Isolated activity could not come within the purview of adventure in the nature of trade and business.


Isolated activity could not come within the purview of adventure in the nature of trade and business.

Dhirubhai Kanjibhai Patel,Huf, … vs Assessee on 21 August, 2013


                “C” BENCH, AHMEDABAD



                       ITA No.1745 /Ahd/2010

                           A.Y: 2006-07

      Shri Dhirubhai                     ITO, Ward-1, Navsari.

      Kanjibhai Patel HUF

      Bal Mandir Falia,

      Kachiawadi, Navsari          Vs

      PAN: AAEHD 5625A

            (Appellant)                     (Respondent)

                Revenue by :            Shri J.P. Jangid, Sr.D.R.

               Assessee(s) by :         Shri M.R. Shah, A.R.

          सुनवाई कȧ तारȣख/

                         / Date of Hearing      :             21/08/2013

          घोषणा कȧ तारȣख /Date of Pronouncement:              30/08/2013

                          आदे श/O R D E R


 This is an appeal filed by the assessee arising from an order

of learned CIT(A), Valsad dated 11.12.2009. The grounds raised

are hereby decided as follows:

      “On the facts and in the circumstances of the case as well as law on

      the subject, the learned CIT(A) has erred in confirming the action of

      Assessing Officer in treating the gain arising on sale of land as

      “Business Income” instead of “Capital Gains” as shown by assessee

      & thereby, erred in disallowing assessee’s claim for deduction u/s

      54EC & 54F of the Act totaling to Rs.37,50,409/-.”

  1. Facts

in brief as emerged from the corresponding assessment order passed u/s. 143(3), dated 30.12.2008 were that the assessee in HUF capacity has filed a return disclosing long term capital at Rs. Nil and the computation was as under:

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 “Capital Gains:

Long Term Capital Gain:

As per Working given (Indexed, 20% Tax) 3665646 3665646 Less : Deduction / Setoff :

Deduction u/s. 54EC:

1440000 1440000 Deduction u/s. 54F: 2500000 2310409 3750409 Nil”

2.1. The AO has noted that for the year under consideration; 54 plots have been sold. However, it was also noted by the AO that the assessee HUF was having agricultural land which was converted into non agricultural land and certain development expenditure was incurred and then plots were sold in few years. According to the AO, the assessee had incurred Rs.27839/- for drainage, Rs.41,125/- for compound wall and Rs.21,087/- for road. Because of the said reason, the assessee had made plots and sold the same. The AO has held that the assessee was carrying on the business of “Real Property”. According to the AO, the profit earned from such activity was required to be taxed as business income. In compliance of a show cause notice, the assessee has replied as under:

“The agricultural land in question is hereditary agricultural land converted into N.A. land vide District Development Officer , Valsad vide order dated O9/10/1987 and sold the same in last three financial year i.e. F.Y. 2003-04, 2004-05 and 2005-06. It is but natural that to make the land salable basic requirement of Road, Fencing of the Plot is necessary.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 You have consider the above expenses as development expenses for selling the plot as business and intend to consider as business. We have never purchase the land and sold in past and at present we have never done any kind of business activities in the past and in resent. I myself and my son doing agriculture activity only. There is no intention of business of sales of land. Mere considering development expenses for sale of land does not amount to Business income and we strongly objection to your action for considering the business income.”

2.3 The AO was not convinced and rejected the claim of the assessee after giving following reasons:

“The explanation of the assessee is considered very carefully. The contention put forth by the assessee is not accepted for the following reasons:

1) It is mentioned in the copy of Registered Document furnished by the assessee that according to permission granted by the District Panchyat Office, the assessee desired to divide alleged land into plots and sale it in the name of “Maninagar”. Thus, it is very clear that the assessee has converted agricultural land into N.A. land with the intention to earn profit.

2) The assessee himself confessed that the alleged land was converted in Non-agricultural Land (N.A. Land) and sold out during the last three financial years after developing.

3)The assessee confessed that in order to make the land more attractive and salable, he has incurred expenses on basic requirements viz. Road, Fencing and drainage.

4) It can be seen that the assessee has sold out 17 plots during Financial Year 2003-04 and remaining plots were kept as stock-in- trade which were sold out in the immediate two subsequent years.

5) The assessee has done all the activities which a person carrying on business in real property will do in his ordinary course of business.

6) Despite the fact that the assessee continuously engaged in selling of plot of land for the last three financial year, the assessee erroneously stated that he had not done any business.”

