ORDER
Shri S. N. Rotho, Accountant Member
1. This appeal has been filed by the department against the order dated 25-3-1980 of the Commissioner (Appeals). The assessee is a private limited company deriving income from business as selling agents for a group of textile mills. The assessment year involved in this appeal is 1973-74 with the year ended 31-12-1972 as its previous year.
2. The first ground in this appeal relates to the question as to whether the surplus realised by the assessee on the sale of a plot of land was to be taxed as capital gains or as business profit. By a resolution dated 14-3-1960, the assessee purchased a plot of land at Borivali, admeasuring 45,533 sq. yards, for a sum of Rs. 1,21,009. The case of the assessee was that the land was purchased for constructing residential quarters for its staff. The purpose for which the land was purchased was not mentioned in the resolution dated 14-3-1960. But the assessee applied to the Municipal Corporation, Bombay, for persmission nto construct res idential quarters on the aforesaid land in accordance with the plans made out by it. This correspondence for permission to construct quarters with the Muncipal Corportion began on 13-6-1962. In its letter dated 22-3-1965 addressed to the Municipal Corporation, the assessee stated that it desired to immediately construct the building for their office staff. The Municipal Corporation raised certain objection and the matter went on lingering until the permission to construct was finally given by the Corporation on 20-4-1971. In the mean-time, the assessee had developed the plot in accordance with the requirements of the rules of the Municipal Corporation, namely, laying out roads sub-roads and earmarking plots for playgrounds, shopping centre, etc., and dividing the balance into 22 plots of convenient sizes. In calendar year 1972, the assessee sold four plots and in the subsequent year 1973, two more plots were sold. Then, the Maharashtra Government issued a Notification on 28-6-1973 proposing to acquire the plot of land, and so the sale of the remaining 15 plots could not be completed.
3. Regarding the sale of the four plots during the previous year under consideration, the assessee computed a capital gain of Rs. 3,49,018 and disclosed the same as such in statement enclosed with the return of income. In its letter dated 26-2-1975 addressed to the ITO the assessee reiterated that the surplus from the sale of the land arose on the capital account and claimed certain expenses to be deducted therefrom. In another letter dated 25-3-1076 addressed to the ITO, the assessee stated that it was not engaged in the business of purchasing and selling land even though its memorandum of association authorised such activities. It was pointed out that the assessee was to act as selling agents for the group of mills right from its inception on 18-9-1946. It was staeted in yhat lrttre that the assrssee did not deal in land in the past and so it was not correct to hold that the assessee was a dealer in land. IN this letter, it is further stated that the assessee acquired the plot of land for constructing residential quarters from some of its own staff members and also for some of the staff members of the group of mills. The assessee’s application for permission to construct the quarters was not granted by the Municipal Corporation because of the Development plan Rules which were brought into force in 1964-65 and it took a long time to comply with the said rules and obtain the sanction. During the interval, the financial position of the company deteriorated because other selling agents came into the field. Hence, the assessee gave up the idea of constructing the quarters for the staff and decided to sell the land for strengthening the financial position of the business carried only it. Accordingly, four plots were sold in 1972. The assessee further contended that the surplus arising on the sale of the four plots in 1972 could not even be assessed to capital gains because there are other plots which could not be sold at a profit or could not be sold at all because of the acquisition notice of the Maharashtra Government and the Land Ceiling Law which came into force in the meantime. However, the letter continued, the plan for sanctioning the construction had to be pursued as without such permission there would be no buyer.
4. In another letter dated 26-9-1975 addressed to the ITO, the assessee stated that the surplus arising out of the sale of the four plots could not be taxed as business profit during the year under consideration because there are other plots remaining unsold. The contention was that no profit or loss could arise until the entire plot was sold.
5. The ITO held that the assessee was a dealer in land and the aforesaid land at Borivali was acquired as stock-in-trade and consequently the surplus which arose on the sale of the four plots of land during the previous year under consideration was assessable as business profit. He did not agree with the assessee’s contention that the surplus arose on capital account and also the contention that no profit or loss arises until the entire plot was sold. In this view of the matter, he taxed the sum of Rs. 3,82,964 as the assessee’s income from business in purchase and sale of land.
6. The assessee appealed to the Commissioner (Appeals) and contested the action of the ITO on both the counts. The Commissioner (Appeals) found that though the Memorandum of Association of the assessee-com-pany authorised dealings in land, year that fact alone was not conclusive to show that the land under consideration was held as stock-in-trade. He relied on the decision in the case of Ukhara Estate Zamindaries (P.) Ltd. v. CIT [1979] 120 ITR 549 (SC) for this proposition. Then he referred to the decision of the Madras High Court in the case of CIT v. Kastri Estates (P.) Ltd. [1966] 62 ITR 578 and found that the fact of that case were identical with the facts of the instant case. Relying on the aforesaid authority, he held that the surplus under consideration should be treated as capital gains and not business profits.
