2009 (2) TMI 278 - AT - Income Tax

Deduction u/s 54EC - Sale of agriculture land, after converting the land into plots - Transaction as an 'adventure in the nature of trade' or capital gain - assessee stated that errors committed by AO in assessing the entire sale proceeds as business income instead of considering it as having generated capital gains - CIT(A) held the same as transaction of sale of an asset resulting in capital gains for claiming deduction u/s. 54EC - He placed reliance on the High Court decision in the case of CIT vs. Suresh Chand Goyal 2007 (1) TMI 90 - MADHYA PRADESH HIGH COURT which was almost identical on facts wherein the word 'business' defined u/s. 2(13) was considered which covered 'adventure in the nature of trade' was on sale of agriculture land and was sold after converting the land into plots for a better price that alone was the activity therefore could not come within the purview of 'adventure in the nature of trade' in business. HELD THAT - The Supreme Court in G. Venkataswami Naidu Co. 1958 (11) TMI 5 - SUPREME COURT held that in each case it is the total effect of all relevant factors and circumstances that determines the character of the transaction. A cumulative consideration of the facts of the present case unmistakably points to the transaction of sale being a realization of the investment in land and consequently the gains are chargeable only to capital gains tax and not to be considered as gains of an adventure in the nature of trade. In coming to this conclusion we have duly taken note of the following facts (a) The assessee was an agriculturist and did not carry on any business at any time. (b) The agricultural land was purchased in 1961 and the assessee did carry on agricultural operations thereon. (c) The land was held by the assessee for more than 40 years. (d) The assessee obtained the permission of the concerned authorities for conversion of the land into residential plots only because of the relevant laws requiring him to do so. (e) The assessee in these 40 years did not make any further purchase or sale of any land. (f) Though it may not be entirely relevant but we cannot ignore the fact that the sale proceeds were invested in approved bonds and were not invested in any business. Therefore, we are of the view that CIT(A) was right in holding that the sale proceeds should be assessed as capital gains and since they were invested in bonds approved u/s. 54EC, the assessee was entitled to the exemption under that section. The appeal is dismissed.

Summary

Issues:
- Characterization of income from the sale of land as capital gains or business income

Analysis:
The appeal before the Appellate Tribunal ITAT Bangalore-B revolved around the characterization of income derived from the sale of land by the assessee. The Assessing Officer (AO) treated the income as business income, considering the activity as an adventure in the nature of trade under section 143(3) of the Income Tax Act. However, the learned CIT(A) allowed the assessee's contention, recognizing the transaction as resulting in capital gains eligible for deduction under section 54EC. The CIT(A) emphasized that the sale of land, converted into residential plots for a better price, did not fall under the purview of 'adventure in the nature of trade' as defined under section 2(13) of the Act.

The Departmental Representative argued that the development of land into residential sites and subsequent sale constituted a business venture, urging the Tribunal to reverse the CIT(A)'s decision. Citing a previous Tribunal decision, the Representative contended that the assessee engaged in an 'adventure in the nature of trade,' warranting taxation as business income. Conversely, the assessee's counsel supported the CIT(A)'s order, highlighting the long-term ownership of the land for agricultural purposes and the absence of any prior business activities. The counsel referenced various judicial precedents to assert that the intention was always to hold the land as an investment, justifying the treatment of income as capital gains.

Upon reviewing the contentions and relevant precedents, the Tribunal delved into the determination of whether the transaction constituted an 'adventure in the nature of trade.' Referencing the Supreme Court's observations in G. Venkataswami Naidu & Co.'s case, the Tribunal outlined tests to ascertain the character of such transactions. Notably, the Tribunal emphasized factors such as the absence of prior trading activities, the nature of the purchased commodity, the duration of ownership, and the absence of repeated transactions. Considering these factors and the specific circumstances of the case, the Tribunal concluded that the sale of land by the agriculturist assessee after over 40 years should be treated as capital gains, eligible for exemption under section 54EC due to investment in approved bonds.

In summary, the Tribunal dismissed the appeal, upholding the CIT(A)'s decision to treat the income from the sale of land as capital gains rather than business income. The detailed analysis considered the nature of the transaction, the intentions of the assessee, and relevant legal principles to arrive at the conclusion that the income derived from the sale of land qualified for capital gains treatment and exemption under section 54EC.