2021 (1) TMI 1038 - AT - Income Tax

Capital Gain (LTCG) or Business income - Exemption u/s 54F - AO took the view that the assessee was engaged in an adventure of the nature of trade and therefore the income declared under the head capital gains is to be taxed under the head Income from Business - HELD THAT - Intention at the time of purchase was to construct a house for self occupation and that intention was given up due to the fact that the land was outside Mysore city and due to financial crunch. Therefore the tests laid down in the decisions support the plea of the Assessee that he did not do any adventure in the nature of trade when he sold the larger extent of property after dividing them into smaller sites. The dates of acquisition of the property and its conversion into sites and obtaining approval and the dates of sale by the Assessee all go to show his intention at the time of acquisition was not with a view to indulge in an adventure in the nature of trade. The case of B.Narasimha Reddy 1984 (7) TMI 72 - KARNATAKA HIGH COURT Thus gain on sale of land is to be regarded as income under the head capital gain . Consequently, the Assessee should be entitled to all the deductions permissible while computing income under the head Capital Gain .is a decision on facts of that case.- Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the Revenue authorities were justified in treating the declared long-term capital gains as income from business.
2. Whether the assessee was entitled to exemption under section 54/54F of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Declared Long-term Capital Gains:
The primary issue in this appeal is whether the Revenue authorities correctly treated the sums of ?7,12,016/- and ?18,01,718/- declared as long-term capital gains by the assessee as income from business, thereby denying the exemption under section 54/54F of the Income Tax Act, 1961. The assessee, a proprietor of a wholesale paper merchant business and a distributing agent for Nandini Ghee, claimed these amounts as long-term capital gains. The Assessing Officer (AO) found that the assessee had sold plots of land and treated the income as business income, arguing that the assessee was engaged in an adventure in the nature of trade. The AO's view was based on the fact that the assessee had purchased land, converted it into residential plots, and sold them over different assessment years. The AO concluded that the activity constituted a business venture, thus taxing the income under the head "Income from Business."

2. Assessee's Intention and Treatment of Property:
The assessee contended that the land was initially purchased with the intention of constructing a house for self-occupation. However, due to the land being outside Mysore City and financial constraints, the assessee decided to sell the property in plots. The assessee maintained that the land was treated as a capital asset in the books of account, not as stock-in-trade. This assertion was not disproved by the AO. The Tribunal considered the assessee's explanation and the treatment of the land in the books of account, concluding that the intention at the time of purchase was not to engage in an adventure in the nature of trade.

3. Legal Precedents and Supreme Court Guidelines:
The Tribunal referred to several legal precedents, including the Supreme Court's decisions in G. Venkataswamy Naidu (1959) 35 ITR 594 (SC) and Raja J. Rameshwar Rao Vs. CIT 42 ITR 179 (SC). These cases established that even isolated transactions could be regarded as business activities if the intention was to resell at a profit. However, the Supreme Court also noted that land transactions are often investments rather than trading activities. The Tribunal emphasized that the intention at the time of purchase is a crucial factor in determining whether a transaction is an adventure in the nature of trade.

4. Conclusion and Tribunal's Decision:
The Tribunal concluded that the assessee's intention at the time of purchase was to construct a house for self-occupation, which was later abandoned due to external factors. The dates of acquisition, conversion into plots, and subsequent sales supported the assessee's claim. Therefore, the Tribunal held that the gains from the sale of land should be treated as income under the head "capital gain," entitling the assessee to the deductions permissible while computing income under this head. Consequently, the appeal of the assessee was allowed, and the order of the CIT(A) was overturned.

Final Judgment:
The appeal of the assessee is allowed, and the gains on the sale of land are to be regarded as income under the head "capital gain," entitling the assessee to the applicable deductions under section 54/54F of the Income Tax Act, 1961.