2018 (10) TMI 451 - AT - Income Tax

Assessment u/s 153A - head of income for the purposes of assessment of gain arising on sale of plot of lands has been changed from capital gains offered by the assessee to business income assessed by the AO - whether the Revenue is entitled to interfere with the assessment concluded either under s. 143(1) or under s. 143(3) of the Act and not pending at the time of search in the absence of any incriminating material unearthed as a result of search? - Held that - Referring to decision of the Hon ble Delhi High Court rendered in the case Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT we are of the view that various additions/disallowances made by the AO are clearly beyond the scope of the authority vested under s. 153A of the Act owing to absence of any incriminating material or evidence deduced as a result of search. No reference of such incriminating material, if any, is found in the assessment year. We hold that routine adjustments in the nature of change of head of income of reported income without any nexus to incriminating material found, if any, as a result of search operations are not sustainable in the eyes of law in Section 153A proceedings. Hence, the re-alignment of head of income towards gain on sale of land for the purposes of taxability requires to be quashed. Thus, we find merit in the legal ground raised by the assessee. In this view of the matter, we do not intend to adjudicate the merits of the adjustments / re-alignment . Assessing capital gains arising from the sale of Sanavad land under the head of business income - Held that - The question is essentially factual in nature and depends on the facts prevalent in a given case. The assessee has advanced justification for taxability under the head capital gains on the ground that the assessee being a farmer has acquired agricultural land. However, due to change in the Government policy, the land fell into residential zone where the assessee found it difficult to carry on agricultural activity due to ongoing construction and development. Due to the large size of the land, it was divided and sub-divided and sold to the interested customers. These facts do not exclusively suggest that the entire exercise was to exploit the land commercially in the nature of adventure which is akin to the business. We find merit in the plea of the assessee for treating the same to be gain arising for capital nature and thus, assessable under the head of capital gains - Decided in favour of assessee

Summary

Issues Involved:
1. Legality of assessment under Section 153A without incriminating material.
2. Re-alignment of head of income from 'capital gains' to 'business income'.

Issue-wise Detailed Analysis:

1. Legality of Assessment under Section 153A without Incriminating Material:
The primary legal issue raised by the assessee was whether the Revenue is entitled to interfere with an assessment concluded under Section 143(1) or 143(3) of the Income Tax Act, 1961, in the absence of any incriminating material unearthed during a search. The assessee argued that the assessment under Section 153A should have a nexus to incriminating material found during the search. The Tribunal noted that the assessment order lacked reference to any incriminating material that could justify the re-alignment of the head of income. Citing judicial precedents, including the Hon'ble Gujarat High Court's decision in Pr.CIT vs. Saumya Construction (P.) Ltd., the Tribunal held that routine adjustments without any incriminating material are beyond the scope of Section 153A. Consequently, the Tribunal quashed the re-alignment of the head of income from 'capital gains' to 'business income' for the assessment years in question.

2. Re-alignment of Head of Income from 'Capital Gains' to 'Business Income':
The assessee challenged the action of the Assessing Officer (AO) in assessing the gains from the sale of land under the head 'business income' instead of 'capital gains'. The AO had observed that the assessee's activities of converting agricultural land to non-agricultural land, plotting, and selling it to various customers constituted a business activity. The Tribunal, however, found merit in the assessee's argument that the land was initially acquired for agricultural purposes and was sub-divided due to zoning changes and development activities in the area. The Tribunal cited the decision of the Hon'ble Gujarat High Court in CIT vs. Premji Gopalbhai and the Ahmedabad Tribunal's decision in Hiteshkumar Ashokkumar Vaswani vs. Jt.CIT, supporting the assessee's claim that the gains should be taxed under 'capital gains'. The Tribunal concluded that the facts did not exclusively suggest a commercial exploitation akin to business. Thus, the Tribunal restored the treatment of the gains as 'capital gains' as declared by the assessee in the returns.

Separate Judgments Delivered:
The Tribunal delivered a common order addressing all the appeals together due to the interconnected nature of the cases and similar grievances across different assessment years. The appeals for assessment years 2009-10, 2012-13, and 2013-14 were allowed in favor of the assessee, quashing the re-alignment of income head. Similarly, the appeals for assessment years 2007-08 and 2008-09 were also allowed based on identical facts and issues.

Conclusion:
In conclusion, the Tribunal allowed all the captioned appeals, holding that the re-alignment of the head of income from 'capital gains' to 'business income' without any incriminating material found during the search was not sustainable under Section 153A of the Income Tax Act, 1961. The Tribunal restored the treatment of gains as 'capital gains' as offered by the assessees in their returns.