Supreme Court clarifies the nature of income from transfer of development rights: Commissioner of Income Tax vs. Glowshine Builders & Developers Pvt. Ltd. (04 May 2023)

Date of the Judgment: 04 May 2023
Citation: 2023 INSC 492
Judges: M.R. Shah, J. and B.V. Nagarathna, J.
When is the sale of development rights considered a business transaction, and when is it a capital gain? The Supreme Court recently addressed this question in a case involving a real estate developer. The core issue revolved around whether the income from the transfer of development rights should be treated as business income or capital gains, impacting the tax liability of the assessee. This judgment clarifies the factors to be considered when determining the nature of such transactions.

Case Background

The case involves an appeal by the Commissioner of Income Tax against Glowshine Builders & Developers Pvt. Ltd. The dispute arose from the Assessment Year 2009-10, pertaining to the Financial Year 2008-09. The assessee, a real estate developer, entered into an agreement on 06 May 2008 with M/s Kirit City Homes Pvt. Ltd. to sell development rights for a property in Vasai for a total consideration of Rs. 15,94,06,500. However, this transaction was not initially disclosed in the income tax return of the assessee.

During the assessment, the Assessing Officer (AO) noticed that the assessee had not included this income in its profit and loss account. In response to the notice, the assessee claimed that this transaction was already offered to tax in AY 2008-09, reflecting a consideration of Rs. 5,24,27,354. The assessee stated that a “rectification deed” was executed on 30 May 2008, reducing the value of development rights from Rs. 15,94,06,500 to Rs. 5,24,27,354. The AO, however, was not satisfied with this explanation and initiated proceedings under Section 142(1) of the Income Tax Act, 1961.

Timeline

Course of Proceedings

The Assessing Officer (AO) treated the transaction as a short-term capital gain and added Rs. 15,94,06,500 to the assessee’s income for the year. The Commissioner of Income Tax (Appeals) upheld the AO’s decision, rejecting the assessee’s claim that the transfer of development rights was made in the Financial Year 2008-09 and that the value was reduced.

The Income Tax Appellate Tribunal (ITAT), however, reversed the decisions of the AO and CIT(A). The ITAT concluded that the assessee was engaged in the business of building and development, and the sold rights were part of its inventory, not a capital asset. The ITAT also accepted that the sale consideration was Rs. 5,24,27,354, which was already declared in AY 2008-09.

The Revenue then appealed to the High Court of Judicature at Bombay, which dismissed the appeal, stating that no substantial questions of law were involved. Consequently, the Revenue appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of whether the transfer of development rights constitutes a capital asset or stock-in-trade under the Income Tax Act, 1961. The relevant provisions are:

• Section 142(1) of the Income Tax Act, 1961: This section empowers the Assessing Officer to issue notices requiring the assessee to furnish information and documents for assessment purposes.
• Section 50C of the Income Tax Act, 1961: This section deals with the special provision for determining the full value of consideration in certain cases relating to transfer of immovable property. The AO had invoked this section stating that it was applicable despite the reduction in the agreement value.
• The court also considered the general principles of business income versus capital gains.

Arguments

Arguments by the Revenue:

• The Revenue argued that the High Court and ITAT failed to appreciate that the assessee had taken contradictory positions regarding the sale of development rights.
• The assessee’s ledger account showed an initial receipt of Rs. 15,94,06,500 on 31 March 2008, which was then reversed on the same day. The ITAT did not address this.
• The ITAT incorrectly relied on an MOU dated 27 December 2007, for a consideration of Rs. 5,24,27,354, without examining the actual entries in the books of accounts.
• The ITAT did not question the refund of the differential amount of Rs. 10,69,79,146 to the purchaser.
• The Revenue contended that the assessee’s balance sheets from AY 2006-07 to 2009-10 showed no sales, indicating that the transaction was a transfer of a capital asset, not stock-in-trade.
• The ITAT erred by relying on the assessee’s past inventory records without considering the lack of sales during the relevant assessment years.
• Even if the assessee’s claim of showing Rs. 5,24,27,354 in the tax return for AY 2008-09 was accepted, the differential amount of Rs. 10,69,79,146 should have been assessed as either capital gain or business income in the current year.

