TMI Blog1995 (11) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter, while filing the return, disclosing an income of Rs. 53,900 and agricultural income of Rs. 10,811 assessee has not disclosed the capital gains on the sale of the above lands. Though the assessment was originally completed on 27-3-1986 under section 143(1), with the prior approval of the IAC, a notice under section 143(2) of the Act was served on the assessee, and thereafter fresh assessment by the order dated 26-3-1987 under section 143(3) read with section 143(2)(b) was framed. In the course of said re-assessment, the Assessing Officer noted that in the statement enclosed to the return, the assessee mentioned that during the year of account, he hold ten sites for a sum of Rs. 1,67,180 and that the total sale proceeds were invested in National Rural Development Bonds and, hence, no capital gains were disclosed. During the course of hearing, the Assessing Officer obtained particulars of sale of land and the same were extracted in para (c) of the assessment order on pages 2-3 thereof. He noted from the said particulars that the assessee sold the land belonging to him in square yards. On examination of couple of sale deeds, copies of which were furnished in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trade. It was submitted that the assessee has not purchased any lands and made any plots for the purpose of selling and even in the case of two instances noted in the assessment order, the assessee has not done any plotting. It was also contended that the cost price was not there for arriving at the income from the adventure in the nature of trade, and the reasoning adopted and the cost price determined by the Assessing Officer were unjustified. It was also the contention of the assessee that there were only capital gains in the hands, and even those capital gains were not taxable in view of the A.P. High Court decision in the case of J. Raghottama Reddy v. ITO [1988] 169 ITR 174. Keeping in view, the plea of the assessee that the assessee itself has not done anything for the layout or divided the plots, etc., the CIT(A) noted that further enquiries were got conducted by contacting four of the persons, viz. D.A. Narasimha Prasad Varma, Sagiraju Pukhraju, D. Bhaskara Reddy and Smt. D. Padmavathi W/o. D. Bhaskara Reddy, who stated that there was no agreement before the purchase of sites and they purchased layout plots; that was already done by the assessee and the purchase consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of trade' and as such the income from such an adventure was liable to be taxed under the head 'Business income'. The CIT(A) also upheld the estimation of the allowable deduction out of sale proceeds at 10%, holding the same to be fair and reasonable. He, accordingly, sustained the addition made by the Assessing Officer. (c) Aggrieved by the order of the CIT(A) in this behalf, assessee came up with this appeal before us. 4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the lands were of agricultural nature, inherited by the assessee and they were sold to various persons only as agricultural lands and there was no intention on the part of the assessee to carry on business in lands. He submitted that it was not the assessee who got the agricultural lands converted into house-sites, and that the application to the Town Planning authorities were made and signed by the assessee only because the assessee continued to be the owner of the lands, till execution of the documents of sale and had undertaken to do so only on behalf of the agreement-holder under clause 3 of the agreement of sale dated 7-7-1982 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cost at 10% of the sale value is too low, arbitrary and without any basis. The learned counsel for the assessee has filed exhaustive memorandum of submissions reiterating the above contentions, a copy of which is filed at pages 1-37 of the paper-book. The said paper-book filed on behalf of the assessee contains inter alia, particulars of agricultural lands of the assessee as on 14-4-1974, copy of computation for estate duty purposes in the matter of estate of Late Pyda Suryanarayana Murthy, copy of estate duty assessment order dated 14-11-1983, copy of agreement to sell dated 7-7-1982, alongwith free translation thereof, a copy each of the show-cause notice issued under section 263 dated 18-5-1987, assessee's explanation in response thereto for the assessment year 1983-84 and the order of the Commissioner (Appeals), Vijayawada for the assessment year 1985-86 and 1986-87 dated 28-10-1992, copies of consequential orders for the assessment years 1985-86 and 1986-87 dated 30-3-1993, and the copy of order of the Tribunal in ITA No. 738/Hyd/89 for the assessment year 1984-85 in the appeal filed by the Department. 5. The learned counsel for the assessee has relied upon the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuously and systematically by a person by the application of his labour and skill for the purposes of earning profit. Trade connotes the idea of buying and selling. Activities organised on normally accepted commercial lines constitute the essence of any business. It can embrace within its fold dealings in real property also. However, the paramount consideration which should weigh is whether the acquisition of the property was by way of investment and whether property was sold out because of the assessee having a title in the same or whether the acquisition and sale of property constituted the 'business' or 'trading activity' of the assessee. Where owner of an ordinary investment choses to realise it by sale and obtain higher price for it than for what he acquired, then the enhanced price is not profit from business, unless it is shown that the enhanced price was obtained not merely by realisation of investment, but by an act of carrying on business. For determining whether a transaction is an adventure in the nature of trade or not, what has to be seen is whether it is a gain made from a mere enhancement of value by realising the security or is it a gain made in an operation of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in deciding whether the transaction of purchase and resale was an adventure in the nature of trade, and in conjunction with other circumstances including the conduct of the assessee, such an intention might well establish beyond doubt that the adventure was in the nature of trade. As we have already pointed out, courts have never treated such a question as one capable of easy solution by the taxing authorities. Our task, however, it should be remembered, is more limited in scope. Did the evidence on record justify the finding of the Tribunal, that the purchase and sale of Cottangady group of estates by the assessee constitute an adventure in the nature of trade. " In the case of Saroj Kumar Mazumdar, the Supreme Court observed as follows--- ". . . It has also not been disputed that in a case where a transaction under examination is not in the line of the business of the assessee, and is an isolated or a single instance of a transaction like that, the burden lies on the revenue to bring the case within the words of the statute, namely, that it was an adventure in the nature of trade." In the case of CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65, the Supreme Court, after going into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. The Court noticed in that case that throughout the period, the lands were in the possession of the assessee, who cultivated them and received income from them. The Court also held in that case that the burden lies entirely on the department to establish that the land was purchased with a view to trade, and the said burden was not discharged. 