Relinquishment of Right in Land Earmarked for Common Utility Purpose as per Regulatory Requirements Not Taxable as Capital Gain or Business Income: ITAT [Read Order]

Relinquishment - Land - Common Utility Purpose - Regulatory Requirements - Taxable - Capital Gain - Business Income - ITAT - Taxscan

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that relinquishment of right in land earmarked for common utility purposes as per regulatory requirements is not taxable as capital gain or business income.

Sarojini B. Nair, the assessee engaged in the business of real estate, bus transport, and marriage hall and also received rental income from properties.  The assessee had filed her return of income for the AY 2015-16 on 22.03.2016 declaring ‘NIL’ total income. 

The AO noticed that the assessee has converted investment into stock-in-trade as per s.45(2) of the Act and the assessee had earmarked 40,386.81 sq. ft. land for common amenities like roads, parks, etc., in terms of municipal regulations.

The assessee claimed that land earmarked for road and other common facilities is required to be handed over to local municipal authorities by executing a Settlement Deed or Lease Deed as and when the authorities demand execution of such deed.  The AO computed capital gains on the transfer of land earmarked for public utility purposes and made the addition of Rs.1,80,83,081/- under the head ‘income from capital gains’. 

The AO invoked provisions of Sec.45(2) of the Act, and computed business profits in respect of land earmarked for road and other common facilities on the ground that when the land has been converted into stock-in-trade, the assessee is liable to pay tax on business profits in the year in which such land has been transferred.

The CIT(A) held that “when the assessee has earmarked the land for common utilities without any exclusive right to anybody, including the assessee as per prevailing laws and guidelines related to layout approval, the AO cannot tax said land earmarked for common amenities purpose within the meaning of Sec.47(iii) of the Act, and also Sec.45(2) of the Act.”

Further deleted the additions made by the AO towards computation of long-term capital gains on deemed transfer of land earmarked for roads and other common facilities and also application of Sec.45(2) of the Act, to compute income from business and profession.

A Coram Shri V Durga Rao, JM and Shri G Manjunatha, AM observed that the reasons given by the AO are not subscribed because, relinquishment of right in land earmarked for common utility purpose, cannot be considered as an extinguishment of any right in property which can be considered as transfer within the definition of Sec.47(iii) of the Income Tax Act, 1961. 

Further, the provisions of Sec.45(2) of the Act, also cannot be invoked to compute business profits when the land has been converted into stock-in-trade, because, the assessee has not transferred the land for consideration. 

Further ITAT held that when the assessee has relinquished her right in the land earmarked for common utility purposes in terms of regulatory requirements and also executed Gift Deed in favour of the Commissioner without any consideration, then, the question of computing long-term capital gains on such land and also business profit in terms of Sec.45(2) of the Act.

 While dismissing the appeal, the ITAT upheld the order of CIT(A) which deleted the additions made by the AO.

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