Arguments by the Assessee:

• The assessee argued that it is engaged in the business of building and development of properties since 1999-2000.
• The assessee’s balance sheets showed work-in-progress/inventories year after year, which was accepted by the department in scrutiny assessments under Section 143(3) of the Income Tax Act, 1961.
• The assessee had entered into an MOU on 27 December 2007, for the sale of development rights for Rs. 5,24,27,354.
• The assessee had shown the sale of land development rights at Rs. 5,24,27,354 in the financial year 2007-08 (assessment year 2008-09).
• The development agreement dated 06 May 2008, incorrectly mentioned the sale consideration as Rs. 15,94,06,500, which was rectified by a deed of rectification on 30 May 2008.
• The assessee contended that the land was held as stock-in-trade, and therefore, Section 50C of the Income Tax Act, 1961, was not applicable.
• The assessee relied on the judgment in *Raja J. Rameshwar Rao Vs. Commissioner of Income Tax, Hyderabad* [(1961) 42 ITR 179] to argue that even a single venture can be considered as trade or business.

Submissions Table

Innovativeness of the argument: The assessee’s argument that even a single venture can be considered as trade or business was a novel approach to counter the revenue’s argument that the assessee had no sales during the relevant assessment years.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the Court addressed were:

1. Whether the transaction of transfer of development rights should be treated as a sale of capital assets or stock-in-trade.
2. Whether the Income Tax Appellate Tribunal (ITAT) had correctly appreciated the facts and evidence on record while deciding the issue.
3. Whether the High Court was right in holding that no substantial question of law arose in the matter.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The following authorities were considered by the Court:

The following legal provisions were considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court noted that the assessee had relied on *Raja J. Rameshwar Rao Vs. Commissioner of Income Tax, Hyderabad* [(1961) 42 ITR 179] to argue that even a single venture can be considered as trade or business. However, the Court did not make a finding on this point and remanded the matter to ITAT to decide the nature of the transaction.

The Supreme Court observed that the ITAT had not considered the relevant factors while deciding that the transaction was a sale of stock-in-trade. The Court noted that the ITAT failed to examine the frequency and volume of trade, and the nature of the transaction over the years.

The Court also pointed out that the ITAT did not address the initial receipt of Rs. 15,94,06,500 and the subsequent rectification, nor did it question the refund of the differential amount. The Court held that the High Court had failed to appreciate the inherent contradictions in the order of the ITAT.

The Supreme Court stated that even if the assessee’s claim of showing Rs. 5,24,27,354 in the tax return for AY 2008-09 was accepted, the differential amount of Rs. 10,69,79,146 should have been assessed as either capital gain or business income in the current year.

The Court noted that the ITAT had not considered the relevant aspects and factors while considering the transaction as stock-in-trade. Therefore, the Court remanded the matter to the ITAT for fresh consideration.

The Supreme Court quoted the following from the judgment:

• “From the order passed by the ITAT, it appears that the ITAT has without examining any of the relevant factors confirmed that the transaction was transfer of stock in trade.”
• “The ITAT ought to have appreciated that the moment the receipt of amount is received and recorded in the books of accounts of the assessee unless shown to be refunded/returned, it is to be treated as income in the hands of the recipient.”
• “the matter is required to be remanded to the ITAT to consider the appeal afresh in light of the observations made hereinabove and to take into consideration the relevant factors while considering the transaction as stock in trade or as sale of capital assets or business transaction.”

There were no dissenting or concurring opinions. The judgment was authored by Justice M.R. Shah.

What weighed in the mind of the Court?

The Supreme Court’s decision to remand the case back to the ITAT was primarily influenced by the following factors:

• Lack of Consideration of Relevant Factors: The ITAT failed to consider crucial factors such as the frequency and volume of trade, and the nature of transactions over the years. This indicated a lack of thorough analysis by the ITAT.
• Contradictory Findings: The ITAT did not address the initial receipt of Rs. 15,94,06,500 and the subsequent rectification, nor did it question the refund of the differential amount. This showed a lack of coherence in the ITAT’s reasoning.
• Failure to Assess Differential Amount: Even if the assessee’s claim was accepted, the differential amount of Rs. 10,69,79,146 should have been assessed as either capital gain or business income. This indicated a gap in the ITAT’s assessment.
• Need for Detailed Examination: The Court emphasized the need for a detailed examination of the facts and circumstances of the case to determine the nature of the transaction, whether it was a sale of capital assets or stock-in-trade.