2.4 Thereafter, the AO has placed reliance on the following judgments.

(i) Raja J. Rameshwar Rao Vs. Cit (1961) 42 ITR 179 (SC)

(ii) CIT Vs. M. Krishna Rao, (1979) 120 ITR 101, 105 (AP)

(iii) CIT Vs. V. A. Trivedi (1988) 172 ITR 95, 101 (Bom.)

(iv) M. Krishna Rao (1978) 120 ITR 101 ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07

(v) CIT Vs. Daulat Ram Rawatmull (1973) 87 ITR 349.

2.5 Finally, the AO has computed the profit as under:

“It is seen that the assessee has sold out 54 plots during the year for the total sale consideration of Rs.92,19,252/-. Since the assessee has not produce any details of expenses, the expenses of the assessee is estimate at 20% of total sale consideration keeping in mind that the assessee might have incurred such expenses for earning profits on sale of plots. As such, 20% of Rs.92,19,252/- is worked out to Rs.18,43,850/-. After deducting business expenses of Rs.18,43,850/-, net profit comes to Rs.73,75,402/- is treated as business income of the assessee for the year under consideration and taxed accordingly.”

  1. Being aggrieved, the matter was carried before the learned CIT(A) who has held that the year-wise sale which has rolled over in various financial year has demonstrated that the assessee has carried out the business activity. The action of the AO was upheld in the following manner:

“I have considered the observation of the AO in the assessment order as well as the submission of the AR of the appellant. The AO has rightly raised an issue of treatment of income as business income and not the income from capital gain. The appellant has converted the amount into NA way back in 1987, which itself establishes the facts that the appellant has a very purpose earning income out of land from day one. The property record even does not discuss about the inheritance of land. The crux of issue of conversion of land into NA before two decades is a sufficient indication to determine the intention of the appellant to venture in nature of trade. The arguments advanced by the AR of the appellant is simply based upon the inheritance of land and he emphasized upon the issue of a single plot of land and the investment made by the appellant to claim the deduction u/s. 54EC and 54F of the Act. Considering the instances of sale rolling over various financial years, the activity carried out by the appellant is treated as business income and therefore, the addition made by the AO is upheld.”

  1. From the side of the assessee, learned AR, Shri M.R. Shah appeared. He has pleaded that the assessee-HUF was in possession of an ancestral agricultural land. The said agricultural ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 land was adjacent to city of Navasari. The assessee was facing problem in maintaining the land as agricultural land, therefore, got it converted into non agricultural land. Learned AR has placed reliance on the submissions made before the Revenue Authorities, relevant portion is extracted below:

“The facts of the case are as under :

The assesses HUF was having agricultural land bearing survey no. 195, 196-197-198/paiki situated at Village Chhapra, Taluka and Dist. Navsari.

This was inherited from Karta’ s father’s HUF on his death. The assessee had not purchased the said land.

The inherited land was an agricultural land. The agricultural activity was being conducted on this land till permission of non-agriculture was obtained. Chikoo, Vegetables, Banana, etc. was grown on this land.

This land was adjacent to the City of Navsari. There was all residential development around this land, therefore, the assessee wanted to sell the said land as it was now not fit for agriculture. Moreover, there could not be any industrial sale of this land as it was not in GIDC area and it was surrounded by residential area. Therefore, it had to be sold as residential area.

Moreover, the adjacent land to the assessee was of Parmesh Diamond Factory where around 1000 workers were working. These persons used the assessee’s land for to and fro to the factory and home. Even after the assessee made fencing and gate, these workers used to enter the land of the assessee for crossing the ground. Therefore, it was not possible to carry on the agricultural activities on this land.

If the land was not sold, in future if the Navsari limits are extended the assessee might have lost some land in town-planning. Therefore, the assessee considered it wise to sell the land.

The area of the land is quite huge – 5667 Sq. Meters of land, at S. no. 196/197/198 paiki and 19264.92 Sq. Meters of S. No. 195 -therefore, the same could not have been sold at once. Moreover, the land if to be sold would have to be made non-agriculture otherwise could not be sold.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 Therefore, the assessee applied for NA for residential purpose and got it done on 9-10-1987. When NA application is made for residence it has to be made with plots planning and common approach roads etc. Accordingly it was done so.

Thereafter, only few plots were sold. As no significant sale was made, the assessee, many years later, in FY 2003-04, 2004-05 and 2005-06, sold plots to various parties by giving name of Maninagar. The plots are sold to individual owners without carrying out any construction or development activities thereon. No further value addition was made to these plots by the assessee as they had no intention to sell the land as stock, in trade with a view to earn profits from this activity. No activity like organizing, construction, etc. was done by the assessee. He has simply sold the open land to the purchasers. Copy of one sale deed selected on random basis is enclosed in Annexure-A to this letter for your reference. From verification of this deed you can see that the open plot of land is sold to the purchaser. No business activity has been carried out by the assessee thereon.”

