ITAT Holds Land Sale Gains Taxable as Capital Gains:

The assessee filed her return of income for Assessment Year 2023–24 declaring total income of Rs 16,68,66,420. During scrutiny, the AO noticed the sale of converted non-agricultural land in which the assessee held a 50% share along with a co-owner.

The AO treated the sale consideration of Rs 3,92,68,000 as business income under Section 2(13) of the Act. The AO also denied deduction of the acquisition cost of Rs 3,07,07,422 and taxed the entire sale consideration as business income. Further, the AO treated Rs 49,64,279 received from business trusts, including REITs, as taxable income from other sources, rejecting the assessee’s claim of exemption under Sections 10(23FD) and 10(23FC). The CIT(A) upheld both additions and dismissed the assessee’s appeal.

The Tribunal examined Section 2(13) of the Income Tax Act, 1961, which includes an adventure in the nature of trade within the definition of “business.” 

The Tribunal observed that the assessee had consistently treated the land as an investment and disclosed income from its sale under the head “Capital Gains.” The Department had accepted this treatment in the immediately preceding assessment year, AY 2022–23. The assessee had also demonstrated that all the land parcels in the relevant year were sold to a single purchaser, Anantbaug Plantations Pvt. Ltd., contrary to the authorities’ observation that the land had been sold to multiple buyers.

Accordingly, the Tribunal directed the AO to assess the income under the head “Capital Gains” instead of business income. It also directed the AO to verify the acquisition records to determine whether the land had been held for two years before its transfer and, if so, to accept the assessee’s claim of long-term capital gains. The AO was further directed to verify the treatment of land in the assessee’s computation for AY 2024–25.

The Tribunal considered the combined effect of Sections 10(23FD), 10(23FC), 115UA and 194LBA of the Income Tax Act, 1961. The Tribunal explained that the taxation framework governing business trusts follows a pass-through mechanism under which specified income retains its character in the hands of the unit holder. The Tribunal observed that dividend income distributed by a business trust becomes taxable in the hands of the unit holder in the relevant circumstances where the underlying special purpose vehicle has exercised the option under Section 115BAA. Conversely, where the SPV has not exercised that option, the specified dividend income remains exempt in the hands of the unit holder.

In the present case, the assessee produced declarations and tax communications confirming that the underlying SPVs had not opted for Section 115BAA. Form 26AS also showed that tax had been deducted on the taxable interest component but not on the exempt dividend component. The Tribunal found this treatment consistent with the statutory framework. Accordingly, it held that the income of Rs 49,64,279 had been correctly claimed as exempt and directed the AO to delete the addition made under the head “Income from Other Sources.”