By TIOL News Service

CHENNAI, MAY 04, 2015: THE issue before the Bench is - Whether the profit on sale of any asset can be treated as Business Income when property is acquired by way of settlement and assessees have sold it in pieces, after collecting the development charges. NO is the answer.

Facts of the case

The assessee is an individual. She filed a return of income for relevant AY. Her case was taken up for scrutiny. After verifying the books of accounts, bank statement and property documents, the AO passed an order u/s 143(3) of the Act, accepting the return of income filed. The CIT later on issued a show cause notice u/s 263, on the ground that the property, which the assessee got by way of settlement, was sold by her over a period of 3 years to various persons in the form of undivided share and that therefore, the income derived therefrom was a business income. The assessee filed objections. However, CIT directed the AO to treat the income from the property transaction as business income instead of capital gain. As against the said order of the CIT, the assessee filed an appeal before Tribunal. The Tribunal, allowed the appeal, holding that the assessee was actually a full time student undergoing MBBS course and that she is not indulging in any business activity and it was a case of change of opinion. Aggrieved by the said order of the Tribunal, the Revenue filed appeal before HC.Counsel for Revenue submitted that merely because the assessee was a student, the Tribunal ought not to have come to the conclusion that she could not have indulged in any business activity. It is also contended that whenever a property acquired by someone is sold in bits and pieces, after collecting the development charges with a view to make a profit out of the same, the same can be treated as business income as per the law laid down by the Supreme Court in Raja Rameshwara Rao Bahadur Vs. CIT.

After hearing both parties, HC held that,

++ assessee got the property by way of settlement. Thereafter, she entered into a promoter's agreement on 18.12.2007 and a construction agreement on 30.3.2008. It was in pursuance of those agreements that the assessee was compelled to sell undivided shares in the land, over a period of three assessment years namely 2008-09, 2009-10, etc. The assessee also filed a return of income for the assessment year 2008-09 under the head 'long term capital gain'. Therefore, the Tribunal rightly concluded that the transaction of sale of undivided shares in the land merely started crystallizing from the assessment year 2008-09 onwards and what is important is that the Revenue accepted the stand of the assessee. Therefore, it was clearly a case of change of opinion and it is now well settled that on the basis of the change of opinion, the power under Section 143(3) cannot be invoked. In so far as the second ground is concerned, it is true that in Raja Rameshwara Rao Bahadur, the Supreme Court held that when a person acquired the land with a view to selling it later after developing it, he is carrying on an activity resulting in profit and the activity can only be described as a business venture. But, the case on hand stands on a different footing. The assessee did not acquire any land for the purpose of development and sale as part of any business venture. She got this property by way of a settlement and she merely wanted to sell it. The better method of selling it was found to be to entrust it to a developer. Once an agreement for sale is entered into in the manner in which a developer wanted, there is no way the assessee would have had control over the period of time, within which, the entire transaction would have been concluded. Therefore, this is not a fit case calling for our interference.

(See 2015-TIOL-1134-HC-MAD-IT)