2018 (12) TMI 1756 - AT - Income Tax

MAT computation - Deduction on account of gain on sale of agriculture land (rural) out of Book Profit - whether income derived from sale of land in the hands of the assessee is in nature of agriculture income exempt under section 10(1)? - if the answer to the same is in affirmative whether it can be excluded while computing book profits under section 115JB - HELD THAT - In the instant case the assessee company is in the business of real estate development including purchase and sale of land where the sole purpose of purchase of the land is to sell the same to third parties or to carry out non-agricultural development activities. AO has also given a finding that the assessee has incurred expenditure on conversion charges on the pieces of land which have been sold during the year which shows clearly the future use of land for non-agriculture purposes and the said finding remain uncontroverted before us. The land in question thus loses its character as agriculture land and any gain arising on sale of such land cannot be regarded as agriculture income exempt under section 10(1) of the Act. In the books of account the assessee has shown this income as profit on sale of agriculture land being capital gains and not as agriculture income we agree with the contention of the ld DR that the provisions of section 115JB is a self contained code and the AO cannot tinker with the books of accounts prepared by the assessee as per Schedule-VI of the Companies Act and once this income in question is not declared by the assessee or treated in the books of account as agricultural income then the same cannot be allowed as deduction as per the provisions of section 115JB. The books profits for the purpose of Section 115JB of the Act shall therefore include the amount being the amount on sale of impunged pieces of land. - Decided in favour of revenue

Summary

Issues Involved:
1. Whether the gain on the sale of agricultural land qualifies as agricultural income exempt under section 10(1) of the IT Act.
2. Whether such gain can be excluded while computing book profits under section 115JB of the IT Act.

Detailed Analysis:

1. Whether the gain on the sale of agricultural land qualifies as agricultural income exempt under section 10(1) of the IT Act:

The assessee, a private limited company engaged in real estate development, claimed a deduction of ?2,43,15,546/- from book profits under section 115JB, citing it as agricultural income from the sale of rural agricultural land. The AO disallowed this deduction, arguing that the gain on the sale of agricultural land does not qualify as agricultural income under section 10(1) of the IT Act. The AO noted that the income was shown as capital gain in the books of account, not as agricultural income.

The assessee contended that the land sold was agricultural land beyond 8 KM from municipal limits, thus qualifying as agricultural income under section 2(1A) and exempt under section 10(1). The assessee relied on various judicial precedents, including decisions from the Bombay High Court and Andhra Pradesh High Court, which held that gains from the sale of agricultural land used for agricultural purposes are agricultural income.

The Tribunal examined the issue in depth, referring to the Coordinate Bench's decision in ACIT vs. Sunil Bansal, which discussed the definition and treatment of agricultural land and income. The Tribunal emphasized that the character of the land must be determined based on its actual use and intended use for agricultural purposes. The Tribunal also noted that the Hon’ble Supreme Court in Union of India vs. S. Muthyam Reddy clarified that income from the sale of agricultural land within specified urban areas is not agricultural income.

The Tribunal concluded that the land in question, used for real estate development, lost its agricultural character. The assessee's intention to use the land for non-agricultural purposes was evident from the conversion charges incurred. Therefore, the gain from the sale of this land cannot be regarded as agricultural income exempt under section 10(1).

2. Whether such gain can be excluded while computing book profits under section 115JB of the IT Act:

The Tribunal addressed whether the gain from the sale of agricultural land could be excluded from book profits under section 115JB. The Tribunal noted that section 115JB is a self-contained code, and the AO cannot alter the books of accounts prepared as per Schedule VI of the Companies Act. Since the assessee did not treat the gain as agricultural income in its books, it cannot claim a deduction under section 115JB.

The Tribunal referenced the Coordinate Bench's decision in Sunil Bansal, which held that the character of the land and its intended use are crucial in determining whether the gain qualifies as agricultural income. The Tribunal agreed with the AO's finding that the land was intended for non-agricultural purposes, and thus, the gain should be included in the book profits.

Conclusion:

The Tribunal set aside the order of the CIT(A) and upheld the AO's decision, confirming that the gain of ?2,43,15,546/- from the sale of agricultural land should be included in the book profits under section 115JB. The appeal of the Revenue was allowed. The judgment emphasized that the income from the sale of land intended for non-agricultural purposes does not qualify as agricultural income and cannot be excluded from book profits.