Conversion of agricultural land in to non agricultural land can be said to be a business activity?

Ajitkumar T.Patel, Mehsana vs Assessee on 13 September, 2010

     IN THE INCOME TAX APPELLATE TRIBUNAL

               AHMEDABAD BENCH ” A “

    Before Shri G.D.AGRAWAL, VICE-PRESIDENT (AZ) and

      Shri MUKUL Kr. SHRAWAT, JUDICIAL MEMBER

Date of hearing : 10/08/2010    Drafted on:13/09/2010

                      ITA No.826/AHD/2010

                    Assessment Year : 2008-09

 Shri Ajitkumar T.Patel Vs.          The DCIT, Circle-1

 1, Harinagar Society                Ahmedabad

 Highway, Mehsana

              PAN/GIR No. :           AFSPP 1261 R

      (APPELLANT)       ..                (RESPONDENT)

               Appellant by :            Shri S.N. Soparkar

               Respondent by:           Shri Anil Kumar, CIT-

                                        Learned Departmental

                                            Representative

                                ORDER

PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :

This is an appeal at the behest of the Assessee which has emanated from the order of Learned CIT(Appeals)-VIII, Ahmedabad dated 24/02/2010 and the substantive grounds are Ground Nos.1 & 2; for ready reference, reproduced below:-

1. The learned CIT(A) has grossly erred in law and on facts in confirming action of the AO in treating land transaction entered into by the assessee as ‘Adventure in the nature of trade’ and to treat the resultant gain arising there from as ‘Business income’ of the assessee. Both the lower authorities have gravely erred in not appreciating the fact that the assessee actively engaged in the business of manufacturing of road construction activities, invested in the impugned land for the sole purpose of appreciation of the investment. Under the facts and the circumstances of the case, ld.

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 CIT(A) ought to have held the surplus arising from said land transaction as short term capital gain as computed and claimed by the assessee.

2. The learned CIT(A) has erred in law and on facts in not adjudicating the ground raised by the assessee in respect of disallowance of expenses incurred claimed as cost of improvement of the asset, for converting the impugned land from agriculture to non agriculture. Ld. CIT(A) ought to have allowed such expenditure claimed by the assessee.
3. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T. Act, 1961 dated 24/02/2010 were that the assessee in his individual capacity has filed the return of income at Rs.5,79,46,830/-. The appellant is stated to be a Director in several Companies, therefore, as per Income Tax Return disclosed salary income, dividend income and income from other sources. The main discussion in the assessment order was in respect of a plot of land which was sold by the assessee during the year under consideration. It was noted by the Assessing Officer that a plot of land was sold for a consideration of Rs.34,32,34,800/- to a concern; namely M/s.Urbanedge Hotel Pvt.Ltd. The details of the property in question can be summarized as follows:-

      Sr.      Purchased on   Details

1. 23/02/2005     Survey # 147/2 Agricultural

                              Land Purchased 0-43-50

                              Hectare(4350 sq.Mtr.) [Copy

                              of Registered Stamp attached]

                              Rs.8,05,000/-

      B..      14/02/2005     Survey # 147/1 Agricultural

                              Land Purchased 0-52-61

                                                      ITA No.826/Ahd/2010

                                          Shri Ajitkumar T.Patel vs. DCIT

                                                       Asst.Year – 2008-09

                              Hectares (5261 sq.Mtrs.)

                              [Copy of Registered Stamp

                              attached] Rs.8,25,000/-

3. 16/05/05         Both Land Consolidated to

                              Survey No.147 Copy of Map

                              is also attached

4. 17/07/2007       Application made for transfer

                              of Agricultural Land to

                              Commercial Purpose Land

                              (N.A. Land] and necessary

                              Fees      paid    as     under

                              Rs.1,93,110/-      Conversion

                              Fees       Rs.43,048/-     and

                              Rs.2,57,480/-

5. 24/07/2007       Order made for Commercial

                              Land by Collector

6. After final Order

                              Plot # 147/1 Final Plot # 7

                              allotted by AUDA and after

                              deduction @ 20% of my land

                              Final Plot allotted by AUDA

                              is 4,262 Sq.Mtr

7.                       After final Order Plot # 147/2

                              Final Plot # 7 allotted by

                              AUDA and after deduction @

                              40% of my land Final Plot

                              allotted by AUDA is 2,175

                              Sq.Mtr

Total Agri.Land was 9,611 Sq.Mtr after deduction by AUDA [as per their law] final plot Comes to 6,437 Sq. Mtr.

