Profit on Sale of Property Held for Rental Income Taxable as Capital Gains | ITAT

Case Details: Basavaraju Shivakumar Holavanahalli vs. Assistant Commissioner of Income-tax - [2025] 179 taxmann.com 520 (Bangalore-Trib.)

Judiciary and Counsel Details

• Keshav Dubey, Judicial Member & Waseem Ahmed, Accountant Member
• Smt. Pratibha, Adv. for the Appellant.
• Shivanand Kalakeri, CIT (DR) for the Respondent.

Facts of the Case

The assessee purchased a vacant site and constructed a commercial building (lodge and restaurant complex) on it. The assessee, thereafter, executed an agreement to sell in favour of 18 individuals, who later formed a partnership firm. The sale deed was registered for a certain amount.

In the return, the assessee declared Long Term Capital Gain (LTCG) after indexation and claimed exemption under section 54EC. The Assessing Officer (AO) held that the assessee was a builder and developer, based on the fact that the assessee constructed the building soon after purchase and later sold it to 18 parties. Thus, the transaction was treated as an adventure in the nature of trade and assessed as business income.

The CIT(A) confirmed the order, and the matter reached the Bangalore Tribunal.

ITAT Held

The Tribunal held that the key issue is whether the property was held as a capital asset or stock-in-trade. The answer depends on intention. Intention has to be gathered from conduct, treatment in accounts, and surrounding circumstances.

In the instant case, the assessee purchased the land in September 2007. He immediately constructed a building and tried to let it out. Negotiations with a hotel, advertisements for tenancy, and a six-year wait indicate that the primary intention was to hold it as an investment for rental income.

Furthermore, the property was disclosed as a capital asset in income tax and wealth tax returns. This conduct is consistent and supports the assessee. If the property was stock-in-trade, it would not have been declared in wealth-tax returns.

The sale was after six years of holding, not immediately after purchase. The assessee sold due to financial pressure and long vacancy. This was a forced sale, not a planned business venture. Therefore, the property in question was a capital asset. The profit on sale has to be assessed under the head “Capital Gains.”