2014 (11) TMI 258 - AT - Income Tax

Transaction of purchase and sale of agricultural land - Business income or capital gains Investment to be treated as capital asset or not u/s 2(14)(iii)(b) - Land located beyond 8 kilometers from the local limits of any Municipality or not - Held that - The land is an agricultural land which is so recognized in the land revenue records at the time of purchase by the assessee and nothing has been done by the assessee for putting it to non-agricultural use - the sale of such land cannot be treated as sale of stock-in-trade merely because assessee is otherwise engaged in the business of sale/development of lands - onus has been aptly discharged by the assessee - the assessee has shown the land as a Personal Asset as distinct from Business Assets in the Balance Sheets - the lower authorities erred in treating the income arising on the sale of land at village Dhamane to be sale of stock-in-trade - the income arising on the sale of land at village Dhamane was on account of sale of investment - the land carried the features prescribed in section 2(14)(iii) of the Act, and, it qualifies to be an agricultural land excludible from the expression capital asset thus, the matter is restored to the return of income filed by the assessee regarding the surplus on sale of agricultural land at village Dhamane Decided in favour of assessee. Nature of income arising on the sale of plot at Kondhwa Onus discharged or not - Held that - The aspect that a taxpayer can have two portfolios i.e. investment portfolio comprising of assets which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading asset has already been noted by us in the earlier paras - merely because assessee is dealing in purchase and sale of land also cannot be a conclusive factor in holding that the impugned sale of land was a business transaction - the land has been disclosed in the account books as an Investment and not as a stock-in-trade - the land has been held for a period of 9 to 10 years by the assessee - there is no charge made by the Revenue against the assessee that any steps were undertaken by the assessee for development of the land during the period it has been held by him the transaction of sale of land at Kondhwa is to be treated as sale of investment chargeable to tax under the head capital gains thus, the CIT(A) is directed to assess the income on sale of land at Kondhwa as sale of investment chargeable under the head capital gains Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of surplus on sale of agricultural land at Dhamane as business income versus capital gains.
2. Treatment of surplus on sale of land at Kondhwa as business income versus capital gains.
3. Treatment of surplus on sale of agricultural land at village Sanswadi as business income versus capital gains.

Detailed Analysis:

1. Treatment of Surplus on Sale of Agricultural Land at Dhamane:
The primary issue was whether the surplus of Rs. 1,40,21,140 from the sale of agricultural land at Dhamane should be treated as business income or capital gains. The assessee claimed the land was not a "capital asset" under section 2(14)(iii)(b) of the Income Tax Act, 1961, and thus, the surplus should not be taxed. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the transaction as business income, arguing that the assessee's business included the sale/purchase of plots. The Tribunal noted that the land was shown as a personal asset in the balance sheet, agricultural activities were carried out on the land, and it was sold to agriculturists without any change in land use. The Tribunal concluded that the land was an investment and not stock-in-trade, hence the surplus was not business income but exempt as it was agricultural land. The Tribunal relied on judgments from the Bombay High Court, emphasizing that agricultural land in revenue records and held as investment should be treated as such for tax purposes.

2. Treatment of Surplus on Sale of Land at Kondhwa:
The second issue was whether the surplus from the sale of land at Kondhwa should be treated as business income or capital gains. The assessee argued that the land was held as a long-term investment for over 9-10 years and shown as a personal asset in the balance sheet. The AO treated it as business income due to the assessee's involvement in land transactions. The Tribunal observed that the land was held for a substantial period without any development activity, and it was consistently shown as an investment in the books. Citing the same Bombay High Court judgment, the Tribunal ruled that the surplus should be taxed as capital gains, not business income.

3. Treatment of Surplus on Sale of Agricultural Land at Village Sanswadi:
The third issue involved the surplus from the sale of agricultural land at village Sanswadi. The facts and circumstances were similar to the Dhamane land case. The Tribunal applied the same reasoning and concluded that the surplus from the sale of Sanswadi land should not be treated as business income. The CIT(A) had noted the similarity between the Dhamane and Sanswadi transactions, and the Tribunal's decision on the Dhamane land applied mutatis mutandis to the Sanswadi land.

Conclusion:
The Tribunal allowed both appeals, ruling that the surpluses from the sales of lands at Dhamane, Kondhwa, and Sanswadi should be treated as capital gains or exempt, as applicable, and not as business income. The orders of the lower authorities were set aside, and the returns filed by the assessees were restored in this regard.