Case Note & Summary
The appeal before the High Court of Bombay arose from an order of the Income Tax Appellate Tribunal (ITAT) which had held that the proceeds from the sale of flats by the respondent-assessee were to be treated as capital gains and not as business income for Assessment Year 2017-18. The assessee, a company engaged in buying properties and leasing them out, developed a real estate project named 7, Marine Drive in South Mumbai. The land was purchased on 31 January 2008, construction commenced on 25 February 2010, and the occupation certificate was received on 5 September 2013. For the relevant assessment year, the assessee declared income from the sale of seven apartments as long-term capital gains. Following a search and seizure action under Section 132 of the Income Tax Act, 1961, the Assessing Officer issued a notice under Section 153A and subsequently framed an assessment under Section 153A read with Section 143(3) on 30 December 2019, treating the sale proceeds as business income. The Assessing Officer relied on the 'Other Objects' clause in the Memorandum of Association which permitted carrying on the business of construction and dealing in buildings, and observed that the flats were sold as bare shells without furnishing, that an advance was received from a buyer soon after the occupation certificate and before water connection, and that significant construction expenses were incurred even after the occupation certificate, indicating that the project was not ready for letting out and that the assessee never intended to hold the flats as investment. The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal on 30 August 2021, confirming the business income classification. On further appeal, the ITAT reversed this decision on 20 June 2023, holding that the income was chargeable as capital gains. Aggrieved by the ITAT’s order, the Revenue preferred the present appeal under Section 260A, raising the question whether the ITAT erred in treating the income as capital gains instead of business income. The judgment extract provided does not include the High Court’s analysis or final decision on the appeal.
Issue of Consideration
Whether on the facts and circumstances of the case and in law, the tribunal has erred in allowing the assessee's appeal on the issue of treatment and taxation of Capital Gain on sale of flats under consideration as business income?
Law Points
- Characterization of income from sale of real estate as business income or capital gains
- interpretation of objects clause
- relevance of intention and conduct of assessee
Case Details
2026 LawText (BOM) (08) 3
Income Tax Appeal No. 220 of 2024
G.S. Kulkarni, Aarti Sathe
Mr. Suresh Kumar for Appellant; Mr. Sashi Tulsiyan a/w P.C. Tripathi for Respondent
Pr. Commissioner of Income Tax-Central 4
Aurum Ventures Pvt. Ltd. (Successor in interest to Aurum Platz Pvt.Ltd.)
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Nature of Litigation
Appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
Remedy Sought
The Revenue seeks to set aside the ITAT order and restore the assessment treating the sale proceeds as business income.
Filing Reason
The Revenue contended that the Tribunal erred in holding that the proceeds from sale of flats constituted capital gains instead of business income.
Previous Decisions
The Assessing Officer assessed the income as business income; the Commissioner of Income Tax (Appeals) dismissed the assessee's appeal, upholding the business income treatment; the Income Tax Appellate Tribunal allowed the assessee's appeal, holding the income to be capital gains.
Issues
Whether on the facts and circumstances of the case and in law, the tribunal has erred in allowing the assessee's appeal on the issue of treatment and taxation of Capital Gain on sale of flats under consideration as business income?
Submissions/Arguments
The Revenue argued that the assessee's true intention was not to hold flats as investment but to conduct business, evidenced by the 'Other Objects' clause in the MOA, lack of furnishing, receipt of advance from a buyer before water connection, and substantial construction expenses incurred after the Occupation Certificate.
The assessee contended that the flats were held as investment and that the main objects clause stated the purpose was to own and let out apartments, and thus the sale proceeds should be treated as capital gains.
Judgment Excerpts
The assessee had developed/ constructed a building but declared income arising from the sale of flats in that building in its return of income as Capital Gains instead of income from business of development and construction by claiming the activity of construction as investment. (Para 6.2)
Even with respect to the provision of letting out apartments, the following factors/ facts highlight that leasing out the apartments was never ever the objective of the company. (Para 6.6)
No person who has intention to put the building on rent will offer it for sale prior to water connection or any other basic amenities being made. This shows that there was no intention of assessee to give the building on rent. (Para 6.15)
Procedural History
The Assessing Officer passed an assessment order dated 30-12-2019 under Section 153A read with Section 143(3) of the Income Tax Act, 1961, treating the proceeds from sale of flats as business income. The assessee appealed to the Commissioner of Income Tax (Appeals), who dismissed the appeal on 30-08-2021, confirming the business income classification. The assessee further appealed to the Income Tax Appellate Tribunal. The Tribunal allowed the appeal on 20-06-2023, holding that the income should be treated as capital gains. The Revenue then filed the present appeal under Section 260A before the High Court challenging the Tribunal's order.
Acts & Sections
- Income Tax Act, 1961: 260A, 143(1), 132, 153A, 143(3)
- Maharashtra Apartment Ownership Act, 1970:
