2023 (8) TMI 287 - AT - Income Tax

Revision u/s 263 - Profit earned from the sale of land as assessable under the head Capital Gains OR Business income - deduction u/s 54EC allowed to the assessee resulting in Nil capital gain being charged to tax - HELD THAT - The factum of conversion of land from agricultural land into non-agricultural land cannot be alone picked up for determining the intention of the assessee. PCIT having done exactly the same by picking out only one factor relating to the land sold, his inference that the land sold by way of adventure in the nature of business, we hold, is not appropriate. The other facts noted by the PCIT for arriving at his finding of the transaction of sale of land being in the nature of adventure in trade we find are entirely irrelevant and do not have any bearing on the finding. We fail to understand how the fact that the firms in which assessee was a partner indulged in real estate transactions can lead to the inference that the assessee in his individual capacity was also intended indulging in such business. For that matter the assessee s affidavit in proceedings before the Civil Court stating that he and his son were involved in real estate business also is of no relevance and consequence since the entire affidavit is not reproduced in the order and until it is read in entirety the import of it cannot be gathered. PCIT s reference to the contents of the affidavit can only be treated as his inference from the same and the affidavit could very well be also read to have been stated by the assessee in the context of the fact that he was indulging in real estate business in partnership. Therefore, we hold that there is no basis with the Ld. PCIT to hold that the facts relating to the transaction in sale of land were indicative of the same being in the nature of adventure in the nature of trade and the AO having accepted assessee s claim of returning capital gains on the same was an error on his part. In the absence of any finding of error in the order of the AO allowing the assessee s claim of gains earned from sale of land as being in the nature of capital gains, the order passed by the ld. PCIT u/s 263 of the Act is liable to be set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the profit earned from the sale of land should be assessed as "business income" or "capital gains."
2. Validity of the Principal Commissioner of Income-Tax's (PCIT) order under Section 263 of the Income-tax Act, 1961.

Summary:

Issue 1: Assessment of Profit Earned from Sale of Land
The primary issue was whether the profit earned from the sale of land by the assessee should be classified as "business income" or "capital gains." The PCIT argued that the Assessing Officer (AO) erred in assessing the profit as capital gains, asserting that the land was converted from agricultural to non-agricultural and sold for profit, indicating a business activity. The PCIT noted the assessee's involvement in real estate through partnerships and previous transactions of land sales to support this argument.

The assessee contended that the land was purchased as an investment, held for a long period (10 years), and consistently shown as a fixed asset in the balance sheet. The land was converted to non-agricultural status five years after purchase and sold another five years later. The assessee argued that the land was acquired from personal funds, not borrowings, and no development or business activities were undertaken on the land, which was still partially held as an investment.

The Tribunal agreed with the assessee, emphasizing that multiple factors must be considered to determine the nature of the transaction. The Tribunal highlighted that the land was held for a long period, shown as an investment, and not developed or sold entirely. The conversion to non-agricultural land alone was insufficient to classify the transaction as a business activity.

Issue 2: Validity of PCIT's Order under Section 263
The Tribunal examined the validity of the PCIT's order under Section 263 of the Income-tax Act, which allows revision of erroneous and prejudicial orders to the interest of revenue. The Tribunal found that the PCIT's order was based solely on the conversion of the land and did not consider other relevant factors, such as the long holding period, the nature of the investment, and the lack of business activities by the assessee.

The Tribunal concluded that the AO's assessment was not erroneous or prejudicial to the interest of revenue. The PCIT's order lacked a comprehensive evaluation of the facts and circumstances, and the inference that the transaction was an adventure in the nature of trade was not appropriate.

Conclusion:
The Tribunal set aside the PCIT's order under Section 263, holding that the profit from the sale of land should be assessed as "capital gains" and not "business income." The appeal of the assessee was allowed.