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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals), Tirupati, dated 23.03.2015 relevant to the assessment year 2010-11. In this appeal, the ground raised by the Revenue is that the ld. CIT(A) has erred in deleting the addition on account of treating the amount of ₹.3,04,01,161/-, which is the margin/gains to the assessee on sale of land as business is not sustainable. Further, the ld. CIT(A) has also erred in holding that the sale consideration received by the assessee as business instead of agriculture.
2, Brief facts of the case are that the assessee is an individual and filed his return of income for the assessment year 2010-11 on 30.12.2011 declaring total income of ₹.12,48,330/- including agricultural income of ₹.4,25,800/-. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short] on 26.03.2013. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued on 18.09.2012. While finalizing the assessment proceedings, the Assessing Officer added to the income returned, an amount of ₹. 3,04,01,161/- being profits earned/gained by the assessee on account of sale of three lands at Pudupakkam, with one of such land sold to M/s. Sai Care Pvt. Ltd. treating the same as profits arising from the purchase and sale of lands by the assessee. During the course of assessment proceedings the Assessing Officer analysed the profit and loss account, balance sheet and details of advances given by the assessee for purchase of lands and from this, the Assessing officer concluded that the assessee has been making huge investments in purchase of lands, developing them and has also been gaining huge income from sale of lands periodically which proves that the business of the assessee is purchase and sale of lands. The Assessing Officer further observed that during the financial year relevant to the assessment year under consideration, the assessee has sold three lands which he has been holding for 2-3 years during which period he has not returned any agricultural income from such lands, though the assessee claims such lands as agricultural lands. The Assessing Officer has also observed that even though the assessee has been holding lands worth of ₹.13.78 crores, he has returned only a meagre agricultural income of ₹.4.25 lakhs and also rejected the assessee’s claim of carrying out agricultural activity. The Assessing Officer treated the difference of ₹.3,66,250/- being the difference as per bank account [₹.99,23,530/-] and balance sheet [₹.1,02,89,780/-] as unexplained income.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) partly allowed the appeal of the assessee.
On being aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR submits that it is clear from the balance sheet that the assessee had received huge advances for sale of land to the extent of ₹.3.21 crores and also advance money to land owners to the extent of ₹.8.58 crores for purchase of lands and held agricultural lands worth of ₹13,78 cores during the year. The break-up of land advances [₹.8.58 crores] received from as many as 54 persons were analysed and the Assessing Officer concluded that the assessee is carrying on the business of purchase and sale of lands, but not agricultural activity as claimed by the assessee. Therefore, the ld. DR has pleaded that the order of the ld. CIT(A) should be set aside and restored that of the Assessing Officer.
5. The ld. Counsel for the assessee submits that the assessee has produced certificate dated 25.02.2009 from the Village Administrative Officer and the VAO has certified that the land is agricultural land and agricultural operations were carried out in that land producing pulses, paddy, etc. She further argued that the Inspector of Income Tax has been deputed by the Assessing Officer to inspect the land. The Inspector reported that the land is full of thorny bushes and was densely covering the land as such these are never been cultivated for the last 10 years. The report of the Inspector should not be accepted since it is only based on the assumption. The ld. Counsel for the assessee has further argued that the assessee and his family have been engaged in agricultural activities for over generation and he is filing the return of income regularly and also has been returning agricultural income. She further submits that the land held by the assessee is an agricultural land and the same has been accepted by the Department in earlier assessment years. The holding of lands by the assessee and carrying on the activity of agriculture continuously on the lands without any conversion of such lands into further developments such as commercialisation do not amount to adventure in nature of trade. Merely sale of few pieces of land did not lose the basic character of agricultural lands and constitute business activity for the assessee and as such, the sale consideration of land though credited to profit and loss account do not amount to business income. Further, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A) on this issue.
We have heard both sides, perused the materials on record and gone through the orders of authorities below. The question before us is whether the addition on account of treating the gains on sale of lands as business profits of the assessee to the tune of ₹.3,04,01,161/- or not. The Assessing Officer asked the assessee to prove that the land sold by him is an agricultural land. The assessee produced certificate from the Village Administrative Officer, vide letter dated 25.02.2009, has certified that the lands in question are agricultural lands and agricultural activity has been carried out on such lands by producing pulses, paddy, etc. However, the Assessing Officer has not accepted the contention of the assessee on the ground that (a) The lands are in the name of Sri Krishnan, M/s. Sai Care India Ltd., M/s. Laryan Builders and not in the name of the assessee. From this the Assessing Officer concluded that the credit for carrying on the agricultural activity goes to owners and not the assessee who made investment on this land. (b) Inspector of Income Tax has been deputed by the Assessing Officer to inspect the lands sold by the assessee claiming them as agricultural lands, to which the Inspector reported that the land is full of thorny
bushes and were densely covering the land as such held that these are never been cultivated for the last 10 years.
