Case Law Details

Case Name : Ramswaroop Saudagar Vs Income Tax Officer (ITAT Jaipur)
Appeal Number : ITA No. 329/JP/2017
Date of Judgement/Order : 22/02/2018
Related Assessment Year : 2007-08
Courts : All ITAT (5168) ITAT Jaipur (97)

Ramswaroop Saudagar Vs ITO (ITAT Jaipur)

Although the land was agricultural land and situated in the limits of city of Dausa. It was developed into 23 plots of various sizes and sold during the year. The nature of land had gone irreversible change from agricultural to residential plots, therefore, we are agree with the finding of the ld. CIT(A) that this was an adventure in the nature of trade and income has to be taxed under the head ‘profit and gains of business and profession’. We have also considered the various case laws relied upon by the ld AR of the assessee during the hearing of appeal, in all these cases, the facts were at variance to the facts of assessee’s case. Therefore, none of the ratio laid down by the Hon’ble Courts is applicable to the assessee’s case, accordingly, findings of the ld. CIT(A) on this issue is sustained. However, the provisions of Section 45(2) of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Apparently these provisions of Act have not been taken into consideration by the ld. CIT(A), therefore, in the interest of justice and equity, the Bench find deem it fit to restore the issue back to the file of the ld. CIT(A) to give effect to the provisions of Section 45(2) of the Act. Hence, the issue is restored back to the file of the ld. CIT(A).

FULL TEXT OF THE ITAT JUDGMENT

This is an appeal filed by the assessee emanates from the order of the ld. CIT(A), Alwar dated 06/03/2017 for the A.Y. 2007-08.

2. The assessee was having agricultural land in Dausa Khurd admeasuring 5910 Sq. yard. During the year, the assessee had developed the land into 23 plots of varying areas ranging from 182 sq. yards to 462 sq. yards and named it as Bhagwati Nagar Residential Scheme. All these plots were sold on the basis of agreement to sale to different persons and sale consideration stated was at Rs. 24,15,600/- and offered capital gain of Rs. 85,258/- after indexation of cost and improvement/dalali expenses. The Assessing Officer estimated the long term capital gain by invoking the provisions of Section 50C of the Income Tax Act, 1961 (in short the Act) by adopting DLT rate. The ld. CIT(A) has sustained the addition by holding that the sale of 23 plots of land during the year under consideration comes under the ‘adventure in the nature of trade’ and liable to be taxed under the profits and gains of business and profession. The ld. CIT(A) has allowed Dalali expenses of Rs. 76,500/- as business expenses U/s 37 of the Act and sustained addition of Rs. 23,39,100/-.

3. Now the assessee is in appeal before the ITAT by taking following grounds of appeal:

“1. In the facts and circumstances of the case and in law the Id. CIT (A) has erred in confirming the action of the Id. AO in reopening the assessment u/s 147 of Income Tax Act, 1961. The action of Id. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the reassessment proceedings being illegal and without any basis.

2(a) In the facts and circumstances of the case and in law the Id. CIT(A) has erred in making an addition of Rs. 23,39,100 on the sale of land under the head “Profits & Gains of Business or Profession”, treating the transaction of sale of capital asset as adventure in the nature of trade. Therefore, Id. CIT(A) has erred in making addition of Rs. 23,39,100 on sale of land under the head profits & gains of business and profession as against capital gain of Rs. 85,258 declared by the assessee and assessed at Rs. 58,60,918 by Id. AO. The action of the Id. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the addition under business head.

(b) In the facts and circumstances of the case and in law the Id. CIT(A), in terms of his power u/s 251, has erred in changing the head from capital gains to profits & gains of business or profession. The action of the Id. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the action of Id. AO.”

4. Grounds No. 1 and 2(b) of the appeal were not pressed by the assessee, therefore, the same stands dismissed as not pressed.

5. In the ground No. 2(a) of the appeal, the sole issue involved is sustaining addition of Rs. 23,39,100/- on the sale of plot of land under the head “Profits & Gains of Business or Profession”. The ld. CIT(A) has decided the issue by holding as under:

“6.3  I have perused the assessment order as well as submissions made by the appellant. Following facts have emerged;

1. That the appellant had inherited agricultural land at Dausa Khurd admeasuring 5910 sq. yard.

2. That during the year under consideration the appellant had developed the land into 23 plots of varying areas ranging from 182/220/205/223/236/334/462 sq. yard. The land plots had been developed as residential plots under the name of ‘Bhagwati Nagar Residential Scheme’.

