Tax treatment in case of co-owned property

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Rishab Agrawal (Querist)
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10 March 2016 A & B purchased a land in joint name. They built an apartment over the land and sold flats.
What is the income tax treatment while selling the flats??

Ankur Singhal

Ankur Singhal (Expert)
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10 March 2016 Dear
Do they form a partnership or aop.
It prima facie looks as a business transaction.
But if you does not have supporting to prove it as a business nature then taxable under head capital gain in hands if both the persons.

Rishab Agrawal

Rishab Agrawal (Querist)
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11 March 2016 They have neither formed partnership nor AOP. They have simply bought the land in their joint name and were seller in joint name while selling the flats. It could be proved as business transaction.
Please guide whether we have to split turnover equally in their hands or anything else?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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26 July 2025 Thanks for the clarification. Let's go through the **income tax treatment** of this situation step by step.

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## 🔍 Scenario Summary:

* **A & B** jointly purchased land and constructed apartments.
* Flats were **sold jointly** (in both names).
* They **did not form** a partnership firm or AOP (Association of Persons).
* It **could be considered a business transaction**, as land was developed and flats sold for profit.

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## 📌 Key Tax Consideration:

### ✅ Is it **Capital Gains** or **Business Income**?

1. **Business Income** if:

* Intention was to **trade** or **earn profits** from construction and sale.
* The activity involved **development, marketing, selling** etc.
* There is **repetition or organized activity** like a builder.

➤ **Taxable under “Profits and Gains from Business or Profession”**
➤ All expenses (construction, marketing, etc.) deductible
➤ **Turnover and profit** to be divided between A & B (based on ownership or actual contribution, but usually 50:50 if equal)

2. **Capital Gains** if:

* The intention was to **hold as investment** and sell.
* No organized activity like a builder.
* This is a **one-off transaction**.

➤ Then tax under **“Capital Gains”** head:

* **Sale proceeds – Cost of acquisition & improvement** = Capital Gain
* Each co-owner is taxed **individually** for their share (e.g., 50%)
* Eligible for **indexation** and **exemptions** (like under section 54, 54F etc.)

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## 🧾 Answer to Your Specific Question:

> **Do we have to split turnover equally in their hands or anything else?**

* Yes, since A & B are **co-owners**, and assuming equal ownership, **the turnover (and any income) should be split equally (50:50)**, **unless there is evidence** of unequal investment or agreement.
* The taxability (business income or capital gain) depends on **intention and conduct**.
If they behaved like developers, then it's **business income**, and the **entire transaction is taxed accordingly**.

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## 🧮 Summary Table:

| Aspect | If Treated as Business Income | If Treated as Capital Gains |
| ---------------- | -------------------------------------- | --------------------------------------- |
| Nature | Trading / Adventure in nature of trade | Investment |
| Tax Head | Business Income (PGBP) | Capital Gains |
| Deductions | All revenue expenses allowed | Only cost of acquisition/improvement |
| Rate of Tax | Slab rate applicable to individuals | Capital gains tax (20% with indexation) |
| Income Splitting | Based on ownership (e.g., 50:50) | Based on ownership (e.g., 50:50) |

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### ✅ Final Advice:

If A & B **only did this once**, and don’t intend to do such real estate development again, they **may claim capital gains** treatment — but the **facts must support** that it’s not a business.
Otherwise, if there’s intent and conduct showing a commercial activity (e.g., constructing with intent to sell), then **business income treatment is safer and likely preferred by the tax authorities**.

Let me know if you want to draft a tax computation for either case.

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