2019 (12) TMI 960 - AT - Income Tax

LTCG - Exemption u/s 54B in respect of gains on sale of agriculture land - AO observed that, the said lands are not only the non-agricultural land but also they are not used for agricultural purposes by the assessee for full 2 years period as required u/s 54B - AO taxed entire such gains and agricultural income as business income - Preliminary issue and admission of additional evidence HELD THAT - The motive of increasing the value of the capital assets should not be confused with the business linked profit motive. Business should not only have the profit motive but also should have the stock-in-trade. The book entries, which happen at the time of purchase of asset, reflects that the intention of the asset is to hold the asset as fixed asset/investment and not the asset for sale for profit. Such business assets are held by the firm where the assessee is the partner. In our view, the assessee s arguments have the merits. Therefore, assessee s claim of offer the gains earned on the disinvestment of the fixed assets, under the head capital gains like in earlier and later years, is proper and is confirmed in principle; but for the additional evidences. However, the Assessing Officer is required to examine the additional evidences furnished by the ld. AR for the assessee as per the set principles of natural justice. Deduction claim u/s 54B - In the present case, there is no dispute about the time-line provided for purchase of eligible lands and the agricultural nature of the same. The dispute is only on the condition of 2 years of land use for agricultural purposes for immediately preceding two years from the transfer date of the lands sold. Thus, while the revenue is in favour of the two calendar years, the assessee argues that the agricultural use of lands for two crop seasons in two years fulfils the specified conditions mentioned in section 54B(1) of the Act. it is evident that the condition of two years of agricultural use of lands stands met if the said lands are used for an year preceding to the date of transfer of land and also same days of the year preceding to the said preceding year. In other words, two crop seasons in the two years preceding to the date of transfer, meets the legal requirement of law in section 54B of the Act. However, this aspect of the provisions was not examined by the Assessing Officer. Therefore, considering the principles of natural justice, Assessing Officer is directed to examine the facts relating to the crop seasons of Rice, to apply the said order of the Tribunal in the case of Ramesh Narhari Jakhadi . 1992 (2) TMI 178 - ITAT PUNE the extent of reimbursement of gains in the eligible lands etc. In the absence of any contrary evidence, Assessing Officer shall accept the contents of 7/12 extract in its entirety. Assessing Officer shall also restrict the deduction u/s 54B of the Act to the extent of reinvestment of gains earned on sale of eligible lands and in the eligible agricultural lands only.

Issues Involved:
1. Classification of income from the sale of land as either "capital gains" or "business income."
2. Eligibility for deduction under Section 54B of the Income Tax Act.
3. Validity of the claim of agricultural income.

Issue-wise Detailed Analysis:

1. Classification of Income from the Sale of Land:
The assessee claimed the income from the sale of land as "capital gains," while the Assessing Officer (AO) and CIT(A) treated it as "business income." The Tribunal noted that the assessee consistently recorded the land as fixed assets in the books of accounts, indicating an investment intention rather than a trading one. The Tribunal emphasized the "rule of consistency," which mandates that similar transactions treated as capital gains in previous years should continue to be treated similarly. The Tribunal found that the assessee's actions, including maintaining separate entities for investments and business activities, corroborated the claim of capital gains. Consequently, the Tribunal ruled in favor of the assessee, holding that the income from the sale of land should be taxed as capital gains.

2. Eligibility for Deduction under Section 54B:
The AO and CIT(A) denied the deduction under Section 54B, arguing that the lands sold were not used for agricultural purposes for two years before the sale. The Tribunal examined the provisions of Section 54B and relevant case law, particularly the decision in Ramesh Narhari Jakhadi vs. ITO, which held that using the land for agricultural purposes for two crop seasons within the two years preceding the sale is sufficient to meet the legal requirement. The Tribunal directed the AO to verify the crop seasons and the extent of reinvestment in eligible agricultural lands. The Tribunal allowed the deduction under Section 54B to the extent of ?1,84,81,978/- out of ?3,14,08,693/-, subject to verification by the AO.

3. Validity of the Claim of Agricultural Income:
The AO rejected the assessee's claim of agricultural income of ?3,61,925/-, citing a lack of direct evidence of agricultural activities. The Tribunal noted that the 7/12 extracts and other documentary evidence provided by the assessee indicated agricultural activities. The Tribunal directed the AO to accept the 7/12 extracts unless contrary evidence is provided. The Tribunal remanded the issue back to the AO for verification and appropriate action.

Decision of the Tribunal:
The Tribunal allowed the appeal of the assessee for statistical purposes, directing the AO to verify the additional evidence and re-examine the claims related to the classification of income, eligibility for deduction under Section 54B, and the validity of the agricultural income claim. The Tribunal emphasized the principles of natural justice and the need for a detailed examination of the facts.

Order Pronounced:
The order was pronounced on the 19th day of September, 2019.

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