3. That the appellant had sold these plots to 23 persons through ‘agreement to sell’ without registered sale deed for a total stated consideration of Rs 24,15,600/- and declared Long Term Capital Gain of Rs. 85,258/- after indexation of cost and improvement/ Dalali exp.

4. That the A.O had called for information from the Sub-Registrar, Dausa to ascertain the prevailing market rate. On the basis of prevailing DLC rate in the area, the A.O had estimated the LTCG by invoking section 50C of the Act at Rs. 58,60,918/-.

5. That the appellant has claimed that the sale of land was never registered and so no DLC rate can be taken beside taking the plea that the amendment in the section 50C to incorporate the word ‘assessable’ to include even assessable value of transfer within the ambit of section 50C of the Act was made effective from 01st October, 2009. In this case the sale was made during F.Y 2006-07. The appellant has also taken the plea that without referring the property valuation to DVO, section 50C cannot be invoked.

6.3.2 I have considered the above mentioned facts. It would be imperative to reproduce the provision of section 50C of the act. It

says;

Section 50C.

(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed 57[or assessable] by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed 57a[or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer :

‘Assessable’ is inserted by the Finance (No.2) Act, 2009, w.e.f. 01/10/2009.

(2) Without prejudice to the provisions of sub-section (1), where—

(a) the assessee claims before any Assessing Officer that the value adopted or assessed 59(or assessable] by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;

(b) the value so adopted or assessed 59(or assessable] by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

60(Explanation 1].—For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

61(Explanation 2.—For the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.]

(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed 61(or assessable] by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed 61(or assessable] by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.]

Thus, looking at the provision of the Act, it is obvious that in the present case, the sale was not made through registration hence, the assessable value of the land cannot be taken as the amendment in the Act is applicable from 01/10/2009 where as the sale in this case was done during F.Y 2006-07. In the event of a dispute in the valuation and before invoking the provision of section 50C, the A.O should have referred the matter to DVO for valuation, which was not done in this case. Therefore A.O is not justified in taking the value of stamp duty prevalent in that area for the purpose of calculating capital gain by invoking section 50C of the Act.

6.3.3 However, as the appellate authority is also a fact finding body, I have considered the submission made by the appellant and the evidences on record. Looking at the nature of transaction, a very pertinent question arises. Whether the true nature of transaction has been declared by the appellant or not which forms the basis of the present appeal? In the present grounds of appeal, whether the transaction involving the sale of plots comes under the purview of ‘adventure in the nature of trade or not’? In this regard, I am inclined to take into account some very basic facts of the land in transaction. In the present case, the appellant had developed the inherited agricultural land into 23 plots of varying sizes ranging from 182/220/205/223/236/334/462 sq. yard. These land plots have been developed as residential plots under the name of ‘Bhagwati Nagar Residential Scheme’ before selling them under agreement to sell to the prospective buyers. Thus, the nature of land had undergone irreversible change from agricultural land to residential plots. The appellant has developed the entire land bank with him under the scheme ‘Bhagwati Nagar Residential Scheme’. The plotting has been done in a manner to cater to a large customer base as per the market need. Thus, there seems to be a proper scheme in the mind of the appellant to use the land assets in a manner to maximize the return by resorting to market practices and needs.

During the course of appellate proceedings, the appellant has been asked to file submission on this issue. 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 rationale and the parameters set by the Apex court in the said judgment.” The relevant part of the judgment is reproduced as under:

The tribunal and the High Court have found that the transaction in question is an adventure in the nature of trade; and it is the correctness of this view that is challenged in the present appeal. The expression “adventure in the nature of trade” is used by the Act in s. 2, sub-s. (4) which defines business as including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Under s. 10, tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profit or gains of any business, profession or vocation carried on by him. Thus the appellant would be liable to pay the tax on the relevant amount if it is held that the transaction which brought him this amount was business within the meaning of s. 2, sub-s. (4) and it can be said to be business of the appellant if it is held that it is an adventure in the nature of trade. In other words, in reaching the conclusion that the transaction is adventure in the nature of trade, the tribunal has to find primary evidentiary facts and then apply the legal principles involved in the expression “adventure in the nature of trade” used by s. 2, sub-s. (4). It is patent that the clause ” in the nature of trade” postulates the existence of certain elements in the adventure which in law would invest it with the character of a trade or business; and that would make the question and its decision one of mixed law and fact. This view has been incidentally expressed by this Court in the case of Meenakshi Mills, Madurai (I) in repelling the appellant’s argument based on the decision of the (I) [1956] S. C. R. 691.

