Sale of flats in a real estate project held capital gains as intention of the assesee was to hold that land to construct the flats, and lease them out.
In a recent judgment, Hon’ble High Court has upheld that sale of apartments in a real estate project was not business income but capital gain as that the main intention of the assesee as on the date of the acquisition of land was to hold that land to construct the flats, and lease them out.
ABCAUS Case Law Citation:
5198 (2026) (08) abacus.in HC
Important Case Laws relied upon by Parties:
Karam Chand Thapar and Bros. (P.) Ltd. Vs. Commissioner of Income-tax
Commissioner of Income-tax, Bombay Central-I Vs. Administrator of the Estate of Shri E.F. Dinshaw
Principal Commissioner of Income Tax Vs. M/s. Shree Shreemal Builders
Principal Commissioner of Income-tax, (Central) Vs. Arun Majeed
Principal Commissioner of Income Tax Vs. M/s. Shree Shreemal Builders
In the instant case, the Revenue had challenged the order passed by the ITAT in holding that the proceeds received on sale of flats by the respondent assessee be treated as income from ‘Capital Gains’ and not as ‘Business Income’.
The Assessee was a company with the objects of buying properties and leasing out those properties on a long-term basis for earning rental income. The assessee developed a real estate project and during the relevant Assessment Year had sold come flats therein declaring the sale of flats under the head capital gains.
The AO noted that the “other objects” of the assessee permits commercial activities in real estate. He also relied upon the Investigation Wing report that the assesee had no intention to let out the flats in the Project, and in fact had acquired land and constructed building thereon with a view to conduct business. Accordingly, he completed the assessment whereby income declared by the assessee arising from the sale of flats in the completed Project was assessed as ‘Business Income’ as opposed to ‘Capital Gains’.
The CIT(A) upheld the order of the AO.
However, the ITAT reversed the findings of the CIT(A) on the ground that the main intention of the assesee as on the date of the acquisition of land on which the flats in the said Project were constructed was to hold that land to construct the flats, and lease them out, as was evident from the MOA and the ‘Objects’ clause in the said MOA of the assesee.
The ITAT, also on the basis of the sequence of events held that the assesee had purchased the land more than ten years before, and the first sale post initial acquisition was made only after six and a half years. The ITAT held that the conduct of the assesee did not resemble that of a builder, and no prudent businessman would hold the inventory for such a long period of time, and that too without making any conscious efforts for advertisement and marketing to sell the aforesaid flats.
he ITAT also held that the assesee 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 assesee 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 two AYs, 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 Hon’ble High Court observed that The ITAT had reached the conclusion on the basis of the MOA and the audited financial statements 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 assessee for a very long duration. It was on the basis of the aforesaid facts that the ITAT rightly come to the conclusion that the conduct of the assessee, was not in the nature of an adventure of trade which could be assessed as ‘Business Income
The Hon’ble High Court analysed the date of formation of the company, the date of acquisition of land, main objects, ancillary objects, timeline of activities and opined that the intention of the assessee was to always hold the acquired land and then to construct the flats thereon and let them out.
The Hon’ble High Court further noted that 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 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 established that that the assessee always held the asset as an investment.
The Hon’ble High Court also noted that he ITAT had come to the conclusion that at all times the assessee had consistently shown the asset under consideration as an investment in its audited financial statements, and there has been no change in such treatment till date, which was evident from the financial statements filed before them.
The Hon’ble High Court opined that though the treatment given by the assessee in its books of accounts would not be the only determinative factor in coming to a conclusion that whether the income has to be taxed under the head ‘Business Income’ or ‘Capital Gains’, however, it is an important factor which has to be borne in mind while deciding the treatment of income.
Accordingly, the appeal of the Revenue was dismissed.
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