2014 (12) TMI 9 - AT - Income Tax

Assessment of profit on sale of land Income to be assessed under business and profession or not Held that - The land, gain from sale of which was subject matter of taxation is situated at Bowrampet Village, Dundigal Mandal, RR Dt. - AO has heavily relied upon observations made in the assessment order passed in case of M/s BCPL and others in the group - the picture which emerges is nature of land sold by assessee is similar to the land sold by BCPL and others within the group to M/s Varun Constructions Following the decision in Bhavya Commissioner Constructions Pvt. Ltd., MS. Raghava Reddy, R. Srinivasa Rao, R. Uma Maheswar, P. Shivakumar, GC. Subbanaidu, T. Gopichand Versus Asst. Commissioner of Income-tax 2014 (9) TMI 85 - ITAT HYDERABAD - the land is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared from this land in the return of income filed by the assessee for the AY as agricultural income - the assessee has not applied for conversion of the agricultural land for non-agricultural purposes before sale of this property and the assessee has not put the land to any purposes other than agricultural purposes - neither the property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land as per the evidence brought on record. what was the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade - when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income - the asset sold by assessee being in the nature of agricultural land cannot be considered as capital asset within the meaning of section 2(14) of the Act. There is nothing brought on record to suggest that assessee is involved in trading activity - assessee had purchased the land in the AY 2005-06 and has sold part of land in the AY for making investment in Bhavya Cements Ltd., therefore, it cannot be considered as a trading activity because sale of land is for a particular purpose Decided in favour of assessee.

Issues Involved:
1. Taxability of profit on the sale of land as income under the head 'business and profession'.
2. Determination of whether the land is agricultural and its tax implications.
3. Applicability of Section 2(47)(v) of the Income Tax Act regarding transfer of capital assets under a development agreement.
4. Determination of whether the transaction is an adventure in the nature of trade.

Detailed Analysis:

1. Taxability of Profit on Sale of Land:
The primary issue in the appeal by the assessee was whether the profit on the sale of land amounting to Rs. 2,89,95,000 should be assessed under the head 'business and profession'. The Assessing Officer (AO) treated the land as non-agricultural and considered the transaction as an adventure in the nature of trade, thereby taxing the profit as business income. The AO based this on the fact that no agricultural activity was conducted on the land and relied on statements and evidence indicating the land was not used for agriculture. The AO also noted that the land was contiguous to other lands transacted by Bhavya Constructions Pvt. Ltd. (BCPL) and its associates, who were involved in similar transactions.

2. Determination of Agricultural Land:
The assessee claimed the land was agricultural and outside the limits of the Greater Hyderabad Municipal Corporation (GHMC), supported by a certificate from the Town Planning Officer. However, the AO rejected this claim, asserting that the land's physical appearance and surrounding urban development indicated it was not agricultural. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view, stating that the land was fallow and idle, with no substantive evidence of agricultural use.

3. Applicability of Section 2(47)(v):
In the department's appeal, the issue was whether the CIT(A) was justified in deleting the addition made by the AO on account of capital gain. The AO had assessed capital gain based on a development agreement, claiming a transfer of capital asset under Section 2(47)(v) of the Income Tax Act. The CIT(A) found that the developer had not taken any steps towards development, leading to a breach of the agreement and a civil suit for its cancellation. The CIT(A) concluded that there was no transfer as envisaged under Section 2(47)(v) due to the developer's failure to perform.

4. Adventure in the Nature of Trade:
The AO and CIT(A) considered the transaction as an adventure in the nature of trade, given the rapid rise in land prices and the involvement of multiple investors in similar transactions. However, the assessee argued that the land was held for investment purposes and sold to make an investment in Bhavya Cements Ltd., not as a trading activity.

Tribunal's Findings:

On the Assessee's Appeal:
The Tribunal found that the facts in the present case were identical to those in the case of BCPL and others, where the land was held to be agricultural and outside the prescribed limits of a notified municipality. The Tribunal upheld the assessee's claim that the land was agricultural and not a capital asset, thus not taxable. The Tribunal also rejected the AO's view that the transaction was an adventure in the nature of trade, noting the lack of evidence of trading activity by the assessee.

On the Department's Appeal:
The Tribunal upheld the CIT(A)'s decision that there was no transfer under Section 2(47)(v) due to the developer's lack of performance. The Tribunal noted that the developer had not taken any steps towards development, and the landowners had filed a suit for cancellation of the agreement, indicating a lack of willingness to perform. The Tribunal also observed that the land was agricultural and not a capital asset, further supporting the CIT(A)'s decision.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the land was agricultural and not a capital asset, and the profit from its sale was not taxable. The Tribunal dismissed the department's appeal, agreeing with the CIT(A) that there was no transfer under Section 2(47)(v) and that the land was agricultural.

← Previous Next →