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Facts
The assessee company, engaged in real estate business, sold a property held as stock-in-trade. It also incurred renovation and professional expenses for a newly purchased property, also held as stock-in-trade. The Assessing Officer (AO) treated the sale gain as Short Term Capital Gain and disallowed the renovation and professional expenses, capitalizing them to the property cost.
Held
The Tribunal held that the assessee is in the regular business of buying and selling real estate. The sale of the flat was correctly treated as stock-in-trade and the gains as business income. The renovation and professional expenses incurred for the new property, which is also stock-in-trade, are directly related to the business and should be allowed as revenue expenditure.
Key Issues
Whether renovation and professional expenses incurred on properties held as stock-in-trade are to be treated as capital expenditure or allowable as business expenditure.
Sections Cited
143(2), 142(1), 143(3)
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Income Tax Appellate Tribunal, MUMBAI “J(SMC
Before: SHRI VIKRAM SINGH YADAV & MS. KAVITHA RAJAGOPAL
Assessment Year : 2016-17 Indradhanu Textile ITO, Ward-3(2)(1), Private Limited, Room No. 673A, 104, Dalamal Tower vs. 6th Floor, Aayakar Bhavan, Free Press Journal Marg, M.K. Road, Nariman Point, Mumbai-400020. Mumbai-400021. PAN : AACCI9288F (Appellant) (Respondent) For Assessee : Shri Nishit Gandhi For Revenue : Shri Aditya Rai, Sr.DR Date of Hearing : 08-10-2025 Date of Pronouncement : 14-10-2025 O R D E R PER VIKRAM SINGH YADAV, A.M : This is an appeal filed by the assessee against the order of the Ld.Addl/JCIT(A)-1, Coimbatore [„Ld.CIT(A)‟], dated 06-02-2025, pertaining to Assessment Year (AY) 2016-17, wherein the assessee has taken the following grounds of appeal:
1. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals) ["Ld. CIT (A)"] erred in assessing the income of the Appellant at Rs. 9,49,588/- as against returned income of Rs. 1,15,350/- The Appellant prays that the returned income be considered as correct income.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding addition made to returned income by the Learned Assessing Officer on account of Renovation Expenses of Rs. 6,26,632 and Professional Fees of Rs. 2,07,604 spent in respect of the new Residential Flat purchased and held as stock-in-trade. The Appellant prays that the Renovation Expenses and Professional Fees be allowed as business expenses.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the Renovation Expenses and Professional Fees incurred by the Appellant during the year under consideration as capital in nature. The Appellant prays that the Renovation Expenses and Professional Fees be considered as revenue expenses and be allowed as business expenses. 4. The Assessee craves leave to add, alter modify or delete one or more ground before or at the time of hearing of Appeal.”
2. Briefly the facts of the case are that the assessee-company filed its return of income on 13-10-2016, which was selected for scrutiny and notices u/s. 143(2) and 142(1) of the Income Tax Act, 1961 („the Act‟) were issued calling for the necessary information/documentation. On going through the Profit & Loss Account of the assessee-company, the AO observed that the assessee-company has sold residential property at Sea Springs, Bandra which was held as stock in trade. However, as per the Memorandum of Association and Articles of Association of the assessee- company, the main objects of the assessee-company are regarding the textile business and ancillary activities in relation to the said business. The assessee was accordingly asked to explain as to why the sale of the property should not be treated as capital asset instead of stock in trade. In its submissions, the assessee-company referred to one of the objects i.e., Object No. 32 of its Memorandum of Association, whereby the assessee-company was allowed to undertake purchase, sale of apartment, building, etc. The assessee-company also mentioned about its intention to hold the asset as stock in trade and not as investment, and thus selling it very next year thereby showing it as business income. The submissions so filed by the assessee company were considered, but not found acceptable to the AO. As per the AO, the assessee-company‟s submission that in the Memorandum of Association, the assessee-company is authorized to conduct the business of purchasing and selling of apartments, is not a complete fact. The main object of the assessee-company is the textile business, and thus any income/loss in relation to such business will be categorized under the head „Business Income‟. Further, any activities ancillary to the main objects of the business should be categorized into different heads of income, depending upon the nature of the transaction and merely one or two purchase and sale transactions in a year does not conclude that the assessee was in the business of buying and selling of properties. Thus, the contention of the assessee was found not acceptable and gains arising out of such sale of property of Rs. 15,06,900/- was treated as Short Term Capital Gain.
3. The AO further observed that the assessee-company has claimed renovation expenses of Rs. 6,26,632/- and professional fees of Rs. 2,07,604/- towards purchase of new property located at Hiranandani, Powai. The AO held that since all such expenses are incurred towards enhancement of the property and the property being capital asset, the expenditure incurred therein cannot be allowed as revenue and thus, has to be capitalized to the cost of the property and the expenses so claimed were disallowed and the assessment proceedings were accordingly concluded vide order passed u/s. 143(3) of the Act, dt. 28-11-2018.
