Realty Company's Sale of Long-Held Freehold Land Is Capital Gains Not Business Income: Madras Court

The Madras High Court has held that profits earned from the sale of decades-old freehold land must be taxed as capital gains and not as business income, rejecting the income tax department's attempt to treat the transaction as part of a real estate business.

A division bench of Justices Anita Sumanth and Mummineni Sudheer Kumar said the record clearly showed that the land was held as a long-term asset and was sold without any development or trading activity.

"The accounts reveal that the assessee holds fixed assets, including freehold land, being land purchased over the years and held as is, without any development," it said.

The profit from the sale, the court held, was therefore taxable as capital gains and not as business income.

The bench was dealing with an appeal filed by the income tax department arising from an order in favour of GWL Properties Ltd., formerly Gordon Woodroffe Ltd., for the assessment year 2004–05.

The dispute was narrow but significant. The question before the court was whether the profit from the sale of land should be taxed as capital gains, as claimed by the company, or as business income, as argued by the Revenue.

GWL had sold about 22.28 acres of land during the relevant year and offered the resulting profit of nearly Rs 9.87 crore to tax under the head “capital gains.” The assessment was initially processed, but the Assessing Officer later reopened it under Section 148 of the Income Tax Act, taking the view that the company was engaged in property development.

On that basis, the officer treated the sale proceeds as business income. The Commissioner of Income Tax (Appeals) agreed with this approach. The Income Tax Appellate Tribunal, however, reversed the decision, leading the Revenue to carry the matter to the High Court.

Before the High Court, the tax department argued that property development figured as one of the company's objects in its Memorandum of Association and was also reflected in its financial statements. According to the Revenue, this showed that the sale of land formed part of the company's business activity and could not be taxed as capital gains.

The company took a different stand. Its counsel said GWL maintained two distinct categories of assets. One comprised old freehold land held as fixed assets, without any development. The other consisted of land acquired after its amalgamation with Shaw Wallace Properties Ltd., which was shown separately in the accounts. The land sold during the year, the company said, fell squarely in the first category.

After examining the accounts and the surrounding facts, the bench agreed with the company. It noted that the disputed land had been held for several decades as freehold land and was sold in the same condition, without any development. There was nothing on record to show that the land had been converted into stock-in-trade or that the company had engaged in an organized activity of buying and selling land.

The court also took note of the fact that, post amalgamation, land acquired by the company was shown separately in its books, reinforcing the distinction drawn by the assessee.

Summing up its view, the High Court observed that the accounts showed the assessee held fixed assets, including freehold land, “being land purchased over the years and held as is, without any development.”

It added that merely fetching a good price for an asset, or being aware of its commercial potential, does not turn a capital asset into business stock.

In the absence of any development activity or systematic trading, the court held that the profit from the sale had to be assessed under the head “Capital Gains” and not as “Business Income.”

The tax appeal was accordingly dismissed, and the tribunal's view in favour of the taxpayer was upheld

Case Title: Commissioner Of Income Tax, Chennai v. Gwl Properties Ltd.

Citation: 2026 LLBiz HC (MAD) 22

Case Number: TCA No. 288 of 2011

Counsel for Appellant: T. Ravikumar

Counsel for Respondent: N.V. Balaji