2024 (8) TMI 175 - AT - Income Tax

Gain on sale of land - business income or capital gains - nature of land sold - characterization of receipts/ income - main contention of the assessee is that even though the assessee has divided the land into plots and sold out the same, the assessee s income should not be treated as business income since the assessee has never engaged in any real estate business and also this is the only such transaction done by the assessee - HELD THAT - It is an undisputed fact that the assessee has divided the land into small extents and sold the same. It is also undisputed fact that the land is situated within the Municipal Limits of Serilingampally Municipality. Therefore, even though it is an agricultural land, it attracted capital gain tax Considering the decision of CIT vs. Kasturi Estates (P) Ltd 1965 (10) TMI 7 - MADRAS HIGH COURT we are of the considered view that even in the instant case, the said decision holds good as there is no material evidence to prove that the assessee has ever intended to engage in any trading activity. Therefore, we hereby allow Ground raised by the assessee with a direction to the Ld. AO that the entire sale consideration of the assessee should be treated as capital gains.

Summary

Issues:
1. Determination of income as business income instead of capital gains.
2. Treatment of income for the assessment year 2018-19 when it relates to the assessment year 2017-18.

Detailed Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) concerning the assessment under the Income Tax Act, 1961 for the assessment year 2018-19. The assessee, an individual deriving income from various sources, had filed the return of income, which was selected for scrutiny. The Assessing Officer made additions to the income, including rejecting the claim of deduction and adding back agricultural income. The Commissioner of Income Tax (Appeals) partly allowed the appeal, leading to the current appeal before the Tribunal.

2. The grounds of appeal raised by the assessee primarily challenged the treatment of income as business income instead of capital gains. The assessee argued that the land sold after 24 years should be assessed under the head of capital gains, not business income. The assessee contended that the sale of the land was a one-time transaction and should not be considered a business activity. The Departmental Representative argued that the division and sale of the land constituted an adventure in the nature of trade, supporting the treatment of income as business income.

3. The Tribunal analyzed the facts and legal precedents cited by both parties. It noted that the land was divided into small plots and sold within municipal limits, attracting capital gains tax. However, the Tribunal agreed with the assessee's argument that the transaction did not constitute a regular business activity. Citing the decision of the Madras High Court, the Tribunal emphasized that a surplus from the sale of land can be considered capital gains if it is a realization of an investment asset rather than a trade activity. Therefore, the Tribunal allowed the appeal, directing the Assessing Officer to treat the entire sale consideration as capital gains and not business income.

4. As a result, the Tribunal allowed the appeal of the assessee, overturning the decision of the Commissioner of Income Tax (Appeals) and directing the treatment of the income as capital gains instead of business income. The judgment was pronounced in the open court on 31st July 2024.