2013 (10) TMI 927 - AT - Income Tax

Land to be agricultural land falling ouside the definition of Capital asset u/s 2(14) Held that - Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situated in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of capital asset . Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression capital asset , the agricultural land situated in rural areas continues to be excluded from that definition. In the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee s land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order in the case of M.S. Srinivas Naicker vs. ITO 2007 (1) TMI 149 - MADRAS High Court . Sale of agricultural land to fall within the head Business Income Held that - Intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade - Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and even there was no intention to sell the land in future at that point of time. It was due to the boom in real estate market came into picture at a later stage, the assessee has sold the land. Merely because of the fact that the land was sold for profit, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade Decided in favor of Assessee.

Issues Involved:
1. Classification of income from sale of agricultural land.
2. Treatment of agricultural income.
3. Determination of whether the sale of land constitutes business income or capital gain.
4. Applicability of tax exemption on agricultural income.

Detailed Analysis:

Issue 1: Classification of Income from Sale of Agricultural Land
The primary contention was whether the income from the sale of agricultural land should be treated as business income or capital gain. The Assessing Officer (AO) classified the income as business income, citing the company's activities and objectives, which included real estate development. The AO noted that the company had incurred significant land development expenses and had sold the land to software companies for non-agricultural purposes, indicating a business motive. The CIT(A) upheld this view, emphasizing the company's primary intention of commercial exploitation of land, rather than agricultural use.

Issue 2: Treatment of Agricultural Income
The AO treated Rs. 2,83,175 as income from other sources, rejecting the claim that it was agricultural income. The AO noted the lack of evidence for agricultural activities and expenses, and the meager agricultural income compared to the total land area. The CIT(A) concurred, stating that the assessee failed to provide conclusive proof of agricultural operations on the land.

Issue 3: Determination of Whether the Sale of Land Constitutes Business Income or Capital Gain
The assessee argued that the land was held as a capital asset and not as stock in trade, and thus the income from its sale should be treated as capital gain. The assessee provided evidence of agricultural activities and claimed that the land was situated beyond 8 km from municipal limits, classifying it as agricultural land. The CIT(A) and AO, however, focused on the company's objectives and activities, concluding that the sale of land was a business transaction.

Issue 4: Applicability of Tax Exemption on Agricultural Income
The assessee claimed exemption for the income derived from the sale of agricultural land, arguing that the land was not a capital asset as per Section 2(14) of the Income Tax Act. The CIT(A) and AO rejected this claim, stating that the land was used for commercial purposes and the income should be taxed as business income.

Judgment:
The Tribunal examined the facts and evidence presented, including the classification of land in revenue records, agricultural activities carried out, and the treatment of land in the company's balance sheet. The Tribunal noted that the land was classified as agricultural in revenue records, agricultural operations were conducted, and the land was sold without any development or conversion for non-agricultural use.

The Tribunal referred to several judicial precedents, including the Supreme Court and High Court rulings, which emphasized the importance of the land's classification and actual use. The Tribunal concluded that the land was agricultural, and the income from its sale should be treated as agricultural income, exempt from tax. The Tribunal also held that the AO and CIT(A) erred in treating the income as business income and in classifying the agricultural income as income from other sources.

Conclusion:
The Tribunal allowed the appeal, ruling that the income from the sale of agricultural land should be treated as agricultural income and exempt from tax. The Tribunal also held that the agricultural income of Rs. 2,83,175 was correctly claimed by the assessee and should not be treated as income from other sources. The order of the AO and CIT(A) was reversed, and the assessee's contentions were upheld.

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