2 Section 45 : Capital gains vis a vis Business income – sale of property held as investment – Rental income disclosed as business income – gains arising on sale of property held in investment to be treated as capital gains.

1.      
 Pr. CIT-31 vs. Shree Shreemal Builders [ Income tax Appeal no 205 of
2016, Dated: 31^st July, 2018 (Bombay High Court)]. 

[DCIT
vs. Shree Shreemal Builders; dated 14/11/2014, Mum.  ITAT ]

The
assessee sold a building which was acquired in 1978. It offered the gain made
on the sale of the building for tax under the head “capital gains”. However,
the A.O held that as the assessee was in business of development of real estate
and the fact that rental income received from building was offered to tax as
business income in the earlier years. The profit/gain on sale of the building
was in nature of business profit/gain. Therefore, chargeable to tax under the
head profit/gain of business or purchases and not under the head “capital
gains”.

Being
aggrieved, the assessee filed an appeal to the CIT (A). The CIT(A) on the facts
found that the assessee had been showing the building as part of its assets in
the balance sheet and it has never been shown as stock in trade till date. The
CIT(A) further held that merely because a person is engaged in business of
development of real estate he is not barred by holding any property as and by
way of investment. It was further found that interest paid on borrowed funds
was being capitalised and not claimed as an expenditure in the regular course
of business to arrive at the taxable income. So far as classifying the rental
income under the head “business income” is concerned, it held that by itself it
alone would not change the character of an investment into stock in trade. In
these circumstances the appeal of the assessee was allowed.

Being aggrieved the Revenue filed an appeal to the Tribunal. The
Tribunal find that the said building had been acquired in the year 1978 and
ever since that date the property has been shown as an asset/investment and not
as stock in trade. Further, it held that profit/gain on sale of the building is
classifiable under the head capital gains. Support was also drawn from the fact
that interest paid on the funds borrowed were not debited to the Profit and
Loss Account but were capitalised. So far as classifying the rental income from
the said building as business income is concerned, the ITAT helds that, by
itself, this would not change the character of the investment in the building
into a stock in trade. The appeal of the Revenue was dismissed.

Being aggrieved the Revenue
filed an appeal to the High Court. The Court find that the both CIT(A) and the
Tribunal on consideration of all facts has concluded that the building which
was acquired in 1978 and sold in previous year relevant to the subject
assessment year was an investment. This finding was on the basis that the
assessee had all along shown the building as its investment and not as its
stock in trade in its Balance Sheet and Profit and Loss Account. Further, the
interest paid on the amounts borrowed for acquisition of the building has been
capitalised since beginning and no amount of interest was claimed as an
expenditure in its profit and loss account. The first objection on behalf of
Revenue is that as the assessee is in the business of real estate development
all its income relating to real estate can only be taxed as business income.
This submission on behalf of the Revenue is contrary to the directions in the CBDT
circular No.4/2007 dated 15^th June, 2007 wherein in paragraph 10
thereof it is stated that it is possible for a tax payer to have two portfolios
at the same time i.e. Investment portfolio (investment) and trading portfolio
(stock in trade).

Further
this Court in Commissioner of Income Tax vs. Gopal Purohit (2010) 188 Taxman
140 has also held to the same effect. The second objection on behalf
of the Revenue is that as the assessee had classified its rental income from
the said building as business income that would by itself be evidence of it
being stock in trade. In any case in such matters the totality of the facts are
to be taken into account as done by the CIT(A) and the Tribunal. Therefore the
profit/gain on sale of the investment is taxable under the head “capital
gains”. Accordingly, Revenue appeal dismissed.