Kerala High Court Rules Property Sale Gains Kept For Investment To Be Taxed As Capital Gains

Kerala High Court Rules Property Sale Gains Kept For Investment To Be Taxed As Capital Gains

The Kerala High Court has ruled that gains from selling property held for investment purposes should be classified as 'Capital Gains' not as 'income from adventure in the nature of trade.'

A bench comprising Justices A.K. Jayasankaran Nambiar and Syam Kumar V.M. stated that the onus is on the Department to prove that a transaction is an adventure in the nature of trade. The mere profit from a transaction does not automatically categorize it as such if the original intention was to hold the property for investment.

The respondent, who operates a medical shop and partners in other medical shops under the name "SEVANA," had their premises searched by tax authorities. In response to a notice, the respondent filed income returns for the assessment years 2011–12 to 2014–15.

The assessing officer (AO) had previously reclassified the income from the sale of land from 'capital gains' to 'business income,' citing the systematic purchase and sale of large land parcels over several years. The AO's decision was contested before the Commissioner of Income Tax (Appeals), who ruled in favor of treating the income as 'capital gains.'

The department appealed the CIT(A)'s decision to the Income Tax Appellate Tribunal (ITAT). The ITAT concluded that there was no evidence that the respondent had converted the land into stock for trade or engaged in real estate business. The ITAT noted that the respondent’s treatment of the land as a capital asset supported their intention to invest rather than trade.

The department argued that the ITAT misunderstood the scope of 'business' as defined in Section 2(13) of the Income Tax Act, 1961, which includes any adventure or concern in the nature of trade. They contended that even a single transaction could qualify as an adventure in the nature of trade if driven by a profit motive.

However, the assessee argued that whether an activity qualifies as an adventure in the nature of trade depends on the facts and circumstances of each case. They emphasized that their land transactions were not conducted as a business venture but as a long-term investment, with no evidence of commercial activity or advertisement.

The court upheld the ITAT's findings, confirming that the respondent held the land as an investment. It concluded that the sale of the property did not transform it into an adventure in the nature of trade.

As a result, the court dismissed the department's appeal, affirming that the income from the sale of the property should be treated as 'capital gains' rather than 'business income.'