2021 (7) TMI 1083 - AT - Income Tax

Correct head of income - profit on sale of site - capital gain or business income - AO treated the amount received on sale of sites as income from business instead of capital gain and denied exemption u/s. 54F - HELD THAT - In this case, the purpose and design of assessee in utilization of the land is pointed out towards carrying out adventure in the nature of trade so as to maximise profit from this transaction. As noted earlier, though assessee purchased agricultural land, no agricultural activity has been carried out - as converted into non-agricultural land within 3 months of purchase and later land was converted into small parts of residential units to realise optimum value on sale. The conversion of agricultural land into residential stock in trade of his business of selling the plots of land is for earning profit. In this case, the assessee himself has developed residential plots and then sold it to individual buyers. Therefore, we affirm the findings of the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade in the form of residential plots of assessee s business. The said conversion and development of residential plots has happened by assessee s own admission during and the intent of assessee has thus been demonstrated through his own actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head capital gain in the year(s) the stock-in-trade is sold or transferred. Sales realization of the stock-in-trade over such fair market value is required to be assessed as business income . Therefore, taxability arising on conversion agricultural land into stock-in-trade to the extent it has been sold during the year arises during the impugned assessment year. The matter is accordingly set aside to the file of Assessing Officer to determine the capital gains for fresh consideration in accordance with the provisions of section 45(2) of the Act as well as business income on sale of such plots, after providing opportunity of being heard to the assessee. This issue is accordingly disposed of with the above directions. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Treatment of profit on sale of sites as income from business or capital gains.
2. Denial of exemption u/s. 54F of the Act.
3. Confirmation of interest u/s.234A of the Act.

Issue 1: Treatment of profit on sale of sites as income from business or capital gains.
The appellant contended that the profit on the sale of sites should be assessed under the head 'income from capital gains' rather than as income from business. The appellant argued that the sites were formed out of agricultural lands held for several years and the profit should be treated as capital investment. The appellant also cited various cases, including a High Court judgment, to support their claim. However, the Assessing Officer (AO) treated the amount received on the sale of sites as income from business and denied exemption u/s. 54F of the Act. The Commissioner (A) upheld the AO's decision. The Tribunal observed that the purpose and design of the appellant in utilizing the land indicated an adventure in the nature of trade to maximize profit. The Tribunal agreed with the findings that the conversion of agricultural land into residential stock-in-trade for selling plots was for profit-making purposes. The Tribunal directed the AO to determine capital gains and business income on the sale of plots, setting aside the matter for fresh consideration.

Issue 2: Denial of exemption u/s. 54F of the Act.
The appellant had claimed exemption u/s. 54F of the Act concerning the sale of sites. However, the AO denied this exemption, which was confirmed by the Commissioner (A). The Tribunal's decision on the treatment of the profit as income from business instead of capital gains had a direct impact on the eligibility for exemption u/s. 54F. The Tribunal's direction to reassess the capital gains and business income would also affect the eligibility for this exemption. The issue of exemption u/s. 54F was intertwined with the characterization of the income from the sale of sites, which was the primary focus of the appeal.

Issue 3: Confirmation of interest u/s.234A of the Act.
The appellant raised a concern regarding the confirmation of interest u/s.234A of the Act. However, the Tribunal's decision primarily addressed the treatment of the profit on the sale of sites as income from business or capital gains, as well as the denial of exemption u/s. 54F. The Tribunal's order did not specifically delve into the issue of interest u/s.234A. Therefore, the Tribunal's decision did not provide a detailed analysis or resolution regarding the appellant's objection to the confirmation of interest under this section.

In conclusion, the Tribunal partially allowed the appeal by directing the reassessment of capital gains and business income on the sale of plots, emphasizing the profit-making motive behind the conversion of agricultural land into residential stock-in-trade. The decision impacted the eligibility for exemption u/s. 54F of the Act, highlighting the intricacies of tax treatment concerning such transactions.