2015 (12) TMI 1871 - AT - Income Tax

Gain on sale of agricultural lands - Nature of land sold - taxable as business income OR was exempt from tax - Whether CIT(A) failed to appreciate that the lands sold in this year were capital asset of the firm and since the said lands were agricultural lands and beyond 8 kms from the municipal limits the gain arising on sale of lands was exempt from tax? - HELD THAT - The assessee is a partnership firm and the main activity in which the assessee is engaged is in dealing the lands. The factual finding of the CIT(A) in this regard is that the assessee had owned various lands which have been declared in the balance sheet under the list of Sundry Debtors related with land transactions Scheme VII starting from assessment year 2003-04 and then in assessment year 2004-05. During the year under consideration there is certain movement in the lands and two of the lands have been sold by the assessee. In view of the large number of transactions carried out by the assessee in lands reflect the nature of assessee to carry on the business of sale and purchase of lands where the lands purchased by it were shown as stock-in-trade. The nature of the lands purchased by the assessee is claimed to be agricultural lands. No iota of evidence has been filed by the assessee to establish that any agricultural activity was carried on the aforesaid lands. Further even 7/12 extract filed by the assessee reflects no agricultural activity. In view of the above said facts and circumstances where the assessee is admittedly engaged in the business of purchase and sale of lands and in view of the assessee having declared the said lands as part of its current assets we find no merit in the plea of the assessee in this regard and dismissing the same we uphold the orders of authorities below in treating the profit on sale of land as business income in the hands of the assessee. The grounds of appeal raised by the assessee are thus dismissed.

Summary

Issues:
1. Taxability of gain on sale of agricultural lands as business income.
2. Classification of lands as capital assets or business assets.
3. Application of section 2(14) of the Income-tax Act, 1961.
4. Treatment of profit from land sale as business income.

Issue 1: Taxability of gain on sale of agricultural lands as business income:
The appeal contested the addition of Rs.11,12,595 as taxable business income due to the sale of agricultural lands. The appellant argued for tax exemption based on the lands being beyond municipal limits. However, authorities rejected this claim, asserting the lands were taxable as business income since the appellant was engaged in land trading.

Issue 2: Classification of lands as capital assets or business assets:
The Assessing Officer noted the firm's business activity was land dealing and deemed the gain as business income, not capital gain. The appellant's argument that certain lands were held as investments and not for trading was dismissed. The lands were considered business assets due to the firm's primary motive of profit-making and lack of agricultural income history.

Issue 3: Application of section 2(14) of the Income-tax Act, 1961:
The appellant contended that the lands were agricultural and beyond 8 kms from municipal limits, thus exempt from tax under section 2(14). However, the authorities emphasized the firm's trading nature and lack of agricultural activity evidence, leading to the profit being classified as business income.

Issue 4: Treatment of profit from land sale as business income:
The CIT(A) analyzed the Partnership Deed and balance sheets, confirming the firm's land dealing business. The large number of land transactions indicated a trading pattern, and the absence of agricultural activities or income further supported the characterization of the profit from land sale as business income. The appeal against the CIT(A) order was dismissed, upholding the treatment of the profit as business income.

In conclusion, the judgment upheld the authorities' decision to tax the profit from land sale as business income due to the firm's trading activities and lack of evidence supporting agricultural land exemption. The detailed analysis considered the nature of the lands, the firm's business history, and relevant legal provisions, leading to the dismissal of the appellant's appeal.