2012 (9) TMI 687 - AT - Income Tax

Property Sale Gains Taxable as Business Income despite Agricultural Origin

The court held that the gains from the sale of constructed properties were taxable as business income due to the agreements entered into for construction ... Assessee held agriculture land – Whether sale of shops, duplex & bungalow developed on agriculture land by developer under agreement amount to business income under head PGBP or Capital Gain - Assessee enter into agreement with 2 builders for construction of housing complex on such land and receive advance - In consideration of land, the builder has agreed to give 35% & 33% of constructed area – AO made addition on sale consideration as business income treat it as trading activity – Held that:- Since land was used for agricultural purpose hence capital asset. Once the assessee has entered into agreement with the builder for construction of housing complex on such lands, the same amounts to business, therefore, any gain arising out of sale of such building is business receipts liable to tax as business profit. The benefit of long term capital gain till the date of transfer of such capital assets into stock in trade i.e. year in which agreement with the builder is entered into. As per Sec. 45(2), such capital gain is liable to tax in the previous year in which such stock in trade is sold or otherwise transferred by the assessee. Issue remands back to AO for recompute capital gain and business income. Issues Involved:1. Taxation of long-term capital gains as business income.2. Validity of assessment framed under Section 143(3) of the Income Tax Act, 1961.Detailed Analysis:1. Taxation of Long-Term Capital Gains as Business Income:The primary grievance of the assessee was the treatment of long-term capital gains (LTCG) as business income by the Assessing Officer (AO). During the assessment year 2007-08, the assessee had shown LTCG from the sale of shops and duplexes. The AO observed that the assessee had entered into agreements with M/s. Nirupam Associates and M/s. Aryan Builders and Colonizers for the development and construction of properties on lands owned by the assessee. The agreements stipulated that a certain percentage of the sale proceeds from the constructed properties would be given to the assessee.The AO required the assessee to clarify the computation of LTCG and the cost of acquisition. However, the assessee did not furnish complete data, leading the AO to obtain copies of the agreements through summons. Based on the agreements, the AO concluded that the transactions amounted to trading activities, thus treating the gains as business income under Section 2(13) of the Income Tax Act.The assessee contended that the lands were agricultural and were purchased out of accumulated savings. The construction agreements with the builders did not involve the conversion of land into stock-in-trade, and the possession of the lands was not transferred to the builders. The assessee argued that the income should not be treated as business income and cited relevant case laws to support the claim. However, the AO was not convinced and maintained that the transactions were business activities, given the regular sale of constructed properties from the financial year 2004-05 onwards.The CIT(A) upheld the AO's decision, prompting the assessee to appeal further.Upon review, it was found that the assessee had acquired agricultural lands over time and held them as capital assets. The lands were used for agricultural purposes, and there was no evidence of any intention to develop residential colonies at the time of purchase. The agreements with the builders were for the construction of housing complexes on the lands owned by the assessee. The court noted that once the assessee entered into agreements for construction, the transactions amounted to business activities, making the gains taxable as business income.2. Validity of Assessment Framed Under Section 143(3):The ground raised regarding the validity of the assessment framed under Section 143(3) was not pressed by the assessee's authorized representative, leading to its dismissal in limine.Conclusion:The court directed the AO to allow the benefit of LTCG for the agricultural land owned by the assessee up to the year of conversion into stock-in-trade, as per Section 45(2). Any proceeds received from the sale of constructed areas after the agreement were to be taxed as business receipts. The AO was instructed to recompute the capital gain and business income in the respective years of sale and receipt of consideration by the assessee, following the court's directions.The appeal was allowed in part for statistical purposes, and the order was pronounced in the open court on 5th July 2012.