Profit from Shop Sale Disputed as Business or Capital Gain: ITAT Remits Matter to AO to Verify and Reconsider Partners Salary [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) remitted the matter to the Assessing Officer (AO) to examine whether the profit from the sale of a shop should be treated as business income or short-term capital gain and to reconsider the disallowance of partners’ salary.

Dew Drop Properties, appellant-assessee, filed its income tax return for the year ending 5th August 2013, reporting a total income of Rs. 4,43,15,390. The firm was engaged in property trading, leasing, development, and also operated a resort.

It earned income from house properties, business, capital gains, and other sources. The profit and loss account included Rs. 26,15,420 as profit from the sale of a shop and showed a net profit of Rs. 4,34,525 after paying Rs. 12,00,000 as partners’ salary.

The AO classified the profit from the shop sale as short-term capital gain instead of business income, recomputed the total income, and arrived at a net loss of Rs. 21,80,895 in the P&L account. The partners’ salary was disallowed, and the total assessed income was fixed at Rs. 4,55,15,390.

On appeal, the Commissioner of Income Tax (Appeals)[CIT(A)] observed that the firm failed to provide documentary evidence supporting its claim that the shop sale profit was business income. In the absence of evidence, the CIT(A) upheld the AO’s assessment and dismissed the appeal.

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The assessee counsel stated that the firm had bought and sold two properties, and the profits were shown as business income in the profit and loss account. He submitted a table showing that from Assessment Year 2009-10 to 2024-25, the firm consistently reported such profits as business income and claimed they were not short-term capital gains.

The two member bench comprising Sandeep Gosain (Judicial Member) and Girish Agrawal (Accountant Member) reviewed the records and the orders of the lower authorities, including the tabular details submitted by the assessee counsel.

It noted that, except for these details, there was no documentary evidence to prove that the profits from the sale of the shops were business income. Verification of financial statements, inventory records, and other business profits was necessary before accepting the claim.

In the interest of fairness, the appellate tribunal remitted the matter to the AO to examine whether the shop sale profits were business income and to reconsider the disallowance of partners’ salary. The assessee was directed to be given a reasonable opportunity to provide supporting documents. The tribunal allowed the grounds raised by the assessee for statistical purposes.

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