TMI Blog2002 (12) TMI 197X X X X Extracts X X X X X X X X Extracts X X X X ..... to have held that as the lands sold being beyond the notified area, the surplus of sale would not be liable to tax under the head 'income from capital gains', and without prejudice, even assuming that the appellant was liable to be assessed under the head 'business', the cost of land should have been considered at the market value on the rate of conversion by division of land into small pieces and relevant expenditure incurred for improvement should have been allowed as deduction. 2. The appellant/assessee is a Karta of Hindu Undivided Family engaged in agricultural activities as well as share trading activities, filed its return of income on 2-11-1998 for the assessment year under consideration admitting a net loss of Rs. 11,21,244 from business and a loss of Rs. 7,83,457 from agriculture. The matter was processed under section 143(1)(a) on 6-10-1999 and later on taken up for scrutiny. During the course of hearing before Assessing Officer the assessee filed a revised working of income according to which the net loss was worked out at Rs. 6,97,444. As per the assessment order, it was found by the Assessing Officer that the assessee had claimed a business loss of Rs. 11,21,243 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no taxable income from the partnership firm." The assessee vide its letter dated 13-12-2000 further clarified as follows:- "So far as loans to others are concerned, there are several other creditors to whom the assessee has not been paying any interest. Therefore, it is difficult to specifically identify the interest bearing loan and non-interest bearing loan. The interest paid of Rs. 61,867 as already mentioned in our letter, is after deducting Rs. 70,000 interest received from Estate Club. The interest is not received from Estate Club and Resorts. Estate Club and Resorts is a separate Partnership Firm, whereas the assessee is one of the Partner. The payment of interest is in respect of certain loans, which has also been lent to Estate Club and therefore, netting off the interest is in order." 3. As per the assessment order, the assessee had claimed expenses towards sale of developed plantation land at Rs. 1,48,360 in the Capital Account furnished along with the balance sheet. Clarification was sought from the assessee and was found that the expenditure were claimed in respect of land at Hosur Road. According to copies of the deeds filed, the assessee had been purchasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of agriculture only. Even now on the balance of land the agricultural operation is being carried out. Since the assessee has been incurring loss in agricultural operation and has incurred huge liability, to clear such liability some portion of the land was made into plantation plots and sold." 4. The assessee further claimed that the capital gains arising out of the agricultural land are to be considered as capital gains and not as profit arising out of business operation and further told that since the land is situated beyond 10 kms. from the local limits, the capital gains arising out of this land is exempt from income tax. The reply of the assessee could not find favour with the Assessing Officer. The Assessing Officer opined that though the land is called plantation land, the same is sold after developing them to be fit enough for use for non-agricultural purposes, and hold that the sale of land is treated as adventure in the nature of trade and assessed accordingly. The assessee carried the same unsuccessfully before the first appellate authority. Now the assessee is in further appeal before the Tribunal. 5. At the time of hearing we have heard Shri S. Parthasarathi, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1998-99 4,96,257.40 10. 1999-00 1,88,843.00 11. 2000-01 2,56,015.50 --------------- Total 1,06,33,870.40 --------------- The learned counsel further argued that the assessee's basic operation is agriculture and the land was covered into profitable agricultural use and there is no purchase on regular basis and sold the land as per their requirement. The learned counsel further argued that the land was sold in hard pressed circumstances to come out of the financial crisis and plantation was made so that more amount can be fetched. Mr. Parthasarathi further told that from 1978 to 79 about 40 acres of land was purchased and later on about 7 acres. Out of total land holding, the assessee sold about 35 acres and the remaining about 14 acres is still with the assessee. The learned counsel also drawn our attention to the decision of the Apex Court in CIT v. H. Holck Larsen [1986] 160 ITR 671 and also the decision of the Tribunal in ITA No. 290/Bang./98 dated 30th January, 2002. Mr. Parthasarathi further told that the revenue has accepted the same as capital gains for earlier years. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter stage. 8. We have considered the rival submissions. This is a fact that the assessee is an agriculturist for the last many decades and purchased about 41 acres of land between 1978 to 1979 and only purchased about 7 acres of land later on. The assessee sold about 35 acres of land and remaining about 14 acres is still with the assessee. For fair conclusion, the income and expenditure statement is extracted, as under, from the agriculture income and loss for the year ending 31st March, 1982 to 1990 showing a loss of Rs. 3,487,397.82 p.:- --------------------------------------------------------- Amount -------------------------------------- Sl.No. Year Profit Loss 1. 1981-82 Rs. 0.00 Rs. 189,058.57 2. 1982-83 Rs. 396,718.52 3. 1983-84 Rs. 481,200.00 4. 1984-85 Rs. 513,161.00 5. 1985-86 Rs. 127,515.00 6. 1986-87 Rs. 457,011.00 7. 1987-88 Rs. 629,084.00 8. 1988-89 Rs. 499,490.00 9. 