There was loss of Commercial Land Area is 9611 – 6437 = 3174 Sq.Mtr is W 33% loss of land.

2.1. From the above details, it is evident that the appellant has purchased two pieces of land for a total consideration of Rs.16,30,000/- (Rs.8,05,000/-+Rs.8,25,000/-) stated to be agricultural land respectively ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 on 23.2.2005 and 14.2.2005. After retaining these two plots, the same were sold to M/s. Urbanedge Hotels Pvt. Ltd. for a consideration of Rs.34,32,34,800/- vide a sale-deed dated 23/08/2007. Since the plots in question were sold within a short-period of about 2½ years, therefore, the Assessing Officer has issued a show-cause notice asking that why the said transaction be not held in the ‘nature of trade’. However, on the other hand, the appellant has claimed the same as ‘short-term capital gain’. The Assessing Officer was of the view that the assessee has continuously taken a risk in investing in the said land which had an unclear title. The assessee had made efforts to get the title cleared of the land in question. The assessee had taken pains for conversion of agricultural land into non-agricultural land. Further as per A.O. the assessee had also taken steps to get consolidated these two pieces of lands. The appellant has also made efforts to get the clearance from the AUDA Authorities. The AUDA Authorities have deducted 3174 sq.mtrs. from the total area of land of 9611 sq.mtrs. and allowed to transact the balance land admeasuring 6437 sq.mtrs. Prima-facie those were the reasons on the basis of which the Assessing Officer had issued a show-cause notice asking the assessee to explain as to why the land transaction in question be not held as ‘ an adventure in the nature of trade’. In compliance, the assessee has furnished the following reply:-

“i. Your goodself has called for the reasons for as to why the gains occurred on account of land transactions in respect of survey No.147, Tal: Daskroi, Village Sola should not be considered as business transactions:-

Please note the said show-cause notice is defective, illegal and bad in law as much as the said notice doesn’t contain ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 even single reason as to why your goodself wants to treat the aforesaid transactions, as a business transactions.

Further note that the above referred transaction should never imagine to be a business transaction fort the reasons narrated hereinafter:-

1. I have purchased on agriculture land in the year 2004-

05 out of my own money. There was no borrowing for the purpose of an investment in the agriculture land. Copy of land purchase deed and bank statements reflecting the source of my investment were already submitted to you.

Further note that I have invested the said amount out of my deposits with Road Tech Eq.[P] Ltd. Copy of Bank ledger a/c reflecting the said transactions along with the copy of ledger a/c of Road Tech Eq. [P] Ltd. of that period are attached herewith for ready reference.

2. Further, note that in our country there is a restriction on the sale and purchase of agriculture land. Hence, one cannot do business of purchasing and selling of the agriculture land in India. Hence there was a clear intention of purchase of the agriculture land was to have capital appreciation. Further, this intension was proved by an action that I have also paid wealth tax on the said land in the subsequent year. This proves my genuine intention of purchase as an investment. In support of that I am also submitting herewith the copy of balance sheet with the break-up of fixed assets as well as return of Wealth and statement of wealth.
3. My intention of the purchase have been further proved by my personal books of accounts in which the said land was shown under the group fixed assets and it was assessed as such for two years. And in the balance-sheet of subsequent year also it was shown ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 under the Group Fixed assets. Copy of these is attached herewith for ready reference.
4. Please note that I am a director in so many companies which are doing businesses in field of manufacturing of the Road construction machineries. This can be verified from my return of income itself. Further, I have purchase the land for the first time. There was neither purchase nor sale of land in the subsequent years nor I am dealing in land or doing construction business or a broker of land. Under the circumstances, this transaction cannot be considered as my business transaction.
5. Further, I have purchase the agriculture land from the Two parties only and sale the land to the one party only. This can be verified from the Sale agreement itself which were already given to your office and verified by your goodself. I have never sold the plot in pieces or make a plots and then sale it to the different persons. Hence, if I had an intention of profit then I might convert the land into the small pieces, develop it and sale it to the different persons. This is not so in my case. Hence, it could never be presumed to be an adventure in nature of trade or commerce.
6. Further, I have never spent any single Rupee on of sale of my land nor devoted any time to fetch higher prices for the said land. This can be verified from my capital gain statement that I have never claim any expenditure on brokerage Exps. Nor spent single Rupee on any advertisement. This clearly shows that I have never intention to get the better price or more profit in short term. Further, I have not utilized that money to purchase again either the new agriculture or non agriculture land. This shows that intention of sale of land was not do business in land.”

