2018 (5) TMI 739 - AT - Income Tax

Deduction u/s 54B - Agricultural land sold by the assessee as covered U/s 2(14) - Held that - It is a fact that the assessee was having agricultural land. Two pieces of the agricultural land situated at village Chakna Sarahbad were sold in the immediate preceding year. The assessee himself has considered this sale of the agricultural land as a sale of capital asset as per Income Tax Act and claimed deduction U/s 54B for investing in agricultural land. The assessee had also offered the sale of land in this year as sale of capital asset and claimed deduction U/s 54B. Thus, the issue of the agricultural land held by the assessee at village Chakna Sarahbad, Tehsil- Khairthal, district- Alwra is settled being the capital asset . Therefore, the issue raised in the ground No.1 of the assessee s appeal has no merit and the same stands dismissed. Capital gain - Held that - The assessee has sold residential plot on his agricultural land. The same has been treated by the ld. CIT(A) as adventure in nature of trade and taxed the receipt in the hands of the assessee under the head profit and gain in business and profession. We hold that the assessee has sold small residential plots to various persons. The sale of these residential plots at his agricultural land was definitely an act of business and an adventure in the nature of trade. The annexure to the sale deed placed in the paper book clearly establishes that the assessee has sold the residential plots of land after developing roads etc. thus, this establishes sale of the plots on this land and it was an act of adventure in nature of trade. However, we agree with the pleadings of the ld. AR that once this was an adventure in nature of trade and income is to be taxed as per the provisions of Section 45(2) of the Act. The capital gain shall be worked out on the date of conversion of agricultural land to the stock in trade and then only work out the profit and gain of business. Therefore, the issue is restored back to the file of the Assessing Officer. The Assessing Officer will invoke the provisions of Section 45(2) of the Act and decide as per law

Issues Involved:
1. Whether the agricultural land sold by the assessee is covered under Section 2(14) of the Income Tax Act, 1961.
2. Whether the conversion of agricultural land into residential plots and subsequent sale is an adventure in the nature of trade and thus taxable as business income.
3. Whether the sales consideration should be adopted under Section 50C of the Act.
4. Whether the provisions of Section 45(2) of the Act should be applied for assessing the income.
5. Whether deduction under Section 54B of the Act should be allowed.

Detailed Analysis:

Issue 1: Agricultural Land under Section 2(14)
The assessee contended that the land sold was agricultural and thus not a capital asset under Section 2(14) of the Income Tax Act, 1961. The CIT(A) dismissed this claim, stating that the appellant did not provide sufficient evidence to prove that the land was agricultural as defined in clauses (iii)(a) and (iii)(b) of Section 2(14). The appellant had also declared the land as a capital asset in his return of income and claimed a deduction under Section 54B. Hence, the CIT(A) upheld the assessment of the land as a capital asset, making it liable for capital gains tax.

Issue 2: Nature of Trade and Business Income
The CIT(A) held that the assessee's act of converting agricultural land into residential plots before selling them was an adventure in the nature of trade. The assessee sold 17 plots to different individuals, which the CIT(A) interpreted as a business venture aimed at maximizing profit. This decision was based on the Supreme Court's parameters in the case of G. Venkataswamy Naidu vs. CIT, which involve assessing the intent, the nature of the commodity, and the conduct of the assessee. The CIT(A) concluded that the assessee's actions were consistent with a business venture, thus the income from the sale was taxable as business income.

Issue 3: Sales Consideration under Section 50C
The CIT(A) adopted the sales consideration of ?33,38,015 as per the value assessed by the sub-registrar under Section 50C, instead of the actual consideration of ?28,24,000 declared by the assessee. This was upheld as the correct approach for determining the sale value of the plots.

Issue 4: Application of Section 45(2)
The assessee argued that if the land was considered stock-in-trade, the provisions of Section 45(2) should apply, which necessitates calculating capital gains on the date of conversion of the agricultural land into stock-in-trade. The Tribunal agreed with this contention, stating that the capital gain should be calculated at the time of conversion and the subsequent profit from the sale should be treated as business income. The case was remanded to the Assessing Officer to apply Section 45(2) and reassess the income accordingly.

Issue 5: Deduction under Section 54B
The assessee claimed a deduction under Section 54B for reinvesting the sale proceeds in agricultural land. The CIT(A) rejected this claim on the grounds that the land was not used for agricultural purposes in the preceding two years and the new land was purchased in the names of the assessee's minor sons. The Tribunal did not specifically address this issue in the final order due to the remand for reassessment under Section 45(2).

Conclusion:
The Tribunal concluded that the sale of residential plots constituted an adventure in the nature of trade, thus taxable as business income. However, it directed the Assessing Officer to reassess the income by applying Section 45(2) of the Act, which involves calculating capital gains at the time of conversion of the land into stock-in-trade and treating subsequent profits as business income. The appeal was partly allowed for statistical purposes.

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