This question has been the subject-matter of several judicial decisions; and in dealing with it all the judges appear to be agreed that no principle can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. When s. 2, sub-s. (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 transaction can satisfy the description of an adventure in the nature of trade. 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 the 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 was faintly argued for the appellant that it would be difficult to regard a single or an isolated transaction as one in the nature of trade because income resulting from it would inevitably lack the characteristics attributed to it by Sir George Loundes in Commissioner of I. T. vs. Shaw Wallace and Company(l). ‘Income their Lordships (1) (1932) L. R. 591.A. 206.

Lord Carmont observed that he did not wish to read the said passage out of its context and without regard to the facts of the case then under consideration. Then Lord Carmont added that though the language used by Lord Dunedin “may cover the purchase of houses” it “would not cover a situation in which a purchaser bought a commodity which from G its nature can give no annual return”. “This comment of mine”, said Lord Carmont, ” is just another way of saying that certain transactions show inherently that they are not investments but incursions into the realm of trade or adventures of that nature Then reference was made to the fact that the assessee was a warehouse company director and not a property agent or speculator and that the only purchases of property with which he was concerned were two separated by ten years and that the first heritage was acquired without the intention to sell, which only arose fortuitously. His Lordship then put his conclusion in this way: “I would therefore say that the Commissioners of Inland Revenue have failed to prove and the onus is on them the case they sought to make out”. According to Lord Carmont, Lord Dunedin’s observations do not suggest that the initial declaration of intention per se leads to the conclusion that the transaction was in the nature of trade. He thought that much more was required to show that the assessee was engaged in an adventure in the nature of trade than was proved in the case before the court. Lord Russell, who concurred with this opinion, began with the observation that “prima facie the difference of opinion among the General Commissioners suggests that the case is a narrow one and that the onus on the appellants of showing that the transaction was an adventure in the nature of trade is not a light one”. Lord Russell then mentioned the argument of the Lord Advocate that if a person buys anything with a view to sale that is a transaction in the nature of trade because the purpose of the acquisition in the mind of the purchaser is all- important and conclusive; and that the nature of the thing purchased and the other surrounding circumstances do not and cannot operate so as to render the transaction other than an adventure in the nature of trade, and observed that in his opinion the argument so formulated ” is too absolute and is not supported by the judicial pronouncements on which it was sought to be raised “. He then referred to the variety of circumstances which are or may be relevant to the determination of such a question; and he concluded with the observation that the appellants had not discharged the burden of showing that the transaction was an adventure in the nature of trade. Lord Keith also took the same view and stated that “the facts were, in his opinion, insufficient to establish that this was an adventure in the nature of trade “. This case was no doubt a case on the border line;- and if we may say so with respect it was perhaps nearer an adventure in the nature of trade than otherwise. It would not be unreasonable to suggest that, in this case, if the Commissioners had found that the transaction was an adventure in the nature of trade, the court would probably not have interfered with the said conclusion; but the Commissioners were equally divided and so the assessment had been discharged by them. It was under these circumstances that the point about the onus of proof became q matter of substance; and, as we have already pointed out, all tile learned judges have emphasized that the onus had not been discharged and that no case had been made out for reversing the order of discharge -passed by the Commissioners. However that may be, it would, we think, be unsafe to treat this case as laying down any general proposition the application of which would assist the appellant before us. We would also like to add that there can be no doubt that Lord Russell’s criticism against the contention raised by the Lord Advocate was fully justified because the contention as raised clearly overstated the significance and effect of the initial intention. As we have already pointed I out, if it is shown that, in purchasing the commodity in question, the assessee was actuated by the sole intention to sell it at a profit, that no doubt is a relevant circumstance which would raise a strong presumption that the purchase and subsequent sale are an adventure in the nature of trade; but the said presumption is not conclusive and it may be rebutted or offset by other relevant circumstances. What then are the relevant facts in the present case?

