Sale of flats taxed as capital gains, not business income under Sec 2(13) IT Act | Real-estate project disposal : Bombay HC

The Bombay High Court affirmed that the proceeds from the sale of flats in a real-estate project must be taxed as capital gains, rejecting the Revenue's claim that they constitute business income. The decision clarifies the application of the "adventure in the nature of trade" test and underscores the importance of the assessee's intention, holding period and consistency in tax treatment.

Background & Facts

The Dispute

The appellant-Revenue, the Principal Commissioner of Income Tax-Central 4, challenged the order dated 20 June 2023 of the Income Tax Appellate Tribunal (ITAT) which had allowed the respondent-Assessee, Aurum Ventures Pvt. Ltd. (successor to Aurum Platz Pvt. Ltd.), to treat the proceeds from the sale of flats in the project "7 Marine Drive" as capital gains rather than business income for Assessment Year (AY) 2017-18.

Key Facts

• The respondent-Assessee is engaged in buying, developing and leasing properties.
• Land for the project was purchased on 31 January 2008 (AY 2007-08).
• Construction commenced on 25 February 2010.
• Occupancy Certificate (OC) was received on 5 September 2013.
• First flat was sold on 11 July 2014, ten months after the OC.
• Subsequent sales: three flats in FY 2015-16, one flat in FY 2016-17, one flat in FY 2017-18; one flat remains unsold.
• Search and seizure under Section 132 of the Act was conducted on 22 March 2018.
• Notice under Section 153A was issued on 4 July 2019; the assessee filed a revised return on 17 July 2019 declaring total income of Rs 12,84,53,098.
• Assessment order dated 30 December 2019 by the Assessing Officer (AO) treated the sale proceeds as business income and added Rs 16,09,45,739.
• The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s order on 30 August 2021.
• The ITAT, by its order dated 20 June 2023, reversed the CIT(A) order and held that the income should be taxed as capital gains.
• The present appeal was filed under Section 260A of the Income-Tax Act, raising nine questions of law; the Revenue limited its challenge to Question 1: whether the tribunal erred in treating the income as business income.

Procedural History

• 22 March 2018: Search and seizure under Section 132.
• 4 July 2019: Notice under Section 153A.
• 17 July 2019: Revised return filed.
• 30 December 2019: AO assessment order treating proceeds as business income, addition of Rs 16,09,45,739.
• 30 August 2021: CIT(A) order upholding AO’s assessment.
• 20 June 2023: ITAT order reversing CIT(A) and holding income as capital gains.
• 24 July 2026: Judgment reserved by the Bombay High Court.
• 4 August 2026: Judgment pronounced.

Relief Sought

The Revenue sought to set aside the ITAT order and restore the assessment of the proceeds as business income.

The Legal Issue

Whether, on the facts and in law, the income earned by the respondent-Assessee from the sale of flats in the "7 Marine Drive" project should be taxed under the head "Capital Gains" or under "Business Income" pursuant to Section 2(13) of the Income-Tax Act, 1961.

Arguments Presented

For the Appellant-Revenue

• The respondent-Assessee’s primary objective was to sell the flats for profit, as evidenced by the acceptance of advances amounting to Rs 4 crore on 29 January 2013, well before the OC.
• Substantial construction expenses continued after the OC (e.g., elevator work completed in 2015, window work in 2015-16), indicating a business-like development.
• The Memorandum of Association (MOA) contains an "Other Objects" clause authorising construction, development and dealing in buildings, supporting a business intent.
• The Revenue argued that the assessee’s conduct - taking advances, holding the property for a relatively short period after OC, and the lack of any marketing for lease - demonstrates an adventure in the nature of trade.
• Reliance was placed on the AO’s findings and on the principle that the burden of proving an adventure in the nature of trade lies with the Revenue.

For the Respondent-Assessee

• The MOA expressly states the intention to own and let out apartments; the "Other Objects" clause merely permits ancillary activities.
• The flats were sold as bare units without furnishing, precluding immediate leasing.
• The holding period from land acquisition (2008) to first sale (2014) was six and a half years, and the overall project spanned thirteen years, characteristic of an investment rather than a business.
• The assessee consistently treated the land and building as "Investments in Land and Building" in its audited financial statements, a treatment accepted by the Department in AY 2014-15 and AY 2015-16.
• No incriminating material was uncovered during the 2018 search; the Department had previously accepted the capital-gains character.
• The respondent relied on the tests articulated by the Gujarat High Court in Pari Mangaldas Girdhardas v. CIT and on Supreme Court pronouncements that intention, holding period, volume, frequency and accounting treatment are decisive factors.

