HIGH COURT OF ALLAHABAD
Rajendra Kumar Dwivedi
Commissioner of Income-tax, Kanpur
Sunil Ambwani and A.N. Mittal, JJ.
IT Appeal Nos. 33 of 2002, 457 & 458 of 2007
August 24, 2012
1. We have heard Shri Krishna Agrawal for the appellant-assessee. Shri Dhananjay Awasthi appears for the respondent-department.
2. These three income tax appeals under Section 260A of the Income Tax Act, 1961 (the Act) filed by the appellant-assessee, are directed against common order of the Income Tax Appellate Tribunal dated 31st December, 2001 deciding Income Tax Appeal Nos.2038 (A) of 1995; 220 (A) of 1997 and 728 (A) of 1999 for the assessment years 1989-90, 1990-91 and 1991-92 respectively.
3. The appeals were admitted on 27.8.2007 on the following substantial questions of law:-
“(i) Whether on the facts and in the circumstances of the case, Tribunal is legally justified in confirming the order of the Assessing Authority computing capital gain?
(iv) Whether on the facts and in the circumstance of the case, Tribunal is legally justified in confirming the order of the Assessing Authority and estimating business income for the sale of the land?”
4. Brief facts giving rise to these income tax appeals are that during the financial year 1984-85 to 1990-91 the assessee serving as employee in Nagar Palika Parishad, Jalaun at Orai, sold agricultural land allegedly belonging to H.U.F. by carving out plots of 60 sq. mtrs. to 1815 sq. mtrs., by 43 sale transactions. The Assessing Officer (AO) after seeking approval from the Deputy Commissioner of Income Tax, Range-3, Kanpur issued notice under Section 148 on which the assessee filed returns declaring total income of Rs.14,240/- for the year 1989-90, and for the same amount for the year 1990-91. The notices under section 143(2) and 143(1) were also sent to the assessee for the years 1990-91 and 1991-92.
5. For the year 1989-90 the AO considered the income under the capital gains at Rs.60,802/-, business income at Rs.29,200/- and salary income as per return at Rs.15,290/-. The assessee was assessed for the total income of Rs.1,05,290/-. A penalty notice was also directed to be issued against him. The agricultural income of Rs.15,000/- was directed to be taxed for rate purposes. The C.I.T. (Appeals) dismissed the appeal for the year 1989-90.
6. For the assessment year 1990-91 the AO proceeded on the same basis as in the year 1989-90. He worked out capital gains at Rs.32,470/-, business income at Rs.88,500/- and salary income as per return of Rs.15,260/- and thus assessed the total income of Rs.1,36,230/-. He also directed penalty notice to be issued for the year under Section 271(1)(c) and taxed agricultural income of Rs.15,000/- for rate purposes.
7. For the year 1991-92 the original assessment was made on the income at Rs.88,420/- as on 24.3.1995 by adopting income from capital gain at Rs.23,569/-, business income at Rs.48,900/- and salary income at Rs.15,950/-. The assessee preferred an appeal before the DCIT (Appeals), Kanpur, who vide his order in Appeal Nos.55, 56 and 57 dated 5.8.1996, for the assessment year 1986-87; 1988-89 and 1991-92, remanded the matter to make fresh enquiries on the issue as to whether land was assessable as business profits and whether capital gain should be worked out keeping in view that the appellant had become owner of the agricultural land as on 28.1.1977, and whether he is entitled to benefit under Section 54-F of the Act as assessee claimed that construction of residential property out of sale proceeds of the agricultural land. For this year also notices under Section 143(2)/142(1) were issued. The AO worked out capital gains at Rs.23,569/-, business income at Rs.48,900/- and salary as shown in the return of Rs.15,950/-; he thus assessed the assessee at Rs.88,420/- and directed interest to be charged under Section 234A, 234B and 234C. The A.O. also directed issuance of penalty notice under Section 271(1)(c) and taxed agricultural income of Rs.18,000/- for rate purposes. The appeal was dismissed.
8. The Tribunal dismissed the three appeals by common order dated 31.12.2001, on the following reasoning:-
“We have considered the rival submissions, the fact remains that the assessee became entitled to land and individual capacity which he converted into stock-in-trade. The land being situated in urban area it was in asset in his hand and it was fragmented inconvenient small pieces and sold along with facility of passage and drainage, therefore, the intention of the assessee was to reap business profit and not to sale any agricultural land. The A.O. has taken the actual sale consideration for the purpose of computation of income. Therefore, deduction of notional value of land covered under passage and drainage cannot be allowed, therefore, we find no infirmity in the order of CIT (A) in confirming the order of A.O. in respect of quantification of business income.