1989-90 Rs. 194, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of Fragmentation and consolidation of holding (Repeal) Act of 1990 as the land was purchased from the year 1977 onwards. How can an agriculturist presume that after so many years the fragmentation and consolidation Act will come into effect? At the same time we agree with the contention of Mr. Amitabh Kumar that the intention was to earn maximum profit. This is the intention of every person who undertakes any activity whatsoever. This fact is not disputed that different kinds of plants/trees were available on the land such as coffee, papaya, coconut etc. At the same time, the land under consideration is on green belt and cannot be converted into non-agricultural purposes. This is also a fact that the assessee never applied for conversion of land for non-agricultural purposes. If the assessee would have applied for conversion of land use certainly the intention of the assessee would have been different. This is also a fact that the assessee wrote a letter to the Dy. Commissioner on 19th October, 2000 stating that the assessee purchased agriculture land in different stages during 1977 to 1992 and the entire land purchased was agricultural land and not a converted land. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sell to Building Society was entered. Therefore, it was held that the profit on sale of this land was not agricultural and was taxable since the land was not agricultural land. In this case the assessee transferred the land to various purchasers as plantation land only and not as agricultural land. The Hon'ble High Court held that as long as there was no evidence to prove that the purchase of land was made with the intention to resell, the purchase and sale cannot be termed as adventure in the nature of trade. Therefore such profits cannot be assessed as income from business. In the present case before us certainly this is a green belt and the assessee never applied for conversion of land use and the same is an accepted position supports the case of the assessee. The Income-tax Appellate Tribunal, Pune Bench in the case of Baramati Taluka Sahakari Doodh Purvatha Sangh Ltd. v. Asstt. CIT [2000] 75 ITD 284 wherein the assessee was engaged in the business of collecting milk from primary members and supplies the same to the Government. They purchased a land for erecting cattle feed factory. The said land could not be used for constructing factory due to certain circumstances and wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter the character of the land as on the date of transfer. The Hon'ble Tribunal held that the capital gains arising on transfer of land is not taxable. The Hon'ble High Court of Delhi in the case of CIT v. Krishan Kumar Kapoor [2001] 251 ITR 150 held that when the revenue records show that the land was agricultural land and transfer is also made as agricultural land, the capital gains should be considered as exempt being capital gains on sale of agricultural land. In the present case before us also, as per revenue record the land has been shown as agricultural land even the assessee never applied for conversion of land use, certificate from the Tahsildar, all supports the case of the assessee. We do not agree with the contention of the learned counsel for the revenue that some of the purchasers has erected building/farmhouse has changed the character of the land. Just because the building has been put up by the purchaser cannot change the character of the land as on the date of sale. As the assessee has incurred huge losses and having huge liabilities in order to acquire the same, plots were made and sold as agricultural land, it cannot be considered as adventure in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is required under the relevant rules and as such no authority is invested with the powers of giving permission for construction of farm house on agriculture land. 10. As per the Karnataka Land Reforms Act, 1961 the purchase of agriculture land by the following persons is prohibited under section 80 of the Karnataka Land Reforms Act:- (1) One who is not an agriculturist (2) One being an agriculturist holds land exceeding ceiling limits (54 acres - 'D' Clause land) (3) One who is not an agricultural labourer (4) One whose annual income from non-agricultural sources exceeds Rs.50,000 (earlier the limit was Rs. 12,000 the same has been increased through KLR (2nd Amendment) 1950 Karnataka Act of 1991 w.e.f. 5-2-1991. New Limit Rs. 2 lakhs. The learned counsel for the assessee has also produced before us a decision dated 10th March, 1978 ordered by the Karanataka Appellate Tribunal, Bangalore regarding Karnataka Land Revenue Act, 1964 as per section 95, Farm Building, that is- "Any building constructed on the land for enabling better cultivation and management of the land ought to be treated as a "Farm Building". As long as the predominant purpose of the building constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the land. The land was left fallow up to 1969 in which year the assessee obtained permission to convert the land for non-agricultural purposes. Immediately thereafter, he formed a layout for house sites and sold the sites to the workers in the nearby factories. The assessee claimed before the ITO that he made the investment in agricultural land with the intention of cultivating it and, therefore, the income realized from the sale of the land should be assessed as capital gains. The ITO rejected the claim of the assessee on the ground that the transaction was an adventure in the nature of trade and, hence, assessed the income as business profits. The AAC upheld the order of the ITO. The Tribunal allowed the appeal of the assessee on the ground that it was a case of realisation of investment in the land. On a reference it was held that the assessee did not purchase the land by