2016 (5) TMI 634 - AT - Income Tax

Disallowance of profit in sale of agriculture land - whether transaction in property by assessee company should not be treated as business activity - Held that - There is no enabling provision in the income-tax law prescribing that even if the assessee s income is exempt by a provision, then it can be forcibly brought into the tax net by assuming the assessee s activity to be adventure in the nature of trade. It is a settled position by Hon ble Delhi High Court in Delhi Apartments (P) Ltd. (2013 (3) TMI 330 - DELHI HIGH COURT ) that real estate companies can also hold separate portfolio of land as stock-in-trade and as investment portfolio; the sale of investment portfolio is always taxed as capital gains. Thus, assuming worst against assessee, even if it is inferred that it has carried on business activity so long as it holds specified agricultural land in terms of s. 2(14) in,i,e. not being an asset, its transfer will neither attract capital gain tax nor can be treated as business income. In view of the foregoing and respectfully following the case law cited by the assessee we have no hesitation but to held that the assessee s gains were profits from sale of specified agricultural land which does not come within the definition of asset as prescribed under s. 2(14) and by virtue of s. 2(lA)(a) r/w s, 2(14)(iii) r/w s. 10(1) the assessee s gains from sale of such agricultural land are exempt income - Decided in favour of assessee Disallowance under section 40A(3) - Held that - The activities of the assessee was not in the nature of adventure of trade. However the purchase of land was an investment and was not stock in trade. The cash payment made by the assessee exceeding ₹ 20,000/- have duly been explained by the assessee. The AO has neither doubted the transaction nor it has doubted even the registration of sale deed nor it has doubted the amount. Since the AO has not doubted any of the above and further the land purchase was in the nature of investment and, therefore, following the judgment of the Hon ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991 (8) TMI 5 - SUPREME Court ) and also following the Hon ble Jurisdictional High court in the matter of Smt. Harshila Chordia vs. ITO, (2006 (11) TMI 117 - RAJASTHAN HIGH COURT) which was relied upon by the Hon ble Punjab & Haryana High Court in the matter of Gurdas Garg vs. CIT,(2015 (8) TMI 569 - PUNJAB & HARYANA HIGH COURT) whereby it has been held that the rigour of section 40A(3) are not attracted - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of the addition of ?57,39,980/- made on account of disallowance of profit in the sale of agricultural land.
2. Deletion of the addition of ?55,20,000/- made on account of disallowance under section 40A(3) of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of the addition of ?57,39,980/- made on account of disallowance of profit in the sale of agricultural land:

The primary issue revolves around whether the profit from the sale of agricultural land should be treated as business income or as capital gains exempt from tax. The Assessing Officer (AO) argued that the assessee's activities constituted an "adventure in the nature of trade" because the land was purchased and sold within a short period, and the assessee was in the business of real estate. The AO noted the lack of agricultural activity and assumed the land was within 8 kilometers of municipal limits, thus not qualifying as agricultural land under section 2(14) of the Income Tax Act.

The CIT (A) countered these points by stating that the assessee had not engaged in any business activity from A.Y. 2003-04 to A.Y. 2008-09 and had not carried out any development activities on the land. The land was shown as part of fixed assets, not stock-in-trade. The CIT (A) also accepted additional evidence showing the land was more than 10 kilometers from municipal limits, thus qualifying as agricultural land under section 2(14).

The Tribunal upheld the CIT (A)'s decision, noting that the AO's assumptions were unfounded and that the land was indeed agricultural, as evidenced by the additional certificate. The Tribunal emphasized that the assessee's intention was not to engage in a trade but to hold the land as an investment, thus the profit from the sale of the land was not taxable as business income.

2. Deletion of the addition of ?55,20,000/- made on account of disallowance under section 40A(3) of the IT Act, 1961:

The second issue concerns the disallowance under section 40A(3) for cash payments exceeding ?20,000/-. The AO treated the purchase of land as stock-in-trade and invoked section 40A(3), which disallows cash payments exceeding the specified limit for business transactions.

The CIT (A) deleted the addition, stating that the land was part of the fixed assets, not stock-in-trade. The CIT (A) emphasized that section 40A(3) applies to business expenditures, not to investments in fixed assets. The Tribunal agreed with the CIT (A), noting that the purchase of land was an investment and not a business activity. The Tribunal cited relevant case law, including the Supreme Court's decision in Attar Singh Gurmukh Singh vs. ITO, which held that section 40A(3) does not apply to investments in fixed assets.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s decision to delete both additions. The Tribunal concluded that the profit from the sale of agricultural land was not business income but exempt under section 2(14) and section 10(1). Additionally, the Tribunal held that section 40A(3) did not apply to the cash payments for the purchase of land, as it was an investment, not a business expenditure.