As a result, appellant/ assessee’s appeal is treated as dismissed.”
9. The land is situate within municipal limits, in respect of which the Zamindari was abolished on 1.7.1961 and therefore the land was treated as capital asset. The assessee converted the land into small pieces and sold them from 1984 onwards to reap the profits, which was rightly treated as business profits. The land was sold in small plots measuring 60 sq. mtrs. to 1815 sq. mtrs. along with facility for roads and drainage. The 43 sale deeds were executed between 1984 to 1991.
10. The Tribunal found that the explanation that the assessee needed funds for constructions of his house is an afterthought, as the investment in residential houses out of sale proceeds of the plots could not be co-related at the first opportunity, and thus ground against the treatment of conversion of asset into stock-in-trade and realisation of profits was not acceptable. The passage and drainage to the plot owners were provided under constraints to sell the land to suit the requirement of purchaser and for which no extra cost was charged from the purchasers and thus the ground that the assessee had undertaken development of land for the purpose of sale was also not acceptable. The Tribunal did not accept the argument that even if the business profits could be considered in the case of the assessee, the notional value of the land covered under the passage and drainage should be deducted, as the AO has taken into consideration the actual sale value of the plot for the purposes of computation, in the absence of any information regarding expenditure incurred on passage and drainage.
11. The Tribunal held that the assessee had become entitled to land in individual capacity, which he converted into stock-in-trade. The land being situate in urban area, it was an asset in his hand, which he fragmented into small pieces and sold them with facility of passage and drainage. The intention of the assessee was to reap business profits and not to sell any agricultural land. The A.O. had taken the actual sale consideration for the purposes of computation of income and therefore deduction of notional value of land covered under passage and drainage could not be allowed. The appeals were consequently dismissed.
12. Shri Krishna Agrawal, learned counsel appearing for the appellate assessee submits that Shri Narain Rao Sapre sublet his ‘Sir-Khudkasht’ to Shri Kamta Prasad, Manphoole and Bhawani before 1951. Shri Kamta Prasad, father of the appellant died in December, 1952. The appellant was only son of Shri Kamta Prasad. By two sale deeds dated 16.12.1958 and 16.5.1959 Shri Narain Rao transferred his zamindari rights in favour of the appellant as well as two other persons namely Shri Manphoole and Shri Bhawani. After the execution of the sale deed Shri Narain Rao became ex-proprietary tenant of the land and appellant remained ‘Sikmi Kashtkar’. After one year Shri Narain Rao filed 3 ejectment suit against the appellant and others. He accepted the appellant as sub-tenant on annual rent basis. The appellant was in possession of the land and was carrying on the agricultural operation since after the death of his father in 1952. After the abolition of zamindari in Urban Area on 1.7.1961, the appellant along with his two co-partners filed a declaratory suit no.183 to 1966 in the Court of Sub-Divisional Officer, Orai for the declaration as ‘Sirdars’ of the land. The suit was filed under Section 229B of the UPZA & LR Act. The Sub Divisional Officer, Orai declared the appellant and his partners as Sirdars vide order dated 5.9.1968.
13. The two sons of Shri Narain Rao named as Sri Ram Chandra Rao and Sri Vishal Narain Rao filed a Civil Suit No.312 of 1967 for cancellation of sale deed and for possession. The Munsif Orai by order dated 28.2.1974 cancelled the sale deed to the extent of 2/3rd but disallowed the claim for possession as it was not found on the basis of the sale deed. Aggrieved they filed appeals before the District Judge, Orai. The appeal filed by the appellant was allowed. Shri Ram Chandra Rao filed second appeal before the High Court, which was dismissed on 23.11.1987.
14. It is submitted that in the year 1977 the appellant was declared as bhumidhar vide entry made in the khatauni. Subsequently three co-partners filed suit for partition. On 11.7.1980 partition suit was decreed and the appellant was allotted a share in the agricultural land to the extent of 4.44 acres. He was carrying the agricultural operation in the land thereafter. Since he was in need of money he started selling the land, which came to his share by partition. The first sale was made in July 1984 and last in march, 1991. The appellant was employee in Nagar Palika Parishad, Jalaun at Orai. He was not engaged in the business of plotting and selling the land. The appellant sold agricultural land, which he got after litigation and not after payment of consideration. The income tax authorities have wrongly treated the land as stock in trade, and sale of the plots as business carried out by the assessee.
