Kerala High Court says Income From Sale Of Immovable Properties should be Treated as ‘Capital Gains’ Not ‘Business Income’
The Kerala High Court has clarified that income from the sale of immovable properties should be taxed as ‘capital gains’ and not as ‘business income.’ This ruling came from a Division Bench comprising Justices A.K. Jayasankaran Nambiar and K.V. Jayakumar, who emphasized the importance of maintaining uniformity and consistency in tax assessments, especially when categorizing the nature of an assessee’s income-generating activities.
Background of the Case
The assessee had consistently classified its rental income as “Income from House Property,” a practice accepted by the tax department in previous assessments. However, for the assessment years 2012-13 and 2015-16, the Department reclassified the income as “Business Income,” leading to the taxation of the sale proceeds of immovable properties under that category instead of as capital gains.
Challenging this reclassification, the assessee filed appeals with the Commissioner of Income Tax (Appeals), who ruled in its favor. The Revenue subsequently appealed the decision before the Income Tax Appellate Tribunal (ITAT), which initially dismissed the Revenue’s challenge. However, the Tribunal later accepted a rectification application by the Revenue based on audit objections and restored the appeals.
Court’s Observations
The High Court noted that the assessee’s consistent practice of earning rental income and categorizing it under “Income from House Property” had been accepted by the Department in prior and subsequent assessment years. The Bench stated that merely selling a portion of its properties during the disputed years did not transform the assessee’s primary activity into a business of buying and selling properties, even if such activity was permitted by its Memorandum of Association.
The Court also highlighted that these property sales were incidental to the assessee’s main activity of letting out properties for rent. This incidental nature could not alter the established classification of income under “capital gains.”
Tribunal’s Jurisdiction Questioned
The Bench agreed with the assessee’s argument that the ITAT lacked jurisdiction to entertain the Revenue’s belated rectification application. It reiterated that the Tribunal, as a statutory body, could not extend its powers beyond those explicitly granted by law.
Verdict
In its judgment, the Kerala High Court ruled that the sale of immovable properties during the disputed assessment years should be treated as “capital gains” for taxation purposes. It further held that the ITAT’s acceptance of the Revenue’s rectification plea was beyond its statutory jurisdiction. Consequently, the Court allowed the appeal, reinforcing the importance of consistency and fairness in tax assessments.
