2021 (4) TMI 210 - AT - Income Tax

Correct head of income - income from sale of impugned properties - business income OR long term capital gain - whether sale of 39 plots/land parcels and transaction of capital contribution of 3 plots to partnership firm out of 215 bigha agricultural land cannot be regarded as 'business activity' in the given set of factual matrix? - HELD THAT - The provisions of Section 2(14) of the Act defines a 'capital asset' whereby property of any kind held by the assessee, whether or not connected with his business or profession would fall within the sweep of expression 'capital asset'. Thus, the law does not expect complete absence of business connection of an asset for the ascertainment of the character of asset. Property of 'any kind' is somewhat sweeping in nature which stipulates that property could be capital asset, even if, connected with business of the assessee. In the instant case, the Revenue could not demonstrate any real substantive and systematic course of activity or conduct on the part of the assessee to characterize the income to be sourced from a business activity induced by commercial spirit. The assessee is entitled in law to hold certain class of asset as 'capital asset' even while he is dealing with the assets of similar nature in business with commercial objectives. In the instant case, the AO has inter alia alleged that the assessee is engaged in a systematic commercial exploitation of land in the capacity as a partner with other co-owners. In our view, cannot be seen as an handicap in the hands of HUF assessee and would not deprive the HUF assessee of treating the assets as capital assets. Thus, in the totality of extenuating circumstances existing in the present case, we find that plea of the assessee has merits and deserves acceptance. We accordingly hold that claim of assessee to characterize the gain arising on sale of land parcels in question to be chargeable under the head 'capital gain' cannot be dislodged and replaced by 'business income'. Hence, we set aside the order of the Revenue authorities and restore the action of the assessee in this regard.- Decided in favour of assessee.

Summary

Issues Involved:
1. Characterization of income from sale of properties as business income or long-term capital gain.
2. Treatment of land parcels as capital assets or stock-in-trade.
3. Application of tax treatment on transfer of land to partnership firm.
4. Assessment of intention behind holding land parcels.
5. Justification of realignment by revenue authorities.

Issue 1: Characterization of Income:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) concerning the treatment of income from the sale of properties as business income instead of long-term capital gain. The Assessing Officer (AO) had issued a show cause notice intending to treat the profit from land sales as business income, leading to denial of concessional tax treatment. The assessee contended that the profits should be treated as capital gains, supported by various facts and circumstances.

Issue 2: Treatment of Land Parcels:
The assessee argued that the land parcels were held as capital investments, as evidenced by the treatment in books and wealth tax returns. The AO realigned the income as business income, disregarding the lack of regularity in purchase and sale of properties. The Tribunal found that the transactions did not qualify as business activities and upheld the assessee's claim that the land parcels were capital assets.

Issue 3: Tax Treatment on Transfer:
The assessee transferred land to a partnership firm as a capital contribution, invoking the definition of 'transfer' under the Income Tax Act. The Tribunal analyzed the tax liability under section 45(3) and concluded that the gains arising from such transfers should be treated as capital gains and not business income.

Issue 4: Assessment of Intention:
The revenue authorities alleged that the assessee intended to exploit the land commercially due to the conversion of agricultural land into plots. However, the Tribunal noted the lack of systematic commercial activity and the historical treatment of the land parcels as capital assets, supporting the assessee's intention to hold them as investments.

Issue 5: Justification of Realignment:
The Tribunal scrutinized the actions of the revenue authorities and found that the realignment of income from capital gains to business income was not justified. It emphasized the lack of substantial evidence to support the characterization of income as business activity, ultimately ruling in favor of the assessee and allowing the appeal.

In conclusion, the Tribunal set aside the order of the revenue authorities and restored the characterization of the gains arising from the sale of land parcels as capital gains, thereby granting relief to the assessee in the assessment for the relevant year.