Joining lands and entering development agreement amounted to business as owners who were brother were also directors in the builder company
In a recent judgment, ITAT Jodhpur has held that activity of joining the lands and constructing houses thereon amounted to adventure in the nature of trade as it was done among three brothers who were directors in the builder company to which the developing rights were sold.
ABCAUS Case Law Citation:
4662 (2025) (07) abcaus.in ITAT
In the instant case, the Income Tax Department  had challenged the order passed by the CIT(A), National Faceless Appeal Centre (NFAC) in treating the income from the sale of immovable properties as capital gains instead of business income and directing the Assessing Officer (AO) to examine the eligibility of exemption u/s 54F/54EC the Income Tax Act, 1961 (the Act) before giving the order appeal effect.
The appellant was an Individual. Â The assessee had shown income from salary as director, income from capital gains and income from other sources being interest on savings bank, GFDR, other interest and bond etc. The appellant had claimed deduction u/s 54EC and 54F of the Act in the return of income.
The  case  was  selected  for  scrutiny  under  CASS  for  the  reason  of “Deduction/Exemption of Capital Gains” and accordingly notices t/s 143(2) of the Act and notices u/s 142(1) of the Act were issued to the assessee.
During the course of assessment proceedings, it was found by the AO that the appellant had sold 10 immovable properties during the impugned AY. The properties sold were constructed over a period of 3 years by joining the land of 3 family members. The AO held that the activity of joining the lands and constructing houses thereon amounted to adventure in the nature of trade and accordingly, the AO brought to tax the profit on sale of properties as income from business and disallowed the deductions/exemptions claimed by the appellant u/s 54F and 54EC of the Act.
The CIT(A) granted relief to the assessee and directed the AO to examine the eligibility of exemption u/s 54F/54EC of the Act.
Before the Tribunal, the assessee contended that NFAC/CIT(A) was not justified in facts and law in directing to treat the income from the sale of immovable properties as capital gains instead of business income, by ignoring the fact that assessee in his business concerns was engaged in the business of real estate development and huge expenses were incurred on development of projects to earn profit.
It was submitted that CIT(A) had erred in law & facts by directing the AO to treat the income from the sale of immovable properties as income from capital gains instead of business income by merely following the order of Hon’ble ITAT in the case of appellant for preceding year which was distinguishable on facts as the said order ITAT was not acceptable by the department but further appeal against the order was not recommended only due to law tax effect involved.
It was further submitted that CIT(A) had been not justified as he has no authority under law in directing the AO to examine the eligibility of exemption u/s 54F/54EC without giving appeal effect in absence of any finding on eligibility of deduction u/s 54F and 54EC particularly without addressing the matter on the nature of the asset involved, in view of the date of conversion of properties into stock in trade for the assessment year under consideration for the purpose of carrying out the Real Estate Business of construction.
It was submitted that assessee purchased certain land when simultaneously contiguous land was purchased by his brother and also certain part of contiguous land was already purchased by wife of the assessee’s brother. All three land was named as ‘Royal Residency Township’ (FRR) and the planned map had been submitted to Nagar Parishad for approval which was approved and the status of property got changed to ‘AT DISPOSAL. That after approval of the Township plan identity of the land by individual Khasra No had been lost.
The Tribunal observed that it was evident that the assessee and his two brothers were directors in the builder company. The company was engaged in business of Builders – Property Developers and that the company had projects in different names. During the survey held at the premise of the builder, the assessee himself admitted in the statement given on oath that Royal Residency is   jointly developed by himself, his brother was also jointly developed by himself, his brother. Thus, the assessee himself had admitted that Royal Residency and Royal Hills was co-developed properties, and the transactions were also done on reoccurrence basis.
The Tribunal opined that the developer agreement itself could not be treated as transfer of asset under consideration through a sale deed. Meaning thereby that it was purely a business transaction and could be carried out with such an ease because it was done among the three brothers who were the directors in the same company to which the developing rights of their own properties were being shown to be sold through an agreement.
The Tribunal noted that a planned map had been submitted to Nagar Parishad for approval of the properties which was duly approved and therefore the status of the said properties get stands changed to ‘AT DISPOSAL and thereafter, the contiguous land was given to the builder through a developer agreement meaning thereby that the subject properties of the assessee stood converted into stock in trade as on the date of agreement.
The Tribunal clarified that any error or mistake committed in the order of Tribunal may not be allowed to continue in perpetuity. In the cases of the assessee and his brother the coordinate bench has not addressed the vital issue on merits of the case while granting relief to the assesee and therefore, the judgment of the coordinate Bench had no precedent value.
The Tribunal observed that The CIT (A) had also observed that the subject properties sold were constructed over a period of 3 years by joining the land of 3 family members. However, he ignored the vital fact that the assessee had converted these properties with a map duly approved by Nagar Parishad and transferred to his business concern company in which he was one of the Director along with his other two brothers as above which were engaged in the business of real estate development where huge expenses were incurred by assessee on development of projects to earn profit.
The Tribunal held that the developer agreement itself could not be treated as transfer of asset under consideration through a sale deed and in fact, it was purely a business transaction which could be carried out with such ease because it was done among the three brothers who were the directors in the company to which the developing rights were being sold. The AO had rightly held that the activity of joining the lands and constructing houses thereon amounted to adventure in the nature of trade and accordingly, the AO was justified in charging tax on the profits on sale of the properties as income from business and disallowed the deductions/exemptions claimed by the appellant u/s.54F of and 54EC of the Act.
The Tribunal held that the order of the CIT(A)/NFAC was cryptic, infirm and perverse to the facts on record which was contrary to the law. Accordingly, the impugned order was set aside.
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