4. The assessee thereafter carried the matter in appeal before the Ld.CIT(A). It was submitted before the Ld.CIT(A) that the assessee- company has bought the flat at Sea Springs, Bandra in the FY. 2014-15 with an intention to sell the same, it was held and reflected as stock in trade in the Balance Sheet as at 31-03-2015 and during the year under consideration, the same has been sold. It was submitted that immediately after selling the said property, the assessee purchased another property at Hiranandani, Powai and the same was also classified as stock in trade. It was submitted that the assessee has been in regular business of buying and selling of property and accordingly classified both the properties as stock in trade and income arising from the sale of the said property should be treated as business income and not to be brought to tax under the head „capital gains‟. Reference was drawn to the financial statements for the previous financial years, Memorandum of Association and Articles of Association, copy of the purchase, sale deed and it was submitted that the assessee-company always intended to conduct and has really conducted real estate business activities which is one of its objects of the company and, therefore, the gain on the sale of the property sold is rightly computed as income arising from business activities. It was further submitted that the expenditure incurred towards repairs and professional expenses does not increase the life of the property and are mainly incurred to maintain the property and all these expenses thus classified as revenue expenditure which has wrongly been disallowed by the AO.
5. The submissions so filed by the assessee were considered. As per the Ld.CIT(A), the claim of the assessee-company is correct that it has stopped its main object regarding the textile business and has ventured into ancillary activities of real estate business so mentioned in the Memorandum of Association and Articles of Association to which it is entitled to and rightly so. Further, the Ld.CIT(A) drawn reference to the return of income filed by the assessee for the AYs. 2014-15, 2015-16 and 2016-17 and the AO was directed to accept the income from sale of the flat as business income.
The Ld.CIT(A) further held that once the stock in trade ceased to exist after the sale of Sea Springs, Bandra property and any amount spent on the new property/stock to make it marketable or professional charges paid to purchase/rectify the title of the stock in trade has to include as work in progress and is to be capitalised as closing work in progress. The expenditure is directly identifiable to the closing stock/work in progress and setting it off against the profit of old property sold is not proper and in order. Accordingly, the Ld. CIT(A) upheld the disallowance of renovation expenses of Rs.6,26,632/- and professional fees of Rs.2,07,604/- made by the AO and held that the amount must be increased as closing stock/work in progress and accordingly the grounds raised by the assessee were partially allowed.
Against the sustenance of the disallowance of renovation and professional expenses, the assessee is now in appeal before us.
During the course of hearing the Ld.AR submitted that the Ld.CIT(A) has accepted the fact that the assessee is in the regular business of purchase and sale of immoveable property and has treated the sale of the flat during the year under consideration as stock in trade and gains arising from there as business income. At the same time, the Ld.CIT(A) has sustained the disallowance on renovation expenses and professional expenses incurred in relation to new property, which was purchased by the assessee at Hiranandani, Powai during the financial year relevant to the impugned assessment year. It was submitted that once the factum of stock in trade has been accepted by the Ld.CIT(A), wherein there is sale of the flat which was purchased in the earlier financial year and purchase of another flat during the year and the stock in trade continues to exist at the end of the financial year, any expenses incurred in relation to the stock in trade have to be treated as revenue expenditure. In this regard, our reference was drawn to the financial statement of the assessee-company where at Note No.7: inventories, there was stock in trade of Flat No. 51 at Sea Springs, Bandra West, at the beginning of the year which was sold during the year under consideration and purchase of another residential flat at Tulip, Hiranandani which was outstanding as on the close of the financial year i.e, 31-03-2016. Further, reference was drawn to Note No.11, other expenses, wherein all the expenses have been allowed by the AO, except for the figure of professional fees and renovation expenses. It was accordingly submitted that the necessary relief be provided to the assessee by allowing the expenses so incurred as revenue expenditure.
Per contra, the Ld. DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A).
We have heard the rival contentions and perused the material available on record. We find merit in the contention advanced by the ld AR where the factum of assessee‟s activities and dealings in real estate have been accepted in realm of business activities and transactions of purchase and sale have been accepted as purchase/sale of stock-in trade, then the expense incurred in relation to such activities have to be allowed as business expenditure. As evident from perusal of the financial statements for the year under consideration, there were two transactions undertaken during the year under consideration – firstly, sale of flat at Sea Springs Bandra which was purchased in the earlier year and purchase of another flat at Hiranandani and both are reflected as part of stock-in-trade in the financial statements. The income on sale of first flat has been offered as business income and the cost of the second flat continues to exist as part of stock-in-trade at the end of the financial year and there are expenses by way of renovation expenses and professional expenses which have been incurred in respect of such transactions, thus establishing the necessary nexus with its business activities. In light of the same, we find that there is no justifiable basis in denying the claim of these expenses as business expenditure and the same is hereby directed to be allowed. The addition so made by the AO and sustained by the Ld.CIT(A) is directed to be deleted.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 14-10-2025.