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TMI Blog2015 (3) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative officer to prove the fact of use as agricultural lands. Some of the lands sold by the assessee have been categorized as “residential land” by the Sub-registrar Office for the purpose of collection of Stamp duty and hence such classification would not determine the character of land. The fact remains that the assessee has cultivated the lands and has declared agricultural income, which is also supported by the certificate of the Village Administrative Officer.The assessee did not develop these lands by forming roads etc., but has sold as agricultural lands only in cents and acres and not in ‘square feet’, which is the normal case in case of housing plots. Lands have been sold in continuous stretches without creating any road for access. Future potential is not relevant and the Character of land as on the date of sale is more relevant as held by the Hyderabad bench of ITAT in the case of DCIT Vs. M. Kalyan Chakravarthy [2014 (11) TMI 338 - ITAT HYDERABAD]. In the case of Mrs. Sakunthala Vedachalam and Mrs. Vanitha Manickavasagam (2014 (9) TMI 3 - MADRAS HIGH COURT), the Hon’ble jurisdictional High Court has held that the manner in which the adjacent lands are use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f land development and sale. In the return of income filed for the year under consideration, the assessee declared business profit on land development and sale. Besides the above, the assessee also declared gain on sale of agricultural land, which is exempt from taxation. The agricultural lands were located at three places viz., Kundrathur Village, Perumbakkam village and Thirumudivakkam village. The AO compared the Gross Profit rate and Net Profit rate declared by the assessee in both the activities, i.e., in the activity of development and sale of land and in the sale of agricultural land. He found that the rate of profit shown on sale of agricultural land was very high. Hence, the AO formed the view that the profit declared on sale of agricultural land did not appear to be credible. 5. Before the AO, the assessee submitted that he has maintained separate account for each of his activity, i.e., for business activity and investment activity. He further submitted that the Agricultural land was shown as his investment and hence the gain arising on its sale was shown as Capital gain and accordingly exemption was claimed. The Assessee placed reliance on the Circular no.4/2007 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of trading of land. Thus it is seen that the assessing officer has taken the view that the assessee has held these lands as his business assets only. Though the AO has not expressly stated that the impugned lands were not agricultural lands, but the reference made by him to the classification of the Subregistrar office, observations about agricultural activity etc. would show that the assessing officer appears to doubt about the character of land as agricultural land. Accordingly, he rejected the claim of the assessee and assessed the profit arising on sale of agricultural land as Business income of the assessee. 7. During the year under consideration, the assessee had also declared profit from sale of developed land as his business income. From the computation of business profits, the AO noticed that the assessee has claimed development expenses of ₹ 26.56 crores, which was about nine times of the cost of land. Hence, the AO considered the same on higher side and accordingly called for details. However, the assessee did not furnish the details called for by AO. The AO further noticed that identical issue was considered by him in the assessee s sister conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Character of land, i.e., whether they are agricultural land or not. (b) Whether the lands were held as Investment or as Stock in trade . There is no dispute between the parties that the impugned lands were located beyond the prescribed municipal limits. If these lands were considered to have been held by the assessee as Stock in trade , then the profit realized on their sale is assessable as business profits of the assessee, even if the character of land remains agricultural land. On the other hand, if they were considered to have been held by the assessee as Investment , the gain realized on their sale would result in taxable Capital gains, if they are not agricultural lands and would be exempt from taxation u/s 10(1) r.w.s. 2(1A)(a) and 2(14) of the Act, if they are held as agricultural lands. 10. We heard the parties and perused the record. We notice from the assessment order that the assessee has declared the profit realized on land development and sale as his Business income. It has been further claimed that the agricultural lands have been held as Investment and accordingly the gain realized on their sale was claimed to be Capital gains exempt from taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he would have purchased the land only with the intention to hold the same as Stock in trade. However, as observed by the Hon ble Courts, the assessee cannot be precluded from holding some of the lands as his Investments. The intention of the assessee at the time of purchase of land would normally decide as to whether the land forms part of his stock in trade or it would form part of his investment. 12. The next question that arises is as to how to ascertain the intention of the assessee in order to determine about the classification of assets, i.e., whether they were held as Investment or as Stock in trade . In this regard, the settled proposition is that the answer to the above said question would depend upon cumulative consideration of a number of facts. The Circular issued by the CBDT and the Courts have listed out various criteria for this purpose. We may observe that the criteria so listed out are not the exhaustive list, but they were in the nature of guiding factors only. One has to consider all the factors in a holistic manner in order to decide the above said question. 13. We notice that the Ld CIT(A) has correctly pointed out that the main factor/criteria is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o it? Did the purchaser, by any act subsequent to the purchase, improve the quality of the land and thereby made it more readily resaleable? What were the incidents associated with the purchase and resale? - etc. will have to be taken into consideration and a holistic view has to be taken. 