2013 (10) TMI 928 - AT - Income Tax

Land classified as agricultural, not business asset. Profit treated as capital gains. Appeal allowed, no interest/penalties.

The Tribunal ruled that the land in question was agricultural land, not a business asset. The profit from its sale should be treated as capital gains, not ... Agricultural land to be ‘Capital Asset’ within the meaning u/s 2(14) of the Income Tax Act – Held that:- Agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of 'capital asset'. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situated in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. In the present case, admittedly, the 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. This is supported by the order in the case of M.S. Srinivas Naicker vs. ITO [2007 (1) TMI 149 - MADRAS High Court] Sale of agricultural land to fall within the head ‘Business Income’ – Held that:- 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 even there was no intention to sell the land in future at that point of time. It was due to the boom in real estate market came into picture at a later stage, the assessee has sold the land. Merely because of the fact that the land was sold for profit, 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. The period of holding should not suggest that the activity was an adventure in the nature of trade – Decided in favor of Assessee. Issues Involved:1. Classification of the transaction involving purchase and sale of agricultural land as a business transaction or capital asset.2. Determination of whether the land in question is agricultural land.3. Taxability of the resultant profit from the sale of land.4. Validity of interest levy under Section 234B of the IT Act.5. Initiation of penalty under Sections 271(1)(b) and 271(1)(c) of the IT Act.Issue-wise Detailed Analysis:1. Classification of the Transaction:The primary issue was whether the purchase and sale of agricultural land by the assessee should be treated as a business transaction or as a capital asset. The Assessing Officer (AO) treated the transaction as a business transaction, adding Rs. 1,23,48,500 to the assessee's income, arguing that the land was purchased with the intent of trading. The CIT(A) confirmed this decision, citing the Supreme Court judgments in G. Venkataswami Naidu & Co. vs. CIT and Deepak Jyoti & Arati Trust vs. CIT, which emphasize the intent and nature of activities carried out by the assessee.2. Determination of Agricultural Land:The assessee contended that the land was agricultural, supported by revenue records and patta pass books. The CIT(A) observed that while some agricultural activities were claimed, there was insufficient evidence of organized agricultural operations. The land was not systematically used for agriculture, and no significant agricultural income was reported. The CIT(A) also noted that the land was not converted into plots or developed for real estate, which would indicate a business transaction.3. Taxability of the Resultant Profit:The assessee argued that the profit from the sale of the land should be taxed under capital gains (Section 45) and not as business income (Section 28). The assessee maintained that the land was held as a capital asset, reflected in the balance sheet, and agricultural operations were carried out. The Tribunal agreed with the assessee, emphasizing that the land was treated as a capital asset, and there was no evidence of systematic trading activities. The land was sold in acreage, not as plots, and was situated beyond 8 km from municipal limits, confirming its agricultural nature.4. Validity of Interest Levy under Section 234B:The assessee contested the levy of interest under Section 234B, arguing that the case did not warrant such levy. The Tribunal, agreeing with the assessee's overall contention that the land was a capital asset and not stock-in-trade, implicitly supported the view that the interest levy under Section 234B was not applicable.5. Initiation of Penalty under Sections 271(1)(b) and 271(1)(c):The assessee also challenged the initiation of penalty proceedings under Sections 271(1)(b) and 271(1)(c). Given the Tribunal's conclusion that the land was a capital asset and not a business asset, the basis for penalties under these sections was undermined. The Tribunal ruled that there was no question of initiating penalties under these sections.Conclusion:The Tribunal concluded that the land in question was agricultural land and not a business asset. The resultant profit from its sale should be treated as capital gains and not business income. Consequently, the appeal of the assessee was allowed, and there was no basis for the levy of interest under Section 234B or the initiation of penalties under Sections 271(1)(b) and 271(1)(c) of the IT Act. The order was pronounced in the open court on 27th September 2013.