2018 (4) TMI 494 - AT - Income Tax

Assessment of income on sale of land - plots on the agricultural land sold belongs to the HUF or assessee in his individual capacity - land inhereted by the son on the death of his father - Held that - The share in the subject land inherited by the assessee under section 8 on the death of his father cannot be considered as HUF property in his hands. Therefore, income from disposal of such land will have to be considered as his individual income. We therefore upheld the view of the lower authorities where the income on the disposal of plots of land has been brought to tax in the hands of the assessee in his individual capacity. Treating the sale of plots of agriculture land - adventure in the nature of trade OR capital gain - Held that - In this case, the assessee itself has developed residential plots and then sold it to individual buyers. Therefore, we affirm the findings of the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade (in form of residential plots) of assessee s business. Development of residential colony and said conversion has happened by assessee s own admission during financial year 2009 and the intent of the assessee has thus been demonstrated through his own actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head capital gain in the year(s) the stock-in-trade is sold/transferred. Sales realization of the stock-in-trade over such fair market value is required to be assessed as business income . During the year under consideration, it is an admitted position that 15 plots have been sold for a consideration of ₹ 54,93,100. Therefore, the taxability arising on conversion of agricultural land into stock-in-trade to the extent it has been sold during the year, arises during the impunged assessment year. The matter is accordingly set-aside to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots.

Summary

Issues Involved:
1. Ownership of the plots on agricultural land.
2. Nature of the income from the sale of plots (capital gains vs. business income).
3. Applicability of Section 2(14) and Section 45(2) of the Income Tax Act.
4. Deduction towards the cost of land.

Issue-wise Detailed Analysis:

1. Ownership of the Plots on Agricultural Land:
The primary contention was whether the plots sold belonged to the Hindu Undivided Family (HUF) or the assessee in his individual capacity. The CIT(A) did not accept the assessee's claim due to insufficient evidence proving the land belonged to the HUF. The sale documents and bank deposits were in the individual’s name, and there was no record of the assessee filing returns as HUF. The Tribunal upheld this view, referencing the Supreme Court’s decision in CWT v. Chander Sen, which established that property inherited under Section 8 of the Hindu Succession Act becomes the individual's absolute property, not HUF property.

2. Nature of the Income from the Sale of Plots:
The CIT(A) and AO treated the sale of plots as an adventure in the nature of trade, thus assessing the income as business income. The land was developed into residential plots, which indicated a change in the nature and character of the agricultural land. The Tribunal concurred, noting that the assessee’s actions (plotting, developing roads, and selling as residential plots) indicated a business venture. The Supreme Court’s parameters in G. Venkataswamy Naidu vs. CIT were applied, confirming the transaction as an adventure in the nature of trade.

3. Applicability of Section 2(14) and Section 45(2) of the Income Tax Act:
The assessee argued that the land was beyond 8 km from the municipal limits, thus not a capital asset under Section 2(14). However, the Tribunal found that the land had been converted into residential plots, thus losing its agricultural character. The Tribunal also invoked Section 45(2), which deals with the conversion of a capital asset into stock-in-trade. It ruled that the fair market value of the asset on the date of conversion should be assessed under capital gains, and the excess over such fair market value should be assessed as business income.

4. Deduction Towards the Cost of Land:
The Tribunal noted that the CIT(A) allowed a 10% deduction towards the development cost of the land. However, the assessee argued that the entire income should not be assessed as business income and that the indexed cost of acquisition should be considered. The Tribunal directed the AO to determine the capital gains according to Section 45(2) and assess the business income on the sale of the plots accordingly.

Conclusion:
The Tribunal dismissed the appeal regarding the ownership of the plots, confirming the income should be taxed in the individual’s capacity. It upheld the conversion of agricultural land into stock-in-trade and directed the AO to reassess the income, considering both capital gains and business income as per Section 45(2). The appeal was partly allowed for statistical purposes.