1. This appeal is by the department. The assessee is a firm dealing in dry fruits. The assessment year is 1981-82. The dispute is about the head under which the income of Rs. 61,000 received by the assessee would be treated. This income had arisen from what is termed in the assessment order as 'reassignment of shop'. The assessee asserted that it was a long-term capital gain and should be assessed as such. The ITO rejected the said claim and held that it was an income from business and added it to the business income of the assessee.
2. The Commissioner (Appeals) accepted the claim of the assessee and directed the ITO to treat the same as long-term capital gain. The department has now come in appeal before us.
3. The only ground raised is that the Commissioner (Appeals) has erred in treating the said income as long-term capital gain and not business income.
4. The facts, as found by the ITO and recorded in the assessment order, arc as follows. The assessee was carrying on business in dry fruits in his shop situated in the Sheikh Menon Street as a tenant. On 28-10-1975 the assessee purchased a building which was situated near this shop.
This building was, at the time of purchase by the assessee, fully tenanted. On 30-10-1975 shop Nos. (1) and (2) in the said building were vacated by the tenants--A.S. Sawant & Sons. The assessee paid Rs. 90,000 to the said A.S. Sawant & Sons and, thereafter, these shops were used by the assessee for business purposes. The above amount of Rs. 90,000 was debited in the books of account to the goodwill account. On 24-3-1980, the assessee assigned the said shops to Kamdar Optics and received Rs. 1,51,000. This amount was accounted for in the goodwill account. There was, thus, income of Rs. 61,000 from this transaction, which is terms as 'reassignment of the shop' in the assessment order.
The ITO observed that the ownership in the said shop had not been transferred to Kamdar Optics and, as such, there was no transfer of any property. Consequently, the provisions regarding capital gains would not be attracted. The transaction was in the course of the business. As such, income arising therefrom was business income.
5. Before the Commissioner (Appeals), it was submitted on behalf of the assessee that when the assessee obtained possession and paid Rs. 90,000, what he acquired was capital asset and, as such, when possession was transferred, what was transferred was. capital asset, with the result that provisions regarding capital gains would be attracted. Since the period between the acquisition or possession and transfer thereof was more than 36 months, the income was a long-term capital gain ; in no case it could be a business income. This contention of the assessee was accepted by of the Commissioner (Appeals). He observed that there was no transfer of immovable property as such by the assessee. However, according to him, the right of possession of the said shops was a capital asset of the assessee as distinguished from the assessee's stock-in-trade, particularly when the assessee was not a dealer in real estate. Consequently, the transaction transfer of possession and obtaining money in the course thereof was in the nature of transfer of capital asset, as defined in Section 2(14) of the Income-tax Act, 1961 ('the Act'), and the income arising therefrom was a long-term capital gain.
6. Before us, the learned departmental reprensentative relied on the reasons given by the ITO and he drew our attention to Section 28(iv) of the Act. On the other hand, the contention on behalf of the assessee was that since the shops in question were not stock-in-trade of the assessee, who was a dealer in dry fruits and not in real estate, and since the shops in question had been used by the assessee for business purpose, before they were reassigned to Kamdar Optics, the income arising therefrom would be long-term capital gain and not a business income. According to the assessee, Section 28(iv) would not be applicable to the facts of this case.
7. We have considered the rival contentions and the facts of the case.
The real question is as to what was the intention of the assessee in purchasing the tenanted building. In other words, the point to be ascertained is whether by purchasing the said building, the assessee opened a new line of business, namely, the business in real estate or whether the said building was acquired as fixed capital asset of the assessee-firm. There are no circumstances on record which would justify the definite conclusion to the effect that when the assessee purchased the tenanted building, the intention was to deal in real estate. Since the building was tenanted, there was no certainty that any portion would become vacant. Except the transaction with which we are concerned in this case, no other transaction of a similar nature was brought to our notice. As already stated, the ITO has found that the shops vacated by the assessee's tenants were used by the assessee for business purposes, i.e., for extension of its already existing business of dry fruits till the time when those shops were reassigned. The period for which such user was made is a long one. Another fact found by the ITO is that the said building was near the shop in which the assessee was carrying on its business of dry fruits. All these facts are consistent with the case of the assessee that the intention in purchasing the building was not to deal in real estate but to use the shops in that building, vacated by the tenants, for the extension of its original business of dry fruits. In the circumstances, the building in question would come within the definition of the term 'capital asset' as defined in Section 2(14).
8. The circumstances do not indicate that the assessee had opened a new line of business in dealing in real estate. This was not a case of exploitation of a commercial asset. This was a case of income arising out of transfer of right of possession in a portion of the fixed assets of the firm which are not its stock-in-trade. Consequently, the income arising therefrom would be taxable as capital gains and not as business income.
9. Section 28(iv), to which our attention was drawn on behalf of the revenue, would not be applicable in the present case. Under the said provision, what is chargeable under the head 'Profits and gains of business or profession' is the value of any benefit or perquisite, whether convertible into money or not, arising from business. The income with which we are concerned in this case cannot be said to be a benefit or perquisite arising from the business. The case is that of transfer of a capital asset and, as such, the provisions regarding capital gains would be applicable. The income would not be a business income.
10. It may be mentioned here that the manner in which the transaction is entered into in the books of account is not decisive of the legal character of the transaction involved. Consequently, the mere fact that income from rent is included in the profit and loss account would not mean that the transaction, with which we are concerned, resulted in business income. We have analysed the nature of transaction and we find that the transaction was that of transfer of capital asset and, as such, the income was taxable under the head 'Capital gains'.
Considering all the circumstances, we confirm the order of the Commissioner (Appeals).