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2018 (8) TMI 662

xpenditure - Held that:- It is not in dispute that assessee purchased the land in his own name which is proved by purchase deed executed in his favour. There were no material available on record to show that land was acquired as stock in trade. It was a solitary transaction entered into by the assessee with an intention of earning profit on accretion. The assessee is not a dealer in land. The assessee entered into the solitary transaction of purchase of land which could not be treated as subject matter of trading. The land was not acquired for the purpose of dealing in land. The length of period of ownership was from 1995-97 to 2005 which speaks that assessee purchased the property to make investment in capital asset. - The very fact that each co-owner separately purchases their lands but only combined for the purpose of sale, does not show any element of carrying out any business for joint profits. The expenditure on acquisition of land, its improvements were separately incurred by respective owners and sale proceeds were also separately received by respective co-owners, therefore, it is a case of capital gains only and assessee is entitled for exemption under section 54F of .....

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arising therefrom are chargeable to tax under the head Profits and Gains of Business or Profession under section 28 of the I.T. Act. Correspondingly, assessee was not allowed to claim deduction under section 54F of the Act against the income from sale proceeds of the land which is held to be business income of the assessee. 4.1 The assessee challenged the order of the A.O. before the Ld. CIT(A) by contending that A.O. erred in holding the profits on sale of land at Village Wazirabad, Sector-53, Gurgaon as income under the Head Business and not accepting the same as Long term capital gains shown at ₹ 37,12,316/-. The A.O. also erred in not granting exemption under section 54F of the I.T. Act. 4.2 The A.O. noted that under an agreement dated 04.04.2005, the total land admeasuring 28.815 acres situated in Wazirabad, Sector 53, Gurgaon, was sold to M/s. Parsvnath Developers Ltd., ( PDL ). Out of the subject land, the assessee owned 1.31 acres and M/s. Puri Construction Ltd., ( PCL ), of which, assessee is a Director, owned 10.53 acres. The remaining land was owned by 04 other persons. All the land owners collectively Authorised PCL to enter into and execute the said Agreement and .....

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assessment of income-tax that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change in investment, but an act done in what is truly the carrying on, or carrying out, of a business...... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realizing a security or is it a gain made in an operation of business in carrying out a scheme for profit-making , (ii) In Janaki Ram Bahadur Ram v. CIT 57 ITR 21 (SC) it was held that the nature of the transaction must be determined on the consideration of all the facts and circumstances which are brought on the record of the Income Tax Authorities. The court observed that a transaction of purchase of land can not be assumed withou .....

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ssumed without more to be a venture in the nature of trade. A Director of a company carrying on the business of warehouseman purchasing a number of houses with a view to resale, and selling them at a profit some years after the purchase : IRC v. Reinhold [1953] 34 Tax Cas 389: a person carrying on business in various lines, including an engineering works, purchasing land which before the land was derequisitioned, and selling it after the land was released: Saw] Kumar Majumdar v. CIT [1959] 37ITR 242 (SC): and a syndicate formed to acquire an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit: Leeming v. Jones [1930] 15 Tax Cas 333, may not be regarded as commencing a venture in the nature of trade These are cases in which the commodity purchased and sold is not ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture In the light of the above observation made by the Hon ble Supreme Court, it is clear that the Hon ble Supreme Court in this case made a distinction between transaction in commercial commodities an .....

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the nature of trade. (vi) In G. Venkataswami Naidu & Co. v. CIT 35 ITR 594 (SC), the following extract is relevant for deciding the question whether the profit is by way of capital accretion or is income from an adventure in the nature of trade. This is what Gajendragadkar J. (as his Lordship then was), who spoke for the court, observed at page 609. If a person invests money in land intending to hold it, enjoy 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 realization of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader, and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the .....

