ORDER
Joginder Singh, Judicial Member
1. This is an appeal by the assessee against the order of the CIT(A) dated 4/3/2002 on the following grounds:–
i) That the CIT(A) ought to have refrained from upholding the assessment on the profit of sale of agricultural land as income from business and ought to have appreciated that the agricultural lands were capital assets and the surplus if any on sale was liable to be held as capital receipt and further should have held that the surplus on sale of land would be subjected to tax only under the head `income from capital gains’.
ii) That the CIT(A) ought to have held that mere division of lands into smaller dimension before sale would not suggest that the transactions were in the nature of trade and ought to have accepted the submission/evidence of the assessee as the proceeds on sale of lands would be capital receipts and subject to tax if any, under the head `income from capital gains’. The learned Commissioner (A ought 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 pirces 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 asst. 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 A.O. 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/- which was revised to Rs. 7,76,444/- as per assessee’s letter dated 7/9/2000 as the assessee has arrived at loss without admitting any income. The assessee claimed that the loss was on account of business in sale of shares as the sum of Rs. 3 lakhs was invested in shares. As per the A.O., the assessee had not clarified the transaction and opined that these expenditures has nothing to do with the assessee’s business in sale of shares and disallowed the same, to which the assessee was asked to explain, which was replied by the assessee. The reply of the assessee is reproduced below:
“For the past several years the assessee has engaged himself in the trade of purchase and sale of shares. However, during the year under consideration, not much of business could be carried out, since the share market was dull and therefore the assessee did not venture in further purchase and sale of the shares. However, during the subsequent years he has made substantial business in the purchase and sale of shares. But the expenses incurred could not be reduced because the employees could not be suspended, all other expenses like printing, stationary, subscription, vehicle maintenance, interest payment, etc. had to be incurred. Since possibilities of revival of the business was still there and therefore the minimum expenses had to be incurred and therefore the assessee has requested that the expenditure claimed be allowed”.
It was further seen by A.O. from the balancesheet that out of the capital contribution made by the assessee and also from the loans from creditors, the assessee has made investment in shares, Estate Club and Resorts, KASS Capital Account, Development expenses and loans to others. The A. O. opined that since there is no income earned from these item, the interest claimed on sundry creditors is not an allowable expenditure, to which the assessee filed objection, which is produced as under:–
“We write to submit that investment in shares and KASS Capital itself is a part of share business. These shares have been purchased to deal in these shares. It is not necessary that every portion of investment should have an earning to claim the expenditure. Further, investments in Estate Club and Resort is an investment in a partnership firm which has already started its business, but since the firm has been incurring the loss, there is no taxable income from the partnership firm”.
The assessee vide its letter dated 13/12/200 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 and 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 state 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 alongwith the balancesheet. 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 purchasing these land from 1977 onwards upto 1992 in different sizes and later on some portion the land was developed and sold in small pieces to various parties after incurring developmental expenses. The assessee claimed that the total development expenses were Rs. 56,39,616/- as on 31/3/1997 and during the current year another sum of Rs. 6,39,880/- was incurred and the total plots made as on the date were 159, out of which about 115 were sold during the year 1996-97 leaving behind about 45 plots. The value of each plots was worked out to Rs. 1,39,554/-. The assessee sold 19 plots cut of the remaining 45 plots during the year under consideration and Rs. 4,48,360/- was debited to capital account as loss. The A.O. opined that the transaction carried on by the assessee indicates that with an intention to earn profit, the assessee converted the land into smaller plots as plantation land and sold them in different years. The A.O. further opined that though the land was purchased as agricultural land and sold b the assessee as plantation land, the transaction clearly indicate that the land was developed with an intention to earn profit and therefore the profit arising on these transactions is liable to tax as business income as it amounts to adventure in the nature of trade. The assessee objected vide its letter dated 13/12/2000. The gist of the letter is reproduced as under:-
“The assessee purchased the land for his regular plantation. AT the time when the land was purchased, It was never the intention of the assessee to make into plots an sell. The coffee plants, coconut trees and other trees like papaya, pepper etc. were grown regularly. The expenditure shown as development expenses is also partly in the nature of drip irrigation, construction of compound, plantation, crops, manuring, levelling of land, filling of the land with black soil, etc. These are all part of the agricultural operation expenses only. It is held by Hon’ble Bombay High Court in the case of CIT v. V. A. Trivedi (172 ITR page 95) which has also been referred by your goodself, in your above cited letter, that the character or the nature of the land is relevant in determining whether land is agricultural land or not”
“In the assessee’s case the intention of the investment in land is only agricultural operation and even the development expenses has been incurred for the purpose 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 he agricultural land are to 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 favor with the A.O. The A.O. 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, learned counsel for the assessee and Shri Amitabh Kumar, learned senior representative for the Revenue, considered the arguments advanced by both the learned representatives and also perused the record available on the file. Both the learned representatives has also filed paper book.
