Mahaveer Yadav Vs ITO (ITAT Jaipur)
Where assessee converted agricultural land into state stock of residential plots then the assessee was liable to pay tax as per section 45(2). The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head Capital gains in the year(s) the stock-in-trade was sold/transferred. Further, sales realization of the stock-in-trade over such fair market value was required to be assessed as Business income.
In the instant case, we find that after the death of his father, the assessee had inherited his share of ancestral agriculture land. We have already held above that such inheritance is in his individual capacity and not in capacity of his HUF. Thereafter, the assessee had taken a series of steps whereby he has developed the agricultural land into 34 smaller plots, developed access road within the plotted land and sold to individual purchasers as residential plots over a period of 3 years. As per assessee’s own submissions dated 23.03.2015 available at APB 14-17, it has been stated by the assessee before the AO that “the development of plots took about 12 months and completed at the end of financial year 2009 and gravel road developed”. There is report of the Inspector on record who has visited the place on 19.3.2015 and has given a finding that about 40-50 residential houses have already been built where people are staying, roads have been laid down, a hospital by name of Shyam Hospital is running on one of the plots, a school by name of little star school is also running on one of the plots and the whole area has been developed as a residential colony. The said findings of the Inspector remain unrebutted before us. The Stamp duty authorities have also recognized the plotting as residential plots which is very much evident from the registered sale deeds and the stamp duty paid on such sale of residential plots. All these facts taken together shows clearly that the assessee has taken affirmative steps and actions where he has converted his agricultural land into residential stock-in-trade of his business of selling the plots of land for earning profit. The very nature and purpose of the agriculture land has been changed and we agree with the findings of the ld CIT(A) that such change is an irreversible change where very nature and purpose of the land has been changed from agriculture to residential. It is not a case that the buyers have acquired agriculture plots and subsequently changed it to residential use. In this case, the assessee itself has developed residential plots and then sold it to individual buyers. Therefore, we affirm the findings of the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade (in form of residential plots) of assessee’s business. The development of residential colony and said conversion has happened by assessee’s own admission during financial year 2009 and the intent of the assessee has thus been demonstrated through his own actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head “capital gain” in the year(s) the stock-in-trade is sold/transferred. Further, sales realization of the stock-in-trade over such fair market value is required to be assessed as “business income”. During the year under consideration, it is an admitted position that 15 plots have been sold for a consideration of Rs 54,93,100. Therefore, the taxability arising on conversion of agricultural land into stock-in-trade to the extent it has been sold during the year, arises during the impunged assessment year. The matter is accordingly set-aside to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-22, Alwar dated 07.02.2017 for Assessment Year 2011-12 wherein the following grounds of appeal are taken:-
”1. The Ld. CIT(A) has erred on facts and in law in not accepting the contention of the assessee that the plots on the agricultural land sold belongs to the HUF and not to the assessee in his individual capacity.
2. The ld. CIT(A) has erred on facts and in law in upholding the action of the AO that the plots on agricultural land sold is an adventure in the nature of trade and thereby assessing such income at Rs. 48,98,790/- instead of working out long term capital gain on sale of these plots.
2.1 The ld. CIT(A) has erred on facts and in law in not allowing the deduction towards cost of land while confirming the assessment of the income of Rs. 48,98,790/- under the head “Profits and Gains from Business”.
2.2 The Ld. CIT(A) has erred on facts and in law in not considering the fact that for better realization of its capital asset, the HUF sold the agricultural land after plotting and the same being not a capital asset u/s 2(14) of the Act, the same is not liable for capital gain.”