4.1 Learned AR has also stated that no substantial development work was carried out by the assessee and the small amount of expenditure was incurred only to improve the value of the land as also to protect the property. Learned AR has also drawn our attention on few of the samples of sale deed executed by the assessee to various persons. He has pointed out that each and every sale deed has consisted the background of the land that the same was ancestral agricultural land. He has also emphasized that the assessee was not in the business of “Real Estate”. The assessee was also not in the business of purchase and sale of land. It was a single transaction of the land which was acquired through inheritance, however, sold in pieces. Because the assessee is not in any trade of land, therefore, the assessee has invested Rs.14,14,000/- in the bonds and claim the deduction u/s. 54EC of IT Act. The assessee has also invested Rs.25,00,000/- towards construction of a residential house. Hence, claimed deduction u/s.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 54F of the IT Act. With these factual background, learned AR has placed reliance on the following orders:

(i) CIT Vs. Suresh Chand Goyal [298 ITR 277 (MP)]

(ii) Ajit Kumar Patel Vs. DCIT, Circle-1 (ITA No. 823/Ahd/2010)

(iii) MadanMohan Magaldas Vs. ITO [35TTJ 134 (Ahd)]

  1. From the side of the Revenue Department, Mr. J.P. Jangid has argued that the expenditure incurred for the development of the property was in the nature of business activity. The assessee has converted the agricultural land into non agricultural land and thereafter plots were made and on sale profit was earned. By placing reliance on the order as cited in the assessment order, he has pleaded that the action of the AO deserves to be confirmed.
  2. We have heard the submissions of both the sides at some length. We have perused the facts of the case in the light of the order of the authorities below as also the compilation filed. On account of following reasons, we hereby approve the argument of learned AR.

(i). The land in question is an ancestral land, which was inherited by the assessee. Since, it was an ancestral land, therefore, there was no cost of acquisition. If there was no cost incurred towards acquisition of the land then naturally one of the conditions of “business activity” is missing in this case.

(ii) The expenditure towards road, drainage and compound wall was very nominal and the same could not be said to be the development activity carried out on the said land by the assessee.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 Such expenditure was mainly incurred to protect the property and to enhance the value of a capital asset.

(iii) Even, the conversion from agricultural land to non agricultural land cannot be said to be a business activity.

(iv) The intention of the assessee was not to enter into any trade of purchase and sale of land, therefore, instead of investing the sale consideration on any other construction business, the assessee had made the investment in the bond as prescribed u/s. 54EC of the Act. The assessee has also invested a major portion towards construction of a residential house, therefore, claimed exemption u/s. 54F of the IT Act. This action of the assessee thus gives an indication about the intention of the assessee that he was not entering into any business or trade of Real Estate, therefore, sale proceeds were utilized towards acquisition of an another capital asset.

(v). The assessee had held this land in possession for more than 18 years. The land was converted into non agricultural land in the year 1987, therefore, the period of holding of the land being substantial, hence, safely can be held that the land in question was within the definition of “Long Term Capital Asset”.

(vi). The carving of the land into small plots can also not be held as a business activity because of the reason that a capital asset can be sold in portions; but by mere selling of a capital asset into pieces do not change the character/nature of the asset and the same always remain a Long Term Capital Asset.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07 6.1 In the light of the above reasoning, we have also examined the case laws cited by both the sides. The AO has placed reliance on the orders of Raja J. Ramashwaram 42 ITR 179 (SC) and a decision of M. Krishna Rao, 120 ITR 101 (AP). We have perused these orders. The facts of these cases have revealed that the land in question was acquired by the assessee; therefore, a clear cut distinction is that this appellant has not acquired the land but the land was inherited by the assessee, therefore, towards purchase of land no investment was made by this assessee. Hence, there was no question of examining the intention of the assessee at the time of acquisition of this asset. In the present appeal, there was no commercial intention when the land came into the possession of the assessee. It was an automatic acquisition of land through inheritance.

6.2 We have examined the other case law, viz., V. A. Trivedi, 172 ITR 95 (Bombay) and noted that the Hon’ble Court has held that certain true character or nature of the land must be seen whether the land was put to use for agricultural purposes for a reasonable span of time. So it is clear that in a situation when a land in question has been put to use for agricultural purposes for a long span of time then the character of the land is agricultural land. In the present case, the ancestral land was in fact used as an agricultural land prior to its conversion. We have also found that in this cited precedent the Hon’ble Court has finally held that the Department had not proved that the purchase was with a view to resell, therefore, it was held that there was no adventure in the ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07

– 10 –

nature of trade and the profit was not assessable as business income.

