Sale of Land: Not Business Income Without Trade Indicators – ITAT Ahmedabad

Shri Laxmanbhai Balchanddas Patel Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that treating transaction of sale of land as business income without any base which indicates that the transaction would be an adventure in the nature of trade is not justified. Hence, AO rightly treated sale of land as capital gain.

Facts- PCIT invoked provisions of section 263 of the Income Tax Act alleging that AO had wrongly allowed assessee’s claim of profit earned from the sale of land as assessable under the head “Capital Gains” and consequently allowed deduction under Section 54EC of the Act to the assessee resulting in Nil capital gain being charged to tax, when the said gains ought to have been assessed as business income of the assessee without allowance of any deduction/exemption against the same.

Being aggrieved against the order of PCIT, the present appeal is filed by the assessee.

Conclusion- Held that there is no basis with the Ld. PCIT to hold that the facts relating to the transaction in sale of land were indicative of the same being in the nature of adventure in the nature of trade and the AO having accepted assessee’s claim of returning capital gains on the same was an error on his part.

In the absence of any finding of error in the order of the Assessing Officer allowing the assessee’s claim of gains earned from sale of land as being in the nature of capital gains, the order passed by the ld. PCIT u/s 263 of the Act is liable to be set aside.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

1. This appeal filed by the assessee is directed against the order passed by the learned Principal Commissioner of Income-Tax-3, Ahmedabad [hereinafter referred to as “PCIT”] dated 20.03.2022, in exercise of his revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year 2017-18.

2. The assessee has challenged the order passed by the ld. PCIT raising the following grounds:-

“1. The learned Principal CIT-3 Ahmedabad has erred both in law and in facts in revising the Order passed by ld A.O. u/s 143(3) on the ground that the AO erred in assessing taxable income of appellant under the head business income (?) instead of capital gain. On the facts and circumstances of the case and considering the details and evidences furnished, order passed by AO being neither erroneous nor prejudicial to interest of revenue, PR.CIT erred in revising the said Order. It be so held now.

2. The learned Principal CIT further grievously erred in law and on facts in not appreciating the submissions made to him that land was held as Investment since inception and so declared in the Balance sheet at cost as also, the same was acquired from own capital and held for long period which established the intention to treat the same as Capital asset and not intention to engage in trade or business. It be so held now and Order passed u/s 263 be set aside.

3. The ld Principal CIT further erred both in law and on facts in not appreciating the various factors leading to the conclusion that the land was never sold as trading asset and there was no adventure as alleged by him when the gain on sale of a part of land held in past was also accepted as Capital Gain. There being no material or different facts, the order passed by ld AO after due application of mind taking a correct view could not be treated as prejudicial to interest of revenue. It be so held now and order passed u/s 263 setting aside the Order of AO be cancelled.

4. The ld Principal CIT also erred both in law and on facts in relying on the case laws not relevant to the facts of the appellants case and/or were distinguishable and in Ignoring the binding judgments of the Apex Court and Jurisdictional High Court in favour of the appellant. It be so held now.

5. The Order passed by ld Principal CIT under section 263 is invalid, illegal and bad in law since the same is passed without application of mind to the facts since in para 11 of his order, there is no firm conclusion and contradictory conclusion in his direction to the AO to pass fresh order. It be so held now and order passed be set aside.

6. The Order passed by ld Principal CIT is also otherwise invalid and untenable since the order of assessment was passed after due consideration of facts by the Id AO and hence there was no lack of inquiries as alleged. It be so held now.

