ITAT held that profit as income from business and not as capital gains

1. The assessee was engaged in the business of share trading and real estate promoters and builders. The assessee was following 'completed contract method'. The assessee had declared sale of flat and plots of land in its profit and loss account and profit derived thereon as income from business. AO called for the copy of the sale deed in respect of sale of one flat for Rs 4 lakhs during the asst year under appeal. AO accepted the sale consideration to be correct and brought the entire sale consideration to tax under the head 'capital gains' without giving any deduction towards cost of acquisition. The assessee pleaded that it started construction of a housing complex named "Neel Kamal Apartment'. The assessee was selling flats as well as plots in the housing complex and followed 'completed contract' method of accounting. The construction of flats and development of plots was completed and the value of closing work in progress was Nil as per the accounts but assessee company was holding two plots of land and one flat in its hand. The assessee sold the remaining two plots and one flat. Since the cost of the said plots and flat was Nil in the books, the assessee offered the entire sale proceeds of plots and flat as sales and offered as income in the return under the head 'income from business'. The total addition on this issue made by the Learned AO by treating the business income as long term capital gains.

2. CIT(A) concluded that it had not been established with any material evidence that the assessee had sold the flat and plot as his stock in trade, there was no reason to interfere with the findings of the Learned AO and accordingly the sale of flats and plots of land would only attract capital gains. But it directed the AO to seek a reference of DVO on Fair Market Value, and obtain the particulars from the office of the Sub-Registrar in respect of the value of those two plots.

3. On appeal, the ITAT held as under:

"We hold that the revenue has been assessing the profits from the housing projects derived by the assessee as income from business and it cannot deviate its stand in the assessment year under appeal in respect of profits of the same project merely because there is no closing stock of plots and flat shown in the books of the assessee and merely because no sale of plots had been offered as business income in the immediately preceding previous year by the assessee. Hence we hold that the profit derived from sale of plots and flat should be assessed only as income from business and not as capital gains. Accordingly the adoption of value determined by stamp valuation authorities u/s 50C (of Income Tax Act, 1961) does not arise. Moreover, the amendment in section 43CA (of Income Tax Act, 1961) applying the value determined by stamp valuation authorities for stock in trade is applicable only from Asst Year 2014-15 and not earlier. Hence upto the Asst Year 2013-14, the decision rendered by the Hon'ble Madras High Court in the case of CIT vs Thiruvengadam Investments P Ltd reported in (2010) 320 ITR 345 (Mad) would hold the fort during the assessment year under appeal. In the said case, the Hon'ble Madras High Court held that the property in the hands of the assessee was treated as a business asset and not as capital asset, and hence there is no question of invoking the provisions of section 50C (of Income Tax Act, 1961). 2.5.1. With regard to the determination of sale of flat and sale of plots by the assessee, we find that the Learned AO had only merely made an estimation of the fair market value without any basis which is also endorsed by the Learned CIT(A). We find that the revenue had not controverted this finding of the Learned CIT(A) before us. Hence we are not confirming the estimation made by the Learned AO to determine the sale consideration of plots and flat. Accordingly, the ground nos. 1 to 6 raised by the assessee are allowed.”

Case Reference- M/s. Mana Kamna Developers Pvt. Ltd Vs. Addl. CIT

IN THE INCOME TAX APPELLATE TRIBUNAL, "C" BENCH, KOLKATA

Before :Shri Mahavir Singh, Shri M. Balaganesh, Judicial Member, and Accountant Member ITA No. 1577/Kol/2010 A.Y 2006-07