Profit From Land Development Agreement With Own Partnership Firm is Considered Business Income, Not LTCG

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  • Last Updated on 20 January, 2024

Land Development Agreement

Case Details: Bhanuprasad Maganlal Patel v. DCIT - [2024] 158 426 (Ahmedabad-Trib.)

Judiciary and Counsel Details

    • T.R. Senthil Kumar, Judicial Member & Smt. Annapurna Gupta, Accountant Member
    • S.N. Divatia, AR for the Appellant.
    • Saumya Pandey Jain, Sr. D.R. for the Respondent.

Facts of the Case

The assessee was an individual and partner in four partnership firms. The assessee along with seven other co-owners, had purchased the immovable property in 2006 in which the assessee’s share was 18%. The assessee and the same seven co-owners established a partnership firm in 2010 with the same shareholding as that in the land purchased by the assessee with the seven co-owners. After that, the same co-owners entered into a development agreement in 2011 with the partnership firm to develop the lands for construction into 18 bungalows.

The assessee claimed that he had sold the land to the partnership firm and claimed the exemption under section 54F. The Assessing Officer found that the chain of facts proved that the land was purchased only for business purposes by developing it as a commercial project. Thus, the transaction was treated as an ‘adventure in nature’. Accordingly, he treated the capital gain as the assessee’s business income and denied the exemption under section 54F.

On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer.

The matter then reached the Ahmedabad Tribunal.


The Tribunal held that the assessee and seven co-owners purchased the land in 2006 and entered into a development agreement in 2011 to construct 18 bungalows in a prime location. The eight co-owners formed a partnership firm in 2010 with the same ratio of land holdings as their partnership shares.

Further, it was noticed that the assessee bought another parcel of land in 2014 along with seven other co-owners, constituted another partnership firm with the same set of co-owners as partners, and engaged in the land development business. This clearly established the assessee’s motive, intention, and interest in the real estate business. Thus, the motive to acquire land was to earn profit by developing the land through his own partnership firm as a builder.

If the assessee had done this construction project in his individual capacity, he should have been liable for higher tax and would not have been eligible to claim exemption under section 54F. Thus, the above transaction of the assessee was clearly to evade legitimate taxes due on the profit from the sale of the property. Therefore, on overall consideration of circumstantial and surrounding evidence, the profit earned by the assessee on the sale of land was correctly treated as business income.

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