7. The ld Principal CIT erred in law and on facts in placing reliance to Explanation-2 to section 263 since it is settled legal position as considered by various judicial pronouncements that it does not give unfettered powers to the Commissioner to assume jurisdiction under section 263 to revise every order of the Assessing Officer to re-examine the issues. It be so held now and order passed by ld Pr. CIT be cancelled. “

3. The order of the ld. PCIT reveals that he found that the Assessing Officer had wrongly allowed assessee’s claim of profit earned from the sale of land as assessable under the head “Capital Gains” and consequently allowed deduction under Section 54EC of the Act to the assessee resulting in Nil capital gain being charged to tax, when the said gains ought to have been assessed as business income of the assessee without allowance of any deduction/exemption against the same. This error noted by the ld. PCIT is stated at paragraph no.2 of his order as under:-

“2. On examination of case records, it is seen that the assessee had sold non­agricultural land (N.A. land) admeasuring 2150 sq. mtrs out of 3753 Sq. Mtrs. N.A. land owned by him falling under FP50 Block No.481 at Village Kudasan, Tal. Gandhinagar on 02/01/2017 for a consideration of Rs.2,20,11,600/-. This piece of land (3753 sq. mtrs) was purchased in 2006- 07 at a cost of Rs. 427835. Subsequently, the said land was converted into non-agricultural purpose in 2010-11. After converting the entire 3753 sq. mtrs agricultural land into non-agricultural purpose (N.A Land), the assessee have sold 2150 sq. mtr land in 2016-17 for Rs.2,20,11,600/- in order to earn profit from business activity. After claiming exemption benefit of section 54EC of Rs.43,00,000/-, the assessee has offered capital gain on Rs.1,67,44,655/-. Thus, the assessee has treated the said NA land as capital Assets instead of Business Asset and offered the gain as Long Term Capital Gain instead of showing it as business income. This is the precis controversy in this case. Further, on perusal of the Balance Sheet, it is noticed that in fixed assets schedule, the assessee has shown various investments in lands and plots too. This proves that assessee is engaged in regular purchase sale activity in lands. Hence, facts of this are sufficient to prove that assessee is engaged in business activity. In view of the above facts, the sale of land and the profit earned therefrom should have been taxed treating the same as business income instead of Long Term Capital Gains claimed by the assessee. However, the then AO failed to treat the above transaction and profit earned therefrom as business income as against the claim of the assessee treating it as capital gain which was accepted without any examination. From the above facts, it is clear that these transactions are in the nature of trade / business and AO should have been treated the profit/gains from this transaction as business income instead of Long Term Capital Gain as treated by the assessee.”

4. We have noted from the order of the ld. PCIT that his basis for holding the gain earned by the assessee to be assessed as business income was the fact that the assessee had converted an agricultural land into non­agricultural land and then sold it; and, also the fact that he was the owner of other pieces of land also. From the same, he inferred that the assessee was engaged in the regular purchase sale activity of land and, therefore, the gain earned during the year was assessable as business income and not capital gains as returned by the assessee and accepted by the Assessing Officer. A further perusal of the order of the ld. PCIT reveals that the assessee, in response to the show-cause notice, had contended that the Assessing Officer had rightly treated the gains to be in the nature of capital gains and not business income. He had pointed out that the assessee never intended to do any business in land which, he stated, was evident from the fact that the land sold during the year had been purchased 10 years back from his own funds and not from any borrowings and that he had converted agricultural land into non-agricultural land only five years after purchasing it and had sold it five years after conversion to non-agricultural land. The assessee had also pointed out that neither in the past nor in the future the assessee had ever entered into any transaction of sale of land and the piece of land sold during the year had always been shown as investment it its balance-sheet and at cost, that if the assessee intended to carry on any business on the same, it could have reflected as “stock-in-trade” and valued it at cost or at net reliable value whichever is less. Reply of the assessee stating so is reproduced at page no.3 and 4 of his order as under:-

“We are in receipt of the above SCN No.Pr. CIT-3/HQ/263/LBP/2021-22 dt.23/02/2 022 wherein your honour have proposed to revise the assessment made by the Ld. AOfor the AY 2017-18 in respect of the following matter;

That why the income on sale of NA land 2150 sq. mtr. out of the 3753 sq. mtr. for a consideration of Rs.2,20,11,600/-falling under FP 50 Block No 481 at Village-Kudasan Tal-Gandhinagar, be treated as business income instead of capital gain as claimed in the return of income filed.