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ion as an adventure in the nature of trade. * At page 585 their Lordships made the following observation The transaction itself should be looked at to see if it is essentially of a commercial character. A purchase and sale of land may be of that character but not necessarily so. If a person is systematically engaged in a series of transactions of purchase and sale of lands with a view to make profit out of them, that may indicate that he is occupied in a trading activity. But it is well settled that ownership of land by itself is not a trade. And so a person may purchase property, hold and enjoy it, derive income from it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them, Sales of land, in those circumstances, as we are inclined to think, are no more than a realization of capital or conversion of one f .....

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xplanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase (6) Motives. - There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realized clearly that it can be inferred from surrounding circumstances, in the absence of direct evidence of the seller s intentions, and even, if necessary, in the face of his own evidence. * The Judgment was concluded by observing this at pages 600-601 : 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 realization of a capital investment or conversion of one form of asset into another Obviously, the surplus in such a case will not be trading or business profit because the transaction is one of realization of asset in investment rather than one in the course of trade carried on by th .....

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ent case are considered in the background of the propositions, stated supra, it is submitted that the profit on the sale of land has appropriately been shown under the head capital gain. The assessee had purchased land in his own name which is evidenced from the purchase deeds executed at the time of purchase of land. There is no material to show, or an entry in any books, that land was acquired as stock-in-trade. It was a solitary transaction entered into with the intention of earning profit on accretion. No doubt expenditure was incurred on the improvement of the land but that was only with a view to ensuring that a better price is realized. That the assessee is not a dealer in land, has not been questioned. This was only a single transaction of its kind. Even otherwise the assessee is not carrying on any business as is evident from the return of income. The three principles laid down in para 8 of Circular 4/2007 go in favour of the assessee to determine the nature of transaction. There is no evidence to show that the land was purchased as stock-in-trade, therefore, the condition in Clause (i) of para 8 applies. That it was a solitary transaction shows that the condition in Claus .....

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h as opening of an office, large scale advertising or any evidence of dealing. (v) The circumstances do show that the assessee wanted to realize the proceeds to invest in another land, i.e. a residential plot in the Palm Springs in Gurgaon and to seek benefit u/s. 54F. (vi) As far as the motive is concerned the facts on record clearly show that the motive right from the time of acquisition of the lot was to realize profit on accretion and not to plunge in the waters of trade. 8. We now deal with the objections of the Assessing Officer: (i) In para 5.1 it is alleged that the land sold was owned jointly and collectively by PCL, Mr. Mohinder Puri, Mr. Arjun Puri and other related concerns. The aforesaid observations are wrong and incorrect on facts, ft is clearly mentioned in para 1(d) of the agreement dated 4th April, 2005, that each of the land owners is individually the owner of the land and the extent of area owned by each of the land owners was mentioned therein. Therefore, the very premise of the AO that the lands were owned jointly and collectively is incorrect. The fact of the matter is that lands were owned individually by the land owners and this fact is also evident from th .....

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bservations of the Assessing Officer in para 5.3 are stoutly challenged. It is not correct on the part of the AO to state that the land was purchased in joint collaboration with PCL. As stated earlier the land was purchased by the assessee in his own name as a transaction entered into by him for his own benefit. The observation of the AO that since PCL has shown the land as stock-in-trade, the holding of land by the assessee should ipso facto become a stock-in-trade in the hands of the assessee, is without any merit. The assessee was full owner of the land purchased by a separate deed of registration and he held the same as investment till it was sold. The Assessing Officer has been influenced by the fact that there being a single sale deed for the lands having been executed with PDL, it was a case of joint collaboration between assessee and PCL. This proposition does not emerge from the agreement. Each landowner being a separate and distinct owner it does not make the sale as having been made in joint collaboration. The Assessing Officer has failed to appreciate that the assessee owned only a small portion of the land i.e. 1,31 acres at Village Wazirabad, Sector 53, Gurgaon. This .....

