2015 (10) TMI 2838 - AT - Income Tax

Gains arising from sale of land - Nature of land sold - correct head of income - business income OR capital gains - period of holding of asset - contention of the assessee was that the assessee has sold part of the land after holding it for a period of 20 years and utilizing it for agricultural purposes during the said period without effecting any kind of improvement on the land therefore earning of sale of land has to be treated as capital gain and not profit and gains of business and profession - HELD THAT - The land has been recorded in the Revenue records as agricultural land there is nothing on record to show that the entry was wrong. As in the case of CIT v Sohan Khan 2008 (4) TMI 142 - RAJASTHAN HIGH COURT made a remarkable observations and stated that in the absence of anything to show that assessee had purchased the land with the intention to sell it at a profit or that the assessee is a regular dealer in real estate piecemeal sale of land by the assessee by earmarking plots constituted disposal of capital asset and not an adventure in the nature of trade and therefore surplus is taxable as capital gains. Also in Pai Provision Stores 2011 (8) TMI 725 - KARNATAKA HIGH COURT held that even though development and sale of property was one of the object of the assessee firm the assessee was in fact not carrying on that business hence income from sale of part of developed property which was utilized in clearing the debts incurred in development of property was capital gains and not business income more so even the remaining property was used by assessee in carrying out its business and letting out to tenants. In the instant case the assessee sold part of the agricultural land holding for last 20 years and entire sale proceeds were invested in constructing the residential house which clearly suggest that assessee is not in the business of sale / purchase of immovable property and therefore the stand taken by the authorities below are not sustainable. Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of income from the sale of land as business income or capital gains.
2. Eligibility for deduction under Section 54F of the Income-tax Act, 1961.
3. Validity of disallowance of indexation benefits claimed by the assessee.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Land:
The primary issue was whether the gains from the sale of land should be classified as business income or capital gains. The assessee purchased agricultural land in 1988 and sold a portion of it in 2009, claiming it as a capital asset. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified the gains as business income, arguing that the land was sold in the form of developed residential plots, with facilities like street lights, water supply, and sewerage, indicating an adventure in the nature of trade.

However, the Tribunal observed that the land was held for 20 years and used for agricultural purposes throughout this period, with agricultural income reported in tax returns. The Tribunal referenced the case of Kaur Singh v CIT, where it was held that merely carving out plots and selling them does not constitute an adventure in the nature of trade if the initial intention was not to sell the property. The Tribunal concluded that the sale of the land should be treated as capital gains, not business income.

2. Eligibility for Deduction under Section 54F:
The AO disallowed the deduction claimed by the assessee under Section 54F, which pertains to the investment of capital gains in the construction of a residential house. The Tribunal found that the proceeds from the sale of the land were indeed invested in constructing a residential house on the remaining portion of the land. Given that the gains were classified as capital gains, the assessee was entitled to the deduction under Section 54F.

3. Validity of Disallowance of Indexation Benefits:
The AO also disallowed the indexation benefits claimed by the assessee, which are typically allowed to adjust the purchase price of a capital asset for inflation, thus reducing the taxable capital gains. Since the Tribunal classified the gains from the sale of land as capital gains, the assessee was entitled to the indexation benefits as claimed.

Conclusion:
The Tribunal set aside the orders of the lower authorities, concluding that the sale of land should be treated as capital gains, not business income. Consequently, the assessee was eligible for the deduction under Section 54F and the indexation benefits. The appeal was allowed in favor of the assessee.