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Income Tax Appellate Tribunal, “RAJKOT” BENCH, RAJKOT
Before: SHRI PRADIP KUMAR KEDIA
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-3, Rajkot, (‘CIT(A)’ in short), dated 10.12.2015 arising in the assessment order dated 04.03.2014 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2011-12.
Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 2 -
The grounds of appeal raised by the assessee read as under:
“1. The learned Commissioner of Income-tax (Appeals)-3, Rajkot erred in confirming the action of the Income-tax Officer in making addition of Rs.1,13,56,933/- by treating the income from sale of impugned properties as business income as against long term capital gain of Rs.1,00,56,134/- shown by the appellant.
2. The learned Commissioner of Income-tax (Appeals)-3, Rajkot erred in holding that the appellant purchased and sold the lands with the intention of adventure in the nature of trade.
3. The learned Commissioner of Income-tax (Appeals)-3, Rajkot failed to appreciate the capital nature of such lands accepted in past income-tax assessments, wealth-tax returns and treatment in books.”
The relevant facts, in short, are that the assessee filed return of income for AY 2011-12 declaring total income of Rs.1,03,87,200/- and agricultural income of Rs.1,30,633/-. The return of income of assessee was subjected to scrutiny assessment. In the course of assessment proceedings, the AO noticed from the return of income that the assessee HUF has inter alia shown long term capital gains of Rs.1,00,56,134/- on sale and/or capital contributions to partnership firm of as many as 42 immovable properties being land parcels. The AO opined that profits arising from land sales transfer of land parcels amounts to business activity and not merely realization of capital investments. Consequently, a show cause notice under s.142(1) of the Act was issued intending to treat the profit arising on sale of such properties as ‘business income’ and consequently to deny concessional tax treatment available as long term capital gains arising on sale of capital assets. In response, the assessee filed a detailed reply narrating facts and circumstances existing in case in justification of taxability of gains arising on sale of such properties under the head ‘capital gains’. The aforesaid reply of the assessee was reproduced by the AO in para 4 of the assessment order. The AO, however, did not find merit in an elaborate justification canvassed on behalf of the Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 3 - assessee. The AO accordingly realigned the head of income and treated the income declared by assessee as ‘business income’ instead of ‘capital gain’ claimed.
Aggrieved, the assessee preferred appeal before the CIT(A). However, the CIT(A) declined to interfere with the order of the AO and denied the relief claimed by the assessee.
Further aggrieved, the assessee preferred appeal before the Tribunal.
When the matter was called for hearing, the learned AR for the assessee relied upon the detailed submission made before the AO & CIT(A) on factual aspects. It was adverted that the assessee jointly holds about 215 bigha agricultural lands in co-ownership at different locations at Junagadh. It was submitted that the assessee has derived agricultural income from the land parcels acquired mainly in F.Y. 2003-04 as tabulated at page no.10 of the assessment order. The land parcels were converted into non-agricultural land in F.Y. 2004-05 except Green city land which was converted in F.Y. 1998-99. Even after conversion, the assessee continued to hold the land for about 5-6 years before a part of it could be sold in F.Y. 2010-11 relevant to AY 2011-12 in question. It was submitted that three land parcels were inter alia transferred to the partnership firm as a capital contribution in the capacity of a partner. It was further submitted that intention of the assessee to hold the land parcels as capital investment was loud and clear from the treatment given in the books maintained by the HUF. It was asserted that the assessee has simultaneously filed wealth tax return year after year from F.Y. 2006-07 to 2009-10 where the land impugned land parcels were shown as investment for the purposes of determination of wealth tax Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 4 - liability. It was thereafter submitted that had the impugned land in question were treated as stock-in-trade/business asset/trading asset instead of capital asset, no wealth tax liability would arise. It was next submitted that no interest bearing loans were utilized in any year for acquisition of land parcels held for such long time. It was stated that no special development expenses have been incurred which would express the commercial intents of assessee.
6.1 It was further argued that the transfer of land to the partnership firm as capital contribution is deemed as ‘transfer’ in the definition provided under s.2(47) of the Act. Consequently, the assessee is liable to capital gain tax under s.45(3) of the Act on such unreal transfers but only where the capital investment is transferred by assessee partner. If the allegations of the AO is accepted that the profits arising on sale/transfer of land parcels are business activity then long term capital gain declared to the extent of Rs.41,35,806/- as capital contributions to firm out of the total amount of Rs.1,00,56,134/-would not be regarded as ‘transfer’ under s.2(47) of the Act and consequently would not liable for taxation at all.