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 2.2. The Assessing Officer was not convinced and in his opinion, the transaction in question was nothing but an adventure in the nature of trade. To adopt that recourse the Assessing Officer has mentioned certain reasons, in short, as follows:-

(i) Investment out of own funds without borrowing has no bearing on the matter because a trade can be made out of own funds without any involvement of borrowed funds.

(ii) The assessee has taken steps to get the title cleared of the agricultural land, hence, actually taken a risk of investment in purchasing the said agricultural land. Once the transaction involved risk, therefore, it was in the nature of business and for that proposition, placed reliance on the decision of Hon’ble Madhya Pradesh High Court in the case of CIT vs. Jawahar Development Association reported as (1981) 127 ITR 431(M.P.).

(iii) Mere payment of Wealth-tax on the said property had no bearing because the treatment in the books of account had no impact as far as the nature of transaction was concerned.

(iv) A single transaction can be a business transaction and for this proposition, he has placed a reliance on the decision of Hon’ble Delhi High Court in the case of R.Dalmia vs. CIT reported as (1982) 137 ITR 665 (Delhi).

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

(v) That, from the beginning, the assessee had an intention to earn profit, therefore, the property was sold at an opportune time when the prices were high. The assessee has incurred expenses and devoted time to get the title cleared and then converted the property into a commercial property and made efforts to consolidate the land in question and then finally got the acquisition clearance from AUDA Authorities, after surrendering 3359 sq. mtrs. to AUDA Authorities. Finally, relying upon the decision of Hon’ble Apex Court in the case of Venkataswami Naidu & Co. vs. CIT reported as (1959) 35 ITR 594 (SC) and decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Premji Gopalbhaireported as (1978) 113 ITR 785 (Guj.), the Assessing Officer has held that there were strong factors to indicate the said transactions were in the nature of stock-in-trade. The dominant and the basic intention of the assessee was to earn profit on sale of plots, therefore, there was strong presumption that transaction was nothing but an adventure in the nature of trade.

2.3) Once it was held so, then out of the sale consideration, the Assessing Officer has allowed cost of purchase etc. and disallowed a payment of penalty and the balance amount was taxed as Business Income as per the following calculation : ———– ………

” Income from Business (being profit on sale of land as discussed above) Sale consideration Rs.34,32,34,800/-

Less: Purchase cost & Expenses Rs. 24,29,069/-

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09 Add: Penalty paid disallowed Rs. 2,57,800/-

—————————-

Rs. 34,10,63,211/-

——————————–

The total income was assessed at Rs.35,20,56,417/-, and there was a claim of Short Terms Capital Loss in share transaction of Rs.29,29,24,958/- which was allowed to be carried forward.

3. Being aggrieved, the matter was carried before the first appellate authority. The Learned CIT(Appeals) has accorded due opportunity of hearing to the appellant as well as the Revenue Department. After narrating the facts of the case and the case laws cited from both the sides he has examined the conveyance-deeds in question. In his opinion, to determine whether or not a transaction was an adventure in the nature of trade the same depends upon commercial background and the social economic conditions. In his opinion, at the time when the investment was made, then as per the ‘Banakat’ the title of the venders was in dispute. The assessee has pursued the venders to get the titles cleared. The steps thereafter taken by the assessee, as per Learned CIT(Appeals), were of the character to convert the land form agricultural purposes to non-agricultural purposes. The assessee had also got it cleared from the reservation of AUDA and obtained a decree for the front side of the land. On account of those steps taken by the assessee, the Learned CIT(Appeals) has opined that all the steps were nothing but indicating that the business activity was carried out by the assessee. He has also mentioned that the profit motive in the said venture was so dominant in the mind of the assessee that the asset in question was sold within 2½ years though the assessee could have waited for the completion of three ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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years so as to get the benefit of Long Term Capital Gain. In that situation, rate of tax was only 20% on ‘long-term capital gain’. In support of these contentions, he has placed reliance on the decision of Hon’ble Apex Court in the case of Janki Ram Bhadur Ram vs. CIT reported as (1965) 57 ITR 21 (SC), next the case of G.Venkataswami Naidu & Co. reported as (1959) 35 ITR 594(SC), next the case ofParvathidevi & Others vs. CIT reported as 164 ITR 675 (A.P.) and decision in the case of Jurisdictional High Court in the case of CIT vs. Minal Rameshchand reported as 167 ITR 507 (Guj.). Thereafter, he has concluded that the surplus which was received on sale of land was the business income being the transaction was adventure in the nature of trade. Since the Assessing Officer’s action was upheld by the Learned CIT(Appeals), therefore, the assessee is now further in appeal.

