NATHABHAI PARSANA (LR. GANESHBHAI PARSANA,RAJKOT vs. ACIT CIR-2(1), RAJKOT

Although, this appeal filed by the assessee, for assessment year 2016-17, contains multiple ground of appeals. However, at the time of hearing we have carefully perused all the grounds raised by the Assessee. We find that most of the grounds raised by the assessee, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the asssessee. There are two main grievances of the assessee, which are as follows: (i) Issue of limited scrutiny: The case of the assessee was selected for limited scrutiny to examine the long-term capital gain, however, the assessing officer made addition on different item under the head, “income from business and profession”, without converting limited scrutiny into full scrutiny, by taking the permission from higher income tax authority. Hence, assessment order should be quashed. (ii) Long term capital gain Vs. Income from business. On merit, the grievance of the assessee, in this appeal is that the assessee sold the ancestor agricultural land and paid long-term capital gain. Some part of agricultural land was gifted to family members. Therefore, as per assessee, it should not be assessed under the head business income, as there is no motive to do the business, hence, it should be assessed under the head capital gain, and the assessee, accordingly, has shown the long-term capital gain in the return of income and paid the taxes there on. Hence, sale of ancestor agricultural land should be treated capital asset, therefore, assessing officer as well as ld CIT(A) both erred in treating the business income.

The facts of the case which can be stated quite shortly are as follows: the assessee filed return of income, declaring an income of Rs.15,38,290/-, on 30.08.2017. The case of the assessee was selected for limited scrutiny through CASS. Hence, a notice u/s 143(2) of the Act, was issued to the assessee, on 21- 09-2018, which was duly served upon the assessee through ITBA, portal. Various notices u/s 142(1) cum questionnaire were issued to the assessee. In compliance thereto, the assessee filed his written submission, before the assessing officer. The assesse derives income from capital gain and income from other sources, during the year, under consideration. During the assessment proceedings, it was noticed by the assessment officer that the assessee was involved in the activity of developing and selling of plots. Hence, a show cause notice was issued to the assessee on 15.12.2018, treating the sales consideration received on the selling of the sub-plots, as business income for the year under consideration instead of capital gain as claimed by the assessee. In compliance thereto, the assessee filed his written submission, before the assessing officer, stating that land was inherited from the grand fathers, hence there is no motive to do the business. The assessee has never purchased the land, however, whatever land got from grand father’s by way of inheritance, was sold by him and capital gain tax on the said land was paid by the assessee. Moreover, assessee is not doing any purchase and sale transactions in the land.

However, assessing officer rejected the above contention of the assessee and observed that the agricultural land was received by the assessee through inheritance from grandfather. However, the said agricultural land was converted into non-agricultural land in FY 2014-15 and after converting the same into non-agricultural (NA), the assessee gifted some part of the land to its relatives, and some part of the land was sold. Therefore, assessing officer held that the transaction should be treated as income from business and profession, and not under the head income from capital gain.

Aggrieved by the order of assessing officer, the assessee carried the matter in appeal before CIT(A) who has partly deleted the addition made by the assessing officer. The ld.CIT(A) observed that assessing officer has rightly held in the assessment order for the sale proceeds to have been earned as business income. However, there was an apparent mistake in calculation of the business income, with regards to the indexation of the cost of the impugned land held by the appellant. The benefit of indexation of the property till 2014- 15 has been allowed to the appellant. Further, in consideration of the perceptible rationale that a person cannot benefit from himself, the value of stock-in trade is kept as the indexed value of the plot calculated in FY 2014-15. Therefore, the findings of the assessing officer was upheld regarding the nature of income.

Aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us.

