2016 (8) TMI 81 - AT - Income Tax

Nature of income - gains on sale of lands - business income or agriculture income - Held that - The mere sale of few pieces of lands here and there now and then irrespective of their value as long as the said assets/lands did not lose the basic character of agricultural lands does not constitute business activity for the assessee. Apart from this the VAO has furnished certificate which indicates that the land under reference are agricultural land and there was no evidence to show that the assessee has changed the land for non-agricultural purpose. Therefore the land held and sold by the assessee were certified and proved as agricultural land and agricultural incomes are offered on such lands year after year and the same is not disputed by the Assessing Officer. However the main contention of the Assessing Officer that there was a disproportionate quantum of agricultural income compared to the value of the agricultural lands from which agricultural income was raised is not an appropriate basis to come to a conclusion that such lands are not agricultural land. Therefore we find no force in the argument of the ld. DR that the assessee has not shown any agricultural activities. Moreover the ld. CIT(A) has relied on various decisions and came to a right conclusion that the addition on account of treating the amount of .3, 04, 01, 161/- which is the margin/gains to the assessee on sale of lands as business income is not sustainable since the lands under reference were held to be agricultural lands and the activities of purchase and sale of such agricultural land in our opinion did not constitute business. Thus we find no reason to interfere with the order passed by the ld. CIT(A) - Decided against revenue

Summary

Issues Involved:
1. Whether the gains on sale of lands amounting to ?3,04,01,161/- should be treated as business income.
2. Whether the lands sold by the assessee qualify as agricultural lands under Section 2(14) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Gains on Sale of Lands as Business Income:
The Revenue contended that the gains from the sale of lands should be treated as business income, arguing that the assessee was engaged in the business of purchasing and selling lands. The Assessing Officer (AO) observed that the assessee made significant investments in purchasing and developing lands and earned substantial income from their sale. The AO concluded that the assessee's activities constituted a business, not agricultural operations, citing the meager agricultural income reported compared to the value of the lands held.

The CIT(A) disagreed, noting that the assessee consistently reported agricultural income and held lands classified as agricultural. The CIT(A) emphasized that the mere sale of lands did not transform the activity into a business. The Tribunal upheld the CIT(A)'s decision, stating that the lands retained their agricultural character, and the assessee's activities did not amount to a business.

2. Qualification of Lands as Agricultural Lands under Section 2(14):
The AO argued that the lands sold were not agricultural, based on the Inspector's report indicating the presence of thorny bushes and the proximity of the lands to Chennai's software parks. The AO relied on the ITAT Chennai's decision in Pallava Resorts and the Supreme Court's ruling in Sarifabibi Mohammed Ibrahim to deny the exemption under Section 2(14).

The CIT(A) found that the lands were agricultural, supported by a certificate from the Village Administrative Officer (VAO) and the absence of any conversion for non-agricultural purposes. The CIT(A) cited judicial precedents, including CIT Vs Borhat Tea Company Ltd and CIT Vs Officer-in-charge, to argue that the potential for non-agricultural use was irrelevant if the lands were capable of agricultural operations. The Tribunal agreed, noting that the AO failed to prove the lands were non-agricultural or developed for commercial exploitation. The Tribunal concluded that the lands remained agricultural and did not qualify as capital assets under Section 2(14).

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that the gains from the sale of lands were not business income and the lands qualified as agricultural under Section 2(14). The Tribunal emphasized the importance of the lands' agricultural classification and the assessee's consistent reporting of agricultural income.