2017 (12) TMI 529 - AT - Income Tax

Determination of nature of income derived on sale of land - profit on sale of land to be assessed as business income or under the head capital gain - Held that - 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. This transaction might be boon because of their geographical location of the land near to power plant. It was not a case that they have anticipated many fold rise of agriculture land price, and therefore, ventured into trade. Apart from the above, the ld.CIT(A) has observed that land was not used for agriculture purpose. This observation was made without any foundation and by merely referring the case of Shri Amitabh Bachhan. It is pertinent to mention that in the land revenue record it was mentioned as agriculture land. The record is per se admissible in evidence. It can be rebutted but by producing evidence and not by general remarks that Shri Amitabh Bacchan was also stated to be farmer. There should be spot inquiry. Presumption of truth is in favour of the record maintained by State revenue official in their official function. Thus, land is to be treated as agriculture land. Therefore, we allow the appeal of the assessee. 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 in favour of assessee.

Summary

Issues Involved:
1. Determination of the nature of income derived from the sale of land—whether it is business income or capital gain.
2. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Determination of Nature of Income:
The primary issue in this appeal was to determine whether the profit from the sale of land should be treated as business income or capital gain. The assessee declared the profit as exempt, claiming it was derived from agricultural land, which falls outside the purview of section 2(14) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the assessee as a trader in land and assessed the profit as business income.

The CIT(A) formulated three questions to adjudicate the controversy:
- Is the sold land 'agricultural land'?
- Was the transaction an 'adventure in the nature of trade' requiring the profits to be taxed as business income?
- Is the transaction a sham transaction and can it be labeled as a colorable device?

The CIT(A) concluded that the land was not agricultural and the transaction was not a sham. The controversy, therefore, boiled down to whether the transaction was an adventure in the nature of trade.

The CIT(A) applied several tests to determine the nature of the transaction, including:
- Whether the land was used for agricultural purposes at the time of purchase.
- The duration of holding the land.
- The proportion of income derived from agricultural operations.
- Permissions obtained for non-agricultural use.
- The surrounding area and physical characteristics of the land.

The CIT(A) concluded that the transaction was an adventure in the nature of trade, primarily because the land was held for only seven months, sold at a significantly higher price, and there was no substantial evidence of agricultural use.

The Tribunal, however, disagreed with the CIT(A). It emphasized that the assessee was an agriculturist, purchased land more than 20 km away from the municipality, and had no history of trading in land. The land was recorded as agricultural in the revenue records, and the assessee did not borrow money for the purchase. The Tribunal concluded that the profit from the sale of land should be treated as exempt capital gain under section 2(14) of the Income Tax Act.

2. Imposition of Penalty under Section 271(1)(c):
Given that the Tribunal allowed the appeal concerning the quantum addition, the penalty imposed under section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income was also canceled. The Tribunal reasoned that since the quantum on which the penalty was based was deleted, the penalty could not stand.

Conclusion:
The Tribunal allowed both appeals of the assessee. It directed the AO to treat the profit from the sale of agricultural land as exempt under section 2(14) of the Income Tax Act and canceled the penalty imposed under section 271(1)(c).