2015 (3) TMI 887 - AT - Income Tax

Nature of land - sale of land should be treated as an adventure in the nature of trade - AO thereafter concluded that the lands are not agricultural in nature - Held that - It is observed that by an Agreement of sale with possession-cum-Irrevocable power of attorney dated 12th March, 2007, the land in question was transferred by the assessee to M/s. Varun Constructions alongwith other 13 land owners who were owners of the adjacent lands. The said thirteen parties had also claimed the profit arising from the transfer of their land to M/s. Varun Constructions as exempt on the ground that their lands, being agricultural lands, were not capital assets within the meaning of S.2(14). In their cases also, the claim was not allowed by the Assessing Officer and when the matter reached the Tribunal in the case of six of the said assessees, namely, M/s.Bhavya Constructions Pvt. Ltd., Shri M.S.Raghava Reddy, Shri R.Srinivasa Rao, Shri R.Uma Maheswar, Shri P.Shivakumar and Shri G.C.Subbanaidu, the coordinate bench of this Tribunal vide its order 2014 (9) TMI 85 - ITAT HYDERABAD decided similar issue in favour of the assessee, holding that the land sold by the said assessees were agricultural lands, and therefore, the profits arising from the transfer of such lands, was not chargeable to tax in the hands of the assessee. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade or capital gain. The period of holding should not suggest that the activity was an adventure in the nature of trade. Further, we make it clear that 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 land in question sold by the assessee, being agricultural land, the profit arising from the sale of the same, is not chargeable tot ax in the hands of the assessee as capital gain - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 153C.
2. Classification of the land as agricultural or non-agricultural.
3. Nature of income from the sale of land (business income vs. short-term capital gains).
4. Treatment of the land as a capital asset under Section 2(14).

Detailed Analysis:

1. Applicability of Section 153C:
The assessee argued that the provisions of Section 153C were not applicable as the registered development agreement, a public document, could not constitute incriminating evidence to initiate proceedings under Section 153C without proper satisfaction. The Tribunal did not specifically address this issue, focusing instead on the nature of the land and the income derived from its sale.

2. Classification of the Land as Agricultural or Non-Agricultural:
The Assessing Officer (AO) determined that the land was not agricultural based on several factors, including the absence of visible agricultural activity, photographic evidence, and statements from local authorities. The AO also noted that the land was sold at a high price, indicating its potential for non-agricultural use. The CIT(A) identified factors both in favor of and against the classification of the land as agricultural. The CIT(A) ultimately held that the land was not agricultural, citing the lack of substantial evidence of agricultural activity and the proximity to urban development.

3. Nature of Income from the Sale of Land:
The AO treated the income from the sale of land as business income, considering it an adventure in the nature of trade due to the systematic and coordinated activities of the assessee and other investors. The CIT(A), however, found merit in the assessee's claim that the income was short-term capital gains and not business income. The Tribunal upheld this view, emphasizing that the land was held as an investment and not as stock-in-trade.

4. Treatment of the Land as a Capital Asset under Section 2(14):
The assessee claimed that the land was agricultural and thus not a capital asset under Section 2(14). The AO and CIT(A) disagreed, citing the lack of substantial agricultural activity and the land's potential for urban development. However, the Tribunal found that the land was indeed agricultural and located beyond the specified distance from any notified municipality, thus not qualifying as a capital asset. This finding was based on the Tribunal's previous decision in similar cases involving adjacent lands.

Tribunal's Decision:
The Tribunal concluded that the land sold by the assessee was agricultural and situated beyond the prescribed limits of any municipality notified by the Central Government. As such, the profit from the sale was not chargeable to tax as capital gains. The Tribunal relied on its previous decision in similar cases, where it was held that the land was agricultural and not a capital asset under Section 2(14). Consequently, the Tribunal allowed the assessee's appeal, rendering other issues raised by the assessee moot.

Order:
The appeal of the assessee was allowed, and the profit from the sale of the land was not chargeable to tax as capital gains. The decision was pronounced on 11th March 2015.