In connection with the above the assessee most respectfully submit their argument and justification along with documentary evidences to support their claim as under;

That assessee is a senior citizen having income from House property (Rent income) and income from other sources only since last 10 years and more.

That assesse has purchased said agriculture land with other co-owners in FY 2006-07 Le. almost 10 years back for the sole purpose of the investment only. It can also ascertained from the books of accounts that the said land along with other land reflected as investment in land under the head “Fixed Assets” in the Balance Sheet and not as “stock in trade” right from the year of purchase to till date.

Later on the said land was converted into NA land with appropriate authorities in the year 2010-11 i.e. almost after 5 years from the year of purchase and even after approval of NA the land was held as investment for further 5 years (total 10 years) which is a considerable time to justify that the purpose of assesse was to investment and not for business and trade. Later on part of land (2150 sq. mtr.) sold in the FY 2016-1 7 and balance of land (1603 sq. mtr) was still held as investment for the purpose of to gain appreciation only. So from the above it is proved that the land was purchased for the sole purpose of investment and not for the purpose of trade or business.

Further to get NA permission one has to follow stringent procedures and have to submit all revenue records with history of the land with respective authorities and after detailed scrutiny of the revenue records with legality and title of the land grant the NA permission. Therefore the only intention behind the NA was to know/check and to make sure about the clearance, legality and title of the ownership because the market price of the said land is increased due to it is situated near by the capital city- Gandhinagar. So by simply converting the agriculture land into NA does not mean/prove that it is for the purpose of the trade or business as claimed by your honour.

As stated above assessee would like to draw your honour kind attention that the even as on today assessee is holding the balance of 1603 sq.mtr. land in same status with other co-owners and even today assessee along with co-owners have not started any developments on the land or any procedures for getting approval of plan for projects or plotting over the said land from any authorities which shows that the intention was very clear to earn gain by appreciation in the value and not to earn profit from trade or business. (copy of latest revenue records 7 and 12 utara with photos of land enclosed herewith)

Further assesse would also like to draw your attention that the said land along with the other land is valued in the Balance Sheet at cost from the date of purchase which indicate the intention that it is held as investment otherwise they are valued at cost or net realizable value (whichever is less) and/or shown as stock in trade for the purpose of trade and business which is not there.

Moreover the said land was purchased by the assessee from its own funds and capital and not from borrowed money which normally in the case of trade or business is also enough to justified the intention of the assessee.

Furthermore we would also like to explain here that source of income of the assesse as filed in the ITR since last 10 years and more was from “Rent income” and “Income from other sources” only. We are enclosing here with copy of ITR filed along with computation of income to the extent available which justified that intention of the assessee is never to engage in trade or business.

From the various circumstances and facts as narrated above including the number and magnitude of transactions, the period of holding and the manner of accounting it is conclude that the assessee has rightly claimed the income from the sale of land under head capital gain and also AO has rightly passed the order after carefully verification of the document, explanation and facts produced at the time of assessment proceeding. So the order passed by the Ld.AO is not erroneous and prejudicial to the interest of the revenue.

Your honour is requested to kindly accept the above justification with documentary evidences to support the claim of the assesse positively and not to treat the income from sale of land as business income.

However if your honour has different views than the above it is requested to provide the same with reasons in writing so that we can put forward our claim against the same in the interest of the natural justice.”

5. The ld. PCIT, we have noted, has rejected this explanation of the assessee and has held the transaction of sale of land to be in the character of an “adventure in the nature of trade/business” and his basis for treating it so is the fact of the land sold being converted from agricultural to non­agricultural land by the assessee. He has also noted that the firms in which assessee is a partner are into real estate business and the assessee alongwith his sons has admitted on affidavit, filed in proceedings in Civil Court, of being involved in real estate business His findings in this regard at paragraph nos. 6 to 6.2 of his order is as under:-

“6. The submission of the assessee along with the documentary evidence is duly considered but the same is not found acceptable. It is seen that the assessee has purchased the agricultural land and thereafter converted it to Non-agricultural land with a view to make it more marketable and profitable with an intent to earn more profit. The intent to resale at profit is a very strong factor. In the case of CIT vs. Premji Gopalbhai [113 ITR 785 (Guj.), it has been held that even if the land which is not a commercial commodity is purchased and it can be shown that the purchase of land was made sole and exclusively with an intention to resell it at a profit, it would be a strong factor to indicate that the transaction would be an adventure in the nature of trade.

