2015 (6) TMI 561 - AT - Income Tax

Profit from sale of agricultural land - business income OR capital gains - claimed by the assessee as exempt from tax - Held that - As the land sold is not only agricultural in nature but is also situated beyond 12 kms from the limit of a municipality notified by the central govt. Hence, land sold by assessee not being a capital asset, the gain derived there from is not taxable at the hands of the assessee. See Commissioner of Income tax & Others Versus Sri R. Srinivasa Rao, Sri MS. Raghava, Bhavya Constructions Pvt. Ltd., R. Vijaya Lakshmi, Shri S. Srinivasa Rao, Sri T. Gopichand, Shri GC. Subba Naidu, Sri P. Shiva Kumar & Others 2015 (4) TMI 295 - ITAT HYDERABAD - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of land as agricultural or non-agricultural.
2. Treatment of profit from the sale of land as business income or capital gains.
3. Applicability of Section 2(14) of the Income Tax Act.
4. Admissibility of additional evidence under Rule 46A.

Detailed Analysis:

1. Classification of Land as Agricultural or Non-Agricultural:
The primary issue was whether the land sold by the assessee was agricultural land, which would be exempt from capital gains tax under Section 2(14) of the Income Tax Act. The Assessing Officer (AO) found that:
- There was no agricultural activity on the land.
- The land was adjacent to an industrial area, making it unsuitable for agriculture.
- The land was sold to a real estate company, indicating it was not intended for agricultural use.

In contrast, the assessee argued:
- The land was beyond 8 km from municipal limits, as certified by the Deputy Collector.
- The land was held for agricultural purposes, supported by land pahani copies and pattadar pass books.
- The future use of the land by the buyer did not affect its classification as agricultural.

The AO countered that the land did not exhibit characteristics of agricultural land, citing factors such as the absence of agricultural income and the land's location in a developed area.

2. Treatment of Profit from the Sale of Land:
The AO treated the profit from the sale of land as business income, asserting that the transaction was an adventure in the nature of trade. The assessee contended that:
- She was a housewife with no business activities.
- The land was held for agricultural activities, not trade.

The AO's findings included:
- The land was sold at a high price, inconsistent with agricultural use.
- The holding period was less than two years, suggesting a short-term investment rather than long-term agricultural use.

3. Applicability of Section 2(14) of the Income Tax Act:
Section 2(14) defines a "capital asset" and excludes agricultural land situated beyond 8 km from municipal limits. The AO argued that the land must first qualify as agricultural before considering its distance from municipal limits. The Tribunal referenced previous judicial pronouncements, including the Supreme Court's decision in Sarifabibi Mohammad Vs. CIT, which outlined tests for determining the nature of land.

4. Admissibility of Additional Evidence under Rule 46A:
The CIT(A) upheld the AO's decision, noting that the assessee's intention from inception was to trade the property. The CIT(A) also rejected the admission of additional evidence under Rule 46A, stating that the AO had provided adequate opportunities during the assessment proceedings.

Tribunal's Decision:
The Tribunal observed that similar cases involving adjacent lands sold to the same buyer had been decided in favor of the assessees, treating the lands as agricultural. The Tribunal noted:
- The land was classified as agricultural in revenue records.
- The assessee had shown agricultural income in previous returns.
- Certificates from government authorities confirmed the land's agricultural status and its location beyond municipal limits.

The Tribunal concluded that the land sold by the assessee was agricultural and situated beyond the prescribed limit of any municipality notified by the central government. Therefore, it did not qualify as a capital asset under Section 2(14), and the profit from its sale was not taxable. The Tribunal dismissed the AO's argument that the transaction was an adventure in the nature of trade, affirming that the land's agricultural classification and the assessee's intention to use it for agriculture were decisive.

Conclusion:
The Tribunal allowed the appeal, ruling in favor of the assessee and confirming that the profit from the sale of the agricultural land was exempt from tax as it did not constitute a capital asset under Section 2(14) of the Income Tax Act. The Tribunal's decision was based on the consistency of the land's agricultural classification in revenue records, the absence of non-agricultural use, and the land's location beyond municipal limits.