Hyderabad ITAT Deletes LTCG Addition as Plot Sales Already Taxed Under Section 44AD

Machavarapu Koteswara Rao Vs DCIT (ITAT Hyderabad)

The Income Tax Appellate Tribunal (ITAT), Hyderabad, disposed of two appeals involving identical issues through a common order. The assessees challenged separate orders of the Commissioner of Income Tax (Appeals) confirming additions made as long-term capital gains (LTCG) in assessments completed under Section 153C of the Income-tax Act.

In the first appeal, the assessee had filed the return declaring total income of ₹14,31,010. Following a search under Section 132 in another group, proceedings under Section 153C were initiated. The Assessing Officer observed that the assessee and two co-owners had sold plots of land, computed the assessee’s 25% share of sale consideration at ₹47,56,937, allowed indexed cost of ₹48,721, and made an addition of ₹47,08,216 as long-term capital gains. The CIT(A) upheld the addition.

Before the Tribunal, the assessee submitted that the land had been purchased with the intention of carrying on a real estate business. The agricultural land had been converted into non-agricultural land with permission from the Revenue Divisional Officer, divided into 13 plots after providing internal roads, and sold as plots. The assessee contended that the entire sale consideration of ₹47,56,937 had already been disclosed as business turnover and income had been offered under Section 44AD. It was argued that the Assessing Officer had accepted the returned business income and could not again tax the same transaction under the head “Capital Gains,” as this resulted in double taxation. The Revenue relied on the orders of the lower authorities and referred to the assessee’s statement recorded after the search and the observations of the CIT(A).

The Tribunal found that the conversion of agricultural land into non-agricultural land, subdivision into plots, provision of internal roads, and sale of individual plots demonstrated a systematic commercial activity undertaken with a profit motive, bearing the characteristics of a business venture. It also found that the assessee had already disclosed the sale consideration as business income under Section 44AD and that the Assessing Officer had accepted the returned income. The Tribunal held that once the transaction had been accepted under the head “Profits and Gains of Business or Profession,” the same sale consideration could not again be assessed under the head “Capital Gains.” It observed that such action resulted in taxation of the same income twice. Accordingly, the Tribunal directed deletion of the addition of ₹47,08,216.

In the second appeal, the issue was identical. Applying the same reasoning, the Tribunal directed deletion of the LTCG addition of ₹9,41,644. Both appeals were allowed.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

These two appeals are filed by Shri Machavarapu Koteswara Rao and Shri Murali Krishna Katragadda (“the assessees”), feeling aggrieved by the separate orders passed by the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad (“Ld. CIT(A)”) dated 06.03.2025 and 10.03.2025 for the A.Y.2019-20 respectively. Since the issues raised by the assessees are identical in both the appeals, for the sake of convenience these two appeals were heard together and are being disposed of by the common and consolidated order.

ITA No.975/Hyd/2025:

2. The assessee has raised the following grounds of appeal:

1. On the facts and circumstances of the case, the Ld. Commissioner of Income-Appeals 11, Hyderabad erred by confirming the order of Assessing Officer ITBA/AST/S/153C/2021-22/1032618345(1) dated 22.04.2021 that is contrary to law and facts of the case, thus the order ITBA/APL/S/250/2024-25/1074139014(1) dated 06.03.2025 is also ex facie contrary to facts, circumstances of case and law, thus needs to be set aside.

2. The Ld. Commissioner of Income – Appeals 11, Hyderabad erred by confirming the Ld. Assessing Officer an addition of Rs.47,08,216/- as long-term capital gain merely based on assumptions and statements recorded during the search operations in violation of circular of CBDT 286/98/2013-IT(Inv.II) dt 18.12.2014.

3. That the Ld. Commissioner of Income Tax – Appeals-11, Hyderabad ought to have appreciated the fact that ROI filed in response to notice u/s.153C stands as retraction of the facts recorded in the statement U/s.132(4) of the Act.

4. That the Ld. Commissioner of Income Tax – Appeals-11, Hyderabad erred by upholding the assessment order of Ld. Assessing Officer that passedin violation of Article 265 of the Constitution of India.

5. The Ld. Commissioner of Income Tax – Appeals 11, Hyderabad failed to correctness of addition to returned income as the same resulted into double taxation i.e. u/s.45 of the Act, whereas the income is already disclosed as taxable u/s.28 of IT Act, 1961. This fact CIT(A) failed to consider while dismissing the appeal.

6. The Ld. Commissioner of Income Tax – Appeals 11, Hyderabad, erred by holding the order of Ld. Assessing Officer as correct that is passed without properly analysing the facts, submissions by appellant. The impugned addition is arbitrary, unjustified, and liable to be set aside.

7. That for above and other grounds of that may be urged during the course of appeal proceedings, the arbitrary assessment order ITBA/APL/S/250/2024-25/1074139014(1) dated 06.03.2025 of the Ld. Commissioner of Income Tax -Appeals 11, Hyderabad, be quashed/deleted/set-aside in the interest of justice.

8. The appellant carves the right to change all or any of the above grounds during the appeal proceedings for any additional/modified grounds of appeal.