15. Shri Dhananjay Awasthi appearing for the revenue submits that the appellant was engaged in the activity of selling the land and plots. The long drawn litigation does not show that he had acquired the land by inheritance, or had matured the right under the revenue laws. On his own admission he was clerk in the service of Municipal Corporation and was not carrying on any agricultural operations. The sale of land by 43 sale deeds between July, 1984 to March, 1991 by developing the land and leaving roads in between and other municipal services, was a profitable venture, which the appellant carried regularly for 7 years selling the entire land all by himself. The income tax authorities did not commit any error of law in treating the entire transaction as business.
16. The ‘Capital Asset’ under Section 2 (14) is defined as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include, (i) any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession, Clause (iii) excludes agricultural land in India not being the land situated (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or (b) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.
17. In G. Venkataswami Naidu & Co. v. CIT  35 ITR 594, (SC) the Supreme Court held:-
“Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the borderline that cause difficulty. 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 be a clear case of capital accretion and not profit derived 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.”
18. In Janab Abubucker Sait v. CIT  45 ITR 37 the Madras High Court held:-
“One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception.”
19. Shri Krishna Agrawal submits in support of his contention that the appellant assessee had inherited the land. He was not in the business of sale and purchase of land. He had not sold the land as part of any business carried out by him and thus sale of the plots, cannot be said to be an activity, which is an adventure in the nature of trade. He had no intention to sell the land. He had received it by way of inheritance, after some litigation. The carving out of the land into different plots after laying down roads and selling them in a period spread out in 7 years would not amount to any such activity, which has any element of trade, commerce or business and that it cannot be said that it was an activity in the nature of a trade. He has relied upon Sri Gajalakshmi Ginning Factory Ltd. v. CIT  22 ITR 502 (Mad.); Bhogilal H. Patel v. CIT  74 ITR 692 (Bom.); Janab Abubucker Sait (supra); CIT v. V.A. Trivedi  172 ITR 95; CIT v. MLM Mahalingam Chettiar  107 ITR 69 (Mad.); Deep Chandra & Co. v. CIT  107 ITR 716 (All); Kaur Singh v. CIT  144 ITR 756; Shyamala Pictures (P.) Ltd. v. CIT  142 ITR 115 and CIT v. B.C. Srinivasa Setty  128 ITR 294 (SC) and lastly on Navnitlal Sakarlal v. CIT  208 ITR 194 to support his submission.
20. It is necessary to refer to the facts and the conclusions drawn by various High Court in the matter of transactions of sale of agricultural land, as a survey of all these authorities would show that the question as to whether the sale of agricultural land of the capital asset is in the nature of trade of which profits are taxed as business profit depends upon facts and circumstances of each case.
21. In Deep Chandra & Co. (supra) the appellant assessee owned considerable agricultural land in Muzaffar Nagar. He entered into agreement of sale with one Sajjad Ali Khan for purchase of agricultural land, which subsequently refused to execute the sale deed. A suit was filed by Deep Chandra. Since the litigation pursued, Deep Chandra in order to lessen his burden entered into partnership agreement with some persons in April 1944 providing in the partnership deed share profits and loss arising out of said land in litigation. He parcelled out some land after obtaining permission from the Town Planner U.P. Lucknow and sold the land by 4 sale deeds between 1957 to 1960. The surplus realization were shown in the year 1961 to 1963. This Court held that the word ‘business’ under Section 2(4) of the Act includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The object and purpose of including an adventure in the definition of trade is to include the receipts from adventure to tax as receipts from trade. The word ‘adventure’ has not been defined. The High Court relied upon the judgment of Supreme Court in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd.  20 ITR 451 (SC) in which it was held that no general principle could be laid down which could be applicable to all cases and that each case has to be decided on its own facts.
22. In G. Venkataswami Naidu & Co. (supra) the Supreme Court again held that it is impossible to evolve any formula, which can be applied in determining the character of isolated transaction, which comes up before the Court in tax proceedings. It would not be inexpedient to evolve any rule or formula to decide whether in a given case transaction is an adventure in the nature of trade or not. A case on border line causes difficulty. In each case the total effect of all relevant facts and circumstances that determine the character of transaction has to be seen.
