ORDER
Per Shri N. Krishnamurthy, Judicial Member – The appeal the Revenue and the cross objection by the assessee are directed against the order dated 31-7- 86 of the Commissioner of Income-tax (Appeals) Madras relating to the assessment year 1983-84. Since both these matters involved related questions they are considered together and disposed of by this common order.
2. The assessee is a company in which the public are not substantially interested and it carries on the business of manufacturing and selling perfumes. It owned property consisting of the factory building and a huge chunk of land attached thereto. During the year under consideration the assessee got the lay out of this land approved cut the trees, filled the low lying areas fixed the boundary stones provided the drainage facilities and sold this land as house sites. Treating the profit arising on the sale of this land as a long term capital gain the assessee in its return for the assessment year 1983-84 has claimed that the transaction in question does not involve any adventure in the nature of trade and the surplus money arising out of the sale of plots should be brought to tax only as capital gains. However the Income-tax Officer being of the opinion that the aforementioned activities carried on by the assessee would show that the sale of the land effect by the assessee was an adventure in the nature of trade had consequently subjected the income arising therefrom to tax treating the same as business income.
3. Aggrieved by this the assessee preferred appeal to the Commissioner of Income-tax (Appeals) Before the Commissioner (Appeals) it was contended on behalf of the assessee that the assessee with a view to get a better price for the lands has developed the same, prepared the lay out provided drainage facilities obtained sanction from the local authority and sold the same as house sites and there was no intention on its part to venture in any trading activity. In this view of the matter it is submitted that the transaction of the assessee did not amount to an adventure in the nature of trade and consequently the Income-tax Officer is not justified in subjecting the surplus amount to tax under the head Business income. The Commissioner (Appeals) accepted the contention of the assessee and reached the conclusion that in the absence of a regular business in lands and house sites it cannot be said that the assessee derived this income from business. He, therefore, directed the Income-tax Officer to accept the assessees claim and to treat the profit as the assessees long term capital gains.
4. The present appeal before us is against the aforementioned order of the Commissioner (Appeals). The learned Departmental Representative submitted that the Commissioner (Appeals) should have held that the profits on sale of land should be assessed under the head Business only considering the assessees intention in developing the sites and selling the same by incurring heavy expenditure after obtaining sanction of the authorities concerned. It is also submitted that the profits on sale of these lands should be assessed under the head business and not under the head capital gains. In support of this reliance was placed on the decision of the Supreme Court in the case of G. Venkataswamy Naidu & Co. v. CIT [1959] 35 ITR 594 and the decision of the Karnataka High Court in the case of CIT v. R Ramaiah [1984] 146 ITR 39/17 Taxman 164 and the decision of the Madhya Pradesh High Court in the case of Badrilal Bholaram v. CIT [1982] 135 ITR 216. Against this the learned counsel for the assessee submitted that the assessee invested money in the factor and the land abutting thereto enjoyed its income for some time and then sold it away as house sites. For this purpose the assessee it made boundaries obtained sanction for house sites and then sold them. This by itself would not establish that in such cases the person concerned would be indulging in a trading activity. It was further contended that there was no intention to trade which must present at the time of purchase of this property to impress a venture with the character of trade and that the onus case on the Revenue in this regard has not been duly discharged. On the other hand other hand it was submitted that the transaction in question cannot be a transaction anything more than a realisation of capital investment or conversion of one form of asset into another. It was therefore contended that obviously the surplus in such a case will not be a trading or business profit and the Commissioner (Appeals) has rightly held it so and as such his order does not call for any interference. In support of this reliance was placed on the decision of the Madras High Court in the case of CIT v. A. Mohammed Mohideen [1989] 176 ITR 393.
5. We have considered the rival submissions. It is not in dispute that the factory building along with the land abutting thereto was purchased by the assessee. After enjoying the property for sometime the assessee has converted the land attached to the factory building into house sites after filling the low lying areas, providing drainage facilities and after obtaining sanction for construction of flats thereon. For this purpose the assessee has incurred an amount of Rs. 90,000. In this context the question that arises for consideration is whether the profit realised from the transaction can be said to be income arising out of an adventure in the nature of trade or it is only a transaction involving the realisation of capital investment or conversion of one form of asset into another.
6. The expression business has been defined in section 2(13) of the Income-tax Act to includ any trade, commerce or manufacture or any adventure in the nature of trade. The Supreme Court in the case of G. Venkateswamy Naidu & Co. (supra) while considering the meaning of the expression adventure in the nature of trade occurring in section 2(13) of the Act has observed as under :
“Generally speaking it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the borderline that cause difficulty. If a person invests money in land intending to hold it enjoys its income for some time and then sells it as profit it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade.”
Again, the Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 has observed that as transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. However the magnitude of the transaction of purchase the nature of the commodity the subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture. The Supreme Court in Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 has inter also laid down that even a single venture may be regarded as in the nature of trade or business.
7. In the case of CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad.) after applying the ratio of the aforementioned decisions of the Supreme Court the Madras High Court has inter alia observed as under :
“Developing land into building sites with a view to realise the best price without anything more is consistent with realisation 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 the realisation of a capital investment or conversion of one form of asset into another.”
The same position has been reiterated by the Madras High Court in its recent decision rendered in the case of A. Mohammed Mohideen (supra).
8. As earlier stated the assessee has purchased this land along with a factory building thereon. After enjoying the property for sometime it took necessary steps to convert this land into house sites and thereafter finally sold it away. This by itself cannot be taken to mean that the transaction in question is an adventure in the nature of trade. At any rate it was not established by the revenue that the purchase and sale of the property by the assessee was with a view to earn profits through trading transaction. On the other hand this course of action namely improving the land laying boundary lines and making plots and subsequently selling the same was adopted by the assessee only with a view to realise the best price from the sale of the property. This being so following the ratio of the decision of the Madras High Court referred to above which is the juridictional High Court we have no hesitation in reaching the conclusion that the transaction of the sale of land effected by the assessee in this case is not an adventure in the nature of trade and consequently the income arising from such a sale cannot be treated as a business income. The same view has been taken by the Commissioner (Appeals) and we do not see any reason to interfere with his finding on this point. In this view of the matter the appeal of the department fails and the same is dismissed :
9. In the Cross Objection arising out of the same order of the Commissioner (Appeals) dated 31-7-86 the ground of appeal raised is that the Commissioner (Appeals) ought to have considered the assessees alternative contention, namely that the cost of the asset should be taken on the date of conversion of asset into the stock-in-trade. We have taken the view in the appeal by the department in ITA No. 2451 (Mad.) /86 that the transaction of sale of land effected by the assessee is not an adventure in the nature of trade but the sale was effected only to realise the best price from the sale of immovable property the income arising from such a transaction is to be treated as an accretion of capital and consequently the same should be subjected to capital gains tax. In view of this finding of ours in the departmental appeal mentioned above it would not be necessary to consider the alternate contention raised by the assessee in the Cross Objection. Accordingly the Cross Objection is dismissed.
10. In the result both the appeal of the Revenue and the Cross Objection of the assessee are dismissed.