2013 (9) TMI 49 - AT - Income Tax

Assessee wins case on land sale classification: Capital Gains over Business Income

The Tribunal ruled in favor of the assessee, determining that the gains from the sale of land should be treated as 'Capital Gains' rather than 'Business ... Sale of land after converting it into plots - Business income or capital gain - assessee HUF was having agricultural land which was converted into non-agricultural land and certain development expenditure was incurred and then plots were sold in few years. - Deduction u/s 54EC & 54F - Held that:- a clear cut distinction is that this appellant has not acquired the land but the land was inherited by the assessee, therefore, towards purchase of land no investment was made by this assessee. Hence, there was no question of examining the intention of the assessee at the time of acquisition of this asset - there was no commercial intention when the land came into the possession of the assessee. It was an automatic acquisition of land through inheritance - whereof assessee has converted ancestral land into stock in trade of his business and sold it, since sale of plot was a solitary transaction and was completed within a short period, therefore, surplus resulting from such transaction was held to be taxable as capital gains and not as business income - Following decision of Commissioner Of Income-Tax Versus V. A. Trivedi [1987 (1) TMI 12 - BOMBAY High Court] and Commissioner of Income-Tax (Central), Calcutta Versus Daulat Ram Rawatmall [1972 (9) TMI 9 - SUPREME Court] - Decided in favour of assessee. Issues Involved:1. Whether the gain arising on the sale of land should be treated as 'Business Income' or 'Capital Gains'.2. Whether the assessee's claim for deduction under sections 54EC and 54F of the Income Tax Act was correctly disallowed.Issue-wise Detailed Analysis:1. Treatment of Gain Arising on Sale of Land:Facts and Arguments:- The assessee, in HUF capacity, filed a return disclosing long-term capital gains as nil, claiming deductions under sections 54EC and 54F.- The Assessing Officer (AO) noted that the assessee sold 54 plots of land, which were originally agricultural but converted into non-agricultural land with some development expenses incurred.- The AO treated the gains as 'Business Income' based on the activities undertaken by the assessee, such as converting the land, incurring development expenses, and selling the plots over several years.- The assessee argued that the land was inherited and not purchased, and the conversion and minor development were necessary to make the land saleable, not indicative of a business activity.AO's Decision:- The AO rejected the assessee's claim, stating that the conversion and development of the land indicated a business activity aimed at earning profits.- The AO relied on several judicial precedents, including Raja J. Rameshwar Rao Vs. CIT and CIT Vs. V. A. Trivedi, to support the decision.CIT(A)'s Decision:- The CIT(A) upheld the AO's decision, emphasizing that the conversion of land into non-agricultural land in 1987 indicated the intention to earn income from the land.- The CIT(A) noted the year-wise sale of plots as evidence of a business activity.Tribunal's Analysis:- The Tribunal considered several factors in favor of the assessee:1. The land was inherited, not purchased, hence lacking the initial investment typical of a business activity.2. The development expenses were minimal and aimed at protecting and enhancing the value of the land, not indicative of a business.3. Conversion to non-agricultural land alone does not constitute a business activity.4. The assessee's investment in bonds and a residential house suggested no intention of entering into the real estate business.5. The land was held for over 18 years, qualifying it as a 'Long Term Capital Asset'.6. Selling the land in plots does not change its nature from a capital asset to stock-in-trade.Tribunal's Decision:- The Tribunal reversed the findings of the AO and CIT(A), ruling that the gains should be treated as 'Capital Gains' and not 'Business Income'.- The Tribunal cited relevant case laws supporting the assessee's position, including CIT Vs. Suresh Chand Goyal and Ajit Kumar Patel Vs. DCIT.2. Deduction under Sections 54EC and 54F:Facts and Arguments:- The assessee claimed deductions under sections 54EC and 54F for investments made in bonds and a residential house, respectively.- The AO disallowed these deductions, treating the gains as business income.Tribunal's Decision:- Given the Tribunal's ruling that the gains are 'Capital Gains', the assessee's claim for deductions under sections 54EC and 54F was deemed valid.- The Tribunal allowed the deductions, reversing the AO's disallowance.Additional Issue on Sale Consideration:Facts and Arguments:- The assessee contested the AO's valuation of the total sale consideration at Rs. 92,19,252/- for 54 plots, arguing that only 26 plots were sold during the year for Rs. 40,66,567/-.- The CIT(A) had sent this issue back to the AO for reconsideration.Tribunal's Decision:- The Tribunal noted that the AO had already granted the required relief in an order dated 12th July 2010.- Therefore, this ground was dismissed as redundant.Conclusion:The appeal of the assessee was partly allowed, with the Tribunal ruling that the gains from the sale of land should be treated as 'Capital Gains', allowing the deductions under sections 54EC and 54F, and dismissing the redundant ground on the sale consideration.