The Court's Analysis

The Court began by reiterating the statutory definition of "business" under Section 2(13) of the Act, noting that it encompasses any trade, commerce or manufacture or any adventure in the nature of trade. It emphasized that the term is elastic and must be interpreted in light of the totality of facts.

"The expression 'business' defined in sec 2(13) of the Act does not merely include any trade, commerce or manufacture but is elastic and wider to include the adjunct adventure in the nature of trade…"

The Court then applied the multi-factorial test laid down in Pari Mangaldas Girdhardas and reiterated by the Supreme Court in G. Venka Taswami Naidu & Co. v. CIT. The factors considered were:

1. Initial intention - Whether the land was acquired with a view to resale or to hold as an investment. The Court found that the thirteen-year gap between acquisition and the first sale, coupled with the MOA’s primary object of letting out apartments, indicated an investment motive.
2. Subsequent conduct - How the asset was dealt with during the holding period. The assessee treated the property as a capital asset in its books, did not record it as stock-in-trade, and only after a prolonged period did it commence sales.
3. Volume, frequency and regularity - The transaction involved a single project with seven units sold over three assessment years, lacking the repetitive pattern typical of a builder’s business.
4. Accounting treatment - The consistent classification of the land and building as "Investments in Land and Building" was a strong indicator of investment intent.
5. MOA and objects clause - While the "Other Objects" clause permitted construction activities, the primary object expressly contemplated letting out apartments, supporting the investment narrative.
6. Consistency principle - The Court stressed that although res judicata does not apply across assessment years, the Revenue must maintain a consistent approach where facts remain unchanged. The Department had accepted the capital-gains treatment in AY 2014-15 and AY 2015-16; there was no material change to justify a divergent view in AY 2017-18.
7. Burden of proof - The Court reiterated that the onus lies on the Revenue to prove that the transaction constitutes an adventure in the nature of trade. The Revenue failed to produce any evidence of advertising, marketing, or a business-like pattern of sales.

The Court also examined the AO’s reliance on post-OC expenditures (elevator and window work) and held that such expenditures, while substantial, were part of completing a single project and did not transform the nature of the transaction into a business activity. The Court cited Karam Chand Thapar & Bros. (P.) Ltd. v. CIT to illustrate that a long holding period is indicative of investment.

Having weighed all factors, the Court concluded that the respondent-Assessee’s intention was to hold the property as a long-term investment and to earn rental income, with the eventual sales being a consequence of the inability to find suitable tenants. Consequently, the income from the sale of the flats falls squarely under the head "Capital Gains".

The Verdict

The appeal filed by the Revenue is dismissed. The ITAT order dated 20 June 2023 is upheld. The proceeds from the sale of the seven flats in the "7 Marine Drive" project are to be taxed under the head "Capital Gains" for AY 2017-18. The unsold flat is to be treated as an investment and not as stock-in-trade. No additional tax, penalty, interest or costs are imposed.

What This Means For Similar Cases

Intention Governs Characterisation

• Courts will look first at the assessee’s declared intention at the time of acquisition, as reflected in the MOA and accounting treatment.
• A long holding period and lack of repeated transactions strongly favour a capital-gains character.

Burden of Proof Lies With Revenue

• The Revenue must produce concrete evidence of a business-like pattern (advertising, bulk purchases, frequent sales) to establish an adventure in the nature of trade.
• Absence of incriminating material during searches weakens the Revenue’s case.

Consistency Is Mandatory

• Once the Department accepts a capital-gains treatment in earlier assessment years, it cannot later reverse that position without a material change in facts.
• Practitioners should ensure that any change in tax characterisation is supported by clear, new evidence.

Practical Checklist for Practitioners

• Verify the primary object clause in the MOA and any ancillary objects.
• Document the holding period and accounting classification of the asset.
• Preserve evidence of any marketing or business-like activities.
• Anticipate the Revenue’s burden of proof and be prepared to demonstrate investment intent.