2017 (12) TMI 524 - AT - Income Tax

Profit on sale of land - nature of land - gain realized on sale of such land was claimed exempt u/s.2(14) - Business income or capital gain - Held that - Merely if an assessee is getting a higher volume of sale consideration, then it could not be construed that transaction would take colour of a business transaction. The assessee is basically an agriculturist; purchases land at a distance of more than 20 kms. away from municipality and close to his native village. After sale of this land, he has again purchases agriculture land. He has not entered into any sale/purchase of land in earlier period of time or in subsequent period of time. He has not borrowed money for purchase of land and incurred interest expenditure. There might be reasons for all of a sudden spurt in the price of land in the area. There could be change of policy of Government level; introduction of some project, but that type of change in the policy, whether, was in the notice of the assessee. No such factors have been brought on record by the AO. It is also pertinent to observe that whether the assessee could anticipate such substantial increase in the sale price of the land because of any policy introduced by the Government, no such factors have been brought on record. Facts are to be view keeping in view perspective the assessee, i.e. from where he belongs; whether he has ventured in any trading activities of similar nature; his educational background etc. Even the entire transaction is being looked into with that angle, then it would reveal that he has not traded in the land, rather it was a simplicitor investment for agriculture operation, but on account of getting good price land has been sold, and higher volume of land purchased at different places. Every agriculturist would like to enhance his land holding, if similar type of sale of land can result into a price, which can enable him to buy higher volume of other agriculture land. In view of the above discussion, we allow appeal of the assessee and direct the AO to treat the assessee as an investor in the agriculture land. Entire land sold to be treated as agriculture land and gain on sale of this land is beyond the purview of the capital gain under section 2(14) - Decided against revenue

Issues Involved:
1. Whether the sold land is 'agricultural land'.
2. Whether the transaction carried out by the appellant was 'adventure in the nature of trade' and the profits thus required to be taxed as business income.
3. Whether the transaction is a sham transaction and can it be labeled as a colorable device.

Issue-Wise Detailed Analysis:

1. Whether the sold land is 'agricultural land':

The first appellate authority accepted that the land sold by the assessee was agricultural land. The land was classified as agricultural in the land revenue records, and agricultural operations were carried on. The land was situated about 20 km from Bhuj, and the gain realized on sale was claimed exempt under Section 2(14) of the IT Act, 1961. The parties did not dispute this conclusion.

2. Whether the transaction carried out by the appellant was 'adventure in the nature of trade' and the profits thus required to be taxed as business income:

The first appellate authority partly treated the assessee as indulging in an adventure in the nature of trade and assessed the profit as business income. The assessee purchased agricultural land in April 2005 and additional land in February-March 2007. The land purchased in 2005 was held for more than three years, while the land purchased in 2007 was held for less than fifteen months. The appellate authority noted a massive increase of about 800% in the price of the land within a short span of time, indicating a business opportunity rather than a simple investment. However, this logic was applied only to the land held for less than fifteen months, treating the profit from these sales as business income. The land held for more than three years was not considered an adventure in the nature of trade.

3. Whether the transaction is a sham transaction and can it be labeled as a colorable device:

The first appellate authority accepted that the transaction was not a sham or colorable device. The parties did not dispute this conclusion.

Conclusion:

The appellate authority's decision was based on the substantial increase in the sale price of the land, treating the short-term holdings as business transactions. However, the tribunal found that merely a higher volume of sale consideration does not necessarily indicate a business transaction. The assessee, primarily an agriculturist, purchased land far from the municipality, did not borrow money for the purchase, and continued agricultural activities. The tribunal concluded that the assessee should be treated as an investor in agricultural land, and the gain on sale of this land is beyond the purview of capital gain under Section 2(14) of the Income Tax Act, 1961. The appeal of the assessee was allowed, and the revenue's appeal was dismissed.

Final Judgment:

The appeal of the assessee is allowed, and the revenue's appeal is dismissed. The assessee is treated as an investor in agricultural land, and the gain on sale is exempt from capital gains tax under Section 2(14) of the Income Tax Act, 1961.

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