2. The ground No. 1 of assessee’s appeal is against the finding of the ld. CIT(A) wherein he has not accepted the contention of the assessee that the plots on the agriculture land belongs to the HUF and not to the assessee in his individual capacity. As per ld. CIT(A), the assessee has failed to produce sufficient evidence both at the assessment and during the appellate proceedings to prove that the land belongs to the HUF or a valid HUF exists. The ld. CIT(A) has also taken note of fact that the sale documents bear the name of the appellant in his individual capacity and the sale proceeds are also deposited in the appellant’s individual bank account. The ld. CIT(A) also held that the assessee has not brought on record whether he is filing return of income as HUF or not. He has further held that AO has given a detailed reasononing as to why the income has been taxed in his individual capacity in para-7 of the assessment order which is reproduced as under:-
3. During the course of hearing, the ld. AR submitted that the land under consideration is an ancestral land as is evident from the copy of inheritance document issued by Tehsildar dt. 26.06.1975. From the same and the family pedigree, it can be noted that Sh. Hardayal has two sons, i.e. Sh. Jhabbu and Sh. Gurbax. Therefore, the land was recorded in Khasra Girdawari in the name of Sh. Jhabbu, 1/2 share and Sh. Gurbax, 1/2 share. Sh. Gurbax has two sons, namely Sh. Gangadeen and Sh. Matadeen whereas Sh. Jhabbu has no successor and therefore, he adopted Sh. Matadeen. Therefore, after the death of Sh. Gurbax and Sh. Jhabbu, in Khasra Girdawari, 1/2 share in the land was recorded in the name of Sh. Matadeen and 1/2 share in the name of Sh. Gangadeen. Sh. Gangadeen has two sons, namely Sh. Kalya and Sh. Mahaveer whereas Sh. Matadeen has only one daughter. Therefore, after the death of Sh. Gangadeen, in the revenue record, 1/2 share in the land was recorded in the name of Matadeen and 1/2 share in the name of Sh. Mahaveer & Sh. Kalya. Sh. Matadeen has no son, he relinquished his share in the name of Sh. Kalya. Accordingly, Sh. Kalya has 3/4 share in the land whereas Sh. Mahaveer has 1/4 share in the land. In the revenue records, the land is always mutated in the individual name, therefore, there is no mention of HUF in these records but from the fact on record it can be noted that the land is ancestral land which is inherited by Sh. Kalya and Sh. Mahaveer. Thus, the land under consideration is HUF land.
3.1 It was further submitted that the AO has considered the land as the individual land of assessee only because the mutation of land in the revenue record is in the name of individual member and not in the name of HUF and that in the sale documents of the plots, there is no mention of the HUF. This finding of the AO is confirmed by CIT(A) at Pg 3, Para 6.2 of the order. It is submitted that whether the land is the HUF land or the individual land is to be decided on the basis of the ancestors from whom the same is inherited and not on the basis of the name in which it is recorded in the revenue record. In the present case, land is not succeeded by the assessee from his father but inherited by him from his forefathers. Therefore, the land under consideration is an HUF land in the hands of assessee and not an individual land.
4. The ld DR is heard who has relied on the findings of the lower authorities.
5. We have heard the rival submissions and purused the material on record. It is noted that Shri Mahaveer inherited 1/2share of his father’s share in the subject ancestral land situated in Village Budhi Bawal, Tehsil Kotkasim, District Alwar after the death of his father, Shri Gagandeen. The question for consideration whether on death of his father, Shri Gagandeen, the assessee Shri Mahaveer inherited the share in the subject land in his individual capacity or in the capacity of his HUF. Apparently Shri Gagandeen expired after coming into force of the Hindu Succession Act, 1956 without leaving behind any will, the land has thus devolved on the assessee by intestate succession under Section 8 of the Hindu Succession Act whereby 1/2 share has devolved on the assessee, Shri Mahaveer and 1/2 share has devolved on his brother and son of the deceased, Shri Kalya.
6. In this connection, a reference may be made to a decision of the Hon’ble Supreme Court in the case of CWT v. Chander Sen [1986] 161 ITR 370. The Hon’ble Supreme Court in that case was concerned with the nature of the property for the purposes of wealth-tax. The Supreme Court observed that it would be difficult to hold today that property which devolved on a Hindu male under section 8 of the Hindu Succession Act would be HUF property in his hands vis-a-vis his own son; that would amount to creating two classes among the heirs mentioned in Class I, the male heirs in whose hands it will be joint Hindu family property vis-a-vis their sons, and the female heirs with respect to whom no such concept could be applied or contemplated. The Supreme Court, therefore, held that the property which devolved on the son under section 8 would be his absolute property and would not be joint Hindu family property vis-a-vis his own son.