Shri Samir Bhuptani, Ld. Counsel for the assessee, argued that assessee’s land is an agricultural land and the said land is inherited from his parents (grandfather). Since, the said land, over a period of time, came within the limit of municipality and comes in the zone of urban area. Therefore, the assessee has converted his agricultural land into non-agricultural land and then after, some of the plots of the land were gifted by the assessee to his relatives and some of the plots were sold by the assessee. The Ld. Counsel submitted that assessee’s case was selected for limited scrutiny to examine the issue of capital gain, in the hands of the assessee. However, the assessing officer made addition on different footing, that is, on account of business income. That is, the reason for which the assessee’s case selected for limited scrutiny was to examine the issue of capital gain, which has been ignored by the assessing officer and assessing officer made addition on different footings/different head, that is, under the head business income, which is not acceptable, as the assessing officer did not take permission from higher income tax authority to convert the limited scrutiny case into the full scrutiny case. The Ld. Counsel, therefore, submitted that if the assessing officer wants to make addition of other item or on different footings or under different head, then in that circumstances, the assessing officer has to take permission from the higher authority to convert limited scrutiny into full scrutiny, which the assessing officer has failed to do so. For that Ld. Counsel relied on the decision of the Hon’ble ITAT, Ahmedabad in the case of Kintukumar Ambalal Patel in ITA No.348/Ahd/ 2019, vide order dated 31-05-2022, wherein it was held that assessing officer did not take the permission from higher authorities to expand the scope of limited scrutiny into full scrutiny/unlimited scrutiny and therefore, Tribunal had quashed the assessment order. 8. The Ld. Counsel for the assessee also relied on the CBDT Circular No. 20/2015 dated 29-12-2019 wherein the CBDT has given the instruction to the officers that in order to convert the limited scrutiny case into full scrutiny case, the assessing officer should follow the due procedure and takes the permission from the higher authorities to convert the limited scrutiny into full scrutiny. The said CBDT Circular is reproduced below. “SECTION 143 OF THE INCOME-TAX ACT, 1961-ASSESSMENT-SCRUTINY ASSESSMENT-SOME IMPORTANT ISSUES AND SCOPE OF SCRUTINY IN CASES SELECTED THROUGH COMPUTER AIDED SCRUTINY SELECTION (CASS) INSTRUCTION NO.20/2015 [F.NO.225/269/2015-ITA-II), DATED 29-12-2015 The Central Board of Direct Taxes ('CBDT), vide lastruction No. 7/2014 dated 26-9- 2014 had clarified the extent of enquiry in certain category of cases specified therein, which are selected for scrutiny through CASS. Further clarifications have been sought regarding the scope and applicability of the aforesaid Instruction to cases being scrutinized. 2. In order to facilitate the conduct of scrutiny assessments and to bring further clarity on some of the issues emerging from the aforesaid Instruction, following clarifications are being made: Year of applicability: As stated in the Instruction No. 7/2014, the said Instruction is applicable only in respect of the cases selected for scrutiny through CASS-2014. i. Whether the said Instruction is applicable to all cases selected under CASS: The said Instruction is applicable where the case is selected for scrutiny under CASS only on the parameter(s) of AIR/CIB/26AS data. If a case has been selected under CASS for any other reason(s)/parameter(s) besides the AIR/CIB/26AS data, then the said Instruction would not apply. iii. Scope of Enquiry: Specific issue based enquiry is to be conducted only in those scrutiny cases which have been selected on the parameter(s) of AIR/CIB/26AS data. In such cases, the Assessing Officer, shall also confine the Questionnaire only to the specific issues pertaining to AIR/CIB/26AS data. Wider scrutiny in these cases can only be conducted as per the guidelines and procedures stated in Instruction No. 7/2014 iv. Reason for selection: In cases under scrutiny for verification of AIR/CIB/26AS data, the Assessing Officer has to intimate the reason for selection of case for scrutiny to the assessee concerned. 3. As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year- one is 'Limited Scrutiny and other is 'Complete Scrutiny'. The assessees concerned have duly been intimated about their cases falling either in 'Limited Scrutiny' or 'Complete Scrutiny' through notices issued under section 143(2) of the Income-tax Act, 1961 (Act'). The procedure for handling 'Limited Scrutiny cases shall be as under. a. In 'Limited Scrutiny cases, the reasons/issues shall be forthwith communicated to the assessee concerned. b. The Questionnaire under section 142(1) of the Act in 'Limited Scrutiny cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the 'Limited Scrutiny issues. c . These cases shall be completed expeditiously in a limited number of hearings. d. During the course of assessment proceedings in 'limited Scrutiny cases, if it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding Rs. five lakhs (for metro charges, the monetary limit shall be Rs. ten lakhs) requiring substantial verification on any other issue(s), then, the case may be taken up such an approval shall be accorded by the Pr. CIT/CIT in writing after being satisfied for 'Complete Scrutiny with the approval of the Pr. CIT/CIT concerned. However about merits of the issue(s) necessitating 'Complete Scrutiny' in that particular case Such cases shall be monitored by the Range Head concerned. The procedure indicated at points (a), (b) and (c) above shall no longer remain binding in such cases. (For the present purpose, Metro charges' would mean Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Ahmedabad). 4. The Board further desires that in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show-cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/reasons forming the basis of the same. Before passing the final order against the proposed additions/disallowances, due consideration shall be given to the submissions made by the assessee in response to the show-cause notice. 5. The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance.”

