Income From Sale Of Immovable Properties To Be Treated As 'Capital Gains,' Not 'Business Income': Kerala High Court

The Division Bench of Justices A.K. Jayasankaran Nambiar and K.V. Jayakumar observed that “the requirement of ensuring uniformity and consistency in tax assessments cannot be overlooked, especially while categorizing the nature of the activity carried on by an assessee to earn its income for the purposes of taxation.”

The assessee/appellant classified its rental income as “Income from House Property,” which was accepted by the Department in prior assessments. However, for the assessment years 2012-13 and 2015-16, the Department reclassified this income as “Business Income,” resulting in the sale proceeds being taxed as business income rather than capital gains.

Aggrieved by the assessment orders, the assessee preferred appeals before the First Appellate Authority. The Commissioner of Income Tax (Appeals) allowed the appeals.

The Revenue filed an appeal before the Income Tax Appellate Tribunal challenging the order passed by the Commissioner of Income Tax (Appeals). The Tribunal dismissed the appeals.

The Revenue filed a rectification application, arguing that the assessments were based on audit objections, qualifying as exceptional circumstances under CBDT Circulars. The Tribunal accepted this and restored the appeals.

The assessee submitted that the income was always classified under the head 'Income from house property' and there was no change in circumstance warranting a change in classification of the head of income. It followed therefore that the income from sale of immovable properties had to be seen as 'capital gains' and not as 'business income' for the purposes of taxation.

The bench observed that the requirement of ensuring uniformity and consistency in tax assessments cannot be overlooked, especially while categorizing the nature of the activity carried on by an assessee to earn its income for the purposes of taxation.

The bench noted that the assessee has been consistently seen as deriving income from letting out house property owned by it. It is on that basis that it has been assessed in all the assessment years prior to, and subsequent to, the assessment years under consideration in these appeals.

The bench further noted that merely for the reason that in the said assessment years, the assessee effected a sale of some of its properties, it cannot be seen as having embarked upon a business of buying and selling properties in those years, even if it was authorized to do such business as per its Memorandum of Association.

The bench further stated that the “sale of properties by the assessee in the two years under consideration in these appeals must be seen as merely incidental to the activity of letting out of properties for rent carried out by it in the years prior and subsequent to the said two years. The said sale transactions cannot have the effect of changing the very nature of the income earning activity consistently carried on by the assessee, and accepted by the Department. Thus, the income derived by the assessee, from the sale of properties owned by it, during the two years under consideration in these appeals, can only be assessed under the head of 'capital gains' and not as 'business income'.”

The bench agreed with the assessee that the Appellate Tribunal did not have the jurisdiction to consider the rectification application belatedly preferred by the Revenue.

The Appellate Tribunal being a creature of the Statute cannot extend its jurisdiction beyond what is expressly conferred on it under the Statute, added the bench.

In view of the above, the bench allowed the appeal.

Counsel for Appellate/ Assessee: Mitha Sudhindran

Counsel for Respondent/ Department: Jose Joseph

Case Title: M/s Knowell Realtors India Pvt. Ltd. v. Assistant Commissioner of Income Tax

Case Number: I.T.A.NO.38 OF 2023