7. This judgment of the Hon’ble Supreme Court has been followed in the subsequent judgement in the case of the CIT v. EL. Karuppan Chettiar [1992] 197 ITR 646 (SC). In this case, the Supreme Court considered the case of the deceased who, with his wife, sons and daughter constituted a HUF at the time of his death. His heirs including his son succeeded to the properties left by the deceased under section 8. The question was whether the income from the property coming to the son on the death of the deceased should be assessed as the income of the joint family of the son. The Supreme Court held that the income from the property which was inherited by the son on his father’s death was not assessable as income of the joint family.
8. The above judgment of the Hon’ble Supreme Court has been followed by the Jurisdictional Rajasthan High Court in case of CIT vs lun Karan Goyal [1993] 203 ITR 67 (Raj). In this case, the question for consideration before the Hon’ble Court was “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the separate property of the deceased Shri L.R. Agarwal would constitute HUF property in the hands of his sons and grandsons?” Referring to various High Court decisions and the decision of the Hon’ble Supreme Court in the case of CWT v. Chander Sen, it was held that the Tribunal was not justified in holding that the separate property of the deceased would constitute HUF property in the hands of the deceased assessee’s sons and grandsons. The relevant findings of the Hon’ble High Court are as under:
“…. It will be seen in this case that the AAC decided the appeal under its order dated 19-3-1981 (Annr. B) on the basis of Gujarat High Court ruling in the case of Dr. Babubhai Mansukh Bhai ( supra). It will be further seen from the order of the Tribunal dated 24-3-1982 that the Tribunal dismissed the appeal relying on its earlier decision in the case of MM. Jain ( supra) and the aforesaid case of The Gujarat High Court. The above case of the Gujarat High Court and other cases of the Allahabad High Court, Andhra Pradesh and Madhya Pradesh High Courts were considered by the Apex Court in the case of CWT v. Chander Sen AIR 1986 SC 1753 and the Supreme Court held that the view taken in the aforesaid case of Gujarat High Court P in Dr. Babubhai Mansukhbha i is not the correct view and the Apex Court upheld the view taken by other High Courts referred to above. The Apex Court in para 20 of the aforesaid judgment said:
“20. In view of the preamble to the Act i.e. that to modify where necessary and to codify the law, in our opinion it is not possible when Schedule indicates heirs in Class I and only includes son and does not include son’s son but does include son of a pre- deceased son, to say that when son inherits the property in the situation contemplated by section 8 he takes it as karta of his own undivided family. The Gujarat High Court’s view noted above, if accepted, would mean that though the son of a predeceased son and not the son of a son who is intended to be excluded under section 8 to inherit, the latter would by applying the old Hindu law get a right by birth of the said property contrary to the scheme outlined in section 8. Furthermore, as noted by the Andhra Pradesh High Court, the Act makes it clear by section 4 that one should look to the Act in case of doubt and not to the pre-existing Hindu law. It would be difficult to hold today that the property which devolved on a Hindu under section 8 of the Hindu Succession Act would be HUF property in his hands vis-a-vis his own son; that would amount to creating two classes among the heirs mentioned in Class I, the male heirs in whose hands it will be joint Hindu family property and vis-a-vis their sons and female heirs with respect to whom no such concept could be applied or contemplated. It may be mentioned that heirs in Class I of Schedule under section 8 of the Act included widow, mother, daughter of pre-deceased son, etc.” (p. 1760)
6. It can, therefore, be said that the view taken by the Tribunal is not correct. We, therefore, answer the question referred to us as under:
“on the facts and in the circumstances of the case the Tribunal was not justified in holding that the separate property of the deceased Shri L.K. Goyal would constitute HUF property in the hands of his sons and grandsons. “
9. The legal proposition and the ratio of these decisions would apply to the present case also and the share in the subject land inherited by the assessee under section 8 on the death of his father cannot be considered as HUF property in his hands. Therefore, income from disposal of such land will have to be considered as his individual income. We therefore upheld the view of the lower authorities where the income on the disposal of plots of land has been brought to tax in the hands of the assessee in his individual capacity. The ground no.1 taken by the assessee is thus dismissed.