The Court’s reasoning was primarily focused on ensuring that the ITAT conducts a thorough and comprehensive analysis of all relevant factors before arriving at a decision. The Court’s emphasis on the need for detailed examination and consideration of all relevant factors indicates a strong inclination towards ensuring fairness and accuracy in tax assessments.

Sentiment Analysis Table

Fact:Law Ratio Table

Logical Reasoning

Key Takeaways

• The nature of income from the transfer of development rights (whether capital gain or business income) depends on the specific facts and circumstances of each case.
• Tax authorities must consider factors like frequency of trade, volume of trade, and the nature of transactions over the years to determine if the transaction is a sale of capital assets or stock-in-trade.
• If there is a change in the sale consideration, the authorities must verify if the differential amount was refunded and if not, the same must be assessed.
• The Income Tax Appellate Tribunal (ITAT) must conduct a thorough and comprehensive analysis of all relevant factors before arriving at a decision.
• Taxpayers must maintain proper documentation and accounting records to support their claims.

Directions

The Supreme Court quashed the judgment of the High Court and the ITAT and remitted the matter back to the ITAT. The ITAT was directed to consider the appeal afresh, taking into account the observations made by the Supreme Court, and to determine whether the transaction was a sale of capital assets or stock-in-trade.

Development of Law

The ratio decidendi of this case is that the determination of whether a transaction is a sale of capital assets or stock-in-trade depends on a comprehensive analysis of all relevant factors, including the frequency and volume of trade, and the nature of transactions over the years. The Supreme Court clarified that the ITAT must conduct a thorough and comprehensive analysis of all relevant factors before arriving at a decision. This case emphasizes the importance of a detailed factual analysis in determining the nature of income from the transfer of development rights.

Conclusion

The Supreme Court’s judgment in the case of Commissioner of Income Tax vs. Glowshine Builders & Developers Pvt. Ltd. clarifies the factors to be considered when determining whether the income from the transfer of development rights is business income or capital gains. The Court emphasized the need for a detailed examination of all relevant factors and remanded the matter to the ITAT for fresh consideration. This judgment underscores the importance of a thorough factual analysis in tax assessments and provides crucial guidance for both taxpayers and tax authorities.

Category

Parent category: Income Tax Act, 1961
Child categories:

• Capital Gains
• Business Income
• Section 142(1), Income Tax Act, 1961
• Section 50C, Income Tax Act, 1961
• Transfer of Development Rights
• Stock-in-trade

FAQ

Q: What is the main issue in the case of Commissioner of Income Tax vs. Glowshine Builders & Developers Pvt. Ltd.?

A: The main issue is whether the income from the transfer of development rights should be treated as business income or capital gains under the Income Tax Act, 1961.

Q: What factors did the Supreme Court say should be considered when determining if a transaction is a sale of capital assets or stock-in-trade?

A: The Supreme Court stated that factors such as the frequency of trade, volume of trade, and the nature of transactions over the years should be considered.

Q: What did the Supreme Court say about the Income Tax Appellate Tribunal’s (ITAT) decision in this case?

A: The Supreme Court found that the ITAT did not consider relevant factors and did not address the initial receipt of Rs. 15,94,06,500 and the subsequent rectification, nor did it question the refund of the differential amount. Therefore, the Supreme Court remanded the matter back to ITAT for fresh consideration.

Q: What is Section 50C of the Income Tax Act, 1961, and is it applicable in this case?

A: Section 50C deals with the special provision for determining the full value of consideration in certain cases relating to the transfer of immovable property. The applicability of Section 50C in this case depends on whether the land was held as a capital asset or stock-in-trade, which is to be determined by the ITAT.

Q: What is the practical implication of this judgment for real estate developers?

A: Real estate developers need to maintain proper documentation and accounting records to support their claims regarding the nature of income from the transfer of development rights. They should also ensure that all transactions, including any rectifications, are properly recorded and explained.