himself but purchased the same along with his son as joint owners. Both of them were businessmen and not agriculturists. The land purchased was located in an urban area surrounded by big factories. If the idea of the assessee was to make an investment in the land he would not have allowed it to remain unculti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the profit realized therefrom was assessable as income. In this case the land was purchased on March 15,1968 and immediately the assessee divided the land into plots and sold the same during the previous year ending March 31,1970. But in the present case before us, the land was purchased from 1977 to 1992 for agricultural purposes. But in the case of P. Kannan, the land was purchases to build a theatre or hotel. From the facts before us we agree with the contention of the learned counsel for the assessee that the agriculture land was purchased in the year 1977 and the assessee is an agriculturist for the last about three decades and had to sell the land to clear the debts loans so is distinguishable. 13. The learned counsel for the revenue also relied upon the decision of the Hon'ble Supreme Court of India in the case of Smt. Indramani Bai. In this case the appellants were the wives of two brothers who were partners in a firm. In December, 1963, they purchased a piece of land for a consideration of Rs. 10,620 and shortly after purchase they carved it into four plots and sold them individually. Two agreements were entered into, one in May, 1964 and the other in July, 1964 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee divided a portion of the vacant land into sub-plots and made some improvements therein and sold a total area of 10,830.75 sq. yards by means of six sale deeds. It was held that neither the AAC nor the Appellate Tribunal considered the nature of the transactions with reference to the changed circumstances and subsequent conduct of the assessee. In this case we feel that the assessee purchased two bungalows and a servants' quarters and a vast piece of land in the city of Jaipur, but in the present case before us, the agriculture land was purchased and that was far away from city and was also purchased from 1977 to 1992. The assessee is basically an agriculturist and had to sell the land to clear the liabilities. The land was also situated in green belt, no land conversion was sought, as discussed above, so is quite distinguishable from the facts of this case. 17. The learned counsel for the revenue also relied upon the decision of the Hon'ble High Court of Gujarat in the case of Hemachand Hirachand Shah. In this case the assessee claimed to be an agriculturist had entered into a series of transactions of purchase and sale of lands which were treated by the ITO as busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural operation only. We are convinced that the character of nature of land and its use is very much relevant in determining whether the land is agricultural land or not. As the assessee had been incurring losses in agriculture operation and had incurred huge liabilities and to clear the same, some portion of the land was made into plantation plots and was sold, after such a long time as has been discussed above. We are convinced that such profit/activity cannot be assessed as income from business. We are also convinced by the bold assertion on the part of the learned counsel for the assessee that the land in question may be inspected even today, which was opposed by the learned counsel for the revenue by saying that it will waster the time of the Bench. 19. The Income-tax Appellate Tribunal, Pune Bench in the case of Baramati Taluks Sahakari Doodh Parvatha Sangha Ltd. under a similar circumstance considered the following decisions: (a) Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 (SC), (b) P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC), (c) CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC). (d) Bhogilal H. Patel v. CIT [1969] 74 ITR 692 (Bom.), ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration while deciding this issue though no hard and fast rules can be laid down. However, we would like to see the observation of Hon'ble Supreme Court of India in the case of G. Venkataswami Naidu Co. which are being reproduced as under:- "If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. 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 purchase showing a design or purpose the incidents associated with the purchase and resale, the simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale of land was taxable as profit arising from the adventure in the nature of trade. The mere frequency of sale by itself should not suggest that the activity was an adventure in the nature of trade as held by the Hon'ble Apex Court in the case of N. Holck Larsen. The Hon'ble High Court of Madras in the case of Sri Gajalakshmi Ginning Factory Ltd. v. CIT [1952] 22 ITR 502 has held that if a person buys lands with a view to sell them and thereafter carries on certain operations so as to bring greater profit and facilitate the sale of plots, it can be said, if it is a single transaction, that his activity is an adventure in the nature of trade, for, the essence of a trade, buying and selling for profit, is present in that activity. But if a person buys land with no intention of selling it and after a long interval finds it convenient to sell the land by parcelling it out into different plots and also by laying out roads and providing other amenities with a view to get more price, it cannot be said that the activity which he carried on has any element of trade, commerce or business and it cannot be said, therefore, that it is an activity in the nature of a trade, further-suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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