(c) To the exemption claimed by the assessee under section 2(14) of the Act on the ground that the land is situated at Pudupakam Panchayat away from the nearest township by more than 10 kms from Chennai, the Assessing Officer rejected the same stating that the lands sold are nearer to Software Companies Park, Chennai and Rajiv Gandhi Information Technology Express Highway on which many multinational software companies have set up their offices and which are landmarks in the greater city of Chennai. In this regard, the Assessing Officer relied on the order of the ITAT, Chennai in in the case of Pallava Resorts, wherein it was held that a land pertaining to the above referred M/s. Pallava Resorts, which is 90 kms further away from Chennai and even south of Chennai, is not exempt under section 2(14) of the Act. By relying on the decision in the case of Sarifabibi Mohammed Ibrahim and Others v. CIT 204 ITR 631 (SC) and applying the factors listed out in that case for determining the applicability of section 2(14) to the assessee’s case, the Assessing Officer has concluded that the lands sold by the assessee cannot be said to be agricultural lands and therefore, the exemption claimed by the assessee under section 2(14) cannot be accepted.
On appeal, the ld. CIT(A) has observed that based on the facts of the case two issues have mainly arisen in this case. First issue is whether the lands under reference, which are claimed to be agricultural lands, located within the vicinity of city of Chennai constituted capital assets as defined in Sec. 2(14) of the I.T. Act or not. Second issue is whether the three instances of sale of lands by the assessee during the year constituted adventure in nature, to give rise to profits from business. The observations of the ld. CIT(A) are reproduced as under: “5.6.1 As could be made out from the facts, the appellant sold three pieces of lands totalling 2.09 acres located at Padupakkam Village, Chengalpattu Taluk of Kanchipuram District in Tamil Nadu, for a total consideration of ₹ .3,82,50,000/-, during the assessment year under reference. There were similar transactions in earlier years as well and for the A.Y. 2007-08 the issue under reference was well debated to arrive at the conclusion by the CIT(A) concerned, that the lands are agricultural. The basic contention of the AO were that the appellant did not carry out agricultural operations on the said lands for last few years, and the agricultural incomes earned on such lands is disproportionate to the value of the lands under reference. In this regard, it may be relevant to observe that the conclusions drawn on non-carrying of agricultural operation was based on the report by the Income Tax Inspector, which was never put to the assessee, before arriving at conclusions. Even otherwise, the report of the Income Tax Inspector was indicative of the agricultural operations not carried in the recent years, but it was not indicating the inability of the land for carrying on the agricultural activity. In this regard it may be relevant to refer to the judicial decisions in the case of CIT Vs Borhat Tea Company Ltd (138 ITR 783) where in Hon'ble Calcutta High Court held that for the purpose of land being agricultural land, actual agricultural operation or cultivation of the land is not necessary, and what is to be seen is whether such land is capable of agricultural operation being carried on. 5.6.2 Potential of non-agricultural use is not material for determining the question whether the land was agricultural land or not. In the case of CIT Vs Officer-in-charge (105 ITR 133) Hon'ble Supreme Court held that agricultural land must be a land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purposes, and determination of the character of land, according to the purpose for which it is meant or set apart and can be used, is a matter of which have to be determined on the facts of each particular case. In the case under reference there was no doubt whatsoever, on the nature of the land being agricultural land, except doubts raised on carrying on the agricultural operations on such lands in the recent years. The certificate furnished by the VRO clearly indicates that the lands under reference are agricultural lands. Further, there was no evidence to show that the assessee has applied for change of the land for non-agricultural purposes. In this case, it may be reasonable to hold that the AO relied on various case laws rather than considering the facts of the case under reference and examining the applicability of those case laws, to the facts of the case. The lands held and sold by the assessee were certified and proved to be agricultural lands and agricultural incomes are offered from such lands, year after year, even as per the own admissions of the Assessing Officer. The disproportionate quantum of agricultural income compared to the value of the agricultural lands from which agricultural income was raised, is not an appropriate basis, to come to the conclusion that such lands are not non- agricultural lands, as made out by the AO. Further, on similar facts, the issue was decided by the CIT(A) for A.Y. 2007-08, holding that the lands held by the assessee, are agricultural lands.
5.6.3 On similar facts, where high valued lands located at Shamirpet, in the vicinity of Hyderabad, purchased on in year 1998 for Rs.27.68 lakhs, were sold for a consideration of Rs.135.00 lakhs in 2006, was in held to be agricultural land, by ITAT, 'A' Bench, Hyderabad in the case of Shri Tulsidas, L/R Late Smt. K. Renuka Devi of Secunderabad Vs ITO, (ITA No. 93/Hyd/08), where in the ITAT had referred to various decisions of High Courts and Supreme Court, including the case of Sarifabibi Mohd Ibrahim & Others (204 ITR 631), while arriving at such conclusions. The relevant portion of the decision runs as under: “The determination of the character of land, according to the purpose for which it is meant or set apart and can be used, is a mater which have to be determined on the facts of each particular case. What is required to be shown is a connection with agricultural purpose and user and not mere possibility of the user of land by some possible future owner. In the case of CIT vs. Borhat Tea Company Ltd (138 ITR 783) the Calcutta High Court held that for the purposes of land being agricultural land, actual agricultural operation or cultivation of the land is not necessary, and what is to be seen is whether such land is capable of agricultural operation being carried thereon. Potential of non-agricultural use is not material for determining the question whether the land was agricultural land or not. The case-law relied upon by the lower authorities is distinguishable and material available on record and also in view of the ratio of the decisions discussed above, it has to be concluded that the assessee's land in question has to be held be of agricultural nature, notwithstanding the fact whether the agricultural operation was actually carried on, on the said land or not during the relevant period.”
