2014 (6) TMI 944 - AT - Income Tax

Valid initiation under Section 153C of Income Tax Act; Land classified as agricultural, exempt from capital gains tax.

The tribunal held that the initiation of proceedings under Section 153C of the Income Tax Act was valid as the Assessing Officer's satisfaction was based ... Assessment u/s 153C - Held that:- The person who has passed the order in the case of the searched person u/s. 153A of the Act is required to record the satisfaction note before completion of assessment u/s. 153A of the Act. The CIT(A) categorically held that/there was recording of satisfaction by the Assessing Officer of searched party and thereafter notice u/s. 153C was issued since the assessee was a party to a transaction as per the evidence seized in the course of search action u/s. 132 of the IT Act in the case of AV Prasad Group cases and the AR is not able to controvert these findings. Being so, it is to be held that invoking of provisions of section 153C in these cases is justified. Capital gain - whether the property represents a capital asset and the gain on transfer of the land is taxable under the head 'short term capital gain' - main contention of the assessee's counsel is that sale of land was exempt u/s. 2(14) - Held that:- In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade or capital gain. The period of holding should not suggest that the activity was an adventure in the nature of trade. In view of our above discussion, in our opinion, the land is not situated within the Qutubullapur municipality, but, the same situated in the Dundigal village and the evidence brought on record suggest that the land is an agricultural land, hence, it is not liable for taxation. Accordingly, the addition made on this count is deleted in all the appeals under consideration - Decided in favour of assessee Issues Involved:1. Initiation of proceedings under Section 153C of the Income Tax Act.2. Classification of the property as a capital asset and the taxability of the gain on its transfer.Issue-wise Detailed Analysis:1. Initiation of proceedings under Section 153C of the Income Tax Act:A search was conducted in the A.V. Prasad Group of cases on 07.10.2009, during which certain documents and books of account related to the assessee were found and seized. The Assessing Officer (AO) issued a notice under Section 153C of the Income Tax Act to the assessee on 26.07.2011, based on a document seized from Bhavya Constructions Pvt. Ltd., which was part of the A.V. Prasad Group.The CIT(A) observed that the provisions of Section 153C come into play when:- A search is initiated in the case of 'A' and documents/valuables are seized.- These documents/valuables are found to belong to 'B'.The AO of 'A' is required to hand over such seized material to the AO of 'B' who can then assess 'B's income as if a search had been initiated in 'B's case. In this case, it was undisputed that the search was initiated in the case of Bhavya Constructions Pvt. Ltd., and the document related to a land transaction involving the assessee. The CIT(A) concluded that the AO's satisfaction was based on an honest belief and thus, the initiation of proceedings under Section 153C was correct.The assessee contended that the initiation of proceedings under Section 153C was not in accordance with law, arguing that a satisfaction note should have been recorded by the AO of the searched person before transmitting the seized document to the AO of the assessee. However, the tribunal found that the AO had recorded the necessary satisfaction before issuing the notice under Section 153C, and thus the invocation of Section 153C was justified.2. Classification of the property as a capital asset and the taxability of the gain on its transfer:The assessee, along with three relatives, purchased agricultural land and later sold it to Varun Constructions. The assessee claimed that the land was agricultural and thus exempt from tax under Section 2(14) of the Income Tax Act, citing reasons such as the land being beyond 8 kms from any municipality, classified as agricultural in revenue records, and agricultural operations being carried out.The AO did not accept this claim, arguing that:- No verifiable proof of agricultural operations was provided.- The land was not used for agricultural purposes.- The area around the land had undergone urban development.The CIT(A) observed that the AO treated the sale as an 'adventure in the nature of trade', but found that the assessee was not in the business of dealing in land and had merely invested in it. The CIT(A) noted that although the land was purchased as agricultural land, it was sold at an exorbitant rate within a year, indicating it was sold for commercial purposes. The CIT(A) concluded that the land ceased to be agricultural and became a capital asset, thus liable for short-term capital gains tax.The tribunal, however, found that the land was classified as agricultural in revenue records, agricultural income was declared from it, and no conversion for non-agricultural purposes was applied for or obtained. The tribunal referred to various judicial precedents, emphasizing that the character of the land at the time of sale and its classification in revenue records are crucial. The tribunal concluded that the land was agricultural and not a capital asset, thus exempt from capital gains tax.In conclusion, the tribunal held that the land was agricultural and not liable for taxation, and the addition made on this count was deleted. The appeals were partly allowed.