7. Shri B. Krishnan, the learned representative for the department, urged before us that the Commissioner (Appeals) erred in his decision. He stated that the totality of the circumstances should be taken into account for deciding as to whether the land under consideration was held as investment or as stock-in-trade. He pointed out that the Memorandum of Association of the assessee-company authorised dealings in land. The assessee purchased the land, developed the same and divided it into plots. They were sold piecemeal and not in one lot. He pointed to the letter dated 26-9-1975 of the assessee addressed to the ITO and urged that the assessee has admitted the transaction to be on the revenue account. Regarding the decision in the case of Kasturi Estates (P.) Ltd. (supra), he stated that the fact of the instant case were different inasmuch as the assessee had to sell the land only because its original intention to construct staff quarters thereon was frustrated by the Government Notifications. Under the circumstance, he urged that the assessee had actually carried on business in land and the Commissioner (Appeals) erred in holding that the land under consideration was held as investment giving rise to capital gains on its sale.
8. Shri Ajay Thakkar, the learned representative for the assessee, on the other hand, supported the order of the Commissioner (Appeals). He plot of land in 1960 was to construct staff quarter thereon and not to treat as stock-in-trade. ACtivities towards construction of the quarters, like preparing the plans by architects began soon after the purchase of the land and the application to the Municipal Corporation. was made as early as in 1962. The matter eas delayed because of the new rules and regulations enforced by the Munucipal Coroporation. When the sanction was finally obtained in 1971, the financial position of the assessee-company had deteriorated nd it had to abandon the idea of constructing the staff quarters because of lack of funds. He pointed out that in the years 1962-63 to 1966-67, the assessee was earning substantial profits but there-after it suffered losses. However, the assessee had to complete the formalities of obtaining permission for construction without which there would be no buyer for the plots. Regarding the letter dated 26-9-1975, he vehemently contended that the assessee did not admit the transaction to be on revenue account. According to him, that letter was written as an alternative to the main contention stated in the return and the earlier letters, namely, that the surplus arose on capital account. Relying on the decision in the case of Khan Bahadur Ahmed Allain and Sons v. CIT [1968] 68 ITR 573 (SC), he urged that the totality of the circumstances in the came points to the fact that the land was all along held as investment and never treated as the stock-in-trade.
9. We have considered the contentions of both the parties as well as the facts on record. As has been held in the cases referred to in the earlier paragraph, the totality of the circumstances has to be taken into account in order to decide whether the assessee realised a capital asset or carried on an adventure in the nature of trade when it sold the four plots during the year under consideration. Taking the entire fact and circumstance from 1960 to 1972, as narrated above, into consideration, we are left with the impression that the land under consideration, we are left with the impression that the land under consideration was acquired not state the purpose for which the land was purchased. But the conduct of the assessee in applying to the Municipal Corporation in 1962 for permission to build staff quarters and the express declaration to that effect in its letter dated 22-3-1965 leave no doubt that the assessee intended to build quarters for the staff. This is also corroborated by the entires in the books of accounts as reflected in the balance sheet in which the land has been treated as a capital asset. The mere fact that the memorandum of association authorises the assessee to deal in land does not lead to the conclusion that the land purchased in 1960 was purchased for being sold at a profit. It is a fact that the sanction from the Municipal Corporation came after protracted correspondence in 1971 and in the meantime the financial position of the assessee deteriorated and the cost of construction also went up considerably. Under the circumstance, we do not see anything improbable in the explanation of the assessee that it decided to abandon the project of constructing the staff quarters, though it had to pursue the permission for construction to be obtained from the Municipal Corporation, without which the property could not be sold. A person may improve even a capital asset before selling it in order to realise a higher amount and that fact alone does not lead to the conclusion that the asset sold was stock-in-trade of the business. There is nothing unreasonable in a person having motor car as capital asset, repairing it or renovating it with a view to obtain a better price on sale. Merely because the person spent some money in improving the value of the asset, it will not mean that the asset was its stock-in-trade. Taking the totality of the circumstances into consideration, we agree with the Commissioner (Appeals) that the revenue has not been able to show that the surplus under consideration arose on the revenue account.
10. We find the Commissioner (Appeals) has rightly relied on the decision in the case of Kasturi Estates (P.) Ltd. (supra). It has been held in that case that developing land into building sites with a vies to realise the best price, without anything more, is consistent with the realisation of a capital investment. In that case, the assessee developed the land, laid roads, converted the land into house sites and eventually sold the plots one by one. The Court held that the aforesaid facts by themselves do not show that the surplus was trading profit. It has been held in the case of Ukhara Estate Zamindaries Ltd. (supra) that neither the existence of the power in the Memorandum to trade in land not the existence of the power in the Memorandum to trade in land nor the declaration of dividend is decisive of the question whether the assessee traded in land; what is of importance is the manner in which the assessee dealt with the assets and the real nature of the operation pertaining to them and the objects with which the operations were done. Considering all the fact and circumstance of the case before us, we hold that the Commissioner (Appeals) was quite correct in his decision and so, we uphold the same.
11 to 13. [These paras have not been printed here as they deal with a minor ground having no bearing on the main issue covered in the synopsis.]
14. In the result, the appeal is dismissed.
Shri P. S. Dhillon
1. I fully agree with the conclusion and reasons of my learned brother Shri Rotho on the issue of deletion of a sum of Rs. 59,609 but on the issue of sale of land referred above, I merely agree with his conclusion.