2017 (10) TMI 387 - HC - Income Tax

Sale of land - nature of land sold - agricultural land or capital asset - Assessee has a case that the Tribunal was wrong in holding that there was transfer of the property as contemplated in Section 2(47) of the Act - Held that - Admittedly, the assessee purchased the land which was a rubber estate. The land was purchased to utilize it for the non-agricultural purpose of expansion of its factory. The rubber trees in the land were slaughter tapped which is a process that immediately precedes the cutting and removal of the rubber trees. The income returned by the assessee, is the income from slaughter tapping of rubber trees. This income was not gained from agricultural operations, but was only from exploitation of standing trees at the end of its useful life. Thereafter, the assessee had converted the land into housing plots leaving out common areas for roads and other purposes. Before that assessee would have cut and removed rubber trees. The asset was brought in as the stock-in-trade of the assessee. Thereafter, gradually the plots were sold to several people and agreements were entered into with many of the buyers for construction of villas. This, therefore, would establish beyond any doubt that though the property was once an agricultural land, its acquisition was for non-agricultural purposes, the assessee did not carry on any agricultural activity in the land and at the relevant date, viz. the date of sale, the land had ceased to be an agricultural land. If that be so, the assessee could not have claimed that the income gained from the sale of the land is from the sale of agricultural land entitling it to exemption from levy of capital gains. Assessee does not have a case that the land was not treated as stock-in-trade. Their business also included real estate development. Therefore, Tribunal was perfectly justified in its conclusion that there was transfer of the asset. - Decided against assessee.

Summary

Issues:
1. Classification of land as a capital asset under Section 2(14) of the Income Tax Act, 1961.
2. Determination of "transfer" as per Section 2(47) of the Act.
3. Granting exemption on profits generated from the conversion of agricultural land to stock in trade under Section 45(2) of the Act.

Issue 1: Classification of Land as a Capital Asset
The case involved the assessee's purchase of agricultural land for factory expansion, later converted into residential plots. The contention was whether income from land sale qualified for capital gains exemption. The court analyzed Section 45 and 2(14) of the Act, emphasizing the importance of the land's status at the time of sale. Referring to precedents, the court emphasized that mere past agricultural use wasn't sufficient for exemption if the land's nature had changed before the sale. The court found that the land was acquired for non-agricultural purposes, converted into stock-in-trade, and sold for residential development, thus not qualifying for agricultural land exemption.

Issue 2: Determination of "Transfer"
The court examined Section 2(47) to determine if the land's conversion into stock-in-trade constituted a transfer. The assessee's argument that the land was not treated as stock-in-trade was dismissed as the business included real estate development. Consequently, the court upheld the Tribunal's conclusion that there was a transfer of the asset.

Issue 3: Granting Exemption on Profits
Regarding the exemption on profits from converting agricultural land to stock in trade under Section 45(2), the court found that since the land was not classified as agricultural at the time of sale, the assessee was not entitled to the exemption. The court endorsed the Tribunal's conclusions, dismissing the appeals and ruling in favor of the Revenue.

In summary, the Kerala High Court analyzed the classification of land as a capital asset, the determination of "transfer," and the granting of exemptions on profits in the context of the Income Tax Act. The court emphasized the importance of the land's status at the time of sale and upheld the Tribunal's decision that the land, initially agricultural, had been converted for non-agricultural purposes, thus not qualifying for capital gains exemption. The court also affirmed that the land's conversion into stock-in-trade constituted a transfer, leading to the dismissal of the appeals in favor of the Revenue.