6.1 The contention of the assessee is that the impugned land is shown in the Balance Sheet under the head “Fixed Assets” as investment and not as stock in trade. Therefore, the profit earned from sale of such land should not be treated as income. The assessee has relied upon the accounting entries made in the Books of Accounts. This no more res integra that merely accounting entries will not decided the nature of transaction. Merely because it has shown the impugned land as “Investment”, it will not automatically becomes a capital asset. It would be important to refer to Hon ble Supreme Court decision in the case of Sutlaj Cotton Mills Ltd. vs. CIT 116 ITR 1 (SC) wherein it has been held that the way in which entries are made by an assessee in his books of accounts is not determinative of the question whether the assessee has earned any profit or suffer any loss. The assessee may be making entries which are not in conformity with the proper principles of accounting, conceal profit or show loss and the entries are made by him cannot therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transactions and whether infact it has resulted in profit or loss to the assessee. As such, the mere diversion between accounting records and the tax treatment cannot lead to any conclusion as to the treatment thereof as has been empathical, judicially affirmed in the cited cases.

6.2 The argument which is often taken as also by the assessee that there should be regularity of transaction and assessee regularly engaged in the business activity then only such transaction can be treated as business or adventure in trade. On this issue it would be relevant to refer to certain Supreme Court decisions which have clearly held that “Single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. The relevant part of decision are reproduced herebelow:

“In the case of G Venkataswami Naidu & Co. v. CIT [19591 35 ITR 594 (SC), it was held that Single/isolated ventures are not excluded – Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true, if, in the metaphor, summer represents trade, but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade. It would be unreasonable to apply the conventional test of income coming in with some sort of regularity or expected regularity from definite sources’ or ‘income being likened pictorially to the fruit of a tree or the crop of the field’ to the determination of the question as to whether a single or an isolated transaction can be regarded as an adventure in the nature of trade.”

If the facts of this case are referred to, it is seen that the assessee is a partner in real estate firms namely M/s Noble Infrastructure, Unjha and M/s Kadam Corporation, Ahmedabad. There are frequent transactions of purchase & sales of land/ immovable properties. For example, value of land under the investment is shown as under in various Balance Sheet:-

Not only this, the assessee has filed copies of affidavit & copy of petition filed in Civil Suits No. 629/2017 & 490/2017 & 401/2017 in first para, it has been admitted that the assessee and his son are engaged in the business of real estate development and construction.”

At Paragraph No. 6.3 of the ld. PCIT’s order also is the reference to this conversion of the land into non-agricultural land by the assessee and states it to be relevant factor for determining the assessee’s intention of conducting business in the transaction of land.

6. We are not in agreement with the ld. PCIT on this score. The nature of a transaction, whether by way of adventure in the nature of trade, is determined not by a solitary factor but by considering a number of factors together, all pointing to the intention of the assessee in undertaking the transactions. The Hon’ble apex court in the case of Venkataswamy Niadu v CIT 35 ITR 594 (SC) explained the purport of the term “adventure in the nature of trade” as having some but not all characteristics of trade or business, as under:

“When section 2(4) refers to an adventure in the nature of trade, it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them; and so, even an isolated and single transaction can satisfy the description of an adventure in the nature of trade. But at least some of the essential features of trade must be present in the isolated or single transaction.”

