2019 (10) TMI 12 - AT - Income Tax

Sale of agricultural land - business income or capital gains - whether the land purchased by the assessee as agricultural land and also sold as agricultural land, is a capital asset u/s 2(14) ? - HELD THAT - Admittedly, the assessee is a company which is engaged in the business of real estate and has apparently purchased the property for development of the same into plots as is evident from the Balance sheet of the company. If the assessee had carried on such activity and had derived income therefrom, it would definitely be business income, as held by the AO - assessee has not carried on any agricultural activity nor has it converted the said agricultural land into non-agricultural land and had not shown any intention of developing the same into plots. Undisputedly, the assessee has sold the land as it is i.e. in the same status of agricultural land to the vendee for a sale consideration in acres. We agree with the contention of the assessee that the land did not loose its character of being agricultural land at the time of sale. Since the location of the land is beyond 8kms from the Municipal area, it did not become a capital asset u/s 2(14) of the I.T. Act. Further, the AO himself has held the land to be agricultural land and thus not a capital asset , but since the assessee was engaged in the business of real estate, he held the income from such sale of land to be business income. We find that the CIT (A), has held the land to be a capital asset only because the land was shown as a fixed asset in the balance sheet of the assessee. Since the assessee before us has purchased the agricultural land and had sold it as agricultural land and there is no evidence brought on record that the assessee has carried on any developmental activities on the said land and since the land was described by the Revenue authorities as agricultural land only, we accept the contention of the assessee and hold that the land, in question, is agricultural land and the profit therefrom is not taxable in the hands of the assessee either as business income or as capital gains. Appeal of the assessee is accordingly allowed.

Summary

Issues:
1. Classification of land as capital asset or agricultural land
2. Taxability of profit on sale of agricultural land as business income or capital gains

Analysis:

1. Classification of land as capital asset or agricultural land:
The case involved a dispute regarding the classification of land purchased and sold by the assessee as a capital asset or agricultural land. The Assessing Officer (AO) observed that the assessee had sold agricultural land for a profit but claimed deduction on the ground that it was agricultural land. The AO treated the profit as business income since the sale proceeds were not reinvested. However, the CIT (A) categorized the land as a capital asset, directing the computation of long-term capital gains. The assessee contended that the land remained agricultural and not a capital asset as it was not developed or converted. The Tribunal agreed with the assessee, emphasizing that the land was sold in the same status as agricultural land and located beyond the municipal area. The Tribunal held that the land did not lose its agricultural character and was not a capital asset under section 2(14) of the Income Tax Act.

2. Taxability of profit on sale of agricultural land:
The second issue pertained to the taxability of the profit on the sale of agricultural land as business income or capital gains. The AO treated the profit as business income due to the nature of the assessee's real estate business. In contrast, the CIT (A) directed the computation of capital gains. The Tribunal analyzed the facts and held that since the land was sold in its original agricultural status without any developmental activities, the profit was not taxable as either business income or capital gains. The Tribunal distinguished previous decisions cited by the Revenue, emphasizing the unique circumstances of the current case. Ultimately, the Tribunal allowed the appeal of the assessee, ruling that the profit from the sale of agricultural land was not taxable either as business income or capital gains.

In conclusion, the Appellate Tribunal ITAT Hyderabad decided in favor of the assessee, holding that the land in question retained its agricultural character and was not a capital asset. Additionally, the profit from the sale of agricultural land was deemed non-taxable as neither business income nor capital gains. The judgment provided clarity on the classification and taxability of transactions involving agricultural land, emphasizing the specific circumstances and intentions of the parties involved.