The property purchased and resold is land and it must be conceded in favour of the appellant that land is generally the subject-matter of investment. It is contended by Mr. Viswanatha Sastri that the four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realised that cannot impress the transaction with the character of an adventure in the nature of trade. The appellant, however, is a firm and it was not a part of its ordinary business to make investment in lands. Besides, when the first purchase was made it is difficult to treat it as a matter of investment. The property was a small piece of 28-1/4 cents and it could yield no return whatever to the purchaser. It is clear that this purchase was the first step taken by the appellant in execution of a well-considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit. Just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resaleable is a relevant factor in determining the character of the transaction, so would his conduct prior to the purchase be relevant if it shows a design and a purpose. As and when plots adjoining the mills were available for sale, the appellant carried out his plan and consolidated his holding of the said plots. The appellant is the managing agent of the Janardana Mills and probably it was first thought that purchasing the plots in its own name and selling them to the mills may invite criticism and so the first purchase was made by the appellant in the name of its benamidar V. G. Raja. Apparently the appellant changed its mind and took the subsequent sale deeds in its own name. The conduct of the appellant in regard to these plots subsequent to their purchase clearly shows that it was not interested in obtaining any return from them. No doubt the appellant sought to explain-its purpose on the ground that it wanted to build tenements for the employees of the mills; but it had taken no steps in that behalf for the whole of the period during which the plots remained in its possession. Besides, it would not be easy to assume in the case of a firm like the appellant that the acquisition of the open plots could involve any pride of possession to the purchaser. It is really not one transaction of purchase and resale. It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holdings that at a convenient time it sold the lands to the Janardana Mills in two lots. When the tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment it would have tried either to cultivate the land, or to build on it; but the appellant did neither and just allowed the property to remain unutilised except for the net rent of Rs. 80 per annum which it received from the house on one of the plots. The reason given by the appellant for the purchase of the properties by the mills has been rejected by the tribunal; and so when the mills purchased the properties it is not shown that the sale was occasioned by any special necessity at the time. In the circumstances of the case the tribunal was obviously right in inferring that the appellant knew that it would be able to sell the lands to the mills whenever it thought it profitable so to do. Thus the appellant purchased the four plots during two years with the sole intention to sell them to the mills at a profit and this intention raises a strong presumption in favour of the view taken by the tribunal. In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts the presumption arising from the initial intention; on the other hand, most of them corroborate the said presumption. We must, therefore, hold that the High Court was right in taking the view that, on the facts and circumstances proved in this case, the transaction in question is an adventure in the nature of trade. The result is the appeal fails and must be dismissed with costs.

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 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?

6.3.4 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 an agricultural land admeasuring 5910 sq yards. The appellant had developed the land into a proper residential scheme under the name of ‘Bhagwati Nagar Residential Scheme’ and carved out 23 plots and started selling those plots at a premium.

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.

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.

Even Hon’ble Rajasthan high Court judgment in the case of Sohan Khan and Mohan Khan as reported in 304 ITR 194(Raj.), observed in the concluding Para of the judgment as under;

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…. ”

Therefore, on the factual matrix of the case, it is my considered view that the sale of 23 plots of land during the year under consideration comes under ‘adventure in the nature of trade’ and is liable to be taxed under business head. Accordingly, the dalali expenditure of Rs. 76,500/- is allowable as business expenses under section 37 of the Act. Accordingly, an addition of Rs. 23,39,100/-under the head business is sustained. Appellant’s ground of appeal on the issue is partly allowed.

6. While pleading on behalf of the assessee, the ld AR has submitted as under:

2.1 Submission made before CIT(A) with regard to the transaction being one of capital gain, also reproduced by him in his order from page 9-11, may please be considered in correct perspective. Those submissions are again reproduced hereunder for the sake of convenience.

2.2 The term “Business” is inclusively defined u/s 2(13) of the IT Act, 1961 being “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

2.3 Therefore, neither the term “Business” nor “Adventure in the nature of trade” is defined under the provisions of Income tax act, 1961. Therefore, the dictionary meaning, that too for each word separately, has to be considered, which is as under:

2.3.i As far as the word ‘adventure’ is concerned, it implies a pecuniary risk, a venture, a commercial purpose. The word ‘venture’ is defined as a commercial activity in which there is a risk of loss as well as a chance of gain.

2.3.ii The term ‘trade’ in the context of the definition of the expression ‘business’ is a wider concept and once this term is associated with the term ‘adventure,’ the scope is further enlarged. The term ‘trade’ means the action of buying and selling goods and services between two or more parties in consideration of money or money’s worth.

