Income from the Sale of Immovable Property Will Be Considered as ‘Capital Gain’, Not ‘Commercial Income’: Kerala High Court

Section Bench Judges AK Jayasankaran Nambiar and KV Jayakumar I observed this “The need to ensure uniformity and consistency in tax bases cannot be ignored, especially while categorizing the nature of the activity carried out by an assessee to generate his income for tax purposes.”

The assessor/appellant classified the rental income as “Income from Home Ownership”, which was accepted by the Department in previous assessments. However, for the assessment years 2012-13 and 2015-16, the Ministry reclassified this income as “Business Income”; as a result, sales proceeds were taxed as business income rather than capital gains.

Aggrieved by the assessment orders, the assessee preferred to file an appeal before the First Appellate Authority. The Commissioner of Income Tax (Appeals) allowed the objections.

The Revenue filed an appeal with the Income Tax Appellate Tribunal challenging the order passed by the Commissioner of Income Tax (Appeals). The court rejected the objections.

The Revenue Administration filed a correction application, claiming that the assessments were based on audit objections, which are considered exceptional circumstances under the CBDT Circulars. The court accepted this and withdrew the objections.

The assessee submitted that the income has always been classified under the head ‘Income from household properties’ and there has been no change in the situation which would warrant a change in the classification of the head of income. Therefore, it became clear that income from the sale of immovable property should be considered as ‘capital gains’ and not as ‘business income’ for taxation purposes.

The bench observed that while categorizing the nature of activity carried out by an assessee, particularly for generating revenue for taxation purposes, the need to ensure uniformity and consistency in tax assessments cannot be ignored.

The court stated that it was observed that the assessee was constantly earning income from renting out the house properties belonging to him. All assessment years before and after the assessment years considered in these appeals have been assessed on this basis.

The court also stated that since the assessee had only sold some of his properties during the assessment years in question, it cannot be seen that he had engaged in the business of buying and selling property in those years. It is authorized to carry out these works in accordance with the Articles of Association.

The bank also stated: “The sale of property by the assessee within the two years considered in these appeals should be viewed as merely incidental to the activity of renting out properties carried out in the years before and after the two years in question. The sales transactions in question cannot have the effect of changing the nature of the income-generating activity continuously carried out by the assessee and accepted by the Ministry. Therefore, the income derived by the assessee from the sale of properties owned by him during the two years considered in these appeals can only be considered under the head of ‘capital gains’ and not as ‘business income’.”

The bench agreed with the assessee that the Appellate Tribunal had no jurisdiction to entertain the application for revision preferred late by the Revenue.

The Panel added that since the Court of Appeal is a product of the Statute, it cannot extend its jurisdiction beyond what is expressly granted to it under the Statute.

In view of the above, the court panel accepted the appeal.

Appellate Counsel/Evaluator: Mitha Sudhindran

Defendant Counsel/Department: Jose Joseph

Case Title: M/s Knowell Realtors India Pvt. Ltd. / Deputy Commissioner of Income Tax

Case Number: ITANO.38 OF 2023