6. The learned counsel for the assessee argued that the assessee is an agriculturist for the last so many decades and purchased land long before the borrowed money for investment. The adjacent land was purchased as the assessee found the same to be profitable and made small pieces to get maximum return and offered the income as capital gains. Mr. Parthasarathi also told that the land was purchased from the year 1977 to 1992. Mr. Parthasarathi further argued that the assessee is basically an agriculturist and though profit motive is there, but that is not the only test for business. Mr. Parthasarathi further drawn our attention to page 44 (SIC) of the paper book as total income of Rs. 22888182.81 p. was shown as income from agriculture from 1991 to 2001, which is reproduced below:-
Sl. No. Year Amount
------- ------- ----------
1. 1990-91 1084411.53
2. 1991-92 3046399.10
3. 1992-93 4380472.45
4. 1993-94 4305035.85
5. 1994-95 2616680.50
6. 1995-96 3134313.00
7. 1996-97 1301408.50
8. 1997-98 99500.00
9. 1998-99 1505610.10
10. 1999-00 446650.00
11. 2000-01 967701.78
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Total = 22888182.81
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Further attention was drawn to page 45 showing expenditure for the said period which is also reproduced below as shown at page 45 of the paper book of the assessee:-
Sl. No. Year Amount
------- ------- ----------
1. 1990-91 1117000.30
2. 1991-92 1298180.28
3. 1992-93 1274726.55
4. 1993-94 1202848.41
5. 1994-95 1925564.61
6. 1995-96 1249936.35
7. 1996-97 741540.44
8. 1997-98 882957.20
9. 1998-99 496257.40
10. 1999-2000 188843.00
11. 2000-2001 256015.50
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Total-10633870.04
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The learned counsel further argued that the assessee’s basic operation is agriculture and the land was converted into profitable agricultural(SIC) 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 160 ITR 67 and also the decision of the Tribunal in ITA No. 290/Bang/98 dt. 30th January, 2002. Mr. Parthasarathy further told that the revenue has accepted the same as capital gains for earlier years. Mr. Parthasarathi further argued that the assessee planted coffee, papaya and other plants such a coconut etc. and the trees are (SIC) available today. Mr. Parthasarathi also told that there was no purchaser of land in 1977 when the assessee was having the major portion of the land the this is a part of green belt area and the assessee had to borrow loan from Vysya Bank and had to repay the same after selling of land. Mr. Parthasarathi further told that when the assessee could not get enough income from agriculture, he made investment in other activities and could only get buyers – after fragmentation Act. At the same time it was also pointed out that the buyers are not debarred from purchasing agricultural land. We were also informed that some of the persons, who has purchased the land constructed farm houses and not houses and due to erosion of capital, the assessee was forced to sell the property. Mr. Parthasarathi further requested to inspect the site/agricultural land even today. Mr. Parthasarathi also told that without proper roads, light, it was not possible to develop farm house. The adjoining land was purchased in 1992 as without the land, the proper landscape/layout was not possible, which is evident from the survey number. It was also told that national award was given to the assessee for growing grapes.
7. On the other hand, Mr. Amitabh Kumar, learned Sr. DR argued that the assessee is also having investment in shares, Estate Club and Resorