In a recent case, the Kerala High Court has held that income from the sale of property kept for investment will be taxed under ‘Capital Gains’ under Income Tax Act, 1961. The court upheld the observations of the ITAT and viewed that the assessee had held the landed property as investment, and disposal of the same would not convert what was a capital accretion into an adventure in the nature of trade.
Arun Majeed, the respondent assessee runs a medical shop and is also a partner in certain other medical shops under the trade name “SEVANA.” There was a search of the residential and business premises of the assessee in response to the notice, the assessee filed the returns of income for the assessment years 2011–12 to 2014–15.
The assessing officer (AO ) completed the assessment by making various additions. While completing the assessment, the AO treated the income from the sale of landed property as ‘income’ under the heading ‘business’ as against the claim of the assessee that it was ‘income from capital gain’.
The AO viewed that there has been systematic purchase and sale of large amounts of land in various locations continuously over many years, either in individual capacity or in collaboration with other individuals. On appeal, the Commissioner of Income Tax (Appeals) ( CIT(A) ) partly allowed the appeals of the assessee and held that the income from the sale of landed property is to be assessed as ‘income from capital gain’ instead of income under the heading ‘business income’ as proposed by the Assessing Officer.
Against that order, an appeal was filed by the department filed the appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT observed that the assessee had not taken permission from the authorities to convert the landed property into plots, as the assessee never had the intention to carry on any business of real estate in respect of landed property. The intention of the assessee cannot be presumed by the AO unless supported by any material evidence that the assessee is in the business of real estate. The ITAT concluded that the treatment given by the assessee for the landed property clearly indicates that the intention of the assessee was to hold the same as a capital asset and have good returns from it.
Before the court, the department contended that ITAT erred in properly appreciating the scope and ambit of the term ‘business’ as defined in Section 2(13) of the Income Tax Act, 1961. The term ‘business’ includes any adventure or concern in the nature of trade, commerce, or manufacture, and when the assessee has been found to be engaging in transactions with a motive for profit, the same can only be treated as an adventure in the nature of trade. Even a single transaction of purchase and sale, outside the assessee’s line of business, could constitute an adventure in the nature of trade.
The division bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that the burden is upon the Department to show that a transaction effected by the assessee is an adventure in the nature of trade. Merely because the 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 reason for investing money was to hold the property and use it for a different purpose.
While upholding the observations of the ITAT, the court held that the assessee had held the landed property as investment, and disposal of the same would not convert what was a capital accretion into an adventure in the nature of trade. The court dismissed the department’s appeal.
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