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Facts
The assessee claimed exemption for agricultural income from the sale of land. The PCIT initiated revision proceedings under Section 263, finding that the Assessing Officer failed to inquire into the conversion of agricultural land into residential plots and the potential for long-term capital gains and business profit. The PCIT concluded that the assessment order was erroneous and prejudicial to the revenue's interest.
Held
The ITAT upheld the PCIT's revision order, agreeing that the Assessing Officer failed to conduct proper inquiries regarding the nature of the land sale (conversion to plots, real estate business) and the applicability of Section 50C, capital gains, and business profit. The tribunal found the assessment order erroneous and prejudicial to the revenue.
Key Issues
Whether the Assessing Officer's failure to inquire into the conversion of agricultural land into residential plots and the applicability of capital gains and business profit provisions rendered the assessment order erroneous and prejudicial to the revenue.
Sections Cited
Section 263, Section 2(14)(iii), Section 45(2), Section 50C, Section 143(3), Section 144B
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Income Tax Appellate Tribunal, DEHRADUN BENCH, DEHRADUN
Before: Sh. Satbeer Singh Godara & Sh. Manish Agarwal
ORDER
Per Satbeer Singh Godara, Judicial Member:
This assessee’s appeal for Assessment Year 2020-21, arises against the PCIT, Bareilly’s DIN & order No. ITBA/REV/F/REF5/2024-25/1075212520(1) dated 28.03.2025, in proceedings u/s 263 of the Income Tax Act, 1961.
Case called twice. None appears at the assessee’s behest. We make it clear that today is the fifth hearing of the assessee’s instant appeal. We thus proceeded ex-parte.
It next emerges with the able assistance coming from the Revenue side that the learned PCIT, Bareilly has exercised his section 263 revision jurisdiction thereby terming the Assessing Officer’s regular assessment dated 22.08.2022 as an erroneous one causing prejudice to the interest of the Revenue vide following detailed discussion: 5. I have perused the assessment records. Following observations are made with regard to the assessment order passed by the FAO being considered erroneous as pointed out in the show cause notice also: (i) The case was selected for scrutiny assessment to examine the issue of “Agricultural Income” for the A.Y 2020-21. (ii) During the assessment proceedings, the Assessing Officer passed the assessment order without making enquiries on the issue of agricultural income claimed, which is received by selling the agricultural land into plots in square meter. The AO ignored the fact the assessee has changed the nature of land from agricultural to residential while selling the land in square meters. Further, the AO has failed to levy the tax on sale consideration of land as LTCG despite nature of land has been changed from agricultural to residential. The AO, further, failed to charge business profit on the same. The assess has made claim that she has sold agricultural land and claimed exemption of sale consideration of land as exempt income u/s 2(14)(iii) of the Act. From perusal of sale deed, it is seen that the assessee is doing business of Real Estate, purchasing agricultural land, converting them into plots and selling them to the purchaser in square meter. It is submitted by the assessee that she has sold agricultural land and agricultural income is exempt income u/s 2(14)(iii) of the Act. Therefore, the provision of section 50C are also not applicable. It is seen from the previous record that asessee has purchased land which is situated beside the roads. The assessee, in first, has never been agriculturist, the nature of the land sold is a residential plot. The assessee has purchased the land for the purpose of business. The business of the assessee for one year is in nature of adventure in trade. As regard to this claim of the assessee, that land sold was agricultural land is not correct.
It is clear from the fact of the case that the assessee has sold residential plot in square meter to different customers during the year under consideration. Therefore, even on sale of agricultural land by converting it into stock, the provision of capital assetwill apply. The matter of similar nature arose before the Hon’ble ITAT Jaipur in the case of Mahaveer Yadav Vs ITO where agricultural land was converted into stock in trade and in that case capital gain and business income both was charged which clearly shows that even agricultural land which was converted into stock in trade also falls under the definition of capital assets. The Hon’ble ITAT held that, “We affirm the findings of the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade (in form of residential plots) of assessee’s business. The development of residential colony and said conversion had happened by asssessee’s own admission during F.Y 2009-10 and the intent of the assessee has thus been demonstrated through his own actions. Therefore, the taxability arising on conversion of 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 the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots” The matter of similar nature, further, arose before The Hon’ble ITAT, Jaipur in the case of RamswaroopSaudagar Vs ITO where the agricultural land sold as stock in trade and section 45(2) was applied. The Hon’ble ITAT held that, “However, the provisions of Section 45(2) of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset .These provisions of Act have not been taken into consideration by the Id. CIT(A), therefore, in the interest of justice and equity, the Bench find deem it fit to restore the issue back to the file of the Id. CIT(A) to give effect to the provisions of Section 45(2) of the Act. Hence, the issue is restored back to the file of the Id. CIT(A). In the result, appeal of the assessee is partly allowed for statistical purposes only”. As seen above in the aforesaid judgement that even agricultural land was treated as capital asset and subsequently a business asset. Thus, the purchase of land was an asset being residential which was subsequently sold as Plot (residential house) falls under the definition of capital assets, hence the provision of section 50Cis applicable. The AO ignored the material facts of the case and applicability of law and also failed to compute Long Term Capital Gain and business profit as well, hence, the order is erroneous and prejudicial to the interest of revenue.