2.3.iii The “Business” is characterized by some of essential ventures such as repetitive transactions, business skills, risks & uncertainties, holding of stock-in-trade, dealing with the customers and implied intention between the parties, etc.

2.4 Based on the above definitions, the “adventure in the nature of trade or commerce” can be defined as a pecuniary risk or venture of buying and selling the goods or services between two or more parties in consideration of money or money’s worth, where there is a risk of loss as well as a chance of gain and these activities may be quite similar to the ordinary business.

2.5 In the instant case, the assessee had inherited the agricultural land which has been sold by him. The assessee did not get the land converted into non- agricultural land. The assessee is having his own business of plying trucks. The Business is located at Tirupati Motars, near railway crossing, Jaipur Road, Dausa. The assessee resides at Dausa, Tehsil Dausa. During the tenure of sale, the assessee was aged about 64 years. No efforts like an entrepreneur were involved in the transaction nor has the assessee hired services of any person to make efforts on his behalf.

2.6 It is submitted that in determining whether a particular transaction is an adventure in the nature of trade, the Courts have emphasized that all the circumstances of the transaction must be considered and that no single criterion can be formulated.

2.7 The distinct facts of the instant case are as follows:

2.7.i Agricultural land which was sold was inherited and not purchased.

2.7.ii Land converted into non-agricultural land.

2.7.iii Land was sold in small plots to realize optimum value of its capital asset.

2.7.iv No such kind of further transaction has been done by assessee till date

2.7.v No efforts like an entrepreneur has been made by assessee.

2.8 It is evident that no two ingredients of trade i.e. purchase & sale was involved in the transaction. In the transaction, purchase was missing and only sale was there. There was no uncertainty as to the earning of profit and incurring the loss. Assessee was certain of earning the profits, but he maximizes the same by selling the land in small plots. Therefore, the isolated transaction of sale of inherited agricultural land in small plots cannot be termed as adventure in the nature of trade.

2.9. Under same set of facts, in the below mentioned judgment transactions were referred to as one of capital gain and not adventure in the nature of trade. Relevant extracts of such judgments are also reproduced here under for the sake of ready reference:-

2.9.i Sushila Devi jain Ltd. [2003] 130 Taxman 120 (Punj. & Har.) (Case Law Page 30-31)

“NX. Sodhi, J. – This appeal by the revenue is directed against the order dated March 14, 2001, passed by the Income-tax Appellate Tribunal whereby the appeal filed by the Department was partly allowed. Two issues were raised before the Tribunal. The first issue relates to the computation of profit on the sale of plot which had been assessed by the assessing authority as adventure in the nature of the trade whereas the Commissioner of Income-tax (Appeals) directed the same to be taxed under the head “Capital gains”. The assessee inherited a piece of agricultural land on the basis of a wil l dated October 30, 1990, made by her the late husband Bimal Prasad Jain. During the relevant year in question the assessee sold a part o f this land for a consideration of Rs. 40 lakhs on February 18, 1993. She worked out the indexed cost of acquisition and disclosed income to the tune of Rs. 17,70,177 under the head “Long-term capital gains”. The Assessing Officer did not accept her plea and observed that the assessee had sold some parcels of land to different concerns on February 5, 1991, and February 13, 1991, and, therefore, she had a profit motive in acquiring the land and selling the same. Fie taxed the entire income of Rs. 40 lakhs as income arising from trade. Feeling aggrieved by his order the assessee filed an appeal before the Commissioner of Income- tax (Appeals) who allowed the same by is order dated November 8, 1994, holding that the land had not been purchased by the assessee but the same was acquired by virtue of a Will from her late husband. It was further held that the land had been sold in parts because the area was huge and could not be sold in one go. In this view of the matter, the Commissioner of Income-tax (Appeals) held that the income earned by the assessee was taxable under the head “Capital gains”. Since the land was held by the assessee for more than three years the profit was taxable under the head “Long-term capital gains“. Fie allowed the indexed cost of acquisition. Not satisfied with the order of the Commissioner (Appeals) the Department filed an appeal before the Tribunal. It was reiterated before the Tribunal that the assessee had a profit motive in selling the land in different parcels and, therefore, the income derived therefrom was from an adventure in the nature of trade. This argument was rejected. The Tribunal referred to the definition of “business” in section 2(13) of the Income-tax Act, 1961 (for short “the Act)”, and observed that a particular activity can constitute business only if it is continuous. Since there was no continuous activity in regard to the sale the Tribunal held that it was not business income and that the income derived from the sale o f land could be taxed only under the head “Capital gains”. Hence, the present appeal.

