2025 (5) TMI 1173 - AT - Income Tax

Enhanced Land Compensation Taxed as Business Income, Not Capital Gains, Under Section 10(37) Agricultural Land Exemption Rules

The SC/Tribunal ruled that enhanced land compensation is taxable as business income, not capital gains. The land was purchased for resale, constituting ... Characterization of receipt - Exemption from income tax u/s 10(37) - enhanced compensation received by the appellant in terms of arbitration award given by the Principal Sub-Court of Kozhikode - HELD THAT:- Considering true nature of the subject land, which were acquired by the Government of Kerala. From the statement of facts narrated above, it is clear that the appellant had entered into agreement along with other eight persons to develop this property. The appellant along with other eight persons had entered into an agreement with the sellers and it is mutually agreed to share the profits as per the terms stipulated in the said agreement. These facts would clearly establish that the subject land was purchased by the appellant along with eight other persons with an intention to resale the same for profit, which constitute “an adventure in the nature of trade”. Therefore, it is clearly a stock in trade as held in the case of Ashok Kumar [2017 (12) TMI 1358 - KERALA HIGH COURT] following the judgment of [1993 (10) TMI 41 - BOMBAY HIGH COURT] and also there is no evidence on record to show that the appellant had carried out any agricultural activity on the subject land. Therefore, the compensation received by the appellant is not eligible for exemption under the provisions of section 10(37). Appeal filed by the assessee stands dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the enhanced compensation received by the appellant for the acquisition of land by the Government of Kerala is taxable under the Income-tax Act, 1961;(b) Whether the subject land qualifies as 'rural agricultural land' exempt from tax under section 10(37) of the Income-tax Act;(c) Whether the compensation received by the appellant constitutes capital receipt or business income, specifically whether the transaction amounts to 'an adventure in the nature of trade';(d) The applicability of the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act ('RFCTLARR Act') to the compensation received;(e) The evidentiary value of certificates and agreements presented to establish the nature of the land and the transaction.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (c): Taxability of Enhanced Compensation and Nature of TransactionRelevant legal framework and precedents: The Income-tax Act, 1961 governs taxation of income, including profits and gains from business or capital gains. Section 2(14) defines 'capital asset,' and section 10(37) exempts capital gains arising from transfer of certain agricultural land. The characterisation of receipt as capital or business income is critical. The principles laid down in Ashok Kumar v. CIT (2018) 89 taxmann.com 145 (Kerala) and the Bombay High Court decision in (1994) 209 ITR 946 (Bom.) are directly relevant, where land transactions were held to be 'adventure in the nature of trade' when land was acquired with intention to resale for profit.Court's interpretation and reasoning: The Tribunal carefully examined the facts and agreements between the appellant and co-venturers, which clearly demonstrated that the land was purchased jointly with the intention to develop and resell for profit. The appellant and eight others contributed capital and entered into a joint venture agreement to purchase the land, indicating a business purpose rather than holding as capital asset for agricultural use.The Tribunal noted absence of any evidence that the land was used for agricultural purposes, including no proof of actual tilling two years prior to sale, which is a requirement to classify land as agricultural under the Income-tax Act. Consequently, the land was held to be stock-in-trade rather than capital asset.Key evidence and findings: The joint venture agreement dated 27.02.2008, oral and written agreements for purchase, payment of consideration, and the fact that the appellant's share of enhanced compensation was brought to tax as business profit by the Assessing Officer (AO) were critical. The appellant's failure to produce evidence of agricultural activity was significant.Application of law to facts: Since the land was held as stock-in-trade, the enhanced compensation received on acquisition by the government was taxable as business income. The exemption under section 10(37) for capital gains on transfer of rural agricultural land was held inapplicable.Treatment of competing arguments: The appellant argued that the land was rural agricultural land and thus exempt under section 10(37), relying on a certificate from the Village Officer. The Tribunal found this insufficient in the absence of evidence of agricultural use and actual tilling. The CIT(A) and Tribunal rejected the appellant's contention, emphasizing the intention and nature of the transaction over mere classification or certificates.Conclusions: The enhanced compensation received by the appellant is taxable as business income because the land was acquired with the intention of resale and profit, constituting