10. In ground No. 2, the assessee has challenged the findings of the ld CIT(A) in affirming the action of the AO in treating the sale of plots of agriculture land as adventure in the nature of trade and thereby assessing the income as business income instead of working out long capital gains on sale of these plots of land. It has further been contended that what has been sold is an agriculture land and the same not being a capital asset u/s 2(14) of the Act, it is not liable for capital gains tax. It has also been contended that the deduction towards the cost of land has not been allowed while determining the income under the head profit and gains from business.
11. Briefly stated, the facts of case are that basis receipt of the AIR information, the Assessing Officer observed that there is a cash deposit of Rs. 11,19,000/- in the bank account maintained by the assessee with the Punjab National Bank and the said income has escaped taxation and after regarding reasons, notice u/s 148 was issued to the assessee. In response to the notice, the assessee filed his return of income disclosing other income of Rs. 88,500/-. During the course of reassessment proceedings, the assessee submitted that the cash so found deposited in his bank account relates to cash receipt on sale of the plots of land. Based on field inspection done by an inspector of the Department and based on information received from Tehsildar, the AO determined that the assessee has sold 20 residential plots for an amount of Rs. 84,09,200/- during the FY 2010-11 relevant to the impunged assessment year. As per Assessing Officer, the nature of income received by the assessee on the sale of the residential plots is in the nature of business income for the reason that the land has been sold after plotting which has resulted in change in the nature and character of agriculture land to residential. It has further been held by the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade of assessee’s business. In this regard, it has been held by the AO that after getting the maps prepared and laying down the road, the plotting has been done and the plots have been sold during the previous year and in the year under consideration. The said fact is confirmed from the information received from the Tehsildar and also the report of the Inspector who has carried out the physical inspection of the site and whose findings are contained at para 12 of the assessment order which is reproduced as under:-
12. The Assessing Officer also referred to the decisions of Hon’ble Supreme Court in case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 (SC) and the Hon’ble Madhya Pradesh High Court in case of CIT vs. Suresh Chand Goyal (2007) 16 (1) ITCL 33 and CIT vs. Jawahar Development Association (1981) 127 ITR 431 (MP). Accordingly, an amount of Rs. 84,09,200/- from the sale of 20 residential plots of land was brought to tax as undisclosed business income of the assessee for the impugned assessment year.
13. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) wherein he accepted the contention of the assessee that a total of 15 plots has been sold during the year under consideration for an amount of Rs. 54,93,100/- as against 20 plots of land for an amount of Rs. 84,09,200/- as held by the Assessing Officer, based on the verification done by the Assessing Officer during the course of remand proceedings. Both the parties have not contested the said findings of the ld CIT(A) and the same has thus attained finality.
14. Regarding the other contentions raised by the assessee before the ld. CIT(A), we refer to the findings of ld. CIT(A) which are reproduced as under:-
“8.3 I have perused the assessment order and submissions of the appellant. Following facts have emerged:
1. That the appellant is the owner of agricultural land Khasra No. 1219, Budhi Bawal, Kotkasim.
2. That the appellant had developed the agricultural land into smal l plots and sold them as residential plots to various purchasers over a period of time.
3. That 31 such plots have been sold over a period of 3 years as per the submission of the appellant.
4. That such plots have been sold as residential plots as per the registered deed and the stamp duty paid.
5. That the return of income has been filed by the appellant in response to notice under section 148 of the Act but not declared any income on sale of such plots.