We have heard the learned senior counsel for the department and find no ground to entertain the appeal. The Tribunal and the Commissioner (Appeals) have both rightly held that the sale of land by the assessee was not in the nature of business because there is no continuous activity. It is true that even a single venture could be regarded as a trade or business but there have to be circumstances which should give rise to such a conclusion. There are no such circumstances existing in the present case. What is necessary is to find out the intention of the assessee at the time of the purchase o f land. In the case before us, the land was never purchased by her. She acquired the same on the basis of a will on the death of her husband. She sold the same in parcels because the huge area could not be sold in one go. Such an activity, in our opinion, cannot amount to trade or business within the meaning of the Act. Both the Commissioner and the Tribunal have followed the correct principles of law and no factual or legal error could be pointed out by the Department. In this view of the matter, we are of the opinion that no substantial question of law arises from the order of the Tribunal so as to warrant the entertainment of this appeal. ’’

2.9.ii Shashi Kumar Agarwal [2003] 131 Taxman 823 (ALL.) (Case Law Page 32)

Head Notes : “Section 2(13), read with section 45, of the Income-tax Act, 1961 – Adventure in nature of trade – Whether profit from sale of land, after plotting it out to secure better price, can be taxed as profit from an adventure in nature of trade – Held, no – Whether it should be taxed under head ‘Capital gains’- Held, yes ”

2.9.iii Smt. Saraswati Jaiswal [2003] 131 Taxman 306 (MP) (Case Law Page 36)

6.“On the anvil of the aforesaid law, we have to analyse the present fact situation. On a perusal of the assessment order, it is quite luminescent that she had inherited the land from Smt. Kamla Jaiswal, her mother, who expired on 18-1-1976. Her name was duly mutated in revenue records in respect of the land in question. The land was acquired by Jabalpur Development Authority which had issued a letter on 15-7-1985 to the assessee proposing allotment of certain plots in consideration of the acquisition of agricultural land. This action is purported to be taken under section 56 of the 1973 Adhiniyam. Thus, it is a compulsory acquisition. The Tribunal in paragraph 6 of its original order has held as under

“6. We have carefully considered the arguments of both the sides and have perused the material placed before us. When a transaction is entered into with the primary or the sole intention of making profit, it would amount to adventure in the nature of the trade. To ascertain the intention of the party, one has to look into the facts and the surrounding circumstances. If on the consideration of all the facts, it appears that the sole intention of the party in purchasing the particular land and selling thereof, was to make profit, it may be termed as adventure in the nature of trade. However, in this case, we find that the assessee had not purchased the land, but it was received by her as per the will of her late mother. Moreover, she did not sell this land, but it was compulsorily acquired by the Jabalpur Development Authority by way of Notification dated 29-4-1983. Thus, the assessee had neither purchased the land under consideration nor sold the same on her own violation. However, when her land was compulsorily acquired by the Government, she did try to maximise the compensation by way of opting to accept the developed plots as against cash compensation. It is only the realization of the value of the land and it cannot be said to be an activity carried on for profit, so as to term it as adventure in the nature of trade. For any adventure or the trade, purchase and sale are two necessary ingredients. Since in the case under consideration before us the first ingredient, that is, purchase of the land is missing. It cannot be said that the transaction under consideration is adventure in the nature of trade. The decision of Hon’ble Allahabad High Court in the case of Shashi Kumar Agrawal (supra) is directly on the point and their Lordships have held as under:

“that the Tribunal had found that the land in question was not purchased by the assessee but was received by him from his father under a deal of gift. Since the assessee was staying in a different place in connection with his official duties and was not in a position to carry on agricultural operations, he sold the land. The Tribunal found that he had sold the land after plotting it out in order to secure a better price and that he had not embarked on an adventure in the nature of trade. This was essentially a question of fact. The gain arising on sale of land was not, therefore, assessable as income from business. “

2.9.iv CIT vs. Suresh Chand Goyal [2007] 163 Taxman 54 (MP)(Case Law Page 40)

‘‘In this case, the assessee received some property, which is agricultural land, on gift and thereafter he got it diverted from agricultural to non- agricultural and thereafter developed as many as 40 plots in the name of Goyal Colony; and after developing the plots like making roads, providing pipelines for water drainage system, etc., the learned Tribunal has held that the activity is not the nature of adventure in trade and commerce and set aside the orders o f Assessing Officer as well as CIT(A).

