2013 (10) TMI 778 - AT - Income Tax

Deduction u/s 54EC of the Income Tax Act Classification of heads of Income Whether the income from sale of land will fall under the head Income from the head Capital gain or Income from the business Held that - Reliance has been placed upon the case of CIT Vs. Suresh Chand Goyal, 2007 (1) TMI 90 - MADHYA PRADESH HIGH COURT - The facts of the above case are similar to the case of Assessee in the present case wherein the land instead of receiving as a gift was received by way of inheritance. Thus, this activity cannot come within the purview of adventure in the nature of trade and commerce so as to treat it as business. Therefore, respectfully following the said decision in the case of CIT Vs. Suresh Chand Goyal (supra), earnings on sale of land in this case was in the nature of capital gain and, therefore, not assessable as income from business. AO and the CIT(A) have erred in treating the entire capital gain as business income, both on facts as well as on law - Assessee is not in the activity of business and, more so, not in the adventure in the nature of trade - Grounds raised by Assessee are allowed and directed the AO to treat the capital gain offered by Assessee as such and allow deduction u/s 54EC, as claimed by Assessee Decided in favor of Assessee.

Issues Involved:
1. Classification of gains from the sale of agricultural land as business income or capital gains.
2. Applicability of Section 45(2) of the IT Act regarding the conversion of capital assets into stock-in-trade.
3. Validity of the computation method used by the Assessing Officer (AO).

Detailed Analysis:

Issue 1: Classification of Gains

The primary issue is whether the gains received by the Assessee on the sale of agricultural land, after plotting it into various plots, should be taxed as business income or as capital gains. The Assessee declared 'long term capital gains' and claimed exemption under Section 54EC by investing in NABARD Bonds. The AO, however, argued that the transaction was an adventure in the nature of trade and should be assessed as 'income from business'.

The Assessee contended that the land was inherited from his mother, who had purchased it with the intention of carrying out agricultural operations. Due to the development of habitations around the land, agricultural operations became difficult, and the land was converted into plots to obtain a better price. The Assessee argued that there was no intention to carry on any business and that the gains should be taxed as capital gains.

The CIT(A) upheld the AO's decision, stating that the Assessee inherited land that was already in the process of being converted into residential plots and intended for commercial exploitation. The CIT(A) concluded that the transaction qualified as an adventure in the nature of trade, and the profit should be assessed as business income.

Upon appeal, the Tribunal considered various case laws and the principles laid down by the Hon'ble Supreme Court. It was noted that the Assessee did not carry on any business and the land was inherited. The Tribunal concluded that the sale of land was a realization of investment and the gains should be chargeable to capital gains tax, not business income. The Tribunal emphasized that the Assessee's mother had purchased the land for agricultural purposes and had sought HUDA permission for better price realization, not for business purposes.

Issue 2: Applicability of Section 45(2)

The Assessee raised an alternate ground that the AO ignored the provisions of Section 45(2) of the IT Act, which deals with the conversion of capital assets into stock-in-trade. The Tribunal noted that the land remained a capital asset until it was intended to be sold after obtaining HUDA approval. The gain should be reckoned at two stages: capital gain on the date of conversion and business income on the sale of stock-in-trade. The AO failed to bifurcate the gains accordingly and treated the entire capital gain as business income, which was incorrect.

Issue 3: Validity of Computation Method

The Tribunal found that the AO's computation method was not in accordance with the provisions of law. The AO did not consider the indexed cost of acquisition and allowed only meager development charges. The Tribunal directed the AO to treat the capital gain as offered by the Assessee and allow the deduction under Section 54EC.

Conclusion:

The Tribunal concluded that the gains from the sale of land should be treated as capital gains and not as business income. The Assessee's grounds were allowed, and the AO was directed to treat the capital gain as such and allow the deduction under Section 54EC. The appeal of the Assessee was allowed.

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