Profit from Sale of Land Should Be Taxed as Capital Gains, Not Business Income: Madras HC

The Madras High Court has ruled in favour of a company, holding that the profit arising from the sale of land is capital gain and not business income.

The petitioner company, GWL Properties Ltd, earned income from the sale of property and had filed its income tax return (ITR), where it paid a tax of Rs 9,87,12,65 as capital gains tax. However, the assessing officer (AO) believed that the sale should be treated as business income.

The company submitted that it was engaged in manufacturing and trading, and not in the purchase and sale of properties. The assessing officer argued that the company has mentioned the activity of property development in its financials and the memorandum of association (MOA), and so the sale of the land was business income. This decision was upheld by CIT(A).

However, the ITAT ruled in favour of the company, noting that the land was acquired many years ago for industrial use and in the financials of the company, the land was shown without any development. The Tribunal observed that the assessee sold the land during the boom in the property prices and was not engaged in the regular business activity of selling and buying land.

The Tribunal, citing the ruling of the Supreme Court, held that for a transaction to be a business income, there must be regularity, frequency, volume and continuity.

The Madras High Court agreed with the ITAT’s findings, holding that the CIT(A) ignored the fact that the assessee had only sold a part of the land that was held by it as fixed assets against which there had not been any development. Further, the court also noted that the assessee had engaged in similar sales in the previous year, and the revenue had not challenged it.

Therefore, the court concluded that the sale of the land should be treated as ‘capital gains‘ and not as business income. The revenue’s appeal was dismissed.