Land earmarked for public utility purpose cannot be taxed either as capital gain or as business income

ACIT Vs Smt. Sarojini B. Nair (ITAT Chennai)

Held that the land earmarked for public utility purpose in terms of municipal regulations while forming residential lay out, cannot be brought to tax either u/s.47(iii) of the Income Tax Act or u/s.45(2) of the Income Tax Act

Facts- During the course of assessment proceedings, AO noticed that the assessee has converted investment into stock-in-trade as per s.45(2) of the Act. AO further noted that the assessee had earmarked 40,386.81 sq.ft. land for common amenities like road, 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 for execution of such deed. AO, however, was not convinced with the explanation of the assessee and according to the AO, the assessee has relinquished her right in land earmarked for road and other common facilities to the extent of 40,386.81 sq.ft. which comes under the definition of transfer as defined u/s.47(iii) of the Act, and thus, computed capital gains on transfer of land earmarked for public utility purpose and made addition of Rs.1,80,83,081/- under the head ‘income from capital gains’. AO had also 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. AO, while doing so has invoked provisions of Sec.43CA of the Act, to adopt Fair Market Value of the land in place of actual consideration and computed income from business and profession on total land earmarked for road and other common utility purpose and made addition of Rs.1,81,74,065/-.

Being aggrieved, the assessee preferred an appeal before the Ld.CIT(A). CIT(A) 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.

Conclusion- Held that the land earmarked for public utility purpose in terms of municipal regulations while forming residential lay out, cannot be brought to tax either u/s.47(iii) of the Act or u/s.45(2) of the Act, because, relinquishment of right in land earmarked for common utility purpose, cannot be considered as extinguishment of any right in property which can be considered as transfer within the definition of Sec.47(iii) of the Act. 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 a consideration. Therefore, we are of the considered view that when the assessee has relinquished her right in the land earmarked for common utility purpose in terms of regulatory requirements and also executed Gift Deed in favour of the Commissioner, Virudhachalam, 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, does not arise.

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