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the judgment in G. Venkataswami Naidu s case, rather supports the assessee. (viii) The observations in para 5.9 do not make any inroads into the claim of the assessee of the transaction resulting in capital gain. It is wrong on the part of the AO to say that the cost of ₹ 77,04,873/- incurred also included cost for making roads and laying sewers. It is wrong to say that the expenditure was large. Looking to the sale price of ₹ 8.37 crores, the expenditure was only 9%, Reference is invited to the case of Kasturi Estates Pvt. Ltd. (supra) where even the expenditure incurred for laying roads, corporation survey, centage, filling up, parceling into plots and other matter was not held on activity of business but expenditure for realizing better sale price of the capital asset. (ix) The observations in para 5.9 are incomprehensible and in any case do not advance the case of the A.O. (x) The observations in para 5.10 are academic and subjective and not based on any material in support. (xi) The observations in para 5.11 are again subjective remarks. The fact that the land was purchased by a single purchaser and who was a builder ipso facto does not make the transaction as an .....

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ade …… This inference is as the basis of the total effect of the distinctive character of all relevant factors and circumstances. These are only vague remarks not backed by any basis or material. The AO then vaguely refers to the various decisions cited in Naidu s case (without pointing them out). Incidentally all these are English cases decided on their own facts. 7. In para 5.7 the AO has stated thus 5.7 PDL (the buyer), like PCL, is also a company engaged in the business of real estate and construction as promoters, developers and builders. The purpose for acquiring the impugned land from PCL et al by PDL was for construction of a real estate project subsequently called Exotica Project of PDL. In the precedent cases, where land purchased and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset in Cavzer, Irvine and Co. Ltd. v. Commissioners of Inland Revenue as cited in the case of G.V. Naidu (supra). 7.1 There is no quarrel on the fact that both PDL and PCL were engaged in the business of real estate. The profit .....

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t. Large expenditure incurred on the development of land consisting mainly in the construction of roads and sewers was held to justify the inference that the transaction was an adventure in the nature of trade. In the case of the assessee we have already submitted in past that the land was purchased with the intention of holding it as investment. It was actually held for more than 10 years. The expenditure incurred was only 9% of the cost. Reference was made to the judgment in case of Kasturi Estates Pvt. Ltd. 62 ITR 578 (Mad) where the judgment of Naidu s case was considered. The incurring of these expenditure did not turn the holding of land for a period of 10 years from investment to stock-in-trade. 8. Without burdening our submissions we conclude by pointing out the fact that Naidu s case was decidedly entirely on its own facts, which facts were so transparent and self evident that no other conclusion could be drawn. All the facts pointed out vividly that it was a case of adventure in the nature of trade. Instead of paraphrasing we consider it appropriate to refer to two pages from the judgment which may be allowed to speak for themselves. The first passage gives the facts and .....

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e appellant that the Janardana Mills decided to purchase the lots because an award passed by an industrial tribunal in June, 1947, had recommended that the mills should provide tenements for its labourers. Thus the appellant s case was that it had not purchased the properties with a view to sell them to the mills and the mills in fact would not have purchased them but for the recommendation made by the award which made it necessary for the mills to purchase the adjoining plots for the purpose of building tenements for its employees. The Tribunal was not impressed even by this plea; and so it ultimately held that the plots had been purchased by the appellant wholly and solely with the idea of selling them at profit to the mills. The Tribunal thought that since the appellant was the managing agent of the mills it was in a position to influence the decision of the mills to purchase the properties from it and that was the sole basis for its initial purchase of the plots. On these findings the Tribunal reached the conclusion that the sum of ₹ 43,887 was not a capital accretion but was a gain made in the adventure in the nature of business in carrying out the scheme of profit-makin .....

