2013 (8) TMI 833 - AT - Income Tax

Agricultural land sale ruled as exempt capital gain, not business income. Importance of land use highlighted.

The Income Tax Appellate Tribunal (ITAT) Hyderabad ruled that the income from the sale of agricultural land should be treated as exempt capital gain, not ... Adventure in the nature of trade - Treating income arising out of the sale of agricultural land as business income – Sale of agricultural land, a long term capital gain, exempted under Income Tax Act - Assessee owns the agricultural lands situated at Mankal village in Maheswaram Mandal of R.R. Dist - During the year, i.e., 2007-08, the assessee has sold the entire land on 1.12.2006 to M/s. Prajay Holding Pvt. Ltd. for a total consideration of ₹ 24,81,60,000 - Held that:- Agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee – Reliance is placed upon the cases s.a. DCIT vs. Arijit Mitra[2011 (8) TMI 556 - ITAT, KOLKATA]; M.S. Srinivas Naicker vs. ITO [2007 (1) TMI 149 - MADRAS High Court ] etc. It is important to note that what was the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. 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. 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 and with this intention assessee entered into lease agreement and even there was no intention to sell the land in future at that point of time. It was due to certain compelling circumstances came into picture at a later stages, the assessees were forced to sell the land. 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 – Appeal allowed - Decided in favor of Assessee. Issues Involved:1. Classification of income from the sale of agricultural land: Whether it should be treated as business income or capital gain.2. Determination of the nature of the land: Whether the land in question is agricultural land or non-agricultural land.3. Assessment of the intention behind the purchase and sale of land: Whether it was an investment or an adventure in the nature of trade.Detailed Analysis:1. Classification of Income from the Sale of Agricultural Land:The primary issue is whether the income arising from the sale of agricultural land should be classified as business income or capital gain. The assessees argued that the income should be treated as exempt capital gain since the land was agricultural and situated outside the municipal limits, thus not falling under the definition of a capital asset as per Section 2(14) of the IT Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the income as business income from an adventure in the nature of trade.2. Determination of the Nature of the Land:The AO noted that the land was purchased for a substantial amount and then sold at a significantly higher price within a short period, suggesting a business motive rather than an investment. The AO highlighted that the land was given on lease to M/s. VVT Agritech Pvt. Ltd., which was a company floated by the assessees, and the lease was canceled within a year, followed by the sale of the land to a real estate developer. The AO concluded that the land was not genuinely intended for agricultural use, despite being classified as agricultural in revenue records.3. Assessment of the Intention Behind the Purchase and Sale of Land:The AO and the CIT(A) both concluded that the assessees' intention was to profit from the sale of the land, rather than to hold it as an investment for agricultural purposes. The AO pointed out that the lease agreement with M/s. VVT was a facade, and the land was sold to a construction company for a substantial profit, indicating a business transaction. The CIT(A) further noted that the assessees were not regular agriculturists and had other sources of income, reinforcing the view that the transaction was an adventure in the nature of trade.Tribunal's Decision:The Income Tax Appellate Tribunal (ITAT) Hyderabad examined the facts and legal principles involved in determining whether the income from the sale of the land should be treated as business income or capital gain. The ITAT considered various judicial precedents and the specific circumstances of the case, including the classification of the land in revenue records, the actual use of the land, and the intention behind its purchase and sale.The ITAT concluded that the land in question was agricultural land, as evidenced by its classification in revenue records and the agricultural activities carried out on it. The Tribunal noted that the land was situated outside the municipal limits and had not been converted for non-agricultural use. The ITAT also emphasized that the mere fact of selling the land at a profit, without more, does not automatically convert the transaction into an adventure in the nature of trade.The ITAT held that the income from the sale of the land should be treated as exempt capital gain, as the land was agricultural and did not fall under the definition of a capital asset as per Section 2(14) of the IT Act. The Tribunal allowed the appeals of the assessees, ruling that the profits from the sale of the land were not taxable as business income.Conclusion:The ITAT Hyderabad's judgment emphasizes the importance of the intention behind the purchase and sale of land, the classification of the land in revenue records, and the actual use of the land in determining whether the income from its sale should be treated as business income or capital gain. The Tribunal's decision underscores that the mere fact of selling land at a profit does not automatically convert the transaction into an adventure in the nature of trade, especially when the land is classified and used as agricultural land.