3. The brief facts of the case are that the assessee is an individual and filed his return of income for Assessment Year 2019-20 on 30.07.2020 declaring total income of ₹14,31,010/-. Certain incriminating material pertaining to the assessee was found and seized during the course of a search and seizure operation conducted under section 132 of the Income-tax Act, 1961 (“the Act”) on 28.02.2019 in the group cases of Shri Thatipalli Sankar Babu and others. Consequently, proceedings under section 153C of the Act were initiated in the case of the assessee and notice under section 153C of the Act was issued by the Learned Assessing Officer (“Ld. AO”) on 10.12.2020. In response to the notice issued under section 153C of the Act, the assessee filed return of income on 28.01.2021 declaring the same total income of ₹14,31,010/-. During the course of assessment proceedings, the Ld. AO observed that the assessee along with two other persons had sold certain plots of land during the year under consideration. The Ld. AO noted that the assessee’s share in the sale consideration was 25%, which worked out to ₹47,56,937/-. The Ld. AO computed the indexed cost of acquisition at ₹48,721/- and accordingly determined long-term capital gain at ₹47,08,216/-. Consequently, the Ld. AO completed assessment under section 153C of the Act vide order dated 22.04.2021 by making addition of ₹47,08,216/- on account of long-term capital gain and assessed the total income of the assessee at ₹61,39,226/-.

4. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). However, the Ld. CIT(A) confirmed the addition made by the Ld. AO and dismissed the appeal of the assessee.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before the Tribunal. The Learned Authorized Representative (“Ld. AR”) submitted that the only issue arising out of the grounds of appeal of the assessee relates to the addition of ₹47,08,216/- made by the Ld. AO on account of long-term capital gain. The Ld. AR further submitted that the assessee along with two other persons had purchased 36 guntas of land situated at Kothagudem on 21.06.2014 for a consideration of ₹5,00,000/-, wherein the share of the assessee was 25%. It was submitted that the land was purchased with an intention to carry on business of real estate by converting the agricultural land into non-agricultural land and thereafter selling the same by dividing it into suitable plots. In support of the aforesaid contention, the Ld. AR invited our attention to the order passed by the Revenue Divisional Officer, Kothagudem, permitting conversion of agricultural land into non-agricultural land placed at page nos. 32 & 33 of the paper book. He further invited our attention to the layout map placed at page no. 34 of the paper book and submitted that the entire land was divided into 13 plots after leaving sufficient area for roads. The Ld. AR also submitted that during the year under consideration the assessee along with the other co-owners sold certain plots for a total consideration of ₹1,90,27,748/- and the assessee’s share therein was ₹47,56,937/-. He invited our attention to the return of income filed by the assessee and submitted that the assessee had disclosed the entire sale consideration of ₹47,56,937/- as business turnover and offered income therefrom under section 44AD of the Act. It was submitted that there was no concealment of income by the assessee. However, the Ld. AO, without appreciating the true nature of the transaction, treated the sale consideration as giving rise to long-term capital gain and made addition of ₹47,08,216/-. The Ld. AR further invited our attention to page no. 6 of the assessment order and submitted that the Ld. AO has accepted the returned income of the assessee, wherein the profit arising from sale of plots had already been offered as business income. Accordingly, it was submitted that once the Ld. AO had accepted the business income declared by the assessee, he could not again assess the same transaction under the head “Capital Gains”. It was contended that the impugned addition results in double taxation of the same income, which is not permissible under law. Therefore, the Ld. AR prayed that the addition of ₹47,08,216/- be deleted.

6. Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the orders of the lower authorities. Inviting our attention to para no. 4 of the assessment order, the Ld. DR submitted that in the statement recorded on 13.05.2019 after the search operation, the assessee himself had admitted that the profit arising from sale of the land was assessable as long-term capital gain. However, while filing the return of income, the assessee did not disclose such income under the head “Capital Gains”. The Ld. DR further invited our attention to page no. 14 of the order of the Ld. CIT(A), wherein the Ld. CIT (A) has recorded his observations that, had it been the intention of the assessee to treat the activity as a business venture, the assessee would have filed the return of income under section 139(1) of the Act. Instead, the assessee filed the return under section 139(4) on 30.07.2020, which was much after the search conducted on 28.02.2019. Therefore, according to the Ld. DR, the assessee changed his stand only after the search proceedings. Accordingly, it was submitted that no interference is called for in the orders of the lower authorities.