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ken no steps in that behalf for the whole of the period during which the plots remained in its possession. Besides, it would not be easy to assume in the case of a firm, like the appellant that the acquisition of the open plots could involve any pride of possession to the purchaser. It is really not one transaction of purchase and resale It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holding that at a convenient time it sold the lands to the Janardana Mills in two lots. When the Tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment it would have tried either to cultivate the land, or to build on it; but the appellant did neither and just allowed the property to remain unutilized except for the net rent of ₹ 80 per annum which it received from the house on one of the plots The reason given by the appellant for the purchase of the properties by the mills has been rejected by the .....

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vidual capacity was ever involved in any activity of purchase/development of land and sale thereof Being a director of the company the assessee spent whole time for the business of the company for which he received salary. The said purchase of land is a solitary purchase and there is nothing to show that there was ever an intention to engage in individual business of purchase/development of land. The first step of purchase was one which lacked the element of trading. It was not a case where the assessee can be said to have plunged into the water of trade. It will be wholly inappropriate to presume that assessee being the director of a company dealing in real estate would necessarily be taken to be engaged in business when he purchased some land. There being no material to show that the first step of purchase of land showed that it was taken as, or in the course of a trading transaction the profit cannot be taken as business income. 4.5 The assessee also relied upon the following decisions: (i) CIT v. Sohan Khan & Mohan Khan [2008] 304 ITR 194 (Raj,). In this case the assessee purchased a large extent of land. The land was under the cloud of sealing laws and after it got clear t .....

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e of trade. Even, mere carving out the plots and selling them to different persons could not be assumed to be an adventure in the nature of trade, unless some more activities in the nature of business were carried out. 4.6 It was further submitted that the observations of the A.O. that assessee entered into a Joint Venture with PCL and other is wrong and incorrect and has no basis. A Joint Venture pre-supposes two or more persons undertaking to combine their property or labour in conduct of a particular line of trade or a general business for joint profit. It was explained that no evidence has been led by the A.O. to show that assessee join hands with other parties to sold the subject land and there was a combination between such persons to carry-out business for joint profits. The very fact that each co-owner separately purchases their lands but only combined for the purpose of sale, does not show any element of carrying out any business for joint profits. The expenditure on acquisition of land, its improvements were separately incurred by respective owners and sale proceeds were also separately received by respective co-owners, therefore, it is a case of capital gains only and as .....

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t near the mills, and the whole basis for the plan was to sell the said lands to the mills, at a profit, and then the subsequent conduct of the purchaser was considered, and after appreciating the totality of attending circumstances. it was found to be a series of transactions, undertaken by the appellant therein, in pursuance of the scheme, and it was after the appellant had consolidated its holding, that at a convenient time the land was sold. The appellant was found to be managing agent of the mill, who was in a position to influence the mill to purchase its properties, which cannot be said to be unreasonable. Thus, in view of the principles propounded therein, and on the facts of that case as considered, it is clear, that in order to arrive at a conclusion, as to whether it is to be taxed as capital gain or the transaction is to be treated to be an adventure in the nature of trade , things cannot be put in any strait jacket formula, and it was dependent upon the facts and circumstances of each case, to be decided on the basis of relevant consideration. (ii) One of the reasons given by the Assessing Officer is that the appellant entered into a joint venture with M/s. PCL and oth .....

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and being in the nature of a trading transaction do not exist. Appellant s land, though separate was contiguous to the larger portion of the land owned by PCL. in order to obtain a better price it was decided to enter into a single sale deed, because the purchaser was the same. This intention of earning a better price cannot be equated to carrying on the business. It is a matter of record that the appellant has never been a dealer in land and the present transaction was a solitary transaction of the sale after about 10 years of acquisition, In CIT v. Sohan Khan & Mohan Khan (supra) original land was surrounded by many lands of near relatives and family members of the assessee. If the plots would have been carved out from assessee s land alone they could not have been sold for want of network of roads available upto the adjoining lands only and that at some distance there was Government road measuring 200 feet. The land owners had planned the sale of plots together. The purchasers were impressed by the fact that all the land belonged to the same family and was being planned and sold together. All these facts were duly considered by the Hon ble Court and it was held that they did .....

