By TIOL News Service

NEW DELHI, DEC 30, 2015: THE issue is - Whether construction of multi-storey building and sale of flats can be characterized as 'an adventure in nature of trade' and receipt is to be treated as business income even if assessee had no intention to exploit the plot as commercial venture. NO is the verdict.

Facts of the case:

The assessee, who is having no regular source of income, was an owner of a house property at Hauz Khas, New Delhi. The land on which the property was located, had been acquired by her on 18th March 1958 for a sale consideration of Rs. 5,500/-. The land was purchased and the house so constructed was for self use and had been continued to be under her occupation for more than 30 years. The aggregate cost of construction was about Rs. 86,285/-. During concerned A.Y, the Assessee entered into an agreement with M/s. Mac Consolidation for construction of additional area on the property in question. However, this agreement did not materialize on account of financial strains, old age and ill health. Thereafter, a fresh agreement was entered into by the Assessee with the builder, stating that the Assessee had approached the builder for their assistance in the construction of the said residential building on the terms and conditions set out in the earlier agreement. The second agreement clearly indicated that the old agreement would be treated as cancelled. The net result of the above agreement was that the entire pre-determined cost of construction was to be incurred by the builder and the Assessee was to be provided with a flat on the rear of the second floor at a pre-determined cost of Rs. 5,32,855/-. The Assessee was also entitled to the share of the profit on the sale of the flats. The Assessee filed her return declaring a profit of Rs. 4 lakhs under the head 'long term gain' and claimed deduction of Rs. 3,75,000/- u/s 54B. The Assessee also declared net taxable income of Rs. 7,500/- under the head 'capital gains'. The said return was accepted by the Revenue u/s 143(1)(a). However, after over six years, notice u/s 148 was sent to the Assessee asking her to file a return inasmuch as he alleged to have reason to believe that the income of the Assessee has escaped assessment. Pursuant to the notice, the Assessee filed a return declaring the original income as declared in the return initially filed.

During assessment proceedings pursuant to the queries raised by the AO, the AR submitted the details regarding the extent of construction carried out on the plot. The Assessee has also furnished the names and addresses of the parties to whom the flats were sold. The AO thereafter, passed an assessment order u/s 147/143(3), in which the amount received by the Assessee was treated as business income. The AO computed the profit from the sale of the flats as Rs. 4,00,000/- and then observed that if the cost of the flat on the second floor retrained by the Assessee was reduced from the cost of construction shown at Rs. 35,39,000/-, then the profit would be more. The AO then observed that "since the Assessee exploited the land owned by her to be used for construction of multi storey building, the activity undertaken was in the nature of trade and accordingly, the profit arising in sale of flats was assessable under head 'profit from business'. The AO proceeded to hold that the deduction u/s 54E was not allowable to the Assessee since the flats were sold within a period 36 months and the profit arising therefrom was not long term capital gain.

After hearing the parties, the High Court held that,

++ it is to be noted that merely because the Assessee has approached the builder for constructing the flats on the portion apart from the already constructed portion, would not make the transaction an 'adventure in the nature of trade.' All that the Assessee had received from the sale of the flats was a residential flat of the value of Rs. 5,32,855/- and Rs. 4 lakhs in cash as a result of the agreement entered into with the builder. As explained by this Court in Raja Bahadur Kamakhya Narain Singh v. CIT and CIT v. R.V. Gupta, where the construction and sale of the flats do not change the character of the asset and there was no material to show that the Assessee ever had the intention to exploit the plot as a commercial venture, the transaction cannot be characterized as 'an adventure in the nature of trade' leading to the resultant receipt as business income in her hand. The fact that the Assessee got a flat on the rear second floor apart from the original constructed portion on the ground floor made no difference to the nature of the transaction. The AO, the CIT (A) and the ITAT have proceeded on an erroneous legal premise that the agreement entered into by the Assessee with the builder and the consequent sale of the flats by the builder on behalf of the Assessee was an adventure in the nature of the trade. Accordingly, the question framed is answered in favour of the Assessee.

(See 2015-TIOL-2938-HC-DEL-IT)