2014 (10) TMI 319 - AT - Income Tax

Claim of deduction u/s 54F - capital gain from the sale of land - agriculture land or not - intention of the assessee - adventure in the nature of trade or not Held that - Following the decision in ACIT, Central Circle-5, Hyderabad vs. M/s. Bhavya Constructions P. Ltd. 2014 (9) TMI 85 - ITAT HYDERABAD - the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality - The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words whether known as clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called - it is important to note that what was the intention of Assessees at the time of acquiring the land or interval action by 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. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non- agricultural land at the relevant point of time when the land was sold by Assessee The intention of Assessee from the inception was to carry on agricultural operations - Merely because of the fact that the land was sold in a short period of holding, 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 or capital gain - The period of holding should not suggest that the activity was an adventure in the nature of trade. The land is not situated within the Qutubullapur municipality, but, the same situated in the Dundigal village and the evidence brought on record suggest that the land is an agricultural land, hence, it is not liable for taxation - the addition made is deleted in all the appeals - No evidence suggests that Dundigal village falls within Qutubullapur Municipality and also this Qutubullapur Municipality has not notified in the year u/s 2(14)(iii) and Qutubullapur Municipality abolished and merged with Municipal Corporation of Hyderabad with effect from 16/04/2007 - when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by Assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income - as the land sold is not only agricultural in nature but is also situated beyond 12 kms from the limit of a municipality notified by the central govt. - land sold by assessee not being a capital asset, the gain derived there from is not taxable at the hands of Assessee the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Determination of the year in which capital gains arise from a development agreement.
2. Eligibility for exemption under section 54F of the Income Tax Act.
3. Nature of the land sold and whether it qualifies as agricultural land exempt from capital gains tax.

Detailed Analysis:

1. Determination of the Year in Which Capital Gains Arise from a Development Agreement:
The primary issue was whether the capital gains from a development agreement should be recognized in the year the development agreement was executed (A.Y. 2005-06) or when the possession of the built-up area was received (A.Y. 2007-08). The Assessing Officer (A.O.) determined that the capital gains arose in A.Y. 2005-06 based on the development agreement dated 08.12.2004, citing the decision in the case of Dr. Maya Shenoy and Jasbeer Singh Sarkaria, where it was held that the liability of capital gains arises in the year of execution of the development agreement. The assessee contended that the capital gains should be recognized in A.Y. 2007-08 when the built-up area was received. The CIT(A) confirmed the A.O.'s view, holding that the date of the development agreement constitutes the transfer within the meaning of section 2(47)(v) of the Income Tax Act. The Tribunal upheld this view, rejecting the assessee's grounds and confirming that the capital gains arose in A.Y. 2005-06.

2. Eligibility for Exemption Under Section 54F of the Income Tax Act:
The assessee claimed exemption under section 54F on the long-term capital gains in A.Y. 2007-08. However, since the capital gains were determined to arise in A.Y. 2005-06, the A.O. and CIT(A) rejected the exemption claim for A.Y. 2007-08. The Tribunal admitted the additional ground raised by the assessee for A.Y. 2005-06, stating that the A.O. should examine the eligibility for exemption under section 54/54F in A.Y. 2005-06. The issue was restored to the file of the A.O. to examine the facts and provisions for granting necessary exemption/deduction if the assessee is eligible.

3. Nature of the Land Sold and Whether It Qualifies as Agricultural Land Exempt from Capital Gains Tax:
In the Revenue's appeal for A.Y. 2007-08, the issue was whether the land sold by the assessee was agricultural land and thus exempt from capital gains tax. The A.O. treated the gain from the sale of the land as business income, rejecting the claim that the land was agricultural and situated beyond 8 km from the notified municipality. The CIT(A) held that the land was agricultural and situated beyond the prescribed limits, exempting it from capital gains tax. The Tribunal upheld the CIT(A)'s decision, noting that the land was agricultural in nature, used for agricultural purposes, and situated beyond the 8 km limit from the nearest municipality. The Tribunal referenced its decision in the case of M/s. Bhavya Constructions P. Ltd., affirming that the land did not qualify as a capital asset under section 2(14) of the Income Tax Act.

Conclusion:
The Tribunal concluded by partly allowing the appeals for statistical purposes for A.Y. 2005-06, dismissing the appeals for A.Y. 2007-08, and dismissing the Revenue's appeal for A.Y. 2007-08. The Tribunal's decision was pronounced in the open court on 12.09.2014.