2014 (11) TMI 1164 - AT - Income Tax

Classification of income on sale of agricultural land - whether the assessee engaged himself in any activity which is an adventure in the nature of trading? - Held that - It is well settled principles of law that for the purpose of finding out the nature of the activity undertaken by the assessee the intention of the assessee at the time of purchase of the property needs to be ascertained. If the assessee purchases the agricultural property as an investment, then naturally profit arising from sale of such land cannot be treated as profit from business. But if the intention is to earn profit by engaging himself in business activity, then naturally it has to be classified as income from business. To find out the actual nature of the activity, the intention of the assessee at the time of purchase of the property has to be ascertained. The material available on record shows that the assessee purchased the property on 16-08-2006. The assessee himself claims that an amount of ₹ 1,75,000 was incurred for leveling the land before selling. The assessee entered into an agreement for sale with one Falgunan on 22-082007. Ultimately, the sale deed was executed on 20-08-2008 in favour of St. Antony s timber Depot, Chevoor. During the course of examination the assessee clarified that the land was left idle and there was no income from this land. He also clarified that no cultivation was done. Therefore, it is obvious that immediately after purchase the assessee has incurred about ₹ 1,75,000 for levelling to make the land a good marketable commodity. If the intention was to retain the land as agricultural land, then there cannot be any necessity for the assessee to level the land by investing ₹ 1,75,000. The very act of levelling the land by spending about ₹ 1,75,000 immediately after purchase establishes that the intention of the assessee at the time of purchase was to indulge in an activity in the nature of trade. Furthermore, Foreign Exchange Management (Acquisition & Transfer of Immovable Property in India) Regulation, 2000, framed by the Reserve Bank of Indi in exercise of its statutory powers conferred u/s 47 of Foreign Exchange Management (Acquisition & Transfer of Immovable Property in India) Act, 1999 prohibits acquisition of agricultural land by an NRI. The intention of the assessee was to trade in agricultural land, therefore, the profit on sale of agricultural land has to be necessarily classified as income from business. - Decided against assessee.

Summary

Issues Involved: Classification of income on sale of agricultural land.

Analysis:
1. Classification of Income: The main issue in this case is the classification of income on the sale of agricultural land. The appellant claimed the profit as capital gain, while the assessing officer classified it as business income due to the nature of the activity. The appellant argued that the land was agricultural and exempt from taxation, emphasizing cultivation and lack of intention for business activity. On the other hand, the respondent contended that the appellant, a non-resident Indian at the time of purchase, engaged in trade activities by leveling the land for sale, indicating a business intention. The respondent highlighted regulations prohibiting NRIs from acquiring agricultural land and the substantial investment in making the land marketable.

2. Intention and Activity: The Tribunal considered the intention of the appellant at the time of purchase to determine the nature of the activity. It was established that the appellant spent a significant amount on leveling the land before selling it, indicating a business motive rather than retaining it for agricultural purposes. The Tribunal noted the absence of cultivation or income from the land, supporting the conclusion that the appellant engaged in trade activities. Additionally, regulations prohibiting NRIs from acquiring agricultural land reinforced the finding that the appellant's intention was to trade in agricultural land, justifying the classification of income as business income.

3. Legal Principles: The Tribunal applied established legal principles that the intention of the assessee at the time of property purchase is crucial in determining the nature of the activity. If the intention is to earn profit through business activity, the income must be classified as business income. In this case, the appellant's actions, such as significant investment in making the land marketable and lack of agricultural use, indicated a business intention. The Tribunal upheld the lower authority's decision, confirming the classification of income as business income based on the appellant's activities and intentions.

4. Decision: Ultimately, the Tribunal dismissed the appeal of the assessee, affirming the lower authority's classification of the income on the sale of agricultural land as business income. The judgment emphasized the importance of the appellant's intention at the time of purchase and the subsequent activities related to the land, leading to the conclusion that the appellant engaged in trade activities, justifying the classification of income as business income.