2017 (12) TMI 529 - AT - Income Tax

Tribunal rules land sale profit as exempt capital gain under Tax Act

Smt. Heenaben B. Mehta Versus ITO, Bhuj

Smt. Heenaben B. Mehta Versus ITO, Bhuj - TMI Issues Involved:1. Determination of the nature of income derived from the sale of land—whether it is business income or capital gain.2. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Determination of Nature of Income:The primary issue in this appeal was to determine whether the profit from the sale of land should be treated as business income or capital gain. The assessee declared the profit as exempt, claiming it was derived from agricultural land, which falls outside the purview of section 2(14) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the assessee as a trader in land and assessed the profit as business income.The CIT(A) formulated three questions to adjudicate the controversy:- Is the sold land 'agricultural land'Rs.- Was the transaction an 'adventure in the nature of trade' requiring the profits to be taxed as business incomeRs.- Is the transaction a sham transaction and can it be labeled as a colorable deviceRs.The CIT(A) concluded that the land was not agricultural and the transaction was not a sham. The controversy, therefore, boiled down to whether the transaction was an adventure in the nature of trade.The CIT(A) applied several tests to determine the nature of the transaction, including:- Whether the land was used for agricultural purposes at the time of purchase.- The duration of holding the land.- The proportion of income derived from agricultural operations.- Permissions obtained for non-agricultural use.- The surrounding area and physical characteristics of the land.The CIT(A) concluded that the transaction was an adventure in the nature of trade, primarily because the land was held for only seven months, sold at a significantly higher price, and there was no substantial evidence of agricultural use.The Tribunal, however, disagreed with the CIT(A). It emphasized that the assessee was an agriculturist, purchased land more than 20 km away from the municipality, and had no history of trading in land. The land was recorded as agricultural in the revenue records, and the assessee did not borrow money for the purchase. The Tribunal concluded that the profit from the sale of land should be treated as exempt capital gain under section 2(14) of the Income Tax Act.2. Imposition of Penalty under Section 271(1)(c):Given that the Tribunal allowed the appeal concerning the quantum addition, the penalty imposed under section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income was also canceled. The Tribunal reasoned that since the quantum on which the penalty was based was deleted, the penalty could not stand.Conclusion:The Tribunal allowed both appeals of the assessee. It directed the AO to treat the profit from the sale of agricultural land as exempt under section 2(14) of the Income Tax Act and canceled the penalty imposed under section 271(1)(c).