5. From the side of the appellant, Mr. S.N. Soparkar Learned Authorised Representative of the assessee appeared and from the side of the Revenue, Mr.Anil kumar Learned Departmental Representative appeared, who has placed strong reliance on the orders of the authorities below.
6. The Learned Authorised Representative of the assessee has placed a reliance on the compilation filed along with the summary of the case laws annexed therein. Mr. Soparkar, representing the appellant, has also placed reliance on the decision of ITAT Pune “A” Bench in the case of ITO vs. Baguio Investment (P) Ltd. reported as (2010) 127 TTJ (Pune) 423. The Learned Authorised Representative of the assessee has ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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emphasized that the intention of the assessee could be judged from the very fact that after the purchase of the land the assessee has disclosed the same as a capital asset in his books of accounts. Moreover, the assessee has filed wealth-tax return for the purpose of disclosing the asset as a capital asset and not as a business asset. Had the assessee treated the land in question as business asset, then as per the provisions of the wealth-tax Act, the same could have been claimed as an exempted asset. Instead the assessee has shown the land as a capital asset to avoid any controversy. The erudite pleading was that on one hand the asset in question was treated as a capital asset by the Rev. Deptt. hence charged Wealth Tax and on the other hand treated the same asset as a business asset for the Income tax purposes. The Learned Authorised Representative of the assessee has also mentioned that at the time of purchase, there was no serious threat to the title of the property and that fact was informed merely to substantiate the claim of expenditure incurred for the transaction of the property. However, as per Mr. Soparkar, the facts were otherwise and there was no dispute in the title and after some adjustment, that too was cleared within a short span of time. The Learned Authorised Representative of the assessee has also informed that, one, the conversion of the character of the land from agriculture to non-agriculture, two, its location being done on the front side of the road, three, amalgamation of two plots, all were not to be considered a business activity but those were simply to improve the market price of the asset in question. He has argued that the assessee being a Director in few companies was not at all in real estate business. None of the sister-concerns were ever involved in real estate business. It was a single transaction and simply by stroke of luck ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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fetched a good price of land within a short span of 2½ years. The assessee has neither manipulated in any manner the amount of consideration received nor the date on which the sale-deed was executed by him. He has also clarified that there was no serious dispute as far as a title in the hands of the agriculturist was concerned but due to change in rules and circumstances it required some efforts to clear the land as also to convert the land into non-agricultural land. He has, therefore, urged that the order of the Assessing Officer and Learned CIT(Appeals) deserves to be reversed.

7. From the side of the Revenue, Mr.Anil Kumar, Learned Departmental Representative has strongly supported the action of the Assessing Officer and argued that though it was a single transaction but the appellant always wanted a quick money, hence, within a short period of 2½ years, sold the property, as it happens generally in a business transaction. Though it was a short term capital gain as per assessee but even after retaining for six months more the gain could have been taxed at a lower rate of L T C G . A business man or a trader do not hold his assets for a long period and sale the same with in a span of short period as it was done by this appellant. Reiterating all those case laws as mentioned in the orders of Assessing Officer and Learned CIT(Appeals), the Learned CIT-DR urged to affirm the orders of the lower authorities.
8. With this elaborate discussion on facts, we have now to proceed to decide whether the transaction in question was actually a business transaction to be held as an adventure in the nature of trade or it was ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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simplistic a capital gain arisen on transfer of the land property. Facts of the case have revealed that the assessee has purchased two pieces of land in the year of 2005 for a total sum of Rs.16,30,000/- admeasuring 9611 sq.mtrs. Undisputedly, the piece of land was sold on 23/08/2007 to M/s.Urbanedge Hotels Pvt.Ltd. for a consideration of Rs.34,32,34,800/-. It is a settled legal proposition that the objective since inception of a deal is one of the major criterion to answer the dispute in hand and therefore the circumstances present at the time of purchase have to be examined to determine as to whether the intention of the assessee was to invest the money for business purpose so as the intention was to enter into a business of Land dealing or it was an investment to en-cash at an appropriate time if the circumstances so permit as it happens generally in the case of a normal investor. We have also to ascertain whether a business like efforts have been made to earn profit on sale of land in question.

