Supreme Court Orders Reassessment in Glowshine Builders’ Income Tax Dispute

The case of Commissioner of Income Tax-8, Mumbai v. Glowshine Builders & Developers Pvt. Ltd. revolves around the addition of Rs. 15.94 crore to the income of the respondent, which was deleted by the Income Tax Appellate Tribunal (ITAT) and upheld by the Bombay High Court. The Supreme Court was called upon to determine whether the assessment of capital gains or business income was correctly adjudicated.

This judgment is significant as it clarifies the interpretation of income from the transfer of development rights and whether such transactions should be treated as business income or capital gains.

Background of the Case

The dispute pertains to the Assessment Year (AY) 2009-10, corresponding to the Financial Year (FY) 2008-09. The respondent, Glowshine Builders & Developers Pvt. Ltd., entered into a development rights agreement with M/s Kirit City Homes Pvt. Ltd. on May 6, 2008. The sale consideration was recorded at Rs. 15,94,06,500, but the amount was later reduced through a rectification deed to Rs. 5,24,27,354.

The Assessing Officer (AO) noted that this transaction was not reflected in the Profit and Loss account and subsequently initiated an inquiry:

The AO found that the assessee had not disclosed the development rights transaction in its return.
The assessee claimed that the transaction was recorded in the previous AY 2008-09.
The AO treated the income as short-term capital gains and added Rs. 15.94 crore.
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision.
The ITAT reversed this decision, ruling that the transaction pertained to AY 2008-09.
The Bombay High Court upheld the ITAT’s decision, dismissing the Revenue’s appeal.

Petitioner’s Arguments

The appellant, Commissioner of Income Tax-8, Mumbai, represented by Additional Solicitor General Balbir Singh, contended:

The ITAT’s order was perverse and contrary to the facts on record.
The assessee had taken contradictory stands before the AO and the ITAT regarding the sale of development rights.
The development agreement dated May 6, 2008, showed receipt of Rs. 15.94 crore, but the rectification deed was executed later on May 30, 2008.
The AO’s analysis of ledger accounts showed an initial recording of Rs. 15.94 crore, which was later reversed.
The ITAT did not consider whether the differential amount of Rs. 10.69 crore was refunded.
Despite the AO’s findings, the ITAT ruled in favor of the assessee without due diligence.

Respondent’s Arguments

The respondent, Glowshine Builders & Developers Pvt. Ltd., represented by Senior Advocate S.K. Bagaria, countered:

The assessee was engaged in the business of property development and the transaction should be treated as business income.
The development rights sale was recorded in AY 2008-09 as per the Memorandum of Understanding (MoU) dated December 27, 2007.
The consideration was reduced from Rs. 15.94 crore to Rs. 5.24 crore via the rectification deed.
The ITAT had rightly examined the business nature of the assessee and concluded that the transaction was part of its normal operations.
The Bombay High Court correctly ruled that no substantial question of law arose.

Supreme Court Judgment

The case was heard by Justice M.R. Shah and Justice B.V. Nagarathna. The Supreme Court set aside the High Court’s decision and remanded the case to the ITAT for reconsideration.

1. ITAT Failed to Consider Critical Financial Aspects

The Court found that the ITAT did not examine whether the differential amount of Rs. 10.69 crore was refunded:

“The ITAT has not even questioned the factum of refund of the differential amount of Rs. 10,69,79,146 to the purchaser on account of the rectification deed.”

2. Incorrect Interpretation of Business vs. Capital Gains

The Court ruled that merely recording land in inventory does not automatically make it stock-in-trade:

“As per the settled position of law, multiple factors like frequency of trade, volume of trade, and nature of transactions over the years must be considered.”

3. AO’s Findings Ignored

The Court observed that the ITAT and the High Court did not properly analyze the AO’s assessment:

“The AO had specifically recorded that the transaction involved the only significant sale in the relevant year, suggesting it was a capital asset transaction.”

4. Need for Reassessment

The Court remanded the case to the ITAT for reconsideration:

“The matter is remitted back to the ITAT to consider the appeal afresh in accordance with law and to determine whether the transaction is the sale of a capital asset or stock-in-trade.”

Final Verdict

The Supreme Court ruled:

The appeal was allowed in part.
The ITAT and High Court rulings were set aside.
The case was remanded to the ITAT for fresh consideration.
The ITAT must reassess whether the transaction constituted business income or capital gains.

Conclusion

This judgment underscores the importance of a thorough financial evaluation in taxation disputes. The Supreme Court’s ruling ensures that ITAT reassesses the case with due diligence, considering all relevant financial factors.

Petitioner Name: Commissioner of Income Tax-8, Mumbai.
Respondent Name: Glowshine Builders & Developers Pvt. Ltd..
Judgment By: Justice M.R. Shah, Justice B.V. Nagarathna.
Place Of Incident: Mumbai.
Judgment Date: 04-05-2023.

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