2015 (3) TMI 836 - AT - Income Tax

Capital gain arising on sale of agricultural land - transfer of Power of attorney (POA) - treatment of sale of agricultural land as business income of the assessee - sale of land as such or plotted land - Held that - Power of attorney is coupled with interest makes the assessee is owner u/s 2(47) of the Act. Further there is no dispute with regard to the ownership and enjoyment of property. Sec. 2(47) of the Income tax Act provides for taxation of Power of attorney transactions. Right to exploit is a Capital asset as held by Hon ble Madras High Court in the case of A.R.Krishnamurthy and A.R. Rajagopalan Vs. CIT (1980 (12) TMI 33 - MADRAS High Court).The assessee is entitled to maintain two different portfolios, one for Stock in Trade and another one for Investment as per the decisions of various High Courts. The intention of the assessee was to hold these agricultural lands as Investment only. The assessee has declared agricultural income in the returns of income filed by him. Further, the assessee has also filed certificates obtained from Village administrative officer to prove the fact of use as agricultural lands. Some of the lands sold by the assessee have been categorized as residential land by the Sub-registrar Office for the purpose of collection of Stamp duty and hence such classification would not determine the character of land. The fact remains that the assessee has cultivated the lands and has declared agricultural income, which is also supported by the certificate of the Village Administrative Officer.The assessee did not develop these lands by forming roads etc., but has sold as agricultural lands only in cents and acres and not in square feet , which is the normal case in case of housing plots. Lands have been sold in continuous stretches without creating any road for access. Future potential is not relevant and the Character of land as on the date of sale is more relevant as held by the Hyderabad bench of ITAT in the case of DCIT Vs. M. Kalyan Chakravarthy 2014 (11) TMI 338 - ITAT HYDERABAD . In the case of Mrs. Sakunthala Vedachalam and Mrs. Vanitha Manickavasagam (2014 (9) TMI 3 - MADRAS HIGH COURT), the Hon ble jurisdictional High Court has held that the manner in which the adjacent lands are used by the owner therein is not a ground to come to a conclusion that the assessees lands are not agricultural lands. The principle that the assessee can hold assets either as Stock in trade or as Investment is now recognized.Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete assessment of gain arising on sale of agricultural land. - Decided in favour of assessee. Disallowance of development expenses - CIT(A) deleted disallowance - Held that - The fact remains that the assessee has developed the land, i.e., he has laid roads, divided the land into various plots after leveling etc. It is in the common knowledge of everybody that the assessee should have incurred huge expenditure, without which he could not have sold the plots.we are of the view that the ld CIT(A) was not correct in deleting the entire amount of disallowance by simply following the decision in the case of M/s Jubilee Plot and Housing Pvt. Ltd., assessee s sister concern. Since there is failure on the part of the assessee also, we are of the view some disallowance is called for in order to cover up the deficiencies, if any and also to put this issue at rest. Accordingly, we are of the view this issue would meet the ends of justice, if the disallowance is restricted to a lump sum of ₹ 50.00 lakhs in order to cover up the deficiencies, if any. We order accordingly. - Decided partly in favour of revenue.

Issues Involved:
1. Characterization of land: Agricultural land or not.
2. Classification of land: Investment or Stock in trade.
3. Disallowance of development expenses.

Detailed Analysis:

1. Characterization of Land: Agricultural Land or Not

The assessee argued that the lands sold were agricultural, thus exempt from taxation. The AO disputed this, citing several factors: the lands were acquired through power of attorney, the assessee is a property developer, there was no agricultural activity, some lands were categorized as residential by the Sub-registrar, the lands were sold in small plots, the high sale price, and the location in a fast-developing area.

The Tribunal examined these factors against principles laid down by higher courts. It noted that the lands were classified as agricultural in revenue records, agricultural income was declared, the lands were held for over four years, and sold without development or reclassification. The Tribunal referenced the decision of the Hon'ble Madras High Court in Mrs. Sakunthala Vedachalam & Mrs. Vanitha Manickavasagam, which emphasized that classification in revenue records and payment of land revenue are significant. The Tribunal concluded that the lands should be accepted as agricultural, thus exempt from taxation.

2. Classification of Land: Investment or Stock in Trade

The AO and CIT(A) classified the lands as stock in trade, arguing that the assessee, being a property developer, would not hold lands as an investment. The Tribunal disagreed, citing CBDT Circular No. 4/2007 and various court decisions, which allow an assessee to hold assets in two separate portfolios. The Tribunal noted that the assessee maintained separate accounts for investments and stock in trade, did not develop the lands held as investments, and sold them in continuous stretches without creating roads. These factors supported the assessee's claim that the lands were held as investments. The Tribunal thus directed the AO to delete the assessment of gains from the sale of these lands as business income.

3. Disallowance of Development Expenses

The AO disallowed Rs. 12.09 crores of the claimed Rs. 26.56 crores in development expenses, restricting the allowance to 43.06% of the sale receipts, based on a similar disallowance in the assessee's sister concern, M/s Jubilee Plot and Housing Pvt Ltd. The CIT(A) deleted the disallowance, following his decision in the sister concern's case.

The Tribunal noted that the AO's method lacked material evidence to show parity of facts between the assessee's case and the sister concern. However, it acknowledged the assessee's failure to produce vouchers. To address this, the Tribunal found it reasonable to restrict the disallowance to a lump sum of Rs. 50 lakhs to cover deficiencies.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the characterization and classification of the lands, directing the AO to delete the assessment of gains as business income. It partly allowed the revenue's appeal on the disallowance of development expenses, reducing the disallowance to Rs. 50 lakhs. The order was pronounced in March 2015.

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