Gain From Selling Of Property Kept For Investment To Be Taxed Under 'Capital Gains': Kerala High Court

The Kerala High Court has held that when a property kept not for trade but for investment purposes is sold, the gain has to fall under the head 'capital gains' and such a transaction is only taxable under capital gain and not under adventure of trade.

The 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.

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 completed the assessment by making various additions. While thus 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'.

As per the AO, there has been systematic purchase and sale of large amounts of land in various locations on a continuous basis over many years, either in individual capacity or in collaboration with other individuals. The assessee had filed appeals against the order of the AO before the Commissioner of Income Tax (Appeals).

The 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. The CIT (A) reasoned that since the assessee had consistently disclosed the income from the sale of land as capital gains, the same should have been accepted by the AO. The Order of the CIT (A) thus directed the AO to treat the income from the sale of land as capital gains and not as income from 'adventure in the nature of trade'.

The department filed the appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT concluded that there was no finding by the AO that the assessee had converted the landed property into stock in trade so as to start business on the landed property. The ITAT observed that the assessee had not taken permission from the authorities for converting 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. The ITAT, after due consideration, held that income has to be treated as income from capital gain and not from business.

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. Thus understanding the term 'adventure' as a pecuniary risk, or as a venture with a commercial purpose, and co-relating it with the facts as revealed during the search under Section 132 of the assessee's premises. The assessee was indulging in real estate business during the relevant assessment years, thus justifying the taxing of the profits from the sale of lands as 'business income' and not as capital gains.

The assessee contended that the existence or otherwise of an adventure in the nature of trade is to be identified not based on any straight jacket method but on the basis of the facts and circumstances of the case at hand. The AO has not brought out any material on record to suggest that the property transactions undertaken by the assessee during the relevant assessing years constitute a 'business activity' in the ordinary sense of the term. The revenue records revealed that the assessee was doing business in medicines and was only dabbling in real estate as a long-term investment, devoid of any immediate or short-range commercial interest. The assessee used family funds for land purchases and no external borrowings were made for investment in properties, and the assessee never advertised the sale of properties. These are clear pointers to the fact that the land purchases and sale were not carried out as a business venture by the assessee.

The term 'adventure in the nature of trade' is used in Section 2(13) of the Income Tax Act, 1961, while defining the term 'business'. Section 2(13) states that “business” includes any trade, commerce, or manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture. The words 'adventure in the nature of trade, etc.' used in Section 2(13) of the Act refer to a purposeful venture or activity that has been carried out or pursued with a clear commercial design and purpose or a profit-making motive. It may fall short of the established drapings or paraphernalia of a trade and may have some randomness about it, but if it has a commercial design and has profit-making as its central purpose or motive, then it constitutes a 'business' as used in the Income Tax Act, 1961, making the income earned therefrom exigible to tax.

The court, while upholding the observations of the ITAT, concluded 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 and answered in favor of the assessee.

Counsel For Appellant: P.K.R.Menon

Counsel For Respondent: P.Jayabal

2024 LiveLaw (Ker) 467

Case Title: PCIT Versus Arun Majeed

Case No.: ITA NO.229 OF 2019

Click Here To Read The Order