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ITR 67 SC, the judgment of Naidu s case (supra) was referred to. It was held that the real question is not whether the transaction lacks the element of trading but to see whether the first step of the transaction was not taken as, or in the course of, a trading transaction. Applying this principle there is nothing to show that the first step of purchase of land was taken in the course of a trading transaction. The land was kept well over 10 years, there is nothing on record to show that in his individual capacity the appellant was ever involved in any activity of purchase/development of land and sale thereof. What was realized on the sale of land was accretion to the capital. It is not a case where the appellant can be set to have plunged into the waters of trade. (v) The following facts also go to show that it was a case of sale of capital assets, giving rise to capital gains. * There is nothing on record to show that there was a motive right from the time of acquisition of land to plunge in the waters of trade. * It was a case of a solitary transaction of acquisition and sale of land. * The length and period of ownership from 1995-97 to 2005 is a strong pointer to the fact that .....

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was partly held by PCL. However, the assessee has held the land singly and also conducted the single transaction only. The property in question was held for 8 to 10 years. The assessee is not in business of trading of land. The land was shown as investment. He has relied upon the findings of the Ld. CIT (A) at page-26 of the order. Learned Counsel for the Assessee submitted that the land in question was held by 06 persons, out of which, 03 are company and 03 are individuals. The individuals are the assessees, Shri Mohinder Puri and Shri Arjun Puri and Ms. Gurleen Manchanda. In the case of co-owner of the land Ms. Gurleen Manchanda, the A.O. passed the assessment order under section 143(3) dated 12.12.2008 for A.Y. 2006-2007 under reference, in which, the co-owner has declared the long term capital gains on account of sale of the same land and claimed exemption under section 54F of the I.T. Act. The A.O. after due enquiry, accepted the claim of assessee of capital gains and also allowed exemption under section 54F of the I.T. Act. He has submitted that the companies are in the trade of land. However, the assessee is an individual and assessed in the capacity as individual. PB-5 to 9 .....

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red into the solitary transaction of purchase of land which could not be treated as subject matter of trading. The land was not acquired for the purpose of dealing in land. The length of period of ownership was from 1995-97 to 2005 which speaks that assessee purchased the property to make investment in capital asset. Thus, the intention of the assessee at the time of purchase of property was to make investment in capital asset as an investor. The assessee kept the same as an investment and has never taken into stock-in-trade. No borrowed funds have been used or interest paid on any amount for the purpose of investment in the land. There is no frequency of transaction carried out by the assessee. The assessee made re-investment in land for claiming exemption under section 54F of the I.T. Act. The assessee made investment in capital asset expecting appreciation-in-value in future. The assessee in his individual capacity was not involved in any trade or business to deal in lands in earlier years. The assessee has income from salary and income from other sources, which have been declared in the returns of income for preceding assessment years, which have been accepted by the Department .....

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r and claim of exemption under section 54F of the I.T. Act, have been allowed. Since in the case of one of the co-owner of the land in question, Revenue has accepted the claim of capital gains and exemption under section 54F of the I.T. Act, the case of the assessee cannot be taken differently who is also an individual and claimed the investment in property as an investor. Therefore, case of the assessee cannot be compared with other companies i.e. PCL and others who were holding the properties as stock-in-trade. The decisions relied upon by the Ld. D.R. in the case of G. Venkataswami Naidu & Co. (supra), do not support the case of the Revenue. Considering the totality of the facts and circumstances of the case in the light of the above discussion and in the light of finding of fact arrived by the Ld. CIT (A), we do not find any infirmity in the order of the Ld. CIT (A) in holding that sale of land was sale of capital asset and the profit was in the nature of capital gain. The claim of assessee for exemption under section 54F is, therefore, been rightly allowed in favour of the assessee. Both these grounds of appeals of Revenue are dismissed. 10. On Ground No.3, the Revenue cha .....

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