2013 (11) TMI 171 - AT - Income Tax

Computation of capital gains - Deduction of cost of improvement of land to compute capital gains not allowed on evidence Held that - For carrying out the development works of removing the rocks, boulders etc., heavy machinery, such as JCBs, Dozers etc., are required. However none of the parties mentioned as the developers of land were filing their returns of income and therefore were indeed not into the activity of carrying out such development works - Said parties did not even have any machinery or technology to carry out such works proving that the story of entering into development agreement was only a make believed arrangement - Assessee and his son failed to discharge the onus of proving that development work had been executed by them and even the technical ability to carry out such works could not be proved. Hence, deduction on this count not allowed Decided against the assessee. Sale of land being agricultural does not constitute a transfer of capital asset for being taxed in the head capital gain when the land is not a capital asset either within the meaning of section 2(14)(iii)(a) or 2(14)(iii)(b) Held that - The land in question giving rise to capital gain was, in fact, urban land though agricultural operations have been carried out on them - The land is situated at Narsing Village of Rajendra Nagar Mandal, R.R. District which is within the municipal limits of Rajendra Nagar - This is urban land akin to the Hyderabad Municipality situated within 8 KM from the local limits of Hyderabad Municipal Corporation - Mere fact that the land in question was agricultural land cannot be a ground to claim for exemption under section 2(14) of the Act as the land is situated within the local limits of Hyderabad Municipal Corporation - Land in question is capital asset liable for income-tax Following the decision of coordinate bench in the case of Smt. Gousia Begum and Others 2013 (9) TMI 559 - ITAT HYDERABAD ., held that the land in dispute cannot be considered as agricultural land so as to hold that it is exempt from capital gains Decided against the Assessee.

Summary

Issues Involved:
1. Disallowance of cost of improvement for the purpose of computation of capital gains.
2. Classification of the land as a capital asset and its exemption from capital gains tax.

Detailed Analysis:

1. Disallowance of Cost of Improvement for Computation of Capital Gains:

The assessees, father and son, procured and leveled land for PEBL, an Indian subsidiary of an Israeli company. They filed returns showing short-term capital gains, deducting amounts paid to landowners and developers as cost of improvement. The AO disallowed the cost of improvement, citing several reasons:
- The agreements with Chennai parties were produced late.
- The leveling work was deemed impossible to complete within the short period between the purchase and sale registration dates.
- The land was not in the assessees' possession during the claimed leveling period.
- Statements by landowners indicated no physical barriers or leveling work.
- Leveling agreements were not registered, and the Chennai parties were untraceable and non-existent according to departmental inquiries.
- Payments to contractors showed immediate withdrawals, and bank accounts did not reflect the capacity to carry out such works.

The CIT(A) upheld the AO's disallowance, concluding no development work involving the claimed expenses was carried out. The assessees' appeal highlighted discrepancies in the AO's conclusions, including retractions by witnesses and the irrelevance of Google Earth images. However, the tribunal confirmed the CIT(A)'s order, noting the assessees failed to prove the technical ability and actual execution of the development work.

2. Classification of the Land as a Capital Asset and Exemption from Capital Gains Tax:

The assessees claimed the land was agricultural and thus exempt from capital gains tax under sections 2(14)(iii)(a) and 2(14)(iii)(b). The CIT(A) rejected this claim, citing the Supreme Court decision in Goetz (India) Ltd., which restricts the AO from entertaining claims not made through revised returns. The CIT(A) also referenced the Punjab & Haryana High Court decision in Rockman Cycle Industries Ltd., emphasizing the change in land use as a determining factor.

The tribunal considered a similar issue in Smt. Gousia Begum and others, where it was held that land within 8 KM of a municipal corporation is considered urban and thus a capital asset, regardless of its agricultural use. Following this precedent, the tribunal concluded the land in question was urban and subject to capital gains tax. The additional ground raised by the assessees was dismissed.

Conclusion:

The appeals and stay petitions were dismissed, confirming the disallowance of the cost of improvement and the classification of the land as a capital asset subject to capital gains tax.