2017 (5) TMI 1688 - AT - Income Tax

Treatment of income from sale of agricultural land as exempted income - treating the part of income declared by the assessee from the said land as agricultural income - HELD THAT - There is no dispute regarding the fact that the assessee acquired agricultural land. There is also no dispute that there was agricultural operation in this land before sale of this land. AO was of the opinion that the amount received on sale of this agricultural property is nothing but long term capital gains on transfer of such an agricultural land and the same was brought into income from business. In this case, the assessee held the land always as fixed asset and not at all converted into stock-in-trade. The character of the land in the hands of the assessee has not changed. There is no material on record in respect of this land to show that the assessee carried on activities of buying and selling of land in a systematic manner so as to justify the action of the AO in treating the activities of the assessee as adventure in the nature of trade. Whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances. The expression 'agricultural land' is not defined in the Act, and now, whether it is agricultural land or not has to be determined by using the tests or methods laid down by the Courts from time to time. Land in question cannot be considered as stock in trade in the hands of assessee or capital asset liable for taxable capital gains on its transfer. It is nothing but transfer of agricultural land in terms of Sec.2(14)(iii) r.w.s. 10(37) of the Act and transfer of that land cannot lead to taxable capital gains or income from business. Consequently, it is not liable for taxation. Once we have considered it as agricultural land, and agricultural income accepted by the CIT(Appeals) as agricultural income, it is to accepted as so. - Decided against revenue.

Summary

Issues Involved:
1. Treatment of income from the sale of agricultural land as exempted income.
2. Classification of part of the income declared by the assessee from the said land as agricultural income.

Issue-wise Detailed Analysis:

1. Treatment of Income from Sale of Agricultural Land as Exempted Income:

The primary contention revolves around whether the income from the sale of agricultural land should be treated as exempted income under Section 2(14)(iii) of the Income Tax Act, 1961. The assessee, a company formed by converting a partnership firm, sold 32.37 acres of rural agricultural land and claimed exemption, arguing that the land was classified as agricultural land in the revenue records and situated beyond the municipal limits, thus not qualifying as a capital asset for capital gains tax.

The Assessing Officer (AO) challenged this claim, asserting that no agricultural activities were carried out on the land during the relevant period, thus disqualifying it from exemption under Section 2(14)(iii). The AO relied on investigations and statements from the Village Administrative Officer (VAO) indicating no agricultural operations since 2005-06.

The Commissioner of Income-tax (Appeals) [CIT(A)] reviewed the evidence, including the chitta and adangal records, and the cross-examination of the VAO. The CIT(A) noted discrepancies in the VAO's records and the fact that the land was still classified as agricultural in the revenue records at the time of sale. The CIT(A) emphasized that the land was beyond 8 km from the nearest municipality and that the assessee had paid land revenue, maintaining its classification as agricultural land.

The CIT(A) concluded that the land was indeed agricultural, not a capital asset, and thus exempt from capital gains tax. The CIT(A) relied on various judicial precedents, including the Supreme Court's judgment in Smt. Sarifabibi Mohamed Ibrahim vs. CIT and the Delhi High Court's judgment in M/s. Hindustan Industrial Resources Ltd. vs. ACIT, to support the decision.

2. Classification of Part of Income Declared by the Assessee as Agricultural Income:

The AO also disputed the agricultural income declared by the assessee, treating it as income from other sources due to the lack of evidence supporting agricultural activities. The CIT(A) partially agreed with the AO, acknowledging that no agricultural activities were conducted on 30 acres of the land but accepted agricultural income from the remaining 120 acres, restricting the agricultural income to ?5 lakhs.

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, emphasizing that the land was classified as agricultural in the revenue records, and no evidence suggested its use for non-agricultural purposes. The Tribunal noted that the land was beyond the municipal limits and that the assessee had treated the land as a fixed asset in the balance sheet.

The Tribunal dismissed the Revenue's appeal, affirming that the gain on the sale of the land was exempt from capital gains tax under Section 2(14)(iii) and should be treated as a capital receipt under Section 10(37) of the Income Tax Act.

Conclusion:

The Tribunal concluded that the land sold by the assessee was agricultural land, exempt from capital gains tax, and the agricultural income declared by the assessee was partially accepted, restricting it to ?5 lakhs. The appeal by the Revenue was dismissed.