6. That the AO has treated the income arisen out of development and sale of such plots as business income.
7. That the appellant is claiming exemption u/s 10(1) within the meaning of section 2(1A) of the IT Act, 1961.
8.3.2 I have considered the above mentioned facts. As per the khasra the appellant has inherited the land from his father as agricultural land. However, the appellant had developed part o f inherited land into 34 residential plots. Out of the above plots the appellant had sold 31 plots during the period 01/04/2009 to 31/03/2012. During the year under consideration the appellant had sold 15 plots and received a total amount of Rs. 54,93,100/-. The AO has treated the development of agricultural land into residential plots and selling them as business venture and taxed the receipts as business income.
I have taken note of the inspector’s report that the land was developed by the appellant by developing access road within the residential colony so developed by the appellant. The Inspector’s report has also indicated that a proper school and a hospital are also running on the developed land. More than 40 residences have already been built by the purchasers on the land. All these facts have indicated that the nature o f agricultural land had undergone irreversible change. It is no longer agricultural land but has been developed as a residential colony.
8.3.3 Now, the moot question in the present grounds of appeal is whether the sale of plots comes under the purview of adventure in the nature of trade or not. In this regard, the appellant had cited a large number of judicial pronouncements in favour of its claim. I have gone into the plethora of judgments cited by the appellant. However the gist of most of the cited judgments hinge broadly on the parameters set by the Hon’ble Supreme Court in the case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 (SC). Therefore it is pertinent to go into the rational and the parameters set by the Apex Court in the said judgment.
Therefore, the above mentioned judgment has laid down certain tests to find out whether a particular transaction of purchase and sale would amount to an adventure in the nature of trade or not, and at the same time cautioned that in each case, it is the total effect of all relevant factors and circumstances that determine the character of the transaction. The Supreme Court in that case determines the character of the transaction. The Supreme Court in that case observed that the following factors are relevant for deciding the character of a transaction:
(1) Was the purchaser, a trader and whether the purchase of the commodity and its resale allied to his usual trade or business or incidental to it?
(2) What is the nature of commodity purchased and sold and in what quantity was it purchased or resold?
(3) Did the purchaser by any act subsequent to the purchase improve the quality of commodity purchased and thereby made it more readily resaleable?
(4) What were the incidences associated with the purchase and sale and whether they are akin to the operations usually associated with trade or business?
(5) Are the transactions of the purchase and sale repeated?
(6) In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture?
8.34 Now, applying the parameters set by the Hon’ble Supreme Court in the present case, the sequence of events leading to the eventual sale of the land plots do not seem to help the cause of the appellant. The appellant had inherited the land which was an agricultural land at the time of inheritance. Then the appellant had developed part of the agricultural land into 34 smaller plots, developed access road within the plotted land and sold to individual purchasers as residential plots over a period of 3 years. Thus, the nature of the land had undergone irreversible change. The development of land was done with the undisputed intention of exploiting the land assets to maximize the gain. The exploitation of the land assets was done over a period of 3 years and the entire area has been developed as a residential colony with school and hospital working on the sold land.
If we look at the sequence of events as mentioned above, I have no doubt whatsoever, that the motive, intention and realization of the entire scheme of thing adopted by the appellant was to maximize the value of the asset and using it for business purposes. In that pursuit the appellant had constantly tried and execute different methods at different time exploiting the resources and maximize the profit out of it. It is a continuous process right from the inheritance of land and till the eventual sale of such residential plots. The registering and stamp duty authorities have also recognized plots. The registering and stamp duty authorities have also recognized the plotting as residential plots which is very much evident from the registered sale deeds and the stamp duty paid on such transfer of residential plots.
In this regard, I have also noted the above mentioned Apex Court Judgment where it has said that just as the conduct of the purchaser subsequent to the purchase of a commodity improving or converting it so as to make it more readily resalable is a relevant factor in determining the character of the transaction, so would is conduct prior to purchase be relevant if it shows a design and purpose.