6.2 It was next contended that the assessee has not sold any property in the earlier year or in the subsequent year and there is total absence of regularity, frequency or a systematic action on the part of the assessee. It was contended that in these circumstances narrated above, the AO and the CIT(A), both have applied wrong tests to deny the concessional tax treatment available on transfer of capital asset of long term holding. It was submitted that the revenue authorities have wrongly justified their action primarily on the ground that the assessee is a join holder of land with outside parties and therefore the intention was to exploit the asset Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 5 - commercially as per market practices and the agricultural income is quite meager. The learned counsel for the assessee further defended his action and submitted that that merely because land parcels were converted into plots and part of it was sold out could not be regarded as adventure in the nature of trade, commerce etc. per se. The conversion was carried out to facilitate the marketability of land parcels.
6.3 The learned counsel accordingly pleaded that unjustified action of the revenue authorities requires to be cancelled and claim of the assessee to treat the gains arising on sale of land / plots as ‘capital gain’ requires to be restored.
The learned DR, on the other hand, relied upon the orders of lower authorities and contended that the conduct of assessee is with set purposes to exploit the land parcels with commercial spirit and thus the profits arising from such endeavors has been rightly treated as ‘business income’ by the Revenue.
We have considered the rival submissions and perused the material available on record. The substantive question placed for our consideration is whether the revenue authorities were justified in realigning and treating the ‘capital gains’ declared by the assessee on sale of certain land parcels to be ‘business income’ of the assessee (inviting higher tax slabs) in the given facts and circumstances.
8.1 The issue is essentially factual and thus no rigid legal principles could be applied to determine the issue. We have thus examined the issue from factual perspective as brought to our notice. On perusal of the contentions on behalf of the assessee, we Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 6 - find persuasive force in the claim made on behalf of the assessee that sale of 39 plots/land parcels and transaction of capital contribution of 3 plots to partnership firm out of 215 bigha agricultural land cannot be regarded as ‘business activity’ in the given set of factual matrix.
8.2 As per stated facts, the transactions entered into are neither regular nor continuous to rank it pari passu with some activities or adventures of commerce. The characterization of land parcels in the books of accounts as ‘capital asset’ coupled with wealth tax return filed by the assessee on such capital investments, adequacy of its own capital clearly undercourse the manifest intention of the assessee to hold land parcels/properties as ‘capital asset’ as claimed.
8.3 We note that assessee has factually demonstrated its conduct of lack of regularity, frequency & repetition in the purchase and sale of land parcels from the comparable statistics year after year. We find it apparent that the AO was simply guided by the considerations of Revenue alone outside the bounds of rationality. The AO has brushed aside the relevant pleas put forth on behalf of the assessee and acted on irrelevant considerations. The AO has omitted to attach any weight to the fact that the yield by way of agricultural income was reported year after year on such land. This apart, the assessee has sold the land in F.Y. 2011-12 after obtaining permission for conversion of land to non-agricultural land way back in F.Y. 2004-05 i.e. after a gap of 5-6 financial years. For taking adverse view, the AO was mainly guided by the fact that agricultural income is meager and the assessee applied for conversion immediately after acquisition of land which reveals the intention of commercial spirit. The cumulative effects of all Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 7 - circumstances most of which signifies the capital orientation were not weighed and co-ownership with third party was given undue primacy.
8.4 Significantly, the provisions of Section 2(14) of the Act defines a ‘capital asset’ whereby property of any kind held by the assessee, whether or not connected with his business or profession would fall within the sweep of expression ‘capital asset’. Thus, the law does not expect complete absence of business connection of an asset for the ascertainment of the character of asset. Property of ‘any kind’ is somewhat sweeping in nature which stipulates that property could be capital asset, even if, connected with business of the assessee.
8.5 In the instant case, the Revenue could not demonstrate any real substantive and systematic course of activity or conduct on the part of the assessee to characterize the income to be sourced from a business activity induced by commercial spirit. The assessee is entitled in law to hold certain class of asset as ‘capital asset’ even while he is dealing with the assets of similar nature in business with commercial objectives. In the instant case, the AO has inter alia alleged that the assessee is engaged in a systematic commercial exploitation of land in the capacity as a partner with other co- owners. This, in our view, cannot be seen as an handicap in the hands of HUF assessee and would not deprive the HUF assessee of treating the assets as capital assets. Thus, in the totality of extenuating circumstances existing in the present case, we find that plea of the assessee has merits and deserves acceptance.
8.6 We accordingly hold that claim of assessee to characterize the gain arising on sale of land parcels in question to be chargeable Mohanlal Laljibhai Ghodasara HUF vs. ITO] A.Y. 2011-12 - 8 - under the head ‘capital gain’ cannot be dislodged and replaced by ‘business income’. Hence, we set aside the order of the Revenue authorities and restore the action of the assessee in this regard.
In the result, the appeal of assessee is allowed.
This Order pronounced in Open Court on 23/03/2021
Sd/- Sd/- (MADHUMITA ROY) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 23/03/2021 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,