15. Considering the aforesaid facts and circumstances of the case, we are also of the view that the selling of own 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 under section 2(13) of the Income- tax Act, 1961, which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. An isolated transaction or activity cannot be part of business. To consider the question o f business, there must be regular activity of purchasing and selling. In this case/ there is nothing on record to show that the land was purchased, for the purpose of selling into plots. Basically, it is a gifted land and the land was developed and was sold after converting into the plots with a view to secure the better price, therefore, the isolated activity cannot come within the purview o f adventure in the nature of trade and business. The main earning on the sale of the land was in the nature of capital gain and, therefore, not assessable his income from business and this question is essentially a question of fact. ”

2.10. Ld. CIT(A) misplaced his reliance on judgment of Hon’ble Rajasthan High Court in the case of Sohan Khan & Mohan Khan [2008] 304 ITR 194 [Case Law Page 41).

Facts: In this case the assessee had purchased a chunk of land measuring few lakh square feet in 1970. The land was under cloud of ceiling laws and after it got cleared therefrom, assessee picked up idea of disposing it by making best profit and according the site plan was prepared showing the land to be divided into different plots and the plots were according sold. The Id. AO in case found the sale to be not taxed as capital gains but it was treated as business income.

Held : Hon’ble Rajasthan High Court on these set of facts held that, there was nothing to show that the land was purchased with the intention to sell at a profit, or with requisite intention, to bring it within the parameters of ‘stock-in-trade’. The assessee was a regular dealer in real estate. It appeared that the land was purchased in 1970, which was under cloud of land ceiling laws, and after that cloud was cleared, and other adjoining lands had been developed, and since the land was not yielding any return, it was decided to be sold in piecemeal, by earmarking plots but then nonetheless it would remain a disposal of the capital asset only and not a transaction of any ‘stock-in-trade’ so as to be described as ‘adventure in the nature o f trade’. Obviously therefore, it was liable to be taxed only as capita l gain.

Ld. CIT(A) has simply without taking into account the entire facts of the case relied on the decision of Hon’ble Rajasthan High Court by simply picking those lines from the order which suited his requirements.

It is pertinent to note that in the case at hand, assessee had not purchased any land, however, the same been inherited by him. This, in itself, proves the transaction to be one of Capital Gains.

In view of the above, the transaction of sale of inherited agricultural land in small plots without converting these to residential plots cannot be termed as adventure in the nature of trade.

Ld. A.R. has further submitted as under:

Ld. CIT(A) has not considered section 45(2). The same is reproduced for ready reference:

Section 45(2)

“Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result o f the transfer of the capital asset. ”

It is submitted that if the conversion into stock in trade is considered to have been taken place during the relevant year then capital gain should have been calculated after considering Fair Market Value (not DLC Value) of the land as on the date of such conversion.

Further, ld. CIT(A) has not even reduced the cost of land to determine the profits from adventure in the nature of trade. Net sale price cannot be considered to be the profit of the assessee. In view of the above, necessary relief may please be granted.

7. On the other hand, the ld DR has vehemently supported the orders of the authorities below.

8. The Bench have heard both the sides on this issue. Although the land was agricultural land and situated in the limits of city of Dausa. It was developed into 23 plots of various sizes and sold during the year. The nature of land had gone irreversible change from agricultural to residential plots, therefore, we are agree with the finding of the ld. CIT(A) that this was an adventure in the nature of trade and income has to be taxed under the head ‘profit and gains of business and profession’. We have also considered the various case laws relied upon by the ld AR of the assessee during the hearing of appeal, in all these cases, the facts were at variance to the facts of assessee’s case. Therefore, none of the ratio laid down by the Hon’ble Courts is applicable to the assessee’s case, accordingly, findings of the ld. CIT(A) on this issue is sustained. However, the provisions of Section 45(2) of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Apparently these provisions of Act have not been taken into consideration by the ld. CIT(A), therefore, in the interest of justice and equity, the Bench find deem it fit to restore the issue back to the file of the ld. CIT(A) to give effect to the provisions of Section 45(2) of the Act. Hence, the issue is restored back to the file of the ld. CIT(A).

9. In the result, appeal of the assessee is partly allowed for statistical purposes only.

Order pronounced in the open court on 22/02/2018.

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