It is apparent that the Assessing officer has passed assessment order on 22.08.2022 u/s 143 r.w.s. 144(B) of the Act without conducting proper enquiries on issues mentioned above. Perusal of the facts shows that the assessing officer proceeded to accept the version of assessee without taking into the consideration of facts and applicability of Income Tax provision and ignoring the documentary evidences placed on record. Thus, the AO ignored the material facts of the case and applicability of law and also failed to compute Long Term Capital Gain and business profit as well, hence the order is erroneous and prejudicial to the interest of revenue.
Following judicial pronouncements are relevant to the facts of the case discussed and hence relied upon while adjudicating this case: (1) Hon’ble jurisdictional High Court of Allahabad in the case of Meerut Roller Flour Mills Ltd. vs CIT(2013) 35 Taxmann.com 13 (Allahabad) held that, ”Return filed by assessee was scrutinized and assessment was completed. Thereafter, Commissioner noticed that AO had not conducted proper entries and trade creditors- He exercised his jurisdiction u/s 263 and remanded matter to AO-Assessee filed writ petition against the order. Records showed that AO did not verify genuineness of trade creditors and assessment order was completely silent and bereft of any discussion on material points- Whether, therefore, assessment order was erroneous and prejudicial to interest or Revenue.” Held, yes. It was further held by the Hon’ble Court that: “The Commissioner may consider an order to be ‘erroneous’ for the purpose of section 263 even if error of law may not be apparent on the face of the order. The Commissioner may consider an order of the assessing authority to be erroneous not only if it contains some apparent error of reason or of law or of fact on the face of it but also because it is stereotype order which simply accepts what the assessee has stated in his report and fails to make inquiry which are called for in circumstances of the case.” (¡i) Further in the case of Ram Pyari Deri Saragogi v/s CIT(1968) 67 ITR 184. The Hon’ble Apex Court while examining the question of revisional power of the CIT under the old Act held that, “where assessment was completed by the ITO with under haste, without holding necessary enquiry, it is sufficient to hold that the assessment order is erroneous.” (¡¡¡) In the case of Smt. Tara Devi Agarwal v/s CIT(1973) 88 ITR 323(SC), it was held by the Hon’ble Apex Court that, “even where income has not been earned and is not assessable merely because the assessee wants it to be assessed in his or her end in order to assist someone else who would have been assessed to a larger amount, the assessment to made can certainly be erroneous and prejudicial to the interest of revenue.” (iv) Hon’ble Delhi High Court in the case of Gee Vee Enterprises v/s Addl.CIT(1975) 99 ITR 375(Delhi) following the aforesaid above two judgements of the Hon’ble Apex Court held that “the position and function of the Income Tax Officer is very different from that of a Civil Court. The statements made in a pleading proved by minimum amount of evidence may be accepted by Civil Court in absence of any rebuttal. The Civil Court is neutral. It simply gives decision on the basis of the pleading and evidences which comes before it.”
Kusum Kujwal Further, it was held by the Hon’ble Court that: “The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparent in the order but call for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry. The meaning to be given to the word “erroneous” in section 263 emerges out of its context. It is because it is incumbent on the Income Tax officer to further investigate the facts stated in the return when circumstances would make an enquiry prudent that the word “erroneous” in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all facts stated therein are assumed to be correct.”
In view of the facts of the case discussed and judicial pronouncements relied upon. I am of the opinion that the AO has not examined/enquired into the details of the facts of the case and the assessment order passed u/s 143(3) r.ws 144(B) of the Act is erroneous in so far as prejudicial to the interest of revenue as per explanation 2(a) to section 263 of the Income Tax Act, 1961. As the AO failed to understand the nature of transaction, applicability of section 500 and to compute the long term capital gain and business profit as well. Therefore, the assessment framed by AO is hereby set aside on the issue of applicability of section 50C and to compute the long term capital gain and business profit on sale of plots which remained left during assessment by the AO, keeping in view the observations made after giving reasonable opportunity to the assessee of being heard.”
Suffice to say, it is come on record that not only the assessee’s land in question has been found to be a capital asset but also there is a categorical finding that the same had been sold after due “ploting” thereof attracting business income addition as well. There is further not denial of the fact that the Kusum Kujwal assessee is engaged in real estate business involving purchase of agriculture lands followed conversion thereof to residential area finally culminating in the corresponding sale deeds on sq.mt. basis. That being the case, we do not see any reason to interfere with the learned PCIT’s impugned revision directions since the Assessing Officer had failed to carry out all the detailed enquiries whilst framing the assessment dated 22.08.2022. We thus uphold the learned PCIT’s impugned revision directions in very terms. We further make it clear before parting that the assessee shall indeed be at liberty to raise all factual as well as legal arguments in the Assessing Officer’s consequential assessment which shall be considered as per law.