7. We have heard the rival submissions and perused the material available on record. The solitary issue arising for our consideration is whether the addition of ₹47,08,216/-made by the Ld. AO on account of long-term capital gain is sustainable. There is no dispute regarding the fact that the assessee along with two other co-owners had sold certain plots of land during the year under consideration for a total sale consideration of ₹1,90,27,748/-. It is also undisputed that the assessee’s share in the said sale consideration was 25%, which comes to ₹47,56,937/-. We have gone through the order passed by the Revenue Divisional Officer, Kothagudem, placed at page nos. 32 and 33 of the paper book and find that the assessee had converted the agricultural land into non-agricultural land. We have also examined the layout plan placed at page no. 34 of the paper book and find that the entire land was divided into 13 plots after leaving space for a 15-feet-wide road. From the said documents, it appears that the conduct of the assessee in converting the agricultural land into non-agricultural land and thereafter subdividing the land into various plots for sale clearly demonstrates a systematic commercial activity undertaken with a profit motive. In our considered opinion, the said activity bears all the characteristics of a business venture or an adventure in the nature of trade. We have further gone through the return of income filed by the assessee and find that the assessee had already disclosed his share of sale consideration amounting to ₹47,56,937/- under the head “Profits and Gains of Business or Profession” and offered income therefrom in accordance with section 44AD of the Act. We have also perused page no. 6 of the assessment order and find that the Ld. AO has accepted the returned income of the assessee. Thus, the business income declared by the assessee on sale of the aforesaid plots has not been disturbed by the Ld. AO. However, while completing the assessment, the Ld. AO again treated the very same transaction as giving rise to long­term capital gain and computed long-term capital gain of ₹47,08,216/- after allowing indexed cost of acquisition of ₹48,721/-. In our considered opinion, once the Ld. AO himself has accepted the income offered by the assessee under the head “Profits and Gains of Business or Profession”, he cannot again assess the very same transaction under the head “Capital Gains”. The Ld. AO cannot simultaneously accept the transaction as a business transaction and thereafter tax the same sale consideration under the head “Capital Gains”. The action of the Ld. AO effectively results in taxation of the same income twice in the hands of the assessee. Such double taxation of the same income, in the absence of any specific statutory provision, is not permissible under law. We also find considerable force in the contention of the assessee that the surrounding facts and circumstances, namely conversion of agricultural land into non-agricultural land, development of the land by carving out plots, creation of internal roads and sale of individual plots, support the assessee’s claim that the activity constituted a business venture. Therefore, considering the totality of facts and circumstances of the case, we are of the considered view that the Ld. AO was not justified in assessing a sum of ₹47,08,216/- as long-term capital gain in the hands of the assessee. Accordingly, we direct the Ld. AO to delete the addition of ₹47,08,216/- made on account of long-term capital gain.

8. In the result, the appeal of the assessee in ITA No. 975/Hyd/2025 is allowed.

ITA No.978/Hyd/2025:

9. The assessee has raised the following grounds of appeal:

1. On the facts and circumstances of the case, the Ld. Commissioner of Income-Appeals 11, Hyderabad erred by confirming the order of Assessing Officer ITBA/AST/S/153C/2021-22/1032618291(1) dated 22.04.2021 that is contrary to law and facts of the case, thus the order ITBA/APL/S/250/2024-25/1074276484(1) dated 10.03.2025 is also ex facie contrary to facts, circumstances of case and law, thus needs to be set aside.

2. The Ld. Commissioner of Income – Appeals 11, Hyderabad erred by confirming the Ld. Assessing Officer an addition of Rs. 9,41,644/- as long-term capital gain merely based on assumptions and statements recorded during the search operations in violation of circular of CBDT 286/98/2013-IT (Inv.II) dt 18.12.2014.

3. That the Ld. Commissioner of Income Tax – Appeals-11, Hyderabad ought to have appreciated the fact that ROI filed in response to notice u/s.153C stands as retraction of the facts recorded in the statement U/s.132(4) of the Act.

4. That the Ld. Commissioner of Income Tax – Appeals-11, Hyderabad erred by upholding the assessment order of Ld. Assessing Officer that passed in violation of Article 265 of the Constitution of India.

5. The Ld. Commissioner of Income Tax – Appeals 11, Hyderabad failed to correctness of addition to returned income as the same resulted into double taxation i.e. u/s.45 of the Act, whereas the income is already disclosed as taxable u/s.28 of IT Act, 1961. This fact CIT(A) failed to consider while dismissing the appeal.

6. The Ld. Commissioner of Income Tax – Appeals 11, Hyderabad, erred by holding the order of Ld. Assessing Officer as correct that is passed without properly analysing the facts, submissions by appellant. The impugned addition is arbitrary, unjustified, and liable to be set aside.

7. That for above and other grounds of that may be urged during the course of appeal proceedings, the arbitrary assessment order ITBA/APL/S/250/2024-25/1074276484(1) dated 10.03.2025 of the Ld. Commissioner of Income Tax -Appeals 11, Hyderabad, be quashed/deleted/set-aside in the interest of justice.

8. The appellant carves the right to change all or any of the above grounds during the appeal proceedings for any additional/modified grounds of appeal.

10. The issue that arises in the present appeal is identical to the issue involved in ITA No.975/Hyd/2025. Therefore, our observation and findings in ITA No. 975/Hyd/2025 shall mutatis mutandis apply to this appeal also. In ITA No. 975/Hyd/2025, we have deleted the addition made by the Ld. AO on account of long-term capital gains. Following the same observation, we direct the Ld. AO to delete the addition of Rs.9,41,644/- made on account of long-term capital gains.

11. In the result, the appeal of the assessee in ITA No. 978/Hyd/2025 is allowed.

12. To sum up, both the appeals of the assessees are allowed.

Order pronounced in the Open Court on 1st July, 2026.