Construction and sale of flats purchasing land amounts to civil construction u/s 44AD

Construction of flats purchasing land amounts to civil construction and profit earned thereon, are eligible for taxation U/s 44AD of the Income Tax Act

ABCAUS Case Law Citation:
ABCAUS 3005 (2019) (06) ITAT

The AO received information from the Director of Income Tax (Inv) that the assessee had sold two immovable properties, however, no capital gain was offered to tax nor any return was filed.

Accordingly, the assessment was reopened by issuance of notice U/s 148 of the The Income Tax Act, 1961 (the Act). In the return so filed after reopening, the assessee had shown business income u/s 44AD of the Act.

During the course of reassessment, the AO declined assessee’s claimed profit offered u/s 44AD of the Act on the plea that Section 44AD is applicable only when the assessee is engaged in business of civil construction or supply of labour for civil construction.

As per the AO, the assessee was not engaged in construction activity but only in purchase and sale of property. Accordingly, the AO estimated profit in respect of flats so sold during the year as against the income offered by the assessee u/s 44AD of the Act @ 8% of the gross receipts.

The CIT(A) confirmed the action of the AO.

Against the order of the CIT(A), the assessee was in further appeal before the ITAT.

The Tribunal observed that the assessee had purchased a plot and constructed flats on it. During the year under consideration, the assessee had sold flats on which the assessee had offered 8% profit under the provisions of Section 44AD of the Act.

The Tribunal did not endorse the action of the A.O. for not applying the provisions of Section 44AD of the Act with respect to construction activity so carried on by the assessee.

The Tribunal opined that the AO had wrongly presumed that Section 44AD of the Act is only applicable in the case when assessee engaged in the business of civil construction for others or supply of labour for civil construction.

The Tribunal opined that in the instant case, since the assessee had constructed flats on the land, the same also amounted to civil construction and profit earned thereon, were eligible for taxation U/s 44AD of the Act.

The Tribunal opined that the assessee after construction of flat had sold the same and the profit earned thereon was also offered as business income, there was no reason to hold that the assessee had earned capital gains.

Accordingly, the Tribunal directed the AO to compute 8% income on the gross receipts of turnover.

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