2018 (11) TMI 1000 - AT - Income Tax

Determination of character of income - Income from sale of plot of land - LTCG or Business income - commercial intention - Held that - The assessee could not find any single buyer for sale of entire piece of land. The assessee essentially has not carried out any development work as alleged except necessary basic requirements like leveling approach road from pucca roads and other statutory requirements necessary for plotting of said land as per directions of the authority for sale of individual plots. The assessee in essence has sold the land by dividing into pieces of land and profit therefrom has been offered as capital gain in sync with the declared position in the regard. As reiterated before the CIT(A) that land in question (Kalhar land & Sola land) before its sale was declared as capital asset in the balance sheet inception. Thus the intention of the assessee to hold the assets as capital assets was evident from the treatment given in the books of accounts. The assessee made para-wise rebuttal of the observations of the AO to plead that the land held by the assessee for a very long period of time before its sale could not be regarded as trading asset for its taxability under the head business income . CIT(A) after taking into account various submissions made on behalf of the assessee as reproduced in the appellate order correctly agreed with the claim of the assessee that gain arising on sale of land cannot be regarded as business income as against the claim of the assessee for its taxability under the head capital gains . - Decided in favour of assessee. Deduction claim under s.54F - CIT(A) found merit in the claim of the assessee that construction of the residential house on the land was complete and is supported by electricity bills property tax etc. - Held that - CIT(A) inter alia noted that the assessee has demonstrated and substantiated the completion of the house construction with reference to receipt of AMC for property tax. The cost of construction is made out of the capital gain deposit scheme where the assessee deposited Rs. 20 Lakhs and the evidences were found by the CIT(A) to establish direct link between withdrawals and the payment made for construction etc. The Revenue could not rebut the findings of the CIT(A) reproduced in the preceding paragraphs in this regard. Therefore we do not see any intangible reason to disturb the action for the CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Characterization of income from sale of land as 'capital gains' or 'business income.'
2. Eligibility for deduction under Section 54F of the Income Tax Act, 1961.

Detailed Analysis:

1. Characterization of Income from Sale of Land:

Background:
The assessee filed a return of income for AY 2010-11, declaring total income of Rs. 14,93,79,950/-, which included long-term capital gains from the sale of Kalhar and Sola lands. The AO recharacterized these gains as 'business income,' disputing the assessee's claim of them being 'capital gains.'

Arguments by the Assessee:
- The assessee, along with co-owners, held the land as a capital asset since its acquisition in 2003 and 2006.
- The land was shown as a capital asset in the balance sheet and subjected to wealth tax.
- The development agreement was with a developer who bore all development costs, and the assessee did not engage in any business activity regarding the land.

Observations by AO:
- The AO observed substantial improvement costs on Sola land, indicating a commercial motive.
- The AO argued that the treatment in the books does not determine the nature of the asset.

CIT(A) Findings:
- The CIT(A) accepted the assessee's claim, noting the land had been consistently shown as a capital asset.
- Previous assessments had accepted the land as a capital asset, and the AO’s recharacterization lacked a strong basis.
- The CIT(A) cited several judgments, including the Gujarat High Court in the case of Premji Gopalbhai, to support the assessee's position.

Tribunal's Conclusion:
- The Tribunal upheld the CIT(A)'s decision, noting the long holding period and consistent treatment of the land as a capital asset.
- The AO failed to provide substantial evidence to recharacterize the income as 'business income.'
- The Tribunal emphasized that the intention at the time of purchase and the treatment in the books were crucial factors, and the AO's action was primarily revenue-driven.

2. Eligibility for Deduction under Section 54F:

Background:
The assessee claimed a deduction of Rs. 1,28,69,619/- under Section 54F for the construction of a residential house.

Arguments by AO:
- The AO denied the deduction, arguing the construction cost was disproportionately low compared to the land cost.
- The AO also noted the absence of a completion certificate or electricity bills as evidence of construction.

CIT(A) Findings:
- The CIT(A) found merit in the assessee's claim, supported by property tax receipts and other documentary evidence indicating the completion of construction.
- The CIT(A) noted the appellant had complied with all conditions for the deduction under Section 54F.

Tribunal's Conclusion:
- The Tribunal supported the CIT(A)'s findings, noting the evidence provided by the assessee substantiated the completion of construction.
- The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the deduction under Section 54F.

Final Decision:
- The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, upholding the CIT(A)'s order on both the characterization of income and the eligibility for deduction under Section 54F.