9. In the case of Deep Chandra Co., the Allahabad High Court, after analysing the decisions of other High Courts observed at page 727 of the Reports (107 ITR) as follows---- " We, therefore, do not find any substance in the submission of the counsel for the revenue that simply because a purchase is made with an intention to resell in future in case its price rises, that is a ground for holding that the money spent was not by way of investment but was a trading venture. A case of commercial commodity certainly stands on a footing different from that of land. In such commercial commodity it is easier to find the purpose, as such commercial commodities are generally purchased with a view to reselling for the purpose of earning profits. " 10. In the case of Shashi Kumar Agarwal before the Allahabad High Court, assessee's father gifted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation of a capital investment. If a land owner developed his land, expended money on it, laid roads, converted the land into house-sites and, with a view to get a better price for the land eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realisation of a capital investment or conversion of one form of asset into another. The surplus in such a case will not be trading or business profit because the transaction is one of realisation of assets in investment rather than the one in the course of trade. The case of an assessee can stand on no different footing merely because it is a company which has among its objects power to trade or traffic in land. " In the case of CIT v. A. Mohammed Mohideen [1989] 176 ITR 393, the Madras High Court held as follows--- " In order to hold that an activity is in the nature of adventure in the nature of trade, there must be positive material to prove that the assessee intended to trade in such an activity and in the absence of evidence, the sale of immovable property consisting of land could give rise only to captial accretion. A sale of immovable property may pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that of an adventure in the nature of trade are that the assessee sold the plots of various sizes measuring the same in square yards; that he was in the habit of selling the plots in earlier years also; and that for selling the agricultural land, by way of plots of various sizes, he must have fixed up necessary identification marks and got the necessary layout, etc. The material evidence on record disproves the contentions of the revenue, and for that matter, none of the above factors can independently and automatically clinch the issue against the assessee, and lead us to the conclusion that the activity of the assessee amounts an adventure in the nature of trade. 15. At this juncture, we may refer to the free translation of the sale agreement, dated 7-7-1982 entered into between the assessee and M. Gopal Krishna, which is filed at pages 58-59 of the paper-book of the assessee. Clause-1 of the said agreement dealing with preamble and consideration reads inter alia as follows--- " 1.... This property devolved on me from my adopted father after his demise with absolute rights and property is in my possession from that date and since it is a dry land with no proper yield and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as far as the assessee was concerned, the land in question was sold to one M. Gopal Krishna, who was described as Second Party in various clauses of the said agreement, at the rate of Rs. 75,000 per acre. It is also clear from the clauses 2 and 3 of the said agreement that it was the Second Party, viz. the said Gopala Krishna, who was to maintain a watchman, spend on necessary improvements and layout of the land, and the assessee was only to sign the necessary papers. As per clause 4 of the agreement, the assessee was to execute sale deeds 'at the expense of the Second Party' for the sale of plots in favour of Second Party or 'to other nominee as required by Second Party'. If the assessee signed the applications for layout or any other papers, or even the sale-deeds, it was because the assessee continued to be the owner of the property, and he was obliged to do so under the terms of the agreement the assessee had with Gopala Krishna, with whom he executed the sale agreement dated 7-7-1982. Though the enquiries by lower authorities with the purchasers of various lands indicated that those purchasers have received the plots with due layout and they have not spent anything for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration of Rs. 75,000 per acre. 19. Further, it is evident from the assessment order, that the assessee has shown interest receipt of Rs. 52,566, comprising of the following items alone, under the head 'Business' : Rs. (i) Interest on National Rural Development Bonds 44,439 (ii) Interest received from Banks 2,114 (iii) Interest received from Savisugo Engg. Corpn. 2,875 (iv) Interest on Public Provident Fund 1,426 (v) Interest received from Malludora 1,526 (vi) Interest on Telephone Deposit 186 ------------------ 52,566 " ------------------ Other than this interest income, against certain expenditure was also claimed as business expenses, assessee has not disclosed any income under the head 'Business'. But for the impugned addition of Rs. 1,50,462 made on account of business on sale of plots, the assessee's version that its only income from business comprised of interest receipts noted above, has been accepted. Thus, it is not the case of the revenue that the assessee is engaged in the business of selling plots after developing the land, or that such an activity is connected with the normal business of the assessee. In similar circumstances, the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents since the property stood in his name and as such has not incurred any expenditure either on layout or improvement to the land, assessee stands on a better footing, as compared to the case before the Tribunal in B. Narasimha Reddy's case. 20. In the fight of the above discussion, considering totality of facts and circumstances of the case, we hold that the activity of the assessee in selling the land in question cannot be termed as an 'adventure in the nature of trade' and it merely amounts to realisation of property acquired by inheritance. In this view of the matter, we set aside the orders of the lower authorities in this behalf, deleting the addition of Rs. 1,50,462 made by the Assessing Officer and sustained by the CIT(A), under the head 'Business on sale of plots'. The surplus if any received by the assessee on the sale of his land, is liable to be taxed only as capital gains in the hands of the assessee. However, it was the contention of the assessee that the sale proceeds were invested in National Rural Development Bonds, and hence no capital gains were disclosed for taxation. In this respect, we direct the Assessing Officer to verify the contention of the assessee wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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