2014 (4) TMI 1184 - AT - Income Tax

Sale of land - nature of land - whether it was a sale of agriculture land simplicitor or it was an adventure in the nature of trade? - whether the land was sold out of compulsion or out of free will? - Held that - Judicial Member rightly observed that the land was actually cultivated throughout the period of holding by the assessee, which is evident from the fact that the agricultural income was offered for rate purpose and accepted by the Revenue. It is, therefore, difficult to appreciate the observation of the learned Accountant Member that the assessee did not take any active step to get returns from the land. The learned Accountant Member has given emphasis to the fact that the assessee sold the land within a short span out of free will. In my considered opinion whether the land was sold out of compulsion or out of free will, will not alter the character of the transaction. Every assessee would like to make profit on a transaction, given an opportunity. In the instant case the assessee purchased the land with standing crops but ultimately sold the land tempted by the offer made by the Vedic Village Developers Pvt. Ltd. but mere sale of land on a profit cannot be a factor to conclude that the intention of the assessee was to carry on an adventure in the nature of trade. In other words, the subsequent making of profit cannot be a decisive factor. Thus, taking a holistic view of the matter, it is of the view that the learned Judicial Member had correctly come to the conclusion that the transaction was not an adventure in the nature of trade. The learned Judicial Member rightly observed that the impugned land will not fall within the purview of capital asset, being the land situated beyond the prescribed municipal limits and thus the sale proceeds thereof are not assessable to tax. For the above reasons question No. 1 is answered accordingly.

Issues Involved:
1. Whether the transactions of purchase and sale of agricultural land with standing crops amount to transactions on capital account or adventure in the nature of trade.
2. Whether the surplus arising on the sale of the impugned agricultural land gives rise to agricultural income within the meaning of section 2(1A) read with Explanation (1)/Section 2(14)(iii)(a) and (b) and is consequently exempt under section 10(1) of the Act.

Detailed Analysis:

Issue 1: Nature of Transactions (Capital Account vs. Adventure in the Nature of Trade)
The assessee purchased agricultural land and sold it within a short period. The Revenue argued that this transaction was an adventure in the nature of trade and should be taxed as business income. The Judicial Member noted that the land was agricultural, situated beyond the municipal limits, and sold with standing crops. The land was not converted for non-agricultural use, indicating no intention to trade. The Judicial Member concluded that the transaction was not an adventure in the nature of trade but a sale of agricultural land, which is not taxable as business income.

Conversely, the Accountant Member emphasized that the assessee had no agricultural background, made significant profits, and the land was located in a rapidly appreciating area within the National Capital Region (NCR). The Accountant Member concluded that these factors indicated an intention to profit from the sale, thus treating the transaction as an adventure in the nature of trade.

Issue 2: Agricultural Income and Tax Exemption
The Judicial Member held that since the land was beyond the municipal limits and used for agricultural purposes, the income from its sale was agricultural income under section 2(1A) and exempt under section 10(1). The land was not a "capital asset" as per section 2(14)(iii), and therefore, the sale proceeds could not be taxed as capital gains.

The Accountant Member, however, argued that the transaction should be treated as an adventure in the nature of trade, thus not qualifying as agricultural income. He cited that the land was not used for substantial agricultural operations and was sold for a significant profit, indicating a business motive.

Resolution by the Third Member:
The Third Member agreed with the Judicial Member, emphasizing that the land's agricultural nature and location beyond the municipal limits meant the income from its sale should be considered agricultural income and exempt under section 10(1). The Third Member highlighted that the land was purchased and sold as agricultural land without any conversion or development, reinforcing the conclusion that the transaction was not an adventure in the nature of trade.

The Third Member also noted the importance of the land's classification and location, stating that agricultural land situated beyond eight kilometers from municipal limits is not a capital asset. Therefore, the sale proceeds are agricultural income, not subject to tax under the Income Tax Act.

Conclusion:
The Third Member resolved the difference of opinion in favor of the Judicial Member's view, concluding that the surplus arising from the sale of the agricultural land is agricultural income and exempt from tax. The transaction was not an adventure in the nature of trade, and the land did not qualify as a capital asset under section 2(14)(iii).

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