23. In P.M. Mohammed Meerakhan v. CIT  73 ITR 735 (SC) the Supreme Court again held that the answer to the question does not depend upon the application of any rule or principle or formula, but must depend upon the total impression and effect of all the relevant facts and circumstances established in a particular case. The test culled out from various decisions may be summarised as follows:-
“For instance, if a transaction is related to the business which is normally carried on by the assessee, though not directly a part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and is divided, altered, treated or repaired and sold or is converted into a distinct commodity and then sold. The magnitude of the transaction of purchase, nature of the commodity, the subsequent dealings of the assessee, the nature of the organization employed by the assessee and the manner of disposal may be such that the transaction may be stamped with the character of a trading nature.”
24. In the facts of the case in Deep Chandra & Co.’s case (supra) this Court held that the activity of parcelling out the land and selling them in the market was designed to enhance the value of the land in which the money was invested. A person, who has no intention of engaging himself in trade of buying and selling property cannot be considered to be a person engaged in any adventure in the nature of trade. Simply by taking some steps he might succeed in receiving higher price of land in the market. A man, who owns or buys without any intention to sell the land, is not engaged in trade; if he subsequently not being himself the developer merely takes steps to enhance the value of the property in the eyes of developer, who might wish to buy for development. The Court held that mere fact that the assessee succeeded in obtaining enhanced value of their land due to future development of that area or subsequent rise in the price of land, would not in law be sufficient to treat the income as accruing from business. The Tribunal was, therefore in error in taking the view that the transaction of sale and purchase of land was in adventure in the nature of trade. The surpluses realized was capital gains and not income or profits from the adventure in the nature of trade.
25. On the tests laid down by the Supreme Court and this Court, we find that the income tax authorities did not commit any error of law. They have applied the correct principles of law and have rightly arrived at the finding that the land in urban area for which the Zamindari was abolished on 1.7.1961 was partly inherited by the assessee from his father. The remaining part was purchased by him by sale deeds dated 16.12.1958 and 16.5.1959. The assessee along with his co-partners had filed suit for declaration, which was decreed on 5.6.1968. The sons of Shri Narain Rao Sapre had filed suits for cancellation of sale deeds and for possession. The suit was decreed cancelling the sale deed to the extent of 2/3rd share but claim for possession was not allowed. In the circumstances, the stand taken by the assessee that the property was inherited as H.U.F., was rightly disbelieved. The assessee was an employee of Nagar Palika Parishad, Jalaun at Orai. He held the land in urban area as capital asset and started selling it in pieces of 43 sale deeds between January, 1984 to March, 1991 in plots ranging from 60 sq. mtrs. to 1815 sq. mtrs. Since no agricultural operations were carried on, the income tax authorities rightly concluded that the capital asset was converted into stock-in-trade, and that sales of plots in the case of such land would be treated to be business activity to make profits.
26. The Commissioner of Income Tax (Appeals) also recorded the findings that the assessee had evened out the land with the help of tractor and had sold the plot after leaving the roads and drainage system and thus in view of the provisions of Section 45 (2) of the Act the profits and gains arising out of transfer by way of conversion by the owner of capital asset into, or its treatment by him as stock-in-trade of business carried on by him is for and from the assessment year 1985-86 be charged to tax under the head capital gains in the previous year in which such stock-in-trade is sold or otherwise transferred by him. The property shall be deemed to have been transferred in the year in which it was converted into stock-in-trade. The provision of Section 45 (2) providing for capital gains takes care of the facts, where the assessee does not transfer capital assets into stock-in-trade, but the asset is treated as stock-in-trade. Section 45(2) provides as follows:-
“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 of the transfer of the capital asset.”
27. We do not find that the income tax authorities and the Tribunal committed any error in applying Section 45 (2) of the Act for the purposes of assessment for the relevant assessment years, and by adopting a notional value for the purposes of fixing the price for land for stamp duty for working out business income from the sale of land. They correctly adopted a method, which was fair and reasonable in arriving at a value of land as on 1.4.1974 to be notional cost of acquisition and applying the depreciated value by 10% of every year for the purposes of arriving at value in the year 1984.
28. Both the questions of law are thus decided in favour of the revenue and against the assessee.
29. All the three income tax appeals are dismissed.