2017 (2) TMI 1364 - AT - Income Tax

Transfer/sale of agricultural lands - computation of taxable income - nature of land sold - Held that - The fact that the land in question in the instant case is bought by Developer cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes. It is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural land located within the jurisdiction of a municipality in the definition of the expression Capital Asset . We are of the opinion that the land in question cannot be considered as stock in trade in the hands of assessee. It is nothing but agricultural land in terms of Sec.2(14)(iii) r.w.s. 10(1) of the Act and transfer of that land cannot lead to taxable capital gains or income from business. Our above view is also supported by the recent judgment of Jurisdictional High Court in T.C.A.No. 483/2016 dated 1-9-2016 in the case of M/s Mansi Finance Chennai Ltd 2017 (1) TMI 1209 - MADRAS HIGH COURT . In view of the above, we direct the AO to consider gain on sale of impugned land as exempted from capital gain and to treat as Agricultural income only. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of profit from the sale of land as business income or capital gains.
2. Classification of land as agricultural land.
3. Nature of the transaction: adventure in the nature of trade or realization of investment.

Detailed Analysis:

Issue 1: Taxability of Profit from Sale of Land
The primary issue is whether the profit from the sale of land amounting to ?4,75,10,880/- should be taxed as business income or as capital gains. The assessee argued that the land was held as a capital asset and sold as agricultural land, thus the gain should be exempt from capital gains tax. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) held that the transaction was an adventure in the nature of trade and taxed the profit as business income.

Issue 2: Classification of Land as Agricultural Land
The assessee contended that the land was agricultural, situated beyond municipal limits, and used for agricultural purposes. The AO argued that no agricultural activities were carried out and the land was sold within a short span of 6½ months, indicating it was not held as a capital asset. The CIT(A) upheld the AO's decision, stating that the land was stock-in-trade and the transaction was an adventure in the nature of trade.

Issue 3: Nature of the Transaction
The AO considered the transaction as an adventure in the nature of trade due to the short holding period and the involvement of the assessee in the real estate business. The assessee argued that the land was held as an investment, not as stock-in-trade, and the sale was due to favorable market conditions.

Judgment Analysis:

Taxability of Profit from Sale of Land
The Tribunal held that the land was indeed agricultural, and the profit from its sale should not be taxed as business income. It emphasized that the land was classified as agricultural in the revenue records, and agricultural operations were carried out, as evidenced by the agricultural income declared in the return of income.

Classification of Land as Agricultural Land
The Tribunal referred to various judgments, including the Supreme Court's decision in Smt. Sarifabibi Mohmed Ibrahim, which laid down 13 tests to determine whether land is agricultural. The Tribunal found that the land was classified as agricultural in the revenue records, used for agricultural purposes, and no commercial activities were carried out on it. The land was sold as agricultural land, and no conversion to non-agricultural use was made.

Nature of the Transaction
The Tribunal concluded that the transaction was not an adventure in the nature of trade. It noted that the land was held as an investment, and the sale was due to favorable market conditions, not as part of a systematic business activity. The Tribunal highlighted that the assessee was primarily engaged in the business of building and flat promotion, not in the business of buying and selling land.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to treat the gain from the sale of the land as exempt from capital gains tax and to consider it as agricultural income. The judgment emphasized the importance of the classification of land in revenue records, the actual use of the land, and the intent of the assessee in determining the nature of the transaction.