Further, the ld. CIT(A) has observed as under: “5.6.5 However, Hon'ble Supreme Court had stated that whether a land is an agricultural land or not essentially a question of fact, and such question has to be answered in each case having regard to the facts and circumstances of that case. It was also stated that there may be factors both for and against particular point of view and court has to answer the question on a consideration of all of them by a process of evaluation and reference has to be drawn on a cumulative consideration of all relevant facts. Reverting to the facts of the case, the cumulative facts may help to address the issue, by referring to the lands as agricultural lands, based on one of these tests, which are specific to the facts of this case. 5.6.6 Further, the lands under reference were never held by AO as non- agricultural lands, in spite of such lands being in the vicinity of Chennai City. In this regard, it may be relevant to mention that the nature of the land has not undergone a change, with the land revenue tax paid by the assessee and the records still showing them to be agricultural lands. Being in the vicinity of city would be different from being within the prescribed limits, from the Municipality/Corporation. In this case it was not the case of the AO to prove that the said lands are within the limits prescribed from the Municipal Corporation of Chennai City. The AO has not brought any evidence on record to show that the land was developed for commercial exploitation, in spite of proximity to the high way and the metro city. Thus, based on the facts of the case, it is reasonable to hold that the lands under reference are continued/remained to be agricultural lands and do not fall under the purview of definition of capital asset as per the provisions of Sec. 2(14) of the I.T. Act, during the year under reference. Accordingly, the consideration mentioned on sale of such lands do not required to be treated as capital gains. 5.7 Regarding the issue of treating the three instances of sale of land as business or adventure in trade, it may be relevant to refer to the whole set of facts of the case, rather than referring to particular instance/instances. As held by pending-case law catena of judicial decisions, there is no standard procedure to describe an activity as an adventure of business/trade or otherwise. In the instant case, where the appellant derived income from rents, from other sources, agricultural income, apart from gains on sale of lands, have credited all these incomes to the profit and loss account prepared by him for the year under reference. The AO has cited the reason of crediting the gains on sale of lands to P&L A/c, as the basis for arriving at conclusion that assessee is engaged in the business. In this regard, it may be relevant to observe that preparation of profit and loss account and crediting of various incomes to such account, alone may not determine the nature of activity, including the business activity, where it is a known fact that appellant/assessee is not established to be carrying on any business activity. 5.7.1 The other reasons stated and quoted by the AO was that, the assessee incurred an amount of Rs.9,58,419/- towards development cost, to indicate the business activity, if the assessee In this regard, it may be relevant to mention that such expenses was claimed in computing the gains on sale of lands, but neither debited to P&L A/c nor claimed as business expenses. In fact it has been admitted and clarified by the appellant that said expenses were incurred to improve the said lands, from the point of view of access, bunding and other infrastructure, but not with the intention of treating the lands as business / commercial assets. This probably clarifies the position on the matter. The other reason cited by the AO for treating the transaction of sale of three pieces of land as business / adventure in nature of trade, was the repeated transaction of sale of lands.”
In the appellate order, the ld. CIT(A) considered each and every aspects and passed a detailed speaking order and also distinguished the case law relied on by the Assessing Officer and concluded that the holding of lands by the assessee and carrying on the activity of agriculture continuously on the lands, without any conversion of such lands into further developments such as commercialisation/plotting of lands, do not amount to adventure in nature of trade. The mere sale of few pieces of lands here and there, now and then, irrespective of their value, as long as the said assets/lands did not lose the basic character of agricultural lands, does not constitute business activity for the assessee. Apart from this, the VAO has furnished certificate, which indicates that the land under reference are agricultural land and there was no evidence to show that the assessee has changed the land for non-agricultural purpose. Therefore, the land held and sold by the assessee were certified and proved as agricultural land and agricultural incomes are offered on such lands, year after year, and the same is not disputed by the Assessing Officer. However, the main contention of the Assessing Officer is that there was a disproportionate quantum of agricultural income compared to the value of the agricultural lands from which agricultural income was raised. That is not an appropriate basis to come to a conclusion that such lands are not agricultural land. Therefore, we find no force in the argument of the ld. DR that the assessee has not shown any agricultural activities. Moreover, the ld. CIT(A) has relied on various decisions and came to a right conclusion that the addition on account of treating the amount of ₹.3,04,01,161/-, which is the margin/gains to the assessee on sale of lands, as business income is not sustainable, since the lands under reference were held to be agricultural lands, and the activities of purchase and sale of such agricultural land, in our opinion did not constitute business. Thus, we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced on the 15th July, 2016 at Chennai.