15. We shall examine the facts prevailing in the instant case under various factors/criteria. (a) We notice that the assessee, in his activity of development of land and sale, was used to divide the land into different plots of small sizes after earmarking major portion of land for roads, public facilities etc. The lay out plan is also required to be approved by a competent authority. Another important factor is that the assessee was required to incur huge expenditure on such kind of development of land. However, in the case of assets held as Investments , no such development activity shall be carried out. In the instant case, the assessee has incurred huge development expenses in respect of land held as Stock in Trade . In fact, the assessing officer himself has disallowed a major part of development expenses. However, it is an admitted fact that the assessee did not develop the lands h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 567 of 2013 - Order dated 06-08-2014) to ascertain the principles to be followed in order to answer this question. In the above said case, the assessees therein sold certain lands which were claimed to be agricultural lands. In support of the said claim, they did not furnish any document before the AO and hence he rejected the claim of the assessees. However, before Ld CIT(A), they furnished a copy of Adangal extract and also claimed that there were casuarinas crops grown in those lands as shown in the chitta adangal, which indicated that the lands were agricultural lands. Accordingly, the Ld CIT(A) allowed the claim of the assessee, but his decision was reversed by the Tribunal by following the decision of Hon ble Gujarat High Court in the case of CIT Vs. Siddharth J Desai (139 ITR 628). The Hon ble Gujarat High Court, in the above cited case had laid down various tests that have to be considered in order to ascertain the true nature and character of land. The Hon ble Madras High Court has extracted the following observations made by the Hon ble Gujarat High Court:- On a conspectus of these cases, several factors are discernible which were considered as relevant and which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user? (12) Whether the land was sold on yardage or on acreage basis? (13) Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield? At the risk of repetition, we may mention that not all of these factors would be present or absent in any case and that in each case one or more of those factors may make appearance and that the ultimate decision will have to be reached on a balanced consideration of the totality of circumstances. The Tribunal, in the case before the Hon ble Madras High Court, had held that the assessees, in the above cited case, could not satisfy any of the conditions except condition Nos. 1, 5, 11 and 12 and accordingly held that the assessees could not prove that the lands was actually or ordinarily used for agricultural purposes. This view of the Tribunal was not acceptable to the Hon ble Madras High Court. The relevant observations made by the High Court in this regard are extracted below:- 13.. ..This reasoning does not appear to be correct in view of the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enoy Kumar Sahas Roy) wherein, it is held as follows: There was authority for the proposition that the expression agricultural land mentioned in Entry 21 of List II of the Seventh Schedule to the Government of India Act, 1935, should be interpreted in its wider significance as including lands which are used or are capable of being used for raising any valuable plants or trees or for any other purpose of husbandry (See Sarojinidevi V. Shri Krishna Anjanneya Subrahmanyam and other (1) and Megh Raj V. Alla Rakhia (2)) . Accordingly, the Hon ble Madras High Court reversed the decision of the Tribunal and restored the order of Ld CIT(A) 17. We shall now apply the principles discussed by the Hon ble Madras High Court in the case of Mrs. Sakunthala Vedhachalam and Mrs. Vanitha Manickavasagam (supra) to the facts prevailing in the instant case. We shall first examine the various criteria laid down by the Hon ble Gujarat High Court to the facts of the instant case. (a) The land has been classified as agricultural land in revenue records. (b) The assessee has declared agricultural income, meaning thereby, he has used the lands for agricultural purposes. (c) The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f attorney is coupled with interest makes the assessee is owner u/s 2(47) of the Act. Further there is no dispute with regard to the ownership and enjoyment of property. Sec. 2(47) of the Income tax Act provides for taxation of Power of attorney transactions. Right to exploit is a Capital asset as held by Hon ble Madras High Court in the case of A.R.Krishnamurthy and A.R. Rajagopalan Vs. CIT (133 ITR 922). (b) The assessee is a property developer and is engaged in purchase of land. Hence the purchase and sale of land is his regular business activity. Submission of the assessee:- The assessee is entitled to maintain two different portfolios, one for Stock in Trade and another one for Investment as per the decisions of various High Courts. The intention of the assessee was to hold these agricultural lands as Investment only. (c) The assessee did not carry on any agricultural activity. Submission of the assessee:- The assessee has declared agricultural income in the returns of income filed by him. Further, the assessee has also filed certificates obtained from Village administrative officer to prove the fact of use as agricultural lands. (d) Some of the lands sold by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that if a transaction is in the assessee s ordinary line of business, there can be no difficulty in holding that it is in the nature of trade. Submission of the assessee:- The principle that the assessee can hold assets either as Stock in trade or as Investment is now recognized. 19. On a combined consideration of the reasons given by the assessing officer and the submissions made by the assessee, we are of the view that there is merit in the submissions of the assessee, in view of the principles discussed in various decisions rendered by the Hon ble High Courts, which we have discussed in detailed manner in the earlier paragraphs. Further, we notice that the ld CIT(A) has upheld the view of the assessing officer without examining the facts prevailing in this case. Hence, we are unable to sustain his order. The Ld A.R also contended that the gain arising on sale of agricultural lands, which are situated outside the prescribed local limits should be considered as Agricultural income exempt u/s 10(1) of the Act and in support of this contention, the Ld A.R also placed reliance on few case laws. However, we do not find it necessary to examine this contention, in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. Accordingly, the ld. AR submitted that there was no basis or material with the AO to make the impugned disallowance and accordingly prayed that the order of ld. CIT(A) on this issue should be upheld. 24. We have heard the rival contentions on this issue and perused the record. The fact remains that the assessee has developed the land, i.e., he has laid roads, divided the land into various plots after leveling etc. It is in the common knowledge of everybody that the assessee should have incurred huge expenditure, without which he could not have sold the plots. We further notice that the AO has followed the method adopted in the case of M/s Jubilee Plot and Housing Pvt. Ltd. for computing the disallowance i.e. the AO allowed only 43.06 % of the total receipts as development expenses, meaning thereby the assessing officer has accepted the expenditure claim to the tune of about 57% only. There should not be any dispute that the quantum of development expenses would vary from place to place and the same would depend upon various factors, like characteristics of the land i.e., whether they are plain or not, its depth from the road level, extent of the land, size and pattern of la ..... X X X X Extracts X X X X X X X X Extracts X X X X
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