2018 (11) TMI 1733 - AT - Income Tax

Profit from sale of land - Characterization of income - nature of land sold - agricultural income or capital asset - whether the transaction of purchase and sale carried out by the assessee during the year under consideration are in the nature of trade ? - HELD THAT - In the case in hand, there is no dispute that the assessee has purchased the lands in question with the intention to sell without holding it for a considerable period of time. The actual use of land and the intended future use of land is also not in dispute as it was not for agriculture purpose as subsequently the lands were converted for nonagricultural use. The location of the land and the area surrounding the land are also in the process of development of real estate for nonagricultural purpose and therefore, the entire exercise of purchase and sale of agricultural lands in questions were to use the same for development of real estate. Hence, the lands have no more retained the character of agricultural land. When the entire surrounding area was under real estate development and already developed area then the transaction of purchase and sale of said agricultural land not a isolated single transaction but a systematic repeated transactions are with the motive and view to earn profit on resale. Incentive of exempting the agricultural land from definition of capital asset and consequently from chargeability of income tax is to encourage the cultivation of land and preserve the character of agricultural land to be used for cultivation and agricultural operations. Therefore, the scheme and the object of providing these incentives to keep the income arising from agricultural land exempt from tax is to promote more and more agricultural operations by the agriculturists and the sole object of this incentive is not to tax the agriculturists who is dealing, cultivating and carrying out the agricultural operations on the agricultural land and then in case if the said land is sold the same is excluded from the purview of income tax either on capital gain or agricultural income. Claiming the said exemption by business person merely because he has purchased the land and then sold it would be defeating the very purpose of the incentive which is only for the genuine cultivator of the land. Hence, we hold that the income arising on sale of the lands in question is not exempt from income tax either as a capital gain U/s 2(14)(iii) or as an agricultural income U/s 2(1A) of the Act. This issue is decided against the assessee

Issues Involved:
1. Deletion of addition on account of business profit from the sale of land.
2. Determination of whether the land sold was agricultural land and thus not chargeable to capital gains tax.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Business Profit from Sale of Land
The revenue contested the deletion of ?2,22,38,555/- added as business profit from the sale of land. The Assessing Officer (AO) had treated the activity of purchase and sale of land by the assessee as a business activity, resulting in business income. The assessee argued that the lands were held as investments, not as stock in trade, and thus any gain from their sale should be considered capital gains. The CIT(A) accepted the assessee's claim, treating the transactions as investments in agricultural lands situated beyond 8 km from municipal limits, thereby excluding them from the definition of capital assets under Section 2(14) of the Income Tax Act.

Issue 2: Determination of Whether the Land Sold Was Agricultural Land
The revenue argued that the land was not used for agricultural purposes and no agricultural income was shown in the return. The AO noted that the assessee purchased and sold lands systematically within short periods, indicating a business motive. The revenue contended that the lands, although recorded as agricultural, were intended for resale for non-agricultural purposes, thus losing their agricultural character.

The assessee, on the other hand, claimed that the lands were agricultural and situated beyond 8 km from municipal limits, thus not capital assets. The assessee also argued that the sale was made for equity shares and not cash, indicating an investment conversion rather than a business transaction. The CIT(A) accepted this view, holding that the lands were agricultural and not chargeable to capital gains tax.

Tribunal’s Findings:
The Tribunal analyzed the nature of the transactions, noting multiple purchases and sales within short periods, which indicated a business activity rather than investment. The Tribunal referred to various judicial precedents, emphasizing that the intention at the time of purchase, the period of holding, and the actual use of the land are crucial factors in determining the nature of the transaction. The Tribunal concluded that the transactions were systematic and with a profit motive, thus constituting business activities.

The Tribunal also addressed the alternative plea that income from the sale of agricultural land should be considered agricultural income. It referred to the Supreme Court’s decision in Commissioner of Wealth Tax Vs. Officer in Charge (Court of Wards) and Smt. Sarifabibi Mohmed Ibrahim v. Commissioner of Income-tax, which emphasized that the actual use and intended future use of the land are critical in determining its character. The Tribunal found that the lands were intended for non-agricultural purposes at the time of purchase, thus losing their agricultural character.

The Tribunal set aside the CIT(A)’s order and restored the AO’s finding, holding that the income from the sale of the lands was business income and not exempt under Section 2(14)(iii) or as agricultural income under Section 2(1A) of the Act.

Conclusion:
The Tribunal allowed the revenue’s appeal, determining that the transactions were business activities and the lands did not qualify as agricultural lands for tax exemption purposes. The income from the sale was thus taxable as business income.

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