an adventure in the nature of trade. The exemption under section 10(37) does not apply.Issue (b): Classification of the Land as Rural Agricultural LandRelevant legal framework and precedents: Section 2(14) of the Income-tax Act defines 'capital asset' excluding certain agricultural land, and section 10(37) exempts capital gains arising from transfer of such land. The classification depends on the nature of land use, location, and actual agricultural activity, including the requirement of actual tilling for two years preceding transfer.Court's interpretation and reasoning: The Tribunal noted that the appellant failed to demonstrate actual agricultural use of the land. The certificate from the Village Officer stating the land as agricultural was not sufficient to override the factual matrix showing the land was purchased for resale and development. The Tribunal accepted the CIT(A)'s finding that no evidence was on record to show actual tilling or agricultural activity for two years prior to sale.Key evidence and findings: Absence of agricultural activity records, lack of cultivation evidence, and the joint venture agreement for purchase and resale were determinative.Application of law to facts: The land was not considered rural agricultural land for the purpose of exemption under section 10(37) because it was held as stock-in-trade and not used for agricultural purposes.Treatment of competing arguments: The appellant's reliance on the Village Officer's certificate was rejected as insufficient to establish agricultural character without corroborative evidence of use.Conclusions: The land does not qualify as rural agricultural land exempt under section 10(37).Issue (d): Applicability of RFCTLARR ActRelevant legal framework: The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 ('RFCTLARR Act') governs land acquisition procedures and compensation post its enactment.Court's interpretation and reasoning: The Tribunal noted that the compensation in question was received before the RFCTLARR Act came into force. Therefore, the provisions of this Act were held not applicable to the compensation received by the appellant.Key evidence and findings: The compensation was awarded initially in 2010 and enhanced in 2013, both prior to the RFCTLARR Act's commencement.Application of law to facts: The Tribunal ruled the RFCTLARR Act provisions do not apply retrospectively to the compensation received.Treatment of competing arguments: The appellant did not significantly contest this point; the Tribunal affirmed the lower authority's view.Conclusions: The RFCTLARR Act is not applicable to the compensation received.Issue (e): Evidentiary Value of Certificates and AgreementsCourt's interpretation and reasoning: The Tribunal emphasized that documentary evidence such as agreements and payments made towards purchase were reliable indicators of the nature of the transaction. Conversely, certificates such as the Village Officer's certificate, without supporting evidence of agricultural use, were insufficient to establish the land's character as agricultural.Key evidence and findings: The joint venture agreement and payment records were accepted as proof of intention to trade in land. The absence of agricultural activity evidence was decisive against the appellant.Application of law to facts: The Tribunal applied a holistic approach, giving precedence to the intention and conduct of parties over mere classification certificates.Conclusions: Agreements and conduct of parties established the true nature of the transaction; certificates alone were inadequate to alter the tax treatment.3. SIGNIFICANT HOLDINGSThe Tribunal held:'These facts would clearly establish that the subject land was purchased by the appellant along with eight other persons with an intention to resale the same for profit, which constitute 'an adventure in the nature of trade'. Therefore, it is clearly a stock in trade as held by the Hon'ble Kerala High Court in the case of Ashok Kumar v. CIT (2018) 89 taxmann.com 145 (Kerala), following the judgment of the Hon'ble Bombay High Court in the case of (1994) 209 ITR 946 (Bom.) and also there is no evidence on record to show that the appellant had carried out any agricultural activity on the subject land. Therefore, the compensation received by the appellant is not eligible for exemption under the provisions of section 10(37) of the Act.'Core principles established include:Land acquired with intention to develop and resell for profit constitutes stock-in-trade and income from compensation is taxable as business income.Exemption under section 10(37) applies only to capital gains arising from transfer of rural agricultural land used for agricultural purposes and not to land held as stock-in-trade.Certificates indicating agricultural classification are insufficient without evidence of actual agricultural use.Compensation received prior to the RFCTLARR Act is not governed by its provisions.Final determinations on each issue:The enhanced compensation received by the appellant is taxable as business income.The land does not qualify as rural agricultural land exempt under section 10(37).The RFCTLARR Act is not applicable to the compensation received.The appeal filed by the appellant is dismissed.