I have clearly noted a purpose and design in the utilization of the land and it all pointed towards a business sense and eventually a business transaction. The appellant has cited Hon’ble Rajasthan High Court judgment in the case of Sohan Khan and Mohan Khan as reported in 304 ITR 194(Raj.), in favour of his claim. I have perused the judgment. However, the concluding para of the judgment has itself said that
“ it is the different story that the question, as to whether a particular transaction falls within the category of adventure in the nature of trade “ or is merely a transaction of transfer of capital asset, since depends on appreciation of facts ”
I have found that the present case is distinguished from facts of the case decided by the Hon’ble Rajasthan High Court judgment. In the present case it is not only the mere sale and purchase of lands. It is a sequence of events showing exploitation of the land purchased, over a period of time that shows the intent and motive of the appellant in the present case as is discussed in details above.
The AO has further brought on record all the facts and conducted necessary enquiries before finalizing the assessment order. Therefore, I agree with the contention of the AO that the exploitation of agricultura l land by converting it into residential plots before selling them to the purchasers is indeed a business venture. As per the Apex court parameters, it is my considered view that the exploitation of land assets by the assessee also comes under the purview of ‘adventure in the nature of trade’and the income arisen is liable to be taxed in the hand of the appellant as ‘business income. However, since the appellant had developed the land before selling them as it brought out in the Inspectors Report also, I find it reasonable to allow 10% of the receipts as allowable expenditure under section 37 of the Act for the possible expenditure incurred in development of the land. Accordingly, the addition to the extent of Rs. 48,98,790/- is sustained. Accordingly, appellant’s ground of appeal on this issue is partly allowed.”
15. Being aggrieved, the assessee is now in appeal before us against the above noted findings of the ld CIT(A). During the course of hearing, the ld AR submitted as under:-
“1. The agricultural land under consideration is situated in Village Budhi Bawal, Tehsil Kotkasim, District Alwar. The Inspector in his report has submitted that the agricultural is 12 kms away from the municipal limits of Kotkasim Tehsil and 15 kms of Bhiwadi. This is also evident from the letter dated 19.03.2015 u/s 133(6) by the Tehsildar of Kotkasim, Alwar submitted to the AO. Section 2(14) clause (iii) states that an agricultural land which is situated beyond 8 kms of the municipal limit is not to be considered as a capital asset. Therefore, as the agricultural land under consideration is situated beyond 8 kms of the municipal limit, it is not a capital asset u/s 2(14)(iii) and consequently any gain on sale of this land is not liable for tax.
2. The jamabandi is at PB 21-27. The land was used for agricultural purposes as is evident from the Khasra Girdawari at PB 28. For better realisation of his ancestral land, he sold the same after dividing it into 34 plots. A total of 31 plots were sold by him in FY 2009-10, 2010-11 and 2011-12 whereas 3 plots were kept for his own use. During the year under consideration, he sold 15 plots amounting to Rs. 54,93,100/-. Therefore, the Ld. CIT(A) has correctly held that income is to be computed with reference to sale of 15 plots having the aggregate consideration of Rs.54,93,100/-.
3. The Ld. CIT(A), however, held that since the assessee has sold the land after plotting, it is an adventure in the nature of trade. Therefore, after allowing the deduction of expenditure on development of land at 10% of the receipt, he computed the income from business at Rs.48,98,790/-. It is submitted that assessee never intended to enter into any real estate business/adventure. He has inherited the ancestral land and to have a better realisation of the capital asset, the same is sold after plotting. Selling of an ancestral agricultural land after plotting it out in order to secure better price, is not an adventure in the nature of trade or business. The word “business” has been defined u/s 2(13) of the IT Act, 1961, which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. To consider the question of business, there must be regular activity of purchasing and selling. In the present case, there is nothing on record to show that the land when acquired was with an intention to sell it by plotting. Basically, it was an ancestral land and was developed and sold after converting it into the plots with a view to secure the better price.
4. In various cases, it has been held that purchase of land once upon a time and thereafter selling the same in piecemeal after development, the profit arising would be taxed under the head Capital gain and cannot be treated as adventure in the nature of trade. Some of these decisions are as under:-
Comments are closed.