In absence of intention to deal in land on regular basis, income earned from sale of land is taxable as capital gain

Brief of the case

Delhi High Court in case of CIT Vs. Edward Keventer (Successors) Private Limited held that factors like intention of the assessee in purchasing the property, duration of time property was kept by assessee, lack of any transactions of sale or purchase of property throughout relevant period of time, should be considered to determine whether transactions of sale of property resulted in capital gains or in business income.

Facts of the case

• The assessee had purchased leasehold rights in a large parcel of land in 1952 with the object of dairy farming and for production of milk. That venture never took off because the requisite permission for the same was not given by the New Delhi Municipal Council.
• On 02.03.1989, the assessee entered into an MOU with Balarpur Industries Limited and Dalmia Promoters for developing a portion of the said land.
• Anyhow, the said Memorandum of Understanding was cancelled on 08.06.2005 and the development of land, as proposed under the Memorandum of Understanding, did not take place. Prior to the cancellation of the Memorandum of Understanding, on 27.05.2005, two Agreements to Sell were entered into between the assessee and  Mr Niranjan Koirala on the one hand and the assessee and Ms Sheila Aggarwal on the other in respect of the said two properties. Mr Koirala and Ms Aggarwal were both occupying those properties.
• The assessee computed Capital Gains in respect of said properties.
• The A.O. held that the transaction resulted in business income and not in capital gains.
  

HELD by CIT(A)

• The CIT (A) observed that there had been no sale or purchase of land by the assessee throughout all these years from 1952 except for the two transactions, which are subject matter of the present appeal. The CIT (A)held that the original intention of the assessee in purchasing the property was clear which was to hold it as a fixed asset. Finally, the CIT (A) concluded that he had no hesitation in holding that the two residential bungalows sold on 27.05.2005 to the existing occupiers of the same bythe assessee, would result only in long term capital gain and not in any income under the head of business.

HELD by ITAT

• The Income-tax Appellate Tribunal, confirmed the findings of the CIT.
  

HELD by HIGH COURT

• The court is in agreement with decision of the Bombay High Court in the case of CIT v. V.A.Trivedi : 172 ITR 95 (Bom.). In which It has been observed that it is not possible to evolve a single test or formula which can be applied in determining whether the transaction was an adventure in the nature of trade. It was also noted that in the case of purchase and sale of land, generally speaking, the original intention of the party in purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealing of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions, afford valuable guides in determining whether the assessee is carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading adventure.

• The court also point out that in a Division Bench decision of this Court in the case of CIT v. Dr Indu Bala Chhabra : (2003) 132 Taxman(Delhi), this Court observed that the question of distinction between a capital sale and an adventure in the nature of trade can be drawn out in respect of a particular transaction but it cannot be so determined solely on the application of an abstract rule, principle or test, and would depend on all the facts and circumstances of the case. Importantly, the Division Bench held that the finding as to whether the transaction in question was or was not an adventure in the nature of trade was purely one of fact. The Division Bench held that unless and until there was any perversity in the order warranting interference by this court, the findings of fact returned by the Tribunal would have to be accepted and no question of law, much less a substantial question of law would arise for consideration of this Court.

• The Tribunal, as a final fact finding authority has confirmed the findings of fact returned by the CIT (A).   While doing so, it did not look at any solitary fact to determine as to whether the transactions in question resulted in capital gains or in business income. Several factors were considered, which included the intention of the assessee in purchasing the property, the length of time the property was kept by the assessee (which in this case is more than fifty years), the lack of any transactions of sale or purchase of property throughout this period of time etc. The CIT (A) as also the Tribunal have examined the case in the correct  perspective and after examining all the factors, which would go into determining the question as to whether the transactions resulted in capital gains or income from business, have arrived at concurrent findings of fact. No perversity in the findings has been pointed out.