2022 (4) TMI 1054 - AT - Income Tax

Realignment of profits arising on sale of land parcels - surplus arising on sale of asset - capital gains OR business income - CIT-A granted relief by the CIT(A) with regard to realignment of profits arising on sale of land parcels under the head capital gains as claimed by the assessee - contention of the assessee that mere conversion of land into NA cannot draw adverse inference to the declared intentions - HELD THAT - The question whether the surplus arising on sale of asset is in the nature of capital receipt or a trading receipt is essentially a question of fact. CIT (A), in our view, has analysed the salient features of the transactions in its natural perspective and has come to a benign conclusion. The declared intentions are supportable by the facts and circumstances of the case and thus cannot be displaced in a light hearted manner merely to deny concessional benefits attributable to such gains. Noticeably, section 2(14) stipulates that property can be capital asset even if connected with business of the assessee. Assessee is entitled in law to hold certain class of assets as capital assets even while he is dealing with the asset of similar type in business with idea of commercial exploitations. Thus, case built by the AO on the grounds of the assessee engaged in business as developer of land would not ipso facto vitiate the nature and character of land holdings declared in a particular manner. The CIT(A), in our view, has come to a rational conclusion having regard to the corroborative evidences placed and conduct of the assessee over a period of several years in the past. Long period of holding, utilization of own funds, near absence of any trading activity on land except conversion of land in question are amongst vital pointers to lend support the declared intentions of acquiring the land as capital investments. Having regard to totality of facts and circumstances existing in the case, we do not see any justifiable reason to diverge from the conclusion drawn in the first appellate order. - appeal of revenue is dismissed.

Issues Involved:
1. Classification of income from the sale of land parcels as 'capital gains' versus 'business income'.
2. Validity of the Assessing Officer's (AO) realignment of profits from 'capital gains' to 'business income'.
3. Assessment of the nature of activities undertaken by the assessee regarding the land parcels.
4. Consideration of the assessee's intention and treatment of the land parcels in financial records.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Land Parcels:
The central issue revolves around whether the profits from the sale of land parcels should be classified as 'capital gains' or 'business income'. The assessee, a partnership firm, declared the income from the sale of land parcels under 'capital gains' in their return for AY 2014-15. The AO, however, reclassified this income as 'business income', asserting that the activities undertaken by the assessee indicated a business motive.

2. Validity of AO's Realignment of Profits:
The AO observed that the sequence of events and actions taken by the assessee, such as the acquisition of land and its subsequent conversion to non-agricultural use, suggested a systematic and concerted effort to generate business profits. Consequently, the AO concluded that the transactions bore the character of 'business income' as defined under section 2(13) of the Income Tax Act, 1961, and denied the concessional tax treatment available under 'capital gains'.

3. Assessment of Nature of Activities:
The CIT(A), upon appeal, reviewed the submissions and remand report of the AO. The CIT(A) concluded that the profits arising from the sale of land had the trappings of an investment activity of a capital nature. The CIT(A) noted that the land was held for a substantial period (over six years) before being sold, and the treatment of these lands in the balance sheet as investments supported the assessee's claim. The CIT(A) emphasized that the assessee had not undertaken any significant development or improvement activities on the land, which would typically characterize a business activity.

4. Consideration of Assessee's Intention and Financial Records:
The CIT(A) considered various factors, including the assessee's intention since the acquisition of the land, the treatment of the land in financial records, the absence of frequent transactions, and the use of own funds for investment. The CIT(A) also referred to judicial precedents, such as the cases of CIT Vs. Vaibhav J. Shah and CIT V. Rewashankar Kothari, to support the conclusion that the transactions should be treated as capital gains.

Tribunal's Analysis and Conclusion:
The Tribunal carefully considered the rival submissions and the orders of the authorities below. It noted that the land was held for over six years and was treated as an investment in the financial records. The Tribunal found that the AO's contention of systematic and concerted business activity was not supported by substantial evidence. The Tribunal agreed with the CIT(A) that the transactions bore the characteristics of capital investments rather than business activities. The Tribunal emphasized that the long holding period, absence of trading activities, and utilization of own funds were vital pointers supporting the assessee's declared intention of holding the land as capital investments.

Final Judgment:
The Tribunal upheld the CIT(A)'s decision, allowing the assessee's appeal and dismissing the Revenue's appeal. The Tribunal concluded that the profits from the sale of land parcels should be classified under 'capital gains' and not 'business income'. The judgment was pronounced on 15/11/2021.

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