2016 (7) TMI 185 - AT - Income Tax

Tribunal rules on tax treatment of land sale: converted agricultural land classified as taxable capital gains

Dy. Commissioner of Income Tax Versus Shri B. Sudhakar Pai

The Tribunal upheld the AO's decision to tax the gains from the sale of lands as capital gains, overturning the CIT (Appeals) ruling. The lands, although ... Agricultural land or Non agricultural land - nature of land - Gain on sale of agricultural lands exempt from tax as per the provisions of section 2(14) - Held that:- The purchase and sale of land within a short span of period is not in dispute and further, the assessee got converted the land in question from agriculture to non-agricultural industrial purpose with the sole purpose and intent to sell the land for industrial purpose. When the land was already converted from agriculture to non-agricultural industrial use then merely it was wrongly shown in the revenue record as agricultural land would not change the actual fact of conversion from agriculture to non-agriculture purpose. Since the assessee has claimed to have some ancestral agricultural land which is not subject matter of the dispute in this case therefore, offering agriculture income and acceptance of the same wouldn’t not change the character of the land in question at the time of sale. Considering the fact that the land in question were held by the assessee for a very short period of time and the intended future use is undisputedly for non- agriculture industrial purpose as the land was sold to the purchaser with the condition for non-agricultural use clearly established that the assessee did not intend to use the land in question for agriculture purpose in the past as well as in future. Thus we have no hesitation to hold that the land in question does not fall under the exclusion clause (iii) of section 2(14) of the income tax act. Accordingly, we set aside the impugned order of the CIT (A) and restore the order of the A.O. - Decided in favour of revenue Issues Involved:1. Whether the lands sold were agricultural lands or industrially converted lands.2. Whether the CIT (Appeals) erred in relying on the decision of the Madras High Court.3. Whether the lands in question should be treated as capital assets and the gains thereon taxed as capital gains.Detailed Analysis:Issue 1: Agricultural Lands vs. Industrially Converted LandsThe primary dispute revolves around whether the lands sold by the assessee were agricultural lands or had been converted to industrial lands prior to the sale. The assessee claimed the gains on the sale of these lands as exempt from tax under section 2(14) of the Income Tax Act, arguing that the lands continued to be used for agricultural purposes until the date of sale. The AO, however, noted that the lands had been converted from agricultural to non-agricultural (industrial) use before the sale, thus categorizing them as capital assets and taxing the gains as capital gains.The CIT (Appeals) sided with the assessee, accepting the evidence that the lands were used for agricultural purposes until the date of sale. However, the Tribunal found that the lands were converted to non-agricultural use just before the sale and were sold under an agreement that required them to be converted for industrial purposes. The Tribunal concluded that the lands did not qualify as agricultural lands at the time of sale, thus supporting the AO's view that the gains should be taxed as capital gains.Issue 2: Reliance on Madras High Court DecisionThe CIT (Appeals) had relied on a decision of the Madras High Court to support the assessee's claim. However, the Tribunal found this reliance to be misplaced, as the facts of the present case were distinguishable. The Tribunal emphasized that the intention behind the conversion and the actual use of the land at the time of sale were crucial factors, which were not adequately addressed by the CIT (Appeals).Issue 3: Treatment as Capital Assets and Taxation of GainsThe Tribunal examined the criteria laid down by the Supreme Court and various High Courts for determining whether land is agricultural. Key factors include the actual use of the land, the intention behind its use, and the period for which it was used for agricultural purposes. The Tribunal noted that the assessee had converted the land to non-agricultural use just before the sale and had sold it under an agreement that required such conversion. The Tribunal also highlighted that the land was not intended to be used for agricultural purposes in the future.The Tribunal referred to several judicial precedents, including the Supreme Court's decision in CIT vs. Raja Binoy Kumar Sahas Roy and Smt. Sarifabibi Mohmed Ibrahim vs. CIT, which stressed the importance of the actual and intended use of the land. The Tribunal concluded that the lands in question did not qualify as agricultural lands at the time of sale and thus did not fall under the exclusion clause of section 2(14) of the Income Tax Act. Consequently, the gains from the sale were rightly treated as capital gains by the AO.ConclusionThe Tribunal set aside the order of the CIT (Appeals) and restored the order of the AO, thereby treating the gains from the sale of the lands as taxable capital gains. The appeal of the revenue was allowed. The decision emphasized the importance of the actual and intended use of the land in determining its classification for tax purposes.