2019 (10) TMI 649 - AT - Income Tax

Revision u/s 263 - Claim of deduction u/s 54B - sale of agriculture land after plotting to 19 persons - purchase of another agriculture land - HELD THAT - It is a clear case of complete lack of enquiry on the part of the AO which renders the assessment order erroneous in so far as it is prejudicial to the interests of the revenue. We note that in the Sale Deed the description of the plot of land has been given with residential plot number situated in a newly developed residential colony, namely, Shanti Nath Nagar-II, Ajmer road, Kekri. This fact is also corroborated by the map of the said colony attached to the registered Sale Deed. Therefore, it is not a simple case of sale of the land by dividing into plots but the assessee has developed the land in question into a residential colony, namely, Shanti Nath Nagar-II. Once the land was converted into residential colony, it was no more an agricultural land in terms of section 54B therefore, even if the land sold is treated as capital asset, it has lost its character of agricultural land not being used for agricultural purpose and consequently the deduction u/s 54B cannot be allowed as the necessary condition prescribed in the said section is not satisfied. Since the ld. Principal Commissioner of Income Tax has set aside the assessment order to the record of the Assessing Officer for fresh consideration, therefore, we do not find any reason to interfere with the impugned order of the learned Principal Commissioner of Income Tax. The decisions relied upon by the ld. A/R of the assessee are entirely on different aspects where the land was sold by the assessee by dividing into plots and therefore, it was held that there was no change of character from capital asset to stock-in-trade. In the case in hand, the issue is not limited to the capital gain or business income but the issue is allowing the deduction u/s 54B without conducting a minimum enquiry by the AO whether the conditions prescribed under section 54B are satisfied or not. - Decided against assessee.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961.
2. Treatment of gain on sale of land as business income versus long-term capital gain.
3. Validity of the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263.
4. Relevance of case laws cited by the assessee.

Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961:
The appeal by the assessee challenges the revision order dated 31st January 2019, by the Principal Commissioner of Income Tax (Pr. CIT), Ajmer, under Section 263 of the Income Tax Act for the assessment year 2014-15. The Pr. CIT invoked Section 263, observing that the assessee's assessment order under Section 143(3) was erroneous and prejudicial to the interests of the revenue. The Pr. CIT noted that the assessee's sale of land after plotting it and claiming exemption under Section 54B was not allowable, as the activity resembled a business venture rather than a capital asset sale.

2. Treatment of Gain on Sale of Land as Business Income versus Long-term Capital Gain:
The Pr. CIT treated the gain on the sale of land as business income, contrary to the assessee's claim of it being a long-term capital gain. The assessee argued that the land was agricultural and registered as such in the Land Revenue records until its sale. The Pr. CIT, however, found that the assessee's intention was to profit from selling the land by making small plots, indicating a business venture. Consequently, the Pr. CIT held that the assessment order was erroneous and set it aside for fresh enquiry.

3. Validity of the Order Passed by the Pr. CIT under Section 263:
The assessee contended that the Assessing Officer (AO) had considered the deduction under Section 54B during the scrutiny assessment, and the AO's view was a possible one. The assessee provided details of the long-term capital gain and claimed that the land was held as a capital asset, not stock-in-trade. The Pr. CIT, however, found no evidence of the AO conducting any enquiry or verification regarding the claim under Section 54B. The assessment order lacked any discussion on this issue, indicating a lack of enquiry by the AO, thus justifying the invocation of Section 263 by the Pr. CIT.

4. Relevance of Case Laws Cited by the Assessee:
The assessee cited various judgments, including CIT vs. Sohan Khan & Mohan Khan and CIT vs. Kasturi Estates Pvt. Ltd., to support the claim that selling land after dividing it into plots does not constitute a business activity. The Tribunal found these cases irrelevant as they did not address the specific issue of eligibility for deduction under Section 54B. The Tribunal emphasized that the deduction under Section 54B requires the land to be used for agricultural purposes for two years prior to the sale, a condition not verified by the AO.

Conclusion:
The Tribunal upheld the Pr. CIT's order under Section 263, agreeing that the AO failed to conduct necessary enquiries regarding the deduction under Section 54B. The Tribunal noted that the land was developed into a residential colony, thus losing its agricultural character, disqualifying it from Section 54B benefits. The appeal by the assessee was dismissed. The decision was pronounced in the open court on 29/07/2019.