2016 (11) TMI 1063 - AT - Income Tax

Capital gain - nature of land - Held that - CIT(A) cannot take such an inconsistent stand to reject one ground and to allow another ground. This approach cannot be upheld. He has to give a specific and categorical finding as to whether the land which was purchased was an agricultural land and also continued to be an agricultural land afterwards and the nature of the land has not been changed at all. Nothing further is borne out from the record or has been brought on record as to what happened with the development agreement which was entered by the assessee with the developer, M/s Sai Venkata & Associates, vide development agreement dated 15.05.2007 for which the assessee has received huge amount of ₹ 2.25 crores as advance for parting away the development rights and whether the development agreement was terminated and money has been refunded to the assessee or not has not been made clear. If the assessee had incurred expenditure to develop the land which ultimately is to be developed by himself or to be handed over to the developer for the development of any real estate project, then definitely it is indicative of the intention that the assessee had some kind of an intent to enter into the business adventure. However, the impugned order is completely silent on this issue. Even if we agree that, it is an agricultural land in the light of various evidences filed, then same needs to be examined properly by the Assessing Officer or by the Ld.CIT(A) because, these evidences were not filed before the Assessing Officer and CIT(A) has refused to admit the same. Therefore, in the interest of justice, we feel this entire matter needs to be restored back to the file of the Assessing Officer to consider these evidences of land revenue records as well as Talathi Certificate to examine that at the time of sale, the land was actually an agricultural land.

Issues Involved:
1. Classification of the sale of land as long-term capital gains vs. adventure in the nature of trade.
2. Disallowance of 30% of the development expenses.
3. Treatment of the sale proceeds of agricultural land as exempt income under section 10(1).
4. Set-off of short-term capital loss from shares and land against capital gains.
5. Set-off of brought forward long-term capital loss against current year’s capital gains.
6. Set-off of loss under income from other sources against income under any other head.
7. Calculation of deductions under Chapter VI-A.

Detailed Analysis:

Issue 1: Classification of Sale of Land
The primary contention was whether the sale of land should be treated as long-term capital gains (LTCG) or as an adventure in the nature of trade. The Revenue argued that the activities undertaken by the assessee, including significant development expenditures, indicated a systematic and organized effort to increase the land's marketability, thus classifying it as a business activity. The Assessing Officer (AO) highlighted that the assessee had incurred development expenditures amounting to ?8,46,36,147/- on the land, which included beautification, leveling, getting electricity connections, building water tanks, planting trees, building roads, and constructing a pond. The AO concluded that the entire sale consideration of ?14,58,01,350/- should be treated as business income.

The assessee, on the other hand, argued that the land was purchased as an investment and held as such in the books of accounts. The development expenditures were necessary to protect the land from erosion and improve its usability. The CIT(A) accepted the assessee's contention, noting that the land was shown as an investment in the balance sheet and that there was no evidence of the assessee engaging in real estate business. The CIT(A) concluded that the sale should be treated as LTCG.

Issue 2: Disallowance of Development Expenses
The AO disallowed 30% of the development expenses claimed by the assessee, arguing that the assessee failed to provide sufficient evidence linking the expenditures to the land. The CIT(A) reversed this disallowance, noting that 70% of the expenses had already been allowed in earlier years and the remaining amount should not be disallowed without valid reasons.

Issue 3: Treatment of Agricultural Land Sale as Exempt Income
The assessee raised an additional ground claiming that the sale proceeds from the land should be treated as exempt income under section 10(1) of the Income-tax Act, as the land was agricultural. The CIT(A) initially rejected this additional ground but proceeded to address it on merits, ultimately rejecting the claim. The CIT(A) observed that the land had been developed significantly and there was no agricultural activity carried out, thus it could not be considered agricultural land.

Issue 4: Set-off of Short-Term Capital Loss from Shares
The assessee contended that the short-term capital loss from shares amounting to ?88,35,265/- should be set off against the capital gains of the year. The CIT(A) did not allow this set-off.

Issue 5: Set-off of Short-Term Capital Loss from Land
The assessee also sought to set off short-term capital loss from land amounting to ?57,40,228/- against the capital gains of the year. This set-off was also not allowed by the CIT(A).

Issue 6: Set-off of Brought Forward Long-Term Capital Loss
The assessee claimed a set-off of brought forward long-term capital loss of ?2,20,513/- from AY 2006-07 against the current year’s capital gains. The CIT(A) did not allow this set-off.

Issue 7: Set-off of Loss under Income from Other Sources
The assessee claimed a set-off of loss under income from other sources amounting to ?63,328/- against income under any other head. The CIT(A) did not allow this set-off.

Issue 8: Calculation of Deductions under Chapter VI-A
The assessee contended that the deductions under Chapter VI-A were not calculated correctly and requested a direction to the AO to grant the deductions as per the provisions of the Act. The CIT(A) did not address this issue in detail.

Conclusion:
The Tribunal found inconsistencies in the CIT(A)'s findings, particularly regarding the classification of the land as agricultural and the treatment of the sale proceeds. The Tribunal restored the matter to the AO for a fresh examination of the evidence, including the development agreement and the nature of the land at the time of sale. The Tribunal directed the AO to consider the land revenue records and other evidences to determine whether the land was agricultural and to decide the taxability accordingly. Both the Revenue's appeal and the assessee's cross-objections were allowed for statistical purposes.

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