2022 (11) TMI 1030 - AT - Income Tax

Land Sale Classified as Business Income; Cash Payments Disallowed

Shri Manish Ambalal Patel Versus ITO, Ward-2 (4) Vadodara.

Shri Manish Ambalal Patel Versus ITO, Ward-2 (4) Vadodara. - TMI Issues Involved:1. Classification of gain from the sale of agricultural land as business income.2. Disallowance of payment made to farmers under section 40A(3) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Classification of Gain from Sale of Agricultural Land as Business IncomeThe primary issue in the appeal was whether the gain from the sale of agricultural land should be treated as business income or exempt under section 10 of the Income Tax Act, 1961. The assessee claimed an exemption of Rs. 28,49,662/- under section 10, arguing that the land sold was agricultural and situated outside the specified limits of 8 kilometers from the municipal boundary, thus qualifying as rural agricultural land under section 2(14) of the Act.The Assessing Officer (AO) conducted a detailed inquiry and found that the assessee, along with two associates, had acquired the land for the purpose of selling it to KEC International Ltd. (KECIL). The AO noted that the land was converted from agricultural to non-agricultural land to facilitate the sale, which was a precondition for KECIL's purchase. The AO concluded that the transaction was an adventure in the nature of trade, aimed at making gains from the acquisition and sale of the land, thus classifying the income as business income.The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the land was non-agricultural at the time of sale and that the sale was conditional upon its conversion to non-agricultural land. The CIT(A) emphasized that the sale deed was valid only after the land's conversion, indicating the intention to derive profit from converting agricultural land to non-agricultural land.The Tribunal also agreed with the CIT(A)'s findings, stating that the distance from the municipal limit was irrelevant since the land was non-agricultural. Therefore, the conditions for exemption under section 2(14) were not met, and the income was rightly classified as business income.Issue 2: Disallowance of Payment Made to Farmers Under Section 40A(3)The second issue was the disallowance of cash payments made to farmers for acquiring the land under section 40A(3) of the Act. The AO disallowed all expenditures incurred in cash, as the payments violated the provisions of section 40A(3).The CIT(A) upheld the AO's decision, stating that section 40A(3) applies to business expenditures. Since the income from the sale of land was classified as business income, the disallowance under section 40A(3) was justified.The assessee argued that the payment made to farmers should not be disallowed as the transaction was not a business activity but a gain from the sale of agricultural land. However, the Tribunal rejected this argument, reiterating that the income was taxable as business income. Consequently, the disallowance under section 40A(3) was upheld.Conclusion:The appeal was dismissed, with the Tribunal affirming the classification of income from the sale of land as business income and upholding the disallowance of cash payments under section 40A(3). The Tribunal's decision was based on the findings that the land was non-agricultural at the time of sale and that the transaction was an adventure in the nature of trade.