2022 (11) TMI 1030 - AT - Income Tax

Nature of land sold - Revenue not accepting the assesses claim of income from sale of land being exempt u/s 10 - whether the asset qualifies as capital asset or not as per section 2(14) ? - Whether the land sold was not capital asset as they were situated outside the specified limit of 8kms. meaning thereby that the land were rural agricultural land? - HELD THAT - The finding of fact by the ld.CIT(A) that the land is non-agricultural land has remained unchallenged before us. In the light of this fact, the distance of land from Municipal limit is wholly irrelevant for the purpose of determining whether the asset qualifies as capital asset or not as per section 2(14) of the Act, since as per the said section only agricultural land situated beyond the specified municipal limits do not qualify as capital assets. Therefore, twin conditions of the land being agricultural land and land being situated beyond a specified limit from the municipal boundary ,both has to be fulfilled for the asset to qualify as not being a capital asset. In the present case, there being no dispute to the fact that the asset was not agricultural land, arguments raised vis- -vis distance beyond municipal limit, is wholly irrelevant since the assesses fails to fulfill the criteria of being an agricultural land for not qualifying as a capital asset. Disallowance of expenditure incurred on the acquisition of the land made in cash u/s 40A(3) - We are in agreement with the finding of the ld.CIT(A) that the income from sale of the land was not exempt as it was not agricultural land. Further the assessee has nothing to say against holding the transaction as business income of the assessee. The income from the transaction having been assessed under the head income from business , disallowance made by invoking provisions of section 40A(3) has been rightly made by the lower authorities. The only argument of the ld.counsel for the assessee that the income was not taxable under the head income from business or profession having already been rejected and the income having been held taxable under the head income from business or profession the disallowance under section 40A(3) of the Act, we hold, has been rightly made. Appeal of assessee dismissed.

Issues Involved:
1. Classification of gain from the sale of agricultural land as business income.
2. Disallowance of payment made to farmers under section 40A(3) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Classification of Gain from Sale of Agricultural Land as Business Income

The primary issue in the appeal was whether the gain from the sale of agricultural land should be treated as business income or exempt under section 10 of the Income Tax Act, 1961. The assessee claimed an exemption of Rs. 28,49,662/- under section 10, arguing that the land sold was agricultural and situated outside the specified limits of 8 kilometers from the municipal boundary, thus qualifying as rural agricultural land under section 2(14) of the Act.

The Assessing Officer (AO) conducted a detailed inquiry and found that the assessee, along with two associates, had acquired the land for the purpose of selling it to KEC International Ltd. (KECIL). The AO noted that the land was converted from agricultural to non-agricultural land to facilitate the sale, which was a precondition for KECIL's purchase. The AO concluded that the transaction was an adventure in the nature of trade, aimed at making gains from the acquisition and sale of the land, thus classifying the income as business income.

The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the land was non-agricultural at the time of sale and that the sale was conditional upon its conversion to non-agricultural land. The CIT(A) emphasized that the sale deed was valid only after the land's conversion, indicating the intention to derive profit from converting agricultural land to non-agricultural land.

The Tribunal also agreed with the CIT(A)'s findings, stating that the distance from the municipal limit was irrelevant since the land was non-agricultural. Therefore, the conditions for exemption under section 2(14) were not met, and the income was rightly classified as business income.

Issue 2: Disallowance of Payment Made to Farmers Under Section 40A(3)

The second issue was the disallowance of cash payments made to farmers for acquiring the land under section 40A(3) of the Act. The AO disallowed all expenditures incurred in cash, as the payments violated the provisions of section 40A(3).

The CIT(A) upheld the AO's decision, stating that section 40A(3) applies to business expenditures. Since the income from the sale of land was classified as business income, the disallowance under section 40A(3) was justified.

The assessee argued that the payment made to farmers should not be disallowed as the transaction was not a business activity but a gain from the sale of agricultural land. However, the Tribunal rejected this argument, reiterating that the income was taxable as business income. Consequently, the disallowance under section 40A(3) was upheld.

Conclusion:

The appeal was dismissed, with the Tribunal affirming the classification of income from the sale of land as business income and upholding the disallowance of cash payments under section 40A(3). The Tribunal's decision was based on the findings that the land was non-agricultural at the time of sale and that the transaction was an adventure in the nature of trade.

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