Sale of real estate held for business purposes is taxable as business income, and Section 50C is not relevant

Fact and issue of the case

The brief facts of the case are that, the assessee did not file his return of income for the assessment year 2007-08, u/s. 139(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The assessment has been reopened u/s. 147 of the Act, for the reasons recorded as per which income chargeable to tax has been escaped assessment on account of nondisclosure of capital gains from sale of property and thus, notice u/s. 148 of the Act, dated 05.03.2013 was issued. In response to the notice, the assessee filed return of income on 07.02.2014, declaring total income of Rs. 1,39,420/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO noted that the assessee has sold a property in financial year relevant to assessment year 2007-08, for a consideration of Rs. 95 lakhs, but admitted a sum of Rs. 47 lakhs under the head ‘profits and gains from business’. The AO, further noted that the assessee has purchased said property on 12.10.2004, for a total consideration of Rs. 79,21,500/-. Therefore, the AO called upon the assessee to furnish necessary evidences including purchase and sale deed copies of property and relevant computation of income under the head profits and gains from business or profession. In response, the assessee submitted that he has purchased a property for the purpose of commercial exploitation and thus, the same has been treated as stock in trade in the books of accounts of the assessee. Therefore, consideration received towards sale of property has been offered to tax on cash system of accounting. Therefore, submitted that the question of computation of capital gains on transfer of property does not arise.

The AO, on the basis of information submitted by the assessee opined that, the claim of the assessee that he had purchased impugned property for business purpose and shown as stock in trade in the books of account is unsubstantiated. Therefore, rejected arguments of the assessee and computed short term capital gains from transfer of property by adopting full value of consideration in terms of provisions of section 50C of the Act and determined short term capital gains of Rs. 2,40,29,848/-. The relevant findings of the AO are as under:

Observation by the tribunal

The tribunal has heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts with regard to the impugned dispute are that the assessee has purchased a property in Devanahalli, Bangalore on 14.10.2004, for a consideration of Rs. 79,21,500/-. The assessee has sold said property in the financial year relevant to assessment year 2007-08 for a consideration of Rs. 95 lakhs and guideline value of the said property as per stamp duty authority was at Rs. 3 crores. The assessee has declared consideration received from transfer of property on cash system and actual consideration received in the impugned assessment year amounting to Rs. 47 lakhs has been treated as business receipts. The AO, assessed profit derived from transfer of property under the head short term capital gains and has also adopted full value of consideration in terms of provisions of section 50C of the Act and determined short term capital gains of Rs. 2,39,76,791/-, after allowing cost of acquisition of the property. The sole dispute requires to be resolved in the given facts and circumstances of the case is whether profit derived from transfer of property is assessable under the head profit and gains of business or profession as claimed by the assessee or under the head capital gains as assessed by the AO. The AO, assessed profit under the head capital gains, on the ground that the assessee could not file any evidences to prove that said property has been purchased as a stock in trade and further, the assessee did not invest any amount for development of the property. It was the argument of the assessee before the AO that property has been purchased and shown as stock in trade in the books of accounts and further, although said property has been purchased for commercial exploitation, but could not develop the property because of civil dispute pending in Civil Court. 10. We have given our thoughtful consideration to the reasons given by the AO to assess profit derived from transfer of property under the head capital gains and we ourselves do not subscribe to the reasons given by the AO for the simple reason that non-development of property during the period of holding the asset does not decide the nature and head of income under which profit derived from transfer of said property is assessable. But, what is relevant to decide the nature and head of income on a particular receipt is intent of the assessee and the treatment given in the books of accounts for the relevant assessment year. In this case, the assessee claims to have purchased the property for the purpose of commercial exploitation, keeping in view the location of land, which is adjacent or near to Bangalore International Airport, where lot of scope for commercial exploitation of property. The assessee further explained that he could not develop the property because of pending OS No. 615/2005 before Devanahalli Civil Court filed by M/s. Alfa Home Maker (P) Ltd, disputing transfer of property. We find that the assessee has filed necessary evidences, including financial statement for the relevant assessment years to prove its claim that property has been shown as stock in trade in the books of accounts of the assessee. The assessee had also filed relevant details including case particulars of OS No. 615/2005 pending before Devanahalli Civil Court, to prove that there was a pending litigation on the property and thus, he could not invest any amount for development of property in absence of clear title. The assessee had also filed necessary financial statements including tax audit report to prove that amount received from transfer of property has been treated as business receipts. From the above, it is very clear that the intent of the assessee when the property has been purchased was to commercially exploit the property keeping in mind the locational advantage of the property. Further, the assessee had also made clear its intention by recording purchase of property as stock in trade in the books of accounts for the relevant assessment years. Therefore, we are of the considered view that the assessee has rightly declared profit derived from transfer of property under the head profit and gains of business and profession. It was only the AO by wrong appreciation of facts has assessed profit derived from sale of property under the head capital gains by holding that income declared by the assessee under the head profit and gains from business or profession is afterthought. In our considered view, the observations of the AO is nothing but suspicion and surmise, but not backed by any evidence. On the other hand, the evidences filed by the assessee clearly suggests that the impugned property sold for the assessment year is a stock in trade and profit derived from transfer of property is assessable under the head profit and gains from business or profession. Therefore, we are of the considered view that the AO and the CIT(A) completely erred in assessing profit derived from transfer of property under the head capital gains.

Having said so, let us come back to the application of provisions of section 50C of the Act. The provisions of section 50C deals with deeming consideration in place of actual consideration received towards transfer of property being land and building, in a case where the transfer of capital asset being land or building and a consideration received for transfer of property is less than guideline value of the property assessable by stamp duty authorities, then the difference between consideration received and actual value of the property will be treated as full value of consideration. In this case, what was transferred by the assessee is a stock in trade, but not a capital asset. Therefore, we are of the considered view that provisions of section 50C cannot be applied when asset transferred is not a capital asset. Thus, we are of the considered view that the AO and CIT(A) erred in applying provisions of section 50C of the Act and determination of full value consideration to compute short term capital gains from transfer of property. Thus, we direct the AO to delete additions made towards computation of short term capital gains from transfer of property.

In the result, appeal filed by the assessee is allowed.

Order pronounced in the court on 8th March, 2023 at Chennai.