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Commissioner of Income Tax 8, Mumbai vs. Glowshine Builders and Developers Pvt. Ltd. (Civil Appeal No. 2565 of 2022)

Civil Appeal · 2023 INSC 492Decided 4 May 2023
Civil Appeal No. 2565 of 2022
M.R. Shah · B.V. Nagarathna

Background

The assessee, a builder and developer, entered into a development agreement in May 2008 to sell development rights in a Vasai property for about Rs. 15.94 crore, but did not disclose this amount in its return for the relevant assessment year, instead claiming a "rectification deed" had reduced the value to about Rs. 5.24 crore and that this reduced amount had already been offered to tax in an earlier assessment year. The Assessing Officer disbelieved this and added the full Rs. 15.94 crore as short-term capital gains for the year in question; the addition was upheld by the Commissioner (Appeals) but reversed by the Income Tax Appellate Tribunal (ITAT), which held, based on the assessee's inventory records over several years, that the property was stock-in-trade of the assessee's business rather than a capital asset, and that the reduced sum had already been taxed in the earlier year. The Bombay High Court dismissed the Revenue's further appeal, prompting this appeal to the Supreme Court.

Decision Breakdown

The Supreme Court found that the ITAT had decided the case superficially. It concluded the transaction was a sale of stock-in-trade merely because inventory was shown in the assessee's balance sheets in some years, without examining the well-established factors relevant to that question, such as frequency and volume of transactions and the nature of dealings over the years, and without even engaging with the Assessing Officer's specific finding that there was not a single other sale transaction across several years. The Court also flagged that the ITAT never questioned or verified whether the assessee had actually refunded the differential amount of about Rs. 10.7 crore to the purchaser under the so-called rectification deed: a critical fact, since money received and recorded in the books is treated as income unless shown to have been genuinely returned. Because these key aspects were left unexamined, the Supreme Court set aside both the High Court's and the ITAT's orders and remitted the matter back to the ITAT to decide the appeal afresh, taking these factors into account, without expressing any opinion on the merits either way.

Lesson Learnt

A tax tribunal cannot decide whether a transaction is a capital asset sale or a stock-in-trade sale merely by looking at how an item is labeled in the books of account. It must examine the real frequency, volume and pattern of the taxpayer's business dealings and verify claimed facts (like an alleged refund reducing the sale price) before accepting them, or its decision risks being sent back for a proper re-examination.

Official source (sci.gov.in)View Judgment (PDF)

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