2017 (12) TMI 525 - AT - Income Tax

Profit on sale of land - adventure in the nature of trade - purchase of agriculture land anticipating the sale at much higher rate- assessed as business income or under the head capital gain - Held that - The AO has neither recorded statement of any person from CGPL nor recorded when CGPL has started its power plant; how it has expressed its desire to acquire further land for its residential colony. Whether a person of having background like the assessee could have chance to inter-act with CGPL officials and only thereafter purchase land. All these factors are totally missing on record. Department has started inquiry only when huge claim was made by local persons of the area for exemption of capital gain. The only reason adopted by the Revenue for treating all these persons as traders was that they have earned profit on sale of their land which is more than 800 times than ordinary profit in this year. In our opinion, it is one of the corroborative factors amongst other. These transactions were boon because of their geographical location of the land near to CGPL. It was not a case that they have anticipated many fold rise of agriculture land price, and therefore, ventured into trade. Therefore, we allow the appeal of the assessee and rejected appeal of the Revenue. We direct the AO to treat the profit earned by the assessee on sale of agriculture land as exempt under section 2(14) of the Income Tax Act, 1961. - Decided against revenue

Issues Involved:
1. Nature of Income from Sale of Land: Whether the profit on the sale of land should be assessed as business income or under the head capital gain.
2. Characterization of Land: Whether the sold land is agricultural land.
3. Nature of Transaction: Whether the transaction was an adventure in the nature of trade.
4. Validity of Transaction: Whether the transaction can be labeled as a sham or colorable device.

Issue-wise Detailed Analysis:

1. Nature of Income from Sale of Land
The primary issue is whether the profit of ?1,20,21,138/- earned by the assessee from the sale of land should be assessed as business income or as capital gain, which is exempt from tax under section 2(14) read with section 45 of the Income Tax Act. The Assessing Officer (AO) treated the profit as business income, considering the assessee a trader in land. However, the Commissioner of Income Tax (Appeals) [CIT(A)] partially disagreed, treating the gain from one piece of land as capital gain and the others as business income. The Tribunal needed to determine the correct nature of this income.

2. Characterization of Land
The CIT(A) accepted that the land sold by the assessee was agricultural land and situated beyond 8 kilometers from the municipal limit, thus not falling under the definition of a capital asset as per section 2(14) of the Act. This conclusion was not disputed by either party.

3. Nature of Transaction
The CIT(A) considered whether the transaction was an adventure in the nature of trade. The CIT(A) concluded that the assessee partly indulged in trading, based on the substantial increase (800%) in the sale price of the land purchased in 2007 and sold after 15-16 months. However, the Tribunal emphasized that merely earning a high profit does not necessarily mean the transaction was a business activity. Factors such as the assessee's background as an agriculturist, the location of the land, and the absence of any prior or subsequent trading activity in land were considered. The Tribunal noted that the assessee had not borrowed money for the purchase and had not engaged in similar transactions before or after the sale.

4. Validity of Transaction
The CIT(A) and the Tribunal both agreed that the transaction was not a sham or colorable device. The CIT(A) dismissed the possibility of the transaction being a sham, and this conclusion was not contested by the parties.

Conclusion:
The Tribunal concluded that the assessee's profit from the sale of agricultural land should be treated as exempt from tax under section 2(14) of the Income Tax Act, 1961. The Tribunal allowed the appeal of the assessee and dismissed the appeal of the Revenue, directing the AO to treat the profit as exempt capital gain.

Final Judgment:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The profit of ?1,20,21,138/- earned by the assessee on the sale of agricultural land was directed to be treated as exempt under section 2(14) of the Income Tax Act, 1961. The judgment was pronounced in the Open Court on 4th December 2017.

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