8.1. It was a controverted fact that whether the title of the property at the time of purchase was disputed one or not? Though in a letter, the assessee had informed that he had to work hard to clear the title of the property, but later on, he has also informed that the steps were taken only to minimize the litigation. Those actions were stated to be taken by the vendors. According to Learned Authorised Representative of the assessee otherwise the title was clear and the purchase of land was through a proper sale-deed which had no element of risk at all. If the Revenue Department ever wanted to straighten the facts then could have placed on record that what was the nature of the dispute in title ?, then why it was a defective title? And whether the assessee had taken substantial risk in ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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buying the property and if at all what was the nature of the risk? All these question remained unanswered and it appears that the A.O. had proceeded merely on a letter of the assessee which had an altogether different context . In fact we wanted to know the exact nature of the defect in the title and how it was removed and what was the effort , if any, taken by the assessee and why it was not the responsibility of the seller to have the clear title before sale. But nothing had come out from the side of the Revenue. If the Revenue was making an allegation that it was their duty to substantiate the same and in the absence the theory of a tax payer ought to have been accepted.

8.2. It is not in dispute that the appellant had taken few steps to improve the status of the land. Those steps were, such as, conversion of agricultural land into non-agricultural land and then the permission of the AUDA for sale of the property. On an analytical examination it can be said that the assessee had taken those steps primarily to save his investment . It was a natural corollary that thereafter the appellant got good price on sale. At this juncture, it is worth to be noted that those steps of consolidation of land and change of its use were only towards the improvement of the property, but those steps, on the face itself, were not a regular series of business steps generally being taken by a Real Estate Trader. Our attention has also been drawn that the purchase of land was as per the norms of that period and there was no business like manipulation, such as, in payment of stamp duty on purchase of land. The said payment of stamp duty was as per the prevailing government rates. Nevertheless the central theme is that those ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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efforts of the assessee can not be termed as a business like steps but such steps are generally being taken even by a common investor.

9. On account of the facts as marshaled hereinabove , it is noteworthy that the assessee as an individual is a Director in few companies. The assessee has never entered into any trade or business of Real Estate. It has been categorically stated before us that even those sister-concerns were never in Real Estate business. In the light of the factual analysis of all those facts of the case , following salient features have been noticed :-

(i) The appellant as an individual has never entered into any sale and purchase of land in the past, hence, this assessee cannot be treated as a business man dealing in Real Estate.

(ii) The land transaction in question was a single land transaction and sold to one party, which means no plotting has been done by the assessee as it generally happens in the case of Land Developers.

(iii) The assessee has not made any developmental activity on the plot, such as, an earth filling, construction of boundary- wall or expenditure on lay out plans etc.

(iv) That, the details of expenditure have shown that apart from the investment towards cost of land, the other expenditure in the nature of payment of AUDA in consolidation, land measurement fees, and a fees paid to Collector, education cess, land tax and payment to Gram Panchayat, were nothing but in the nature of procurement of an asset generally being done by any other investor. None of these expenditure were towards advertisement, brokerage, improvement towards sale of property; generally being done by a Developer in this line of business.

(v) The intention of the assessee can be judged by the fact that the asset in question was reflected in the balance-sheet as a capital asset. Before us, the balance-sheets of the years under consideration have been furnished to demonstrate that the land in question was always reflected under the head “Fixed Asset”.

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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(vi) The intention of the assessee can also be judged by the fact that the property in question was declared as a capital asset in the wealth-tax return. For Assessment Years 2005-06 & 2006-07 value of the property was disclosed at Rs.17,72,2000/- and for Assessment Year 2007-08 value of the land disclosed at Rs.53,34,000/- for Wealth-tax assessment.

(vii) Wealth-tax proceedings can be held a benchmark for determining the intention of the owner of a property. Under the Wealth-tax Act, had the property been a business asset, then as per the provisions of section 2(ea) of the W.T. Act, 1961, the property in question should have been declared as an exempted asset but due to the fact that it was not a business asset, but a personal asset, therefore, the piece of land was subject to tax under the provisions of Wealth-tax Act, 1957.

(viii) Undisputedly, there was no series of transaction as it generally happens in a routine business transaction; meaning thereby there was no regular purchase and sale of land by the assessee.

(ix) That, the assessee is not in the business of purchase and sale of land, but the land was acquired with the only motive to fetch capital appreciation, therefore, cannot be said to be with business intention.

(x) The asset in question was acquired by assessee’s own funds and no borrowings have been made. It was demonstrated through bank statement and the personal accounts in the companies viz. M/s Road Tech Eng.(P) Ltd., that the source of the investment was out of his personal resources.

(xi) The land in question being an Agriculture land at the time of purchase therefore under the restriction of purchase & sale , which also thus demonstrate that being not a saleable asset hence meant for permanent holding.

(xii) That the group concerns in which the asessee is a Director have also not done business of real-estate or purchase & sale of land , rather they are in the business of Road construction.