Therefore Ld. Counsel for the assessee submitted that since the assessing officer has not taken the permission to convert the limited scrutiny case into full scrutiny case, therefore the assessment order framed by the assessing officer should be quashed. 10. On merit, Ld. Counsel for the assessee submitted that assessee is 90 years old person and he has not purchased any agricultural land in his entire life and whatever agricultural land inherited from his father/grand-father, was sold by him, after converting into non-agricultural status of the land and offered the long-term capital gain on such transaction and paid the long-term capital gain, by filing the return of Income. Hence, no further addition should be made in the hands of the assessee, as the assessee had already paid the due taxes.The learned Counsel further submitted that assessing officer treated the transaction under the head business income, rather than under the head capital gain, which is not acceptable, as the assessee is not a dealer in selling and purchasing the land. In order to tax this transaction under the head business income, there should be purchase and sale of the land, however, assessee has never purchased the land and assessee, sold the land which was inherited from his grandfather, and assessee is not doing any frequent purchase and sale transaction in land, hence, this transaction should not be assessed under the head, income from business, and it should be assessed under the head capital gain only. .The assessee has shown this transaction under the head capital gain and paid the taxes thereon. Some part of the land was gifted by the assessee to his relatives. Since the agricultural land was inherited from his ancestral/grand father and it is purely an agricultural land and therefore should not be treated as an adventure in the nature of trade, especially when the assessee gifted 40% of land to his close family members/ relatives and 60% land was sold in the open market. The said land was not held as stock in trade, therefore it should not be treated under the head business income. For that Ld. Counsel for the assessee relied on the direct judgement of the Hon’ble High Court of Rajasthan in the case of Sohan Khan 304 ITR 194. 11. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. In our considered view, it was wholly erroneous on the part of the authorities below to consider the transaction under the head income from business, instead of under the head capital gain. The assessee has never purchased the land. The land was inherited from ancestor/grandfather. The land was converted into non- agricultural status. Out of the total land, 40% land was transferred to the family members/relatives, and 60% land was sold in the open market. The assessee under consideration did not have any motive to run the business. After converting the agriculture land into non-agricultural land, it becomes capital assets in the hands of the assessee and on sale of such a land, the assessee has paid the long-term capital gain. Considering these facts, the land sold by the assessee should not be considered and should not be assessed under the head business income. For this, reliance is placed on the direct judgement of the Hon’ble High Court of Rajasthan in the case of Sohan Khan 304 ITR 194, wherein it was held as follows: “3. The facts of the case, as appear from the Assessing Officer's order are, that the assessee submitted returns declaring particular income as capital gain. The cases were taken up for scrutiny, and ultimately, it was found that certain number of plots were sold, and the assessee had shown the income therefrom, as long-term capital gain. It is found that the assessees purchased the big chunk of land measuring few lakhs square feets, somewhere in 1970, under a valid document, and the land was lying fallow, during all this time. It also appears that the land was under the cloud of ceiling laws, and after it got cleared therefrom, the assessees picked up the idea of disposing it of by making the best profit, i.e., by ensuring that it fetches the best price, and accordingly, the site plan was prepared, showing the land to be divided into different plots, and the plots were accordingly sold. The different assessees sold different plots during different period of time, inasmuch as, Sohan Khan had sold certain plots during the relevant year for the assessment years 1093- 94, 1994-95 and 1995-96 and some plots still continued to remain, while the assessee Mohan Khan had also sold certain plots during the relevant year for the assessment year 1994-95. These appeals relate to the assessment year 1994 95. 4. The Assessing Officer found the sale to be not taxable as capital gain, but it was found to be a business income, and for that, the Assessing Officer found, that the original land is surrounded by many lands of his near relatives and family members, and if the plots would have been carved out from his land alone, they could not have been sold for want of network of roads being available up to the adjoining lands only, and that, at some distance there is government road measuring 200 ft. Then the other circumstance is, that all the land owners had planned the sale of plots, in Nagnechi Scheme, and Vallabh Garden, together, and no land could be sold for residential purposes. Then the next ground considered is, that the purchasers were impressed by the fact that all the land belong to the same family, and is being planned, and sold together, at no stage the huge property of the assessee or his family members was used for personal purposes, and the intention was to gain profit only. Inter alia with this, it was concluded, that the transaction was in the nature of trade.

