2017 (4) TMI 395 - AT - Income Tax

Income accrued to the assessee from sale of land/plots - LTCG or capital gain - Held that - Unable to agree with the contention of the AO as well as observations of the Ld. CIT(A) that the sale of land immediately after 5 months of diversion is an activity of adventure in the nature of trade and business because as per ratio laid down in the case of CIT vs. Suresh Chand Goyal (2007 (1) TMI 90 - MADHYA PRADESH HIGH COURT) as reproduced hereinabove. Section 2(13) of the Act, defines the word business which includes any trade, commerce or manufacture or any other adventure or concerned in the nature of trade, commerce or manufacture. Their lordship clearly held that an isolated transactions or activity cannot be a part of business and to consider the question of business there must regular activity of purchasing and selling. In the present case there is no iota of evidence on the record to show that the assessee was regular in the business of purchase and sale of land or plots, therefore, conclusion drawn by the AO and uphold by the Ld. CIT(A) cannot be held as valid and sustainable as per provisions of the Act - Decided in favour of assessee Claim of deduction u/s 54F on account of investment in construction of residential house out of the long term capital gains from the sale of land - Held that - the authorities below, after treating the income as business income of the assessee, preceded to frame assessment and the issue of exemption/deduction u/s 54F of the Act was not properly adjudicated by them. Since by the earlier part of this order, we have allowed ground no.1 of assessee and we have directed the AO to treat the income from sale of plots/land as long term capital gain. Therefore, consequently, the assessee is entitled to claim exemption u/s 54F of the Act, on the expenditure incurred for construction of residential house. However, since there is no adjudication either by the AO or by the Ld. CIT(A) on this issue requires proper examination and verification at the end of the AO. Therefore, the issue is restored to the file of the AO for reconsideration.

Summary

Issues Involved:
1. Whether the transaction of sale of land by the assessee was in the nature of adventure in trade or a capital gain transaction.
2. Whether the assessee is entitled to claim deduction under section 54F of the Income Tax Act for investment in the construction of a residential house from the long-term capital gains from the sale of land.

Issue-wise Detailed Analysis:

1. Nature of the Transaction: Adventure in Trade vs. Capital Gain Transaction

The primary issue was whether the sale of land by the assessee should be treated as an adventure in the nature of trade, thus taxable as business income, or as a capital gain transaction. The assessee argued that the land was agricultural and had been used for cultivation since its purchase in 1988. A small portion was diverted for non-agricultural purposes in 2007 due to financial requirements and subsequently sold in three pieces. The assessee claimed that this isolated sale did not constitute a business activity but was a long-term capital gain.

The Revenue contended that the diversion and subsequent sale of the land in plots indicated an adventure in the nature of trade. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] supported this view, treating the income from the sale as business income.

The Tribunal analyzed the facts and referred to precedents, including the decision of the Hon’ble High Court of Madhya Pradesh in CIT v. Suresh Chand Goyal. It was observed that an isolated transaction of selling land after plotting it for better price realization does not amount to an adventure in trade. The Tribunal noted that the assessee had no regular activity of purchasing and selling land, and there was no evidence suggesting the land was acquired for resale. The Tribunal concluded that the sale was a capital gain transaction, not business income, and directed the AO to treat the income from the sale as long-term capital gain.

2. Deduction under Section 54F of the Income Tax Act

The second issue was the assessee's entitlement to deduction under section 54F for investment in the construction of a residential house from the long-term capital gains. The AO and CIT(A) had dismissed this claim since they treated the income as business income.

Given the Tribunal's decision to treat the income from the sale of land as long-term capital gain, the assessee's claim under section 54F became relevant. The Tribunal noted that the authorities had not properly adjudicated this issue due to their initial stance on the nature of the income. Therefore, the Tribunal directed the AO to re-examine the claim for deduction under section 54F, allowing the assessee an opportunity to present evidence of the investment in the construction of the residential house.

Conclusion:

The appeal was partly allowed. The Tribunal directed the AO to treat the income from the sale of land as long-term capital gain and to re-examine the claim for deduction under section 54F after proper verification and examination. The order was pronounced in the open court on 31.03.2017.