BASAVARAJU SHIVAKUMAR HOLAVANAHALLI ,BANGALORE vs. ACIT, CIRCLE-5(2)(1), BANGALORE

This is an appeal filed by the assessee against the order passed by the NFAC, Delhi vide order dated 18/10/2024 in DIN No. ITBA/NFAC/S/250/2024-25/1069785049(1) for the assessment year 2014-15.

The assessee is aggrieved by the action of the Revenue in treating the sale of a property as business income instead of capital gains.

The assessee is an individual. He purchased a vacant site at Mysore Road, Bengaluru, on 03.09.2007 for ₹2.80 crore through a registered sale deed. In 2008, the assessee obtained sanction from BBMP and constructed a commercial building (Lodge and Restaurant complex). The construction was financed by own funds and borrowed funds.

The assessee intended to let out the building for commercial use. Negotiations were held with Apodis Hotel & Resorts Ltd. in 2009. They even submitted a revised plan to suit their requirements. The deal could not go through. The assessee also issued advertisements in newspapers on 15.05.2010 inviting tenants. Despite efforts, no tenants were secured for almost six years.

Due to prolonged vacancy, financial pressure and commercial unviability, the assessee decided to sell the incomplete property. Advertisement for sale was published on 23.09.2012. Finally, an agreement to sell dated 28.10.2013 was executed in favour of 18 individuals, who later formed a partnership firm “Raj Towers.” The sale deed was registered on 12.12.2013 for ₹10 crore. In the return of income, the assessee declared long-term capital gains after indexation and claimed exemption u/s 54EC of the Act.

However, the Assessing Officer held that the assessee was a builder and developer. He observed that the assessee constructed the building soon after purchase and later sold it to 18 parties. He treated the transaction as an adventure in the nature of trade. The AO assessed the profit as business income.

On appeal, the CIT(A) confirmed the order. He held that the immediate development and subsequent sale showed trading intention. He also held that Raj Towers was only a paper entity and the series of transactions clearly showed business motive.

Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.

The learned AR before us filed a paper book running from pages 1 to 352 and submitted that the assessee always treated the property as a capital asset. The property was disclosed in the income-tax returns from AY 2008-09 onwards as an investment. It was also declared in wealth-tax returns as evident from page 185 of the paper book

The assessee’s intention was never to sell the property for profit. His intention was to earn rental income. This is proved by the negotiations with Apodis Hotel, by the revised plan submitted by them, and by the advertisement for tenancy published in 2010.

The assessee waited nearly six years before selling. He sold only because he could not secure tenants and faced financial strain. A forced sale under compulsion cannot be equated with business motive. The AR . relied on several case laws reproduced on 6 of the ld. CIT-A order. On the strength of these rulings, it was argued that the income should be taxed under “Capital Gains” and not as “Business Income.”

On the other hand, the learned DR supported the orders of the AO and ld. CIT(A). He argued that the assessee is engaged in real estate development. The quick construction after purchase and later sale clearly show trading intention of the assessee and therefore, the same should be brought to tax under head business and profession.

The ld. DR further argued that selling to 18 individuals and later showing it as a firm was only a device. The arrangement was a business venture.

We have considered rival submissions of both the parties and examined the materials available on record. The key issue is whether the property was held as a capital asset or as stock-in-trade. The answer depends on intention. Intention has to be gathered from conduct, treatment in accounts, and surrounding circumstances.

In the result, the appeal of the assessee is allowed.