ITAT sets aside revision order in the absence of finding error in the order of AO in allowing assessee's claim earned from sale of land as being in the nature of capital gains u/s 54EC [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that there is no basis with the  PCIT to hold that the facts relating to the transaction in sale of land were indicative of the same being in the nature of adventure in the nature of trade.

The order of the PCIT reveals that he found that the Assessing Officer had wrongly allowed assessee’s claim of profit earned from the sale of land as assessable under the head “Capital Gains” and consequently allowed deduction under Section 54EC of the Income Tax Act to the assessee resulting in Nil capital gain being charged to tax, when the said gains ought to have been assessed as business income of the assessee without allowance of any deduction/exemption against the same.

Noted from the order of the PCIT that his basis for holding the gain earned by the assessee to be assessed as business income was the fact that the assessee had converted an agricultural land into nonagricultural land and then sold it; and, also the fact that he was the owner of other pieces of land also. From the same, he inferred that the assessee was engaged in the regular purchase sale activity of land and, therefore, the gain earned during the year was assessable as business income and not capital gains as returned by the assessee and accepted by the Assessing Officer.

A further perusal of the order of the  PCIT reveals that the assessee, in response to the show-cause notice, had contended that the Assessing Officer had rightly treated the gains to be in the nature of capital gains and not business income. He had pointed out that the assessee never intended to do any business in land which, he stated, was evident from the fact that the land sold during the year had been purchased 10 years back from his own funds and not from any borrowings and that he had converted agricultural land into non-agricultural land only five years after purchasing it and had sold it five years after conversion to non-agricultural land.

The assessee had also pointed out that neither in the past nor in the future the assessee had ever entered into any transaction of sale of land and the piece of land sold during the year had always been shown as investment it its balance-sheet and at cost, that if the assessee intended to carry on any business on the same, it could have reflected as “stock-in-trade” and valued it at cost or at net reliable value whichever is less.

The  PCIT, rejected this explanation of the assessee and held the transaction of sale of land to be in the character of an “adventure in the nature of trade/business” and his basis for treating it so is the fact of the land sold being converted from agricultural to nonagricultural land by the assessee. He also noted that the firms in which assessee is a partner are into real estate business and the assessee along with his sons has admitted on affidavit, filed in proceedings in Civil Court, of being involved in real estate business.

After hearing both the parties, the tribunal held that there was no basis with the PCIT to hold that the facts relating to the transaction in sale of land were indicative of the same being in the nature of adventure in the nature of trade and the AO having accepted assessee’s claim of returning capital gains on the same was an error on his part.

The two member bench consisting of Madhumita Roy (Judicial member) and Annapurna Gupta (Accountant member) held that, in the absence of any finding of error in the order of the Assessing Officer allowing the assessee’s claim of gains earned from sale of land as being in the nature of capital gains, the order passed by the  PCIT under Section 263 of the Income Tax Act is liable to be set aside.

To Read the full text of the Order CLICK HERE
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