Sale of flats held as investment is taxable as capital gains, not business income.

The Respondent-Assessee acquired land in 2008 and developed a project comprising seven high-end apartments known as “7, Marine Drive,” Mumbai.

Its Memorandum of Association authorised it to own and let out apartments, while real-estate development appeared among its ancillary objects.

The land and building were consistently shown as investments in the audited accounts and not as stock-in-trade.

The Occupation Certificate was obtained on 5 September 2013; the first apartment was sold in July 2014, followed by sales of other apartments over subsequent assessment years, while one apartment remained unsold.

For AY 2017–18, the Assessee declared the sale proceeds as taxable under “Capital Gains.”

Following a search under Section 132 and assessment under Sections 153A and 143(3) of the Income-tax Act, 1961, the Assessing Officer treated the receipts as “Business Income,” relying, inter alia, on the ancillary object permitting construction and development, advances received from buyers, post-occupation construction expenditure, and the absence of actual letting of the flats.

The Commissioner (Appeals) affirmed the assessment and additionally directed that the unsold apartment be treated as stock-in-trade.

The ITAT reversed the CIT(A), holding that the Assessee had intended to hold the property as an investment and let it out, and that the sale proceeds were taxable as capital gains.

It also quashed the direction treating the unsold apartment as stock-in-trade.

The Revenue challenged the ITAT’s order under Section 260A, ultimately restricting its appeal to the treatment of the sale proceeds.

1. Whether, on the facts and in law, the profit arising from the sale of the apartments was taxable as “Business Income” or as “Capital Gains”?

2. Whether the unsold apartment could be classified as stock-in-trade when the Assessee had consistently treated it as an investment?

Section 2(13) of the Income-tax Act gives “business” an inclusive and wide meaning, extending to an “adventure in the nature of trade”.

Under the principles in G. Venkataswami Naidu & Co. v. CIT, whether a transaction constitutes an adventure in the nature of trade depends on the totality of the facts, including the assessee’s intention at acquisition, the nature and quantity of the asset, subsequent conduct, repetition of transactions, and the commercial features associated with the purchase and sale.

The tests in Pari Mangaldas Girdhardas v. CIT include: the initial intention; the purpose of the subsequent sale; treatment in the books; the manner in which income was returned and assessed in earlier years; the objects in the constitutional documents; and the volume, frequency, continuity and regularity of transactions.

The burden lies on the Revenue to establish that the transaction was an adventure in the nature of trade; a profitable sale does not by itself constitute business income.

Consistency is relevant where a fundamental aspect has been accepted in earlier years and there is no material change in facts, as recognised in Radhasoami Satsang v. CIT.

The classification in the books is not conclusive but is a relevant circumstance, as held in Karam Chand Thapar & Bros. (P.) Ltd. v. CIT.

The Court also relied on CIT v. Administrator of the Estate of Shri E.F. Dinshaw, PCIT v. Shree Shreemal Builders, and PCIT v. Arun Majeed, which recognise that long-held property treated as investment does not become stock-in-trade merely because it is later sold at a profit.

The Court held that the ITAT had applied the correct legal tests to the factual record.

The Assessee’s MOA showed an intention to own and let out the apartments; the land and building were consistently capitalised as investments; and the property was held for a prolonged period—approximately six and a half years from acquisition of the land before the first sale.

The apartments were sold gradually over several assessment years, there was no other real-estate project, and there was no evidence of regularity, volume, advertising or marketing characteristic of a real-estate trading business.

The Court treated the Assessee’s failure to secure tenants and its subsequent sale of apartments as consistent with realisation of an investment rather than proof of an original intention to trade.

The Revenue’s reliance on the ancillary object authorising real-estate development, receipt of advances, and post-occupation construction expenditure was insufficient to displace the cumulative evidence of investment intent.

The Court further held that the Revenue had accepted the capital-gains treatment in assessments for AYs 2014–15 and 2015–16 and had identified no distinguishing feature for AY 2017–18.

The fact that the earlier assessments were unabated and that the present assessment followed a search did not justify a different treatment, particularly when no incriminating material relating to this issue was found.

Since the sale proceeds were capital gains and the remaining apartment continued to be held as an investment and generated rental income, it could not be reclassified as stock-in-trade.

The Court found no substantial question of law warranting interference with the ITAT’s factual determination.

The consequential direction to treat the unsold apartment as stock-in-trade was also unsustainable, as the apartment continued to be held as an investment.

The appeal was dismissed with no order as to costs.