2015 (3) TMI 642 - AT - Income Tax

Sale of land - Assessing Officer in bringing to tax the short term capital gains arising from the sale of agricultural land under the head business income - CIT(A) changed the head of income as determined by the AO as falling under adventure in the nature trade to capital gain - Held that - It is observed that by an Agreement of sale with possession-cum-Irrevocable power of attorney dated 12th March, 2007, the land in question was transferred by the assessee to M/s. Varun Constructions alongwith other 13 land owners who were owners of the adjacent lands. The said thirteen parties had also claimed the profit arising from the transfer of their land to M/s. Varun Constructions as exempt on the ground that their lands, being agricultural lands, were not capital assets within the meaning of S.2(14). In their cases also, the claim was not allowed by the Assessing Officer and when the matter reached the Tribunal in the case of six of the said assessees, namely, M/s.Bhavya Constructions Pvt. Ltd., Shri M.S.Raghava Reddy, Shri R.Srinivasa Rao, Shri R.Uma Maheswar, Shri P.Shivakumar and Shri G.C.Subbanaidu, the coordinate bench of this Tribunal vide its order 2014 (9) TMI 85 - ITAT HYDERABAD decided similar issue in favour of the assessee, holding that the land sold by the said assessees were agricultural lands, and therefore, the profits arising from the transfer of such lands, was not chargeable to tax in the hands of the assessee. 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. 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. Further, we make it clear that 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 the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, 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. the land in question sold by the assessee, being agricultural land, the profit arising from the sale of the same, is not chargeable tot ax in the hands of the assessee as capital gain - Decided in favour of assessee.

Issues Involved:
1. Validity of Section 153C proceedings.
2. Nature of land sold (agricultural or non-agricultural).
3. Classification of income from the sale of land (business income or capital gains).

Detailed Analysis:

1. Validity of Section 153C Proceedings:
The assessee challenged the applicability of Section 153C, arguing that the registered development agreement, being a public document, cannot constitute incriminating evidence to initiate proceedings under Section 153C without proper satisfaction. The learned CIT(A) did not address this specific argument in detail, focusing instead on the nature of the land and the classification of income.

2. Nature of Land Sold:
The primary contention was whether the land sold by the assessee was agricultural land, which would exempt it from being treated as a capital asset under Section 2(14) of the Income Tax Act. The Assessing Officer (AO) argued that the land was not agricultural, citing various pieces of evidence, including the state of the land, blank fertilizer bills, and statements from local officials. The AO concluded that the land was not suited for agricultural use and no agricultural activity was carried on, thus classifying it as a capital asset.

The assessee countered by providing evidence such as purchase and sale deeds describing the land as agricultural, a pattadar pass book, and certificates from the Deputy Collector and MRO stating that the land was agricultural and used for raising crops. The CIT(A) identified factors both for and against the assessee's claim, ultimately concluding that the land was not agricultural. This decision was based on the lack of visible agricultural activity, photographic evidence, and the proximity to urban development.

3. Classification of Income from the Sale of Land:
The AO classified the income from the sale of land as business income, arguing that the assessee's activities constituted an adventure in the nature of trade. This classification was based on the coordinated activities of the assessee and other investors, the significant rise in land prices, and the systematic manner of transactions.

The assessee argued that the land was purchased as an investment, not as stock-in-trade, and that no developmental activities were undertaken. The CIT(A) agreed with the assessee, finding that the profit arising from the sale of land did not constitute business income but was in the nature of short-term capital gains.

Tribunal's Findings:
The Tribunal, upon reviewing the arguments and evidence, found that the issue was similar to other cases where the land was classified as agricultural and the profits from its sale were not taxable. The Tribunal noted that the land was classified as agricultural in revenue records, agricultural income was declared and accepted in previous years, and no conversion to non-agricultural land was applied for. The Tribunal held that the land was agricultural and situated beyond the prescribed limits of a municipality, thus not a capital asset under Section 2(14).

Conclusion:
The Tribunal decided in favor of the assessee, ruling that the land sold was agricultural and the profit arising from its sale was not chargeable to tax as capital gains. Consequently, the other issues raised by the assessee became infructuous. The appeal of the assessee was allowed, and the order was pronounced on 4th March 2015.

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