6.3 Likewise, in the case of Daulat Ram Rawatmull, 87 ITR 349 (SC), the issue was about the onus on the assessee to prove that the apparent is real or not. In our opinion, in the present case, the assessee has discharged that onus of proving that the land in question was only inherited without the intention to enter into a trade activity. The attempt of the assessee was to fetch a good price on sale of land, therefore, it was first converted into non agricultural land in the year 1987 and after retaining for 18 long years it was sold in the financial year 2005-06. Even the plotting of the land in our opinion, in such situation, was with the purpose to fetch a good market price of the land. It is very common and a known fact that in the open market the price of a plot is higher comparing to the price of a big chunk of land.

6.4 The assessee has cited a decision of CIT Vs. Suresh Chand Goyal, (2008) 298 ITR 277 (MP) and according to us, the case is squarely covered by this decision being the facts of this appeal are matching with this cited decision, relevant portion is reproduced below:

“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 can also be part of business, but to consider the question of business, there must be regular activity of purchasing and selling. The assessee received agricultural land as gift. He took steps for converting it to non-agricultural purposes. Thereafter, the land was ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07

– 11 –

converted into plots. The Assessing Officer noted that apart from the approval of map, deposit of tax and other activities for developing the plots like making of roads etc., were also taken up and in two out of the three assessment years, expenditure had been claimed for such development activity. The Assessing Officer held that the activity amounted to an adventure in the nature of trade. He assessed the gains as business profits. This was upheld by the Commissioner (Appeals). The Tribunal however held that the gains were assessable as capital gains. On appeal by the Revenue a preliminary objection was raise that the appeal was not competent in view of the CBDT circular:

Held, (i) that the land had been received as gift and the land was developed and was sold after converting into the plots with a view to secure a better price, therefore, the isolated activity could not come within the purview of 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 as income from business.”

6.5 We have also examined a unreported decision of ITAT A Bench Ahmedabad pronounced in the case of Ajit Kumar Patel Vs. DCIT, Circle-1, (ITA No.826/Ahd/2010), order dated 30th of September, 2010, wherein it was held that there was no series of transaction as it happens in a routine business transaction, meaning thereby there was no regular purchase and sale of land by the assessee; hence, not a commercial activity. It was held that there was no business intention and the land was acquired with the only motive to fetch capital appreciation. Likewise ITAT Ahmedabad in the case of Madan Mohan Magaldas Vs. ITO, 35 TTJ 134 (Ahd) has held that whereof assessee has converted ancestral land into stock in trade of his business and sold it, since sale of plot was a solitary transaction and was completed within a short period, therefore, surplus resulting from such transaction was held to be taxable as capital gains and not as business income.

ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07

– 12 –

6.6 Respectfully, following these decisions as cited from the side of the assessee, we hereby reverse the findings of the authorities below and allow the grounds of the assessee. Ground No. 1 is hereby allowed.

  1. Ground No.2 is reproduced below:

“On the facts and in circumstances of the case as well as law on the subject, the learned CIT(A) instead of deleting the addition erred in sending the issue relating to difference in value of total sale consideration of land back to the file of Assessing Officer. The learned assessing officer erroneously took the value of total sale consideration at Rs.92,19,252/- for 54 plots instead of Rs.40,66,567/- for 26 plots actually sold during the year.”

7.1 Learned AR, Shri M.K. Shah has informed that an order giving effect to the order of learned CIT(A) has been given by the AO on 12th of July, 2010 and the required relief has already been granted, therefore, this ground has become redundant. Learned AR has not pressed this ground, hence dismissed.

  1. In the result, this appeal of the assessee is partly allowed.

          Sd/-                                     Sd/-

   (A.K. GARODIA )                           (MUKUL Kr. SHRAWAT )

ACCOUNTANT MEMBER                              JUDICIAL MEMBER

Ahmedabad;            Dated 30/08/2013

Prabhat Kr. Kesarwani, Sr. P.S.

                                   TRUE COPY

आदे श कȧ ूितिलǒप अमेǒषत/Copy

                     षत      of the Order forwarded to :

  1. अपीलाथȸ / The Appellant
  2. ू×यथȸ / The Respondent.
  3. संबंिधत आयकर आयुƠ / Concerned CIT
  4. आयकर आयुƠ(अपील) / The CIT(A)-III, Ahmedabad ITA No.1745/Ahd/2010 Dhirubhai Kanjibhai Patel HUF Vs. ITO Navsari.

A.Y. 2006-07

– 13 –

  1. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
  2. गाड[ फाईल / Guard file.

आदे शानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) उप/ आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद / ITAT, Ahmedabad