2014 (12) TMI 66 - HC - Income Tax

Sale/transfer of agricultural land capital asset or not u/s 2(14)(iii) Held that - When the assessee in the conveyance deed himself has recited about the land having been converted u/s 90A of the Act, the nature of the land never remained agricultural any more - even the order passed under the Land Revenue Act has also been indicated in the sale deed - the assessee himself has stated that the seller became an absolute owner of the residential land having converted from agricultural to residential use of the land - no documentary evidence was led by the assessee herein to substantiate his claim of doing any agricultural operations therein as the AO in the assessment order has clearly and repeatedly asked the assessee to substantiate the claim about the exact agricultural operations having been carried on by the assessee, but no satisfactory material was placed by the assessee - the other lands, though not converted from agricultural to non-agricultural use, were in the same/near vicinity of the lands which were converted from agricultural to non-agricultural and thus the nature of the said lands too could not be different relying upon Sarifabibi Mohammed Ibrahim & others Vs. CIT 1993 (9) TMI 10 - SUPREME Court it has been rightly held that the lands, sold/transferred by the assesse to the private limited companies, were non-agricultural and outside the scope and meaning of Sec. 2(14)(iii) of the IT Act requires no consideration. thus, no substantial question of law arises for consideration decided against revenue. Rejection of books of accounts u/s 145(3) Higher GP applied and trading accounts rejected Held that - Provisions of Sec. 145(3) are applicable and what should be a reasonable profit on account of the trading transactions, is a finding of fact - The assessee has introduced and recorded bogus purchases and verification of opening stock/closing stock were not open for verification in the books of accounts, thus the motive was to reduce its profits and thus the assessee/appellant has not been able to dispel this finding of fact recorded by all the three authorities who in consonance, have come to the conclusion - on non-genuine purchases, books of accounts can be rejected and provisions of Sec. 145(3) are applicable as such no substantial question of law arises for consideration Decided against assessee.

Issues Involved:
1. Classification of income from the sale of land as business income or agricultural income.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act and application of a higher gross profit rate.

Detailed Analysis:

1. Classification of Income from Sale of Land:
The primary issue was whether the income from the sale of land should be classified as business income or agricultural income. The Assessing Officer (AO) concluded that the income was business income, while the assessee claimed it was agricultural income exempt from tax under Section 2(14)(iii) of the Income Tax Act.

- The AO found that the assessee, a Director in certain companies, frequently sold lands to these companies, resulting in substantial gains. The AO observed that these lands were not agricultural as no agricultural activities were conducted, and the lands were converted for residential/commercial use as per the sale deeds.
- The assessee argued that the lands were agricultural and situated beyond 8 kilometers of municipal limits, hence not a capital asset under Section 2(14)(iii). However, the AO noted that the lands were transferred to companies where the assessee was a Director, indicating business transactions rather than agricultural sales.
- The Commissioner of Income Tax (Appeals) [CIT(A)] initially sided with the assessee, stating the lands were not capital assets and deleted the addition. However, the Income Tax Appellate Tribunal (ITAT) reversed this finding, agreeing with the AO that the lands were converted and used for non-agricultural purposes, thus classifying the income as business income.
- The court upheld the ITAT's decision, noting that the transactions involved frequent sales within short periods, indicating business activity. The court also highlighted that the lands were converted from agricultural to non-agricultural use, as admitted by the assessee in the sale deeds.

2. Rejection of Books of Accounts under Section 145(3):
The second issue was the rejection of the assessee's books of accounts and the application of a higher gross profit rate.

- The AO found discrepancies in the assessee's trading activities, particularly in transactions with a party named Lotus Impex, which was deemed non-genuine. The AO noted the absence of a stock register and discrepancies in stock valuation, leading to the rejection of the books of accounts under Section 145(3).
- The assessee provided confirmations, PAN, and TIN details of the seller and requested summons under Section 131. However, the summons returned unserved, and the Inspector reported that no such concern existed at the given address.
- The CIT(A) upheld the rejection of the books of accounts but enhanced the trading addition, applying a higher gross profit rate.
- The ITAT and the court concurred with the AO and CIT(A), emphasizing the non-genuine nature of the purchases and the lack of verifiable stock records. The court cited a previous case, Venus Arts & Gems, affirming that non-genuine purchases justify the rejection of books of accounts under Section 145(3).

Conclusion:
The court dismissed the appeal, upholding the ITAT's findings on both issues. The income from the sale of land was rightly classified as business income due to the nature of transactions and the conversion of land use. The rejection of books of accounts and the application of a higher gross profit rate were justified due to non-genuine transactions and inadequate stock records. No substantial question of law was found to warrant interference with the ITAT's order.

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