7. The Hon’ble Court then went on to list the various determinative factors for holding the transaction as being in the nature of adventure in trade as whether the person was a trader and the asset purchased was in course of his regular activity, that whether any act subsequent to purchase was done to improve the quality of the commodity so as to make it readily saleable, whether the incidents associated with the transaction were as done in regular business, whether the transaction was repeated, whether purchase was made with an intention to resell etc. The Hon’ble apex court held that all surrounding factors needed to be considered for drawing any inference regarding the nature of the transaction. Its findings in this regard are as under:-

“If, a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant, namely, whether the purchaser was a trader and whether the purchase of the commodity and its resale was allied to his usual trade or business or incidental to it; the nature of the commodity purchased and resold and its quantity; whether the purchaser by any act subsequent to the purchase improved the quality of the commodity purchased and thereby made it more readily resaleable; the incidents associated with the purchase and resale; whether such incidents were similar to the operations usually associated with trade or business; whether the transactions of purchase and sale were repeated; in regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture; and whether the purchase made was with the intention to resell it at a profit but distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole. A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it.

During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a clam is upheld that would be a factor against the contention that the transaction is in the nature of trade. The presence of all the relevant circumstances may help the court to draw a inference as to whether a transaction is in the nature of trade, but it is not a matter of merely counting the number of facts and circumstances pro and con; it is important to consider their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.

Cases do often arise ‘where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. Thus, the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.”

8. In the present case, the Ld. PCIT, we find, has relied only on the fact of conversion of the land sold from agricultural to non-agricultural, as the basis of his finding that the assessee indulged in the activity of sale of land during the year as an adventure in the nature of trade. He has completely given a goby to other conditions and circumstances demonstrated by the Ld. Counsel for the assessee to exist in the present case such as

• that the asset sold by it, i.e. land, was held for a reasonably long period of time, i.e. 10 years, before it was sold;
• that it was converted from agricultural land into non-agricultural land only after 5 years of holding and was sold after conversion again after holding it for a period of 5 years;
• that the land was acquired out of its own funds;
• that the entire parcel of land was not sold, but only a portion of it and the assessee still holds the remaining portion of the land and has not sold it;
• that the assessee has neither started any development activity on the land nor applied for getting any approvals of plans for projects or plotting over the land from any authorities;
• That the assessee had consistently reflected the land as investment in its books of accounts and not stock in trade;
• That that the assessee neither in the past or future had ever indulged in any business activity of this kind, returning income to tax only from house property or from other sources.

All these factors are also very pertinent for determining the intention of the assessee to hold the land whether for earning profits by way of business or otherwise. The factum of conversion of land from agricultural land into non-agricultural land cannot be alone picked up for determining the intention of the assessee. The ld. PCIT having done exactly the same by picking out only one factor relating to the land sold, his inference that the land sold by way of adventure in the nature of business, we hold, is not appropriate.

9. The other facts noted by the Ld. PCIT for arriving at his finding of the transaction of sale of land being in the nature of adventure in trade we find are entirely irrelevant and do not have any bearing on the finding. We fail to understand how the fact that the firms in which assessee was a partner indulged in real estate transactions can lead to the inference that the assessee in his individual capacity was also intended indulging in such business. For that matter the assessee’s affidavit in proceedings before the Civil Court stating that he and his son were involved in real estate business also is of no relevance and consequence since the entire affidavit is not reproduced in the order and until it is read in entirety the import of it cannot be gathered. The Ld. PCIT’s reference to the contents of the affidavit can only be treated as his inference from the same and the affidavit could very well be also read to have been stated by the assessee in the context of the fact that he was indulging in real estate business in partnership.

Therefore, we hold that there is no basis with the Ld. PCIT to hold that the facts relating to the transaction in sale of land were indicative of the same being in the nature of adventure in the nature of trade and the AO having accepted assessee’s claim of returning capital gains on the same was an error on his part.

10. In the absence of any finding of error in the order of the Assessing Officer allowing the assessee’s claim of gains earned from sale of land as being in the nature of capital gains, the order passed by the ld. PCIT u/s 263 of the Act is liable to be set aside.

11. The appeal of the assessee is allowed.

Order pronounced in the open Court on 02/08/2023 at Ahmedabad.