible to evolve any formula which can be applied in determining the character of isolated t....
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....ature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the court to draw a similar inference; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to the facts before us. 17. In this connection it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to resell it at a profit ? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judici....
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....hould the intention of the assessee be discerned from his conduct prior to or subsequent to the transaction? Should conduct of the Assessee both prior and subsequent to the purchase of the commodity be considered? It would hence be relevant to examine some precedents on this point to ascertain whether any broad contours could be identified. 18. The precedents discussed above show that the intention of the assessee gauged from his conduct both prior and subsequent to the transaction assumes relevance while proving that the transaction effected is an adventure in nature of trade. As regards the burden of proving it in Uttam S. Arora v. Deputy Commissioner Of Income Tax [1999] 102 Taxman 150 (Delhi) the High Court of Delhi following the dictum laid down in Commissioner of Income-tax v. Raunaq Singh Swaran Singh [1972] 85 ITR 220 (Delhi)/[1971 SCC OnLine Del. 366] it was held that: "The burden is upon the Department to show that a transaction effected by the assessee is an adventure in the nature of trade." 19. The precedents discussed above leads us to conclude that when a property kept not for trade, but for an investment purpose is sold, the gain has to fa....