2020 (5) TMI 205 - AT - Income Tax

Exemption u/s 54F - Taxing capital gain under the head business income and not giving benefit of exemption u/s 54F - as contended that the assessee was having property since last 20 years, the same held as investment therefore, eligible to claim benefit of long term capital gains and utilization of capital gains for purchase of house u/s 54F - HELD THAT - Land was purchased by the assessee since long back as capita asset and was continuously hold by it for 20 years in case of Fateh Royal Residency and for 4-5 years in case of Fateh Hills as capital asset. There was no intention of assessee to trade for the land so purchased, contrary it was used for agricultural purposes continuously till the year of sale. Agricultural income so earned were offered in the return of income of respective years and accepted by the deptt. Similarly, the Fateh Hills property was acquired long back in the year 2010-11 as capital asset and was so held as capital asset in the balance sheet. Merely conversion of the agricultural land into non-agricultural land will not give rise to the taxable event until it is actually sold. Thus, the assessee has sold the capital asset held for long term, accordingly, gain arising from sale was eligible for deduction u/s 54F of the Act. Accordingly, we direct the A.O. to treat the property on sale of land as capital gains and given the benefit of exemption claimed by the assessee U/s 54F. Disallowance of expenditure towards development of property - A.O. has allowed 50% of the expenditure by stating that no supporting bills of expenditure were provided to him - HELD THAT - It is clear from the findings of the ld. CIT(A) that he has totally discarded the observed of the A.O. for non-production of documentary evidence in support of the expenditure. However, in respect of giving this fact, the ld. CIT(A) has allowed on ad hoc basis only 40% of the expenditure so claimed was genuine and incurred for developing the property, therefore, eligible to be allowed as a deduction while computing capital gains on sale of this property amounting to ₹ 43,90,029/-. No justification in the order of the ld. CIT(A) for sustaining disallowance of 40% against the 50% disallowance made by the A.O., therefore, the A.O. is directed to allow full expenditure so incurred by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of capital gain as business income.
2. Jurisdictional overreach by the Assessing Officer (AO) in limited scrutiny cases.
3. Eligibility for exemption under Section 54F of the Income-tax Act, 1961.
4. Disallowance of construction expenditure claimed by the assessee.

Detailed Analysis:

1. Taxability of Capital Gain as Business Income:
The primary issue in this appeal was whether the capital gain from the sale of land should be taxed as business income. The AO treated the transactions as business activities, asserting that the assessee purchased the properties with a business intention. The CIT(A) upheld this view but recognized that the properties were initially purchased as capital assets. The CIT(A) concluded that the sale was an "adventure in the nature of trade" due to the conversion of agricultural land into non-agricultural land. However, the Tribunal found that the properties were held as capital assets for a long duration (20 years for Fateh Royal Residency and 4-5 years for Fateh Hills) and were used for agricultural purposes. The Tribunal concluded that the sale of these long-held assets should be treated as capital gains, not business income.

2. Jurisdictional Overreach by the AO in Limited Scrutiny Cases:
The assessee argued that the AO exceeded his jurisdiction in a limited scrutiny case by examining whether the gain from the sale of property was capital gain or business income without proper approval from the Pr. CIT/CIT. The Tribunal noted that the CBDT instructions mandate that any enhancement of the scope of limited scrutiny requires written approval from the Pr. CIT/CIT, which was not obtained in this case. Thus, the Tribunal held that the AO's actions were beyond jurisdiction and any additions made beyond the scope of limited scrutiny were void ab initio.

3. Eligibility for Exemption under Section 54F:
The assessee claimed exemption under Section 54F for the purchase of a residential house at Bengaluru against the long-term capital gain from the sale of properties. The AO denied this exemption, treating the transactions as business income. The Tribunal, however, directed the AO to treat the gains as capital gains and allow the exemption under Section 54F, as the properties were held as capital assets and the proceeds were used to purchase a residential house for personal use.

4. Disallowance of Construction Expenditure:
The AO allowed only 50% of the construction expenditure claimed by the assessee, citing a lack of supporting bills. The CIT(A) reduced the disallowance to 40%, acknowledging that some documents were provided. The Tribunal found that the CIT(A) had discarded the AO's observation regarding non-production of documentary evidence and noted that the assessee had provided details and supporting documents for the construction expenditure. Therefore, the Tribunal directed the AO to allow the full expenditure amounting to ?43,90,029/-.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to treat the gains as capital gains, allow the exemption under Section 54F, and accept the full construction expenditure claimed. The Tribunal emphasized adherence to jurisdictional limits in limited scrutiny cases and the importance of considering the intention and holding period of assets in determining the nature of income.