2016 (1) TMI 79 - AT - Income Tax

Gain arising on sale of agricultural land - exemption u/s 2(14) denied - Held that - In the instant case, it is an admitted fact that the land was an agricultural land. The absence on the part of the assessee to carry on agricultural activities shall not support the case that the assessee intended to hold the same as trading asset. Accordingly, we are of the view that the absence of agricultural activity, per se, will not be useful to determine the intention of the assessee. the intention of the assessee at the time of purchase of lands cannot be held to be holding the same as stock in trade. Accordingly, we agree with the contentions of the Ld A.R that the assessee has held the impugned agricultural lands as investment only and hence they cannot be categorized as Capital asset within the meaning of sec. 2(14) of the Act. Hence the gains arising on sale of the same is not liable for taxation under the provisions of the Act. Even though the assessee has initially declared the same as short term capital gain, yet the same is required to be corrected, since there is no estoppels against the law. Accordingly, we set aside the order of Ld CIT(A) and direct the AO to exclude the gains arising on sale of impugned land from the total income of the assessee for the year under consideration. - Decided in favour of assessee

Summary

Issues Involved:
1. Determination of whether the gain arising from the sale of agricultural land is exempt under Section 2(14) of the Income Tax Act.
2. Examination of whether the land sold constitutes a business asset or an investment.
3. Consideration of the applicability of penalties under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determination of Exemption under Section 2(14):
The primary issue revolves around the assessee's claim that the gain from the sale of agricultural land should be exempt under Section 2(14) of the Income Tax Act. The assessee initially declared the gain as short-term capital gains in his return but later contended that the land did not qualify as a "Capital asset" since it was not located within municipal limits or within the prescribed distance from such limits. The assessing officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] initially rejected this claim, citing procedural grounds and the nature of the transactions. However, upon review, it was established that the land was indeed agricultural and situated outside municipal limits, thereby not qualifying as a "Capital asset" under Section 2(14). The Tribunal concluded that the land should be treated as an investment, not a business asset, and thus the gains from its sale are not taxable.

2. Examination of Business Asset vs. Investment:
The CIT(A) had initially determined that the land constituted a business asset based on several factors:
- The power of attorney indicated the assessee was engaged in the business of buying and selling properties.
- The land was sold to a buyer intending to use it for non-agricultural purposes.
- No agricultural activities were conducted on the land.
- The land was sold within a short period after purchase.

The Tribunal, however, found these factors insufficient to classify the land as a business asset. It was noted that:
- The power of attorney's standard recitals cannot solely determine the nature of the asset.
- The prospective use of the land by the buyer does not alter its character as agricultural land.
- The absence of agricultural activity does not necessarily imply an intention to trade.
- Selling the land within a short period, while a factor, is not conclusive evidence of a business intent.

The Tribunal emphasized that the assessee's intention at the time of purchase, supported by the classification of the land as an investment in financial records, indicated that the land was held as a capital asset. Thus, the gains from its sale should not be treated as business income.

3. Penalty under Section 271(1)(c):
Given the Tribunal's decision that the gains from the sale of the agricultural land are not taxable, the grounds for charging interest and initiating penalty proceedings under Section 271(1)(c) became irrelevant. The Tribunal set aside the order of the CIT(A) and directed the AO to exclude the gains from the total income of the assessee for the relevant assessment year.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, concluding that the gains from the sale of agricultural land are not taxable under the provisions of the Income Tax Act. The decision was pronounced in the open court on 16th December 2015.