The said issue under consideration is also squarely covered on identical and similar facts by the judgment of the Co-ordinate Bench of ITAT Rajkot in the case of Shri Gokalbhai Somabhai Sitapare in ITA No. 1032/Rjt/2009 wherein it was held as follows: 2. Brief facts of the case are that during the assessment year the assessee sold several plots of land for a total sale consideration of Rs.26,18,748.. The balance- sheet of the assessee reflected some plots of land as his assets. He did not engage in any other business in this year. He treated the said amount of Rs.26,18,748 as capital gain, which was adjusted against a capital loss from sale of land. He worked out the indexed cost at Rs.24,63,345. With that indexed sum cost of renovation was added making the cost of land at Rs.28,45,407. The assessing officer observed that the above inde4xation was not correct, because once the assessee declared the profit from sale of land under the head ‘Business’, the cost of the same land (Rs.578250) as per valuation report filed by the assessee could not be allowed the indexation for the purpose of long term capital gain. The assessing officer did not accept the assessee’s submission that the land sold was inherited from father of the assessee. The assessing officer was of the view that even though the land might be inherited by the assessee, the subsequent action of the assessee to convert agricultural land into non agricultural land and making plots and sub plots of this land and to put them in open market for sale tantamount to sale / business in purchase and sale of land. The assessee had sold 100 plots of 50 to 100 sq.mtrs during the year under consideration to various parties and he has some more plots with him for sale. The assessing officer treated the sale proceeds as income from business and did not allow indexation benefit and other benefits available to computation of capital gain. The CIT(A) confirmed the order of assessing officer. The CIT(A) has also rejected the alternative contention of the assessee invoking provisions of section 45(2) observing that there is no question of applying section 45(2) observing that there is no question of applying section 45(2) as the same is related to computation of capital gain whereas in the case of the assessee it has been held that the profit arose out fo the plotting and selling of the land as a business income. 3. The ld.AR made his submission on the basis of brief synopsis submitted, which are as follows: “Some relevant dates: Year 1955 : Received Land by way of inheritance 1955 till 2003 : Agricultural operations October 2002 Advance against sales received August 2003 : Conversion to non-agricultural September, 2003 : Land sold 1. Only reason why the A.O. disallowed claim for capital gains is that in the statement of income filed with the return, title of business income was given. 2. However, in the return of income, statutory head of capital gains is shown and in the statement of income also, sub-head capital gains is shown. 3. Accounts are not mandatory for the assessee but only for personal record capital account and balance sheet were prepared by tax practitioner. 4. Other than impugned land, no land transactions are carried out. Land is not treated or converted by the assessee as his stock-in-trade. 5. Appellant has been an agriculturist all along by occupation; no returns of income in past or in future are filed, as he had no other income. 6. He decided to sell agricultural land itself and such was the intention, which is clear from the fact that sale deal was finalized prior to conversion of land to N/A land, as buyers could not hold agricultural land or large land holding of 17,061 Sq.Yds. 7. Sale proceeds are not invested in business but are used for distribution amongst family and for personal use. 8. Occupation continues to be agricultural even presently. 9. Although different small plots are sold, common sale deeds are made for multiple plots to same set of buyers which further goes to show that intention is not to carry out trading of plots to piecemeal buyers on retail basis. 10. Holding period of the land is nearly 48 years. 11. The land is not purchased but inherited and no borrowings are used. 12. NO brokerage or other selling expenses are incurred or claimed. 13. Mere presentation error and that too not in the statutory format, does not alter the true character of the receipts. 14. Merely because large chunk of agricultural and is converted to N/A land, does not always lead to adventure in the nature of trade. 15. List of Authorities relied upon: 1. Circular No.4 of CBDT dt 15.06.2007 2. CIT vs Premji Gopalbhai 113 ITR 785 (Guj) 3. D.S. Virani vs CIT 90 ITR 255 (Guj) 4. CIT Vs Rewashanker A Kothari 283 ITR 338 (Guj) 5. CIT vs Rajamannar (2010) 40 DTR 282 (Kar) 6. CIT vs Raja Malvindersinh (2010) 40 DTR 273 (P&H) 7. CIT vs DN Krishnappa (2009) 21 DTR 11 (Bang)

As we have allowed the appeal of the assessee on merit, therefore, all other issues on technical ground (limited scrutiny) of the additions, in the impugned assessment proceedings, are rendered academic and infructuous, hence do not require adjudication.

In the result, the appeal of the assessee is allowed.