(xiii) The transaction in question was a solitary transaction and not the series of transaction as it happens in the normal ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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business activity where the money is rotated by continuous cycle of trading.

9.1. In the context of the above observations, we have examined few case laws as cited from the side of the appellant.

(A) Deep Chandra & Co. vs. CIT (107 ITR 716)[Allahabad] The Hon’ble Court has opined that the question whether profit earned in any transaction had arisen out of adventure in the nature of trade is a mixed question of law and facts and such a question fall within the realm exclusive facts of each case. The mere fact that the land is purchased with a view to re-selling under favourable conditions does not by itself give rise to a circumstance to hold that the land was purchased with the intention to enter into a trade. The conduct of a purchaser should be inconsonance with the investment and, thereafter realization of investment on sale and in the absence of any other circumstances it is to be held as the surplus money so received was a capital gain. The activity of parceling -out the land and thereafter selling in the market, can be said to be designed to enhance the value of the land and such an activity is a business activity, but where a person has no intention of trading, the land by either parceling or buying and selling cannot be considered to be a person engaged in an adventure in the nature of trade simply because by taking some steps he might succeed in receiving higher price of land in the market. Merely because of certain developments in the town, if the consequence is the increase in the price do not establish that a trade activity was carried out by an assessee.

ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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(B) Sarojkumar Mazumdar vs. CIT (37 ITR 242)[SC] The Hon’ble Court has observed while discussing the nature of business activity that though the appellant was engaged in various types of businesses as a share-holder or a Director, as also in building contracts, but dealing in landed estate was not in the line of his business. The Court has said that if such transaction was in the line of his business, then it would not matter whether it was one transaction or several transaction and even a single transaction being a part of his day- to-day business would be a profit out of trade activity. It was a single transaction out of which a considerable profit was earned which was in the nature of a wind-fall. The possibility or the probability that the site in question may appreciate in value, but would not necessarily land itself to the inference that the transaction was a venture in the nature of trade.

(C) CIT Vs. Rewashanker A. Kothari [2006] 155 Taxman 214 (Guj.) The Hon’ble Court has observed that the tests laid down by various decisions of the Apex Court indicate that, in each case, it is the total effect of all the relevant factors and circumstances that determine the character of the transaction. Each case has to be determined on the total impression created on the mind of the Court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an assessee. It is equally well-settled that, merely because the original purchase was made with the intention to re-sell, if an enhanced price could be obtained, that by itself is not enough to infer that an ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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assessee is carrying on business. Certain tests laid down by the Court are worth reproduction:-

“

(a) The first test is whether the initial acquisition of the subject-

matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.

(b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.

(c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, it not conclusive.

(d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation.

(e) The fifth test, normally applied in cases of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity.

(f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business.”

(D) JANKI RAM BAHADUR RAM Vs. CIT [1965] 57 ITR 21 (SC) The Hon’ble Court has held that “It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the income-tax authorities. It has consistently been held by the Supreme Court that the question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact.” After examining the sequence of events, the inference drawn was that the appellant had no intention to commence business. It could not be presumed that the sole intention was to start a venture in the nature of trade. Baring the expectation of the profit and realization of profit by sale of property, there was no evidence appearing on the intention with which the property was purchased.

(E) D.S. Virani vs. CIT (1973) 90 ITR 255 (Guj.) Though the case was distinguished by the Learned Authorised Representative of the assessee but this case was cited for the purpose that the Hon’ble Court has expressed at one place that there should a clear and positive evidence of facts and circumstances to show that the transaction was a venture in the nature of Trade.

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(F) ITO vs. Baguio Investment (P) Ltd. (2010) 127 TTJ (Pune) 423 In this case, the Respected Co-ordinate Bench has expressed that it is now almost settled and become a trait law that the dominant intention of the assessee at the time of purchase is of prime importance. If the dominant intention is to carry on an adventure of trade, then the profit can be taxed as business otherwise not. If the transaction is frequent with a commercial spirit to make profit by trading then the settled principle is that the same is in the nature of trade but on the same breath, it is also admirable that whether the profit from such transaction is Revenue or a capital receipt and this question is always a mixed question of law and fact.

10. From the side of the Revenue, case laws relied upon has also to be discussed and if distinguishable on facts, then the distinction has to be placed on record :-
11. A) CIT vs Jawahar Development Association127 ITR 431 ( M.P.) It was held that the activity of purchasing of land and selling them into plots, constitutes an adventure in the nature of trade. The mere fact that the land was agriculture land could not make the profit arising from sales exempt from Income tax. Facts were altogether distinguishable reason being that in the present appeal there was no attempt what so ever to sale the land in question after converting into plots. Primarily on this basic difference the reliance can be said to be misplaced. B) R. Dalmia vs CIT137 ITR 665 ( Del.) The observation was, ” the findings of the Tribunal , which are findings of facts , are that the assessee availed of his position vis a vis a ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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Pvt. Ltd. Co. and the original guarantee to derive a gain out of the so called “liability” to the share holders , that both the agreements were only by way of camouflage to conceal the real gain , and that such gain resulted from an activity which by itself was a business activity”. Since it was found that the transaction was well organized , the whole affair was pre-planned and with a view to earn profit hence held as an adventure in the nature of trade. The distinction is not only obvious but also apparent from the facts of the appeal in hand. Therefore this reliance is also misplaced.

1. C) G. Venkataswami Naidu & Co. 35 ITR 594 ( S.C.) ………… From the head note we have gathered that there was purchase and sale of plots and the plan was to sell land to mill at a profit. It was also found that the conduct of the assessee subsequent to the purchase of the plots had also clearly show that after consolidating the holding was to be sold to mill in two lots. So it was inferred by the Honble Court that assessee knew that it would be to sell lands to mill profitably and it was also held that the relevant facts and circumstances have corroborated said presumption. Therefore it was held that the said transaction was an adventure in the nature of trade. Now if we compare the facts of the present appeal then the foremost distinction is that the circumstances of the present appeal do not suggest that subsequent to purchase the assessee had the only intention of sale to the said party. Facts of the case do not show that it was a well organized business activity of the assessee. Rather the circumstantial evidences indicated that the gain was a wind fall .

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1. D) CIT vs. PremJi Gopalbhai113 ITR 785 ( Guj ) Remarkably this decision though went in favour of the assessee but still it was referred by the A.O. It is also astonishing that the facts of the cited decision were on the bad footing, comparing the facts of the appeal in hand. It was found by the jurisdictional High Court that an ancestral land was converted into non-agricultural land, divided into several plots and sold as and when purchaser was available. It was held as a capital gain . Thereafter repurchased two plots and resold some years later resulting into profit. It was held that the assessee was not a dealer in land nor treating land as stock-in-trade, therefore held not an adventure in the nature of trade. We can make a remark that this judgment rather supports the legal proposition as laid down by us hereinabove.
2. E) JANKI RAM BAHADUE RAM vs. CIT…57 ITR 21 ( SC) ——

Assessee was a dealer in iron scrap. Assessee sold one factory. A.O. taxed the profit . It was an isolated transaction. The Honble court has held that the appellant had no intention to start a venture in the nature of trade by purchasing the property. It was held that the absence of advertisement , inviting offers , absence of broker , purchaser himself approached the assessee and the property capable of being rented out , held there was no adventure in the nature of trade involved . On examination of the facts of this precedent we can hold that the law laid down therein do support the stand of this appellant. F) Smt Parvathi Devi & Ors. Vs. CIT 164 ITR 675 (A.P): —- Facts were that the four persons jointly purchased large chunk of lands, and converted into non-agriculture use. Lands were jointly sold to ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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Housing Society with in a period of fifteen months. It was found from the facts that none of them had intention to use the land for construction of house, purchase was not for personal use, possession was not for personal enjoyment, it was not a long term investment, therefore it was held that the transaction was an adventure in the nature of trade. The assessment in the status of AOP was also upheld. The distinction as noted by us is that the intention of the four persons was to join hands to enter into a business of land dealing. From the facts it was noted that their intention was not to personally posses the land but to trade the same . Contrary to this, the appellant is the only person involved in the deal. He has not joined hands to earn more profits. Single handedly the appellant has decided to sale the property hence distinct from an organized activity of business. G) CIT vs. Smt. Minal Rameshchandra167 ITR 507 ( Guj.) In this decision, the Hon’ble Gujarat High Court has categorically pronounced that question whether a transaction is an adventure in the nature of trade or not, is a mixed question of law and fact. Facts of the case have stated that the assessee with her mother and brother had become a partner in a firm. All three of them have contributed land as their share of capital contribution. There were seven other partners who contributed no capital whatsoever. The book value of the land was shown at Rs.34,728/-. The assessee in her books of account put the market value of the land at Rs.4,45,929/-. The surplus was transferred to the capital account. Identical entries were made in respect of two other family members. The question was whether the surplus was a capital gain or there was no transfer of any capital asset. It was found that when the assessee purchased the land jointly with rest of the two family members, the title was in dispute. The land was not yielding regular ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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income. The Commissioner was of the view that profit has accrued to the assessee. When the matter had reached before the Tribunal, it was observed that there was no organized activity which resulted in the dealing that has the attributes of a business transaction. The Tribunal was of the view that the amount in question could not be taxed as a capital gain. When the said order was contested before the Hon’ble High Court, it was held that where the agricultural land was purchased, it was converted into non-agricultural land and sold thereafter through the medium of the bogus firm, then the whole transaction was adventure in nature of trade. We have carefully perused this precedent as well and have noticed that the intention from the beginning has to enter into a venture in the land purchase. Due to this reason, the land was converted into an asset of the firm. This step of converting a personal asset into a business asset of a firm itself demarked a significant difference. Primarily due to this reason, the cited decision cannot be considered at part with the present appeal.

11. In the light of the detailed foregoing discussion and on consideration of the evidences placed on record as well as in view of the legal propositions laid down by the Hon’ble Courts, we hereby hold that the asset in question was not purchased with the object to enter into the trade of land-dealing; because after this transaction or before this transaction there was no evidence of any such activity ever carried out by this assessee. We have also perused the expenses incurred by the assessee and the nature of those expenses are mainly towards payment of legal charges, or prescribed fees for consolidation of the plots, or for the conversion of the agricultural land into non-agricultural land. Commonly ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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known fact is that in a land trade, generally the land is parceled out into small plots and thereafter marketed. Such an activity has not been carried by this assessee. Even there was no systematic or repetitive buying or selling of land which could indicate an adventure in the nature of trade. Few steps taken by this assessee might be an attempt to receive higher price of land, but merely because of those steps, it cannot be held that the appellant is dealing in land estate business. The land in question was never treated as a stock-in-trade but it was treated as capital asset on which wealth-tax was paid. All the circumstances and evidences thus demonstrated the purpose of purchase of land and the objective of the assessee for which the land was acquired which by no means can be held an adventure in the nature of trade. We, therefore, hold that the appellant has not entered into any adventure in the nature of trade and the consideration received on the said land transaction was in the nature of capital gain only. Resultantly, Ground No.1 goes in favour of the assessee.

12. Apropos ground No.2, the Assessing Officer has reduced from the sale price the expenses and cost of purchase totalling to Rs.24,29,069/-. Due to this reason, it appears that there is no fundamental dispute about the allowability of expenditure incurred towards cost and improvement of the land in question. On examination of the details of expenditure it has emerged that the expenditure were towards consolidation charges, land measurement charges, fees paid to Collector, Education tax, land tax, payment to Gram Panchayat. None of those expenditure were towards advertisement, plotting of land, construction of boundary wall, payment to brokers or towards lay-out plans, etc. Since we have already held that ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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this is the case of a capital gain, hence, the expenditure in question being in the nature of cost of improvement are allowable in terms of section 48 of the I.T. Act, 1961. This ground is, therefore, allowed.

13. Apropos ground No.3, the same is general in nature needs no independent adjudication.
14. Apropos ground Nos.4 & 5 both are consequential in nature and, at present, not subjudice before us.
15. In the result, the appeal of the Assessee is allowed.

Order signed, dated and pronounced in the Court on 30/ 09 /2010.

        Sd/-                                                  Sd/-

  ( G.D.AGRAWAL )                      ( MUKUL Kr. SHRAWAT )

VICE PRESIDENT (AZ)                       JUDICIAL MEMBER

Ahmedabad;       Dated       30 / 09 /2010

T.C. NAIR, Sr. PS

Copy of the Order forwarded to :

1. The Assessee. 2. The Department.
2. The CIT Concerned. 4. The ld. CIT(Appeals)-VIII, Ahmedabad
3. The DR, Ahmedabad Bench.6. The Guard File.

BY ORDER, स×याǒपत ूित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad ITA No.826/Ahd/2010 Shri Ajitkumar T.Patel vs. DCIT Asst.Year – 2008-09

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1. Date of dictation…………………..13/09/2010
2. Date on which the typed draft is placed before the Dictating Member 20/09/2010……………… Other Member…………………
3. Date on which the approved draft comes to the Sr.P.S./P.S…27/09/2010.
4. Date on which the fair order is placed before the Dictating Member for pronouncement……
5. Date on which the fair order comes back to the Sr.P.S./P.S………30/09/10
6. Date on which the file goes to the Bench Clerk………………… 30/09/10
7. Date on which the file goes to the Head Clerk…………………………….
8. The date on which the file goes to the Assistant Registrar for signature on the order……………………..
9. Date of Despatch of the Order………………