2024 (1) TMI 657 - AT - Income Tax

LTCG - Exemption u/s. 54F - piece of land was treated by the assessee as stock-in-trade - motive to acquire land - Co-ownership in land - HELD THAT - AO after detailed verification found that the assessee and seven co-owners in their respective shares formed a new partnership firm with the same ratio of the land holding as their partnership shares. The above land was purchased by the co-owners on 02-01-2006 for a consideration of Rs. 6 lakhs and assessee s share is 18%. All the co-owners entered into a development agreement dated 30-11-2011 with their own partnership firm Ashirwad Infrastructure to develop the land into 18 bungalows in the prime location at Thaltej. Assessee bought another parcel of land along with seven other co-owners and constituted another partnership firm namely Sudarshan Developers on 06-05-2014 with the very same set of co-owners as the partners and engaged in the business of land development. This clearly establishes the motive, intention and interest of the assessee in doing the real estate business. Thus the motive to acquire land was to earn profit through activity of development of the land through his own partnership firm as builder, contractors of the partnership firm also not paid taxes. If the assessee would have done this construction project in his individual capacity, he should have been liable for higher tax and will not have been eligible for claiming exemption u/s. 54F of the Act. Thus the above transaction of the assessee is clearly to evade legitimate taxes due on the profit of the sale of the property. Thus the profit earned by the assessee on sale of land is correctly treated as business income by the Lower Authorities. It is further evident in other co-owner cases, similar reopening of assessments were done and one of the co-owner as against the reassessment order settled the issue under Vivad Se Vishwas Scheme. Decided against assessee.

Summary

Issues Involved:
1. Classification of income from the sale of land as "business income" versus "Long Term Capital Gain (LTCG)".
2. Eligibility for exemption under Section 54F of the Income Tax Act, 1961.
3. Non-filing of Wealth Tax returns and its implications on the nature of the asset.

Summary:

Issue 1: Classification of Income
The primary issue was whether the income from the sale of land should be treated as "business income" or "Long Term Capital Gain (LTCG)". The Assessing Officer (AO) argued that the land was purchased with the intention of developing it into a commercial project, thus constituting a business activity. The AO highlighted that the assessee, along with seven co-owners, formed a partnership firm, M/s. Ashirwad Infrastructure, to develop the land into 18 bungalows. The AO concluded that the transaction was an "adventure in nature" of trade, supported by the fact that the partnership firm was established to divert profits expected from the land development. The AO relied on the Supreme Court judgment in CIT Vs. Durga Prasad More, which allows taxing authorities to look beyond documents to the substance of transactions.

Issue 2: Exemption under Section 54F
The AO denied the exemption claimed under Section 54F of the Act. The assessee had claimed this exemption on the basis that the income was LTCG. However, since the AO reclassified the income as "business income," the exemption under Section 54F was not applicable. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting that the assessee's transaction was structured to evade legitimate taxes. The CIT(A) observed that the assessee and co-owners had formed the partnership firm to develop the land and sell bungalows, thus engaging in a business activity rather than an investment.

Issue 3: Non-filing of Wealth Tax Returns
The AO and CIT(A) also noted that the assessee did not file Wealth Tax returns for the periods when the land value increased significantly due to the development agreement. This non-filing was interpreted as an indication that the land was treated as "stock-in-trade" rather than an investment. The CIT(A) cited the case of Vitta Kristappa V/S ITO, which held that the intention behind the transaction is crucial in determining its nature. The CIT(A) concluded that the assessee's actions, including forming a partnership firm and developing the land, clearly indicated a business motive.

Conclusion:
The Income Tax Appellate Tribunal (ITAT) upheld the findings of the lower authorities, agreeing that the income from the sale of land should be classified as "business income" and not LTCG. Consequently, the exemption under Section 54F was denied. The ITAT also supported the view that the non-filing of Wealth Tax returns further substantiated the classification of the land as "stock-in-trade." The appeal filed by the assessee was dismissed, affirming the AO's and CIT(A)'s decisions.