2019 (10) TMI 293 - AT - Income Tax

Deduction u/s 54F - whether the sale of plots by the assessee is business income or capital gains ? - Entitled for deduction u/s 54F if construction of house is commenced prior to the transfer of the asset - HELD THAT - In the instant case, the assessee carried on the agricultural activity till 31.03.2008 and subsequently sold the land in plots. Though the assessee has taken permission for conversion of land for plotting into various units, no evidence was brought on record by the AO that the assessee has carried on any developmental activity. The assessee has not incurred any other expenditure except for payment of conversion fees, transport charges, labour charges etc. From the assessment order, we observe that the AO did not make out a case that the assessee has carried on the business activity. Therefore, the assessee being the agriculturist, not carried on any business activity except conversion of land into plots and disposing them without being developed there is no business activity involved and the income required to be taxed as capital gains, but not business income. It is established that the department also has accepted the assessee s contention that the sale consideration on account of sale of plots to be brought to tax under the head long term capital gains. Accordingly, first question is answered in favour of the assessee and against the revenue. Eligibility for deduction u/s 54F if the asset is transferred prior to the transfer of the land - As relying on SRI BOLLINA SRIHARI RAO AND VICE-VERSA 2017 (4) TMI 117 - ITAT VISAKHAPATNAM and CHAMARTHI MOUNICA 2019 (8) TMI 847 - ITAT VISAKHAPATNAM assessee is eligible for deduction u/s 54F even if the construction is commenced before transfer of the capital asset and completed the construction within the period provided in 54F of the Act. Therefore, we set aside the orders of the lower authorities and allow the appeal of the assessee.

Summary

Issues Involved:
1. Whether the sale of plots by the assessee is business income or capital gains.
2. Whether the assessee is entitled to a deduction under section 54F of the Income Tax Act if the construction of the house commenced prior to the transfer of the asset.

Issue-wise Detailed Analysis:

1. Business Income vs. Capital Gains:
The primary issue is whether the income from the sale of plots should be classified as business income or capital gains. The assessee, an agriculturist, converted agricultural land into plots and sold them. The Assessing Officer (AO) argued that this activity constituted a business, thus the income should be taxed as business income. However, the assessee contended that he did not engage in any business activity, merely converting the land to fetch a better price. The Tribunal noted that the assessee did not undertake any developmental activities beyond basic conversion and sale of plots. Citing precedents like CIT Vs. Suresh Chand Goyal and CIT Vs. A. Mohammed Mohideen, the Tribunal concluded that the mere conversion and sale of land do not constitute a business activity. Consequently, the income should be taxed as capital gains, not business income. The Tribunal also highlighted that the AO taxed the income under long-term capital gains, implicitly accepting the assessee's position.

2. Deduction under Section 54F:
The second issue revolves around the eligibility for a deduction under section 54F of the Income Tax Act when the construction of the house commenced before the transfer of the asset. The assessee argued that he used the sale proceeds from the plots to construct a residential house, which was completed within the stipulated three-year period. The AO disallowed the deduction, asserting that the construction began before the sale of the plots. The Tribunal referred to various judgments, including CIT Vs. H.K. Kapoor and CIT Vs. Bharati Mishra, which support the view that the commencement date of construction is irrelevant as long as the construction is completed within three years of the asset transfer. The Tribunal concluded that the assessee is entitled to the deduction under section 54F, as the construction was completed within the required timeframe, even though it began before the asset transfer.

Conclusion:
The Tribunal ruled in favor of the assessee on both issues. It determined that the income from the sale of plots should be taxed as capital gains, not business income. Furthermore, it held that the assessee is eligible for a deduction under section 54F, as the construction of the house was completed within three years of the asset transfer, irrespective of the commencement date. The appeal of the assessee was allowed, and the orders of the lower authorities were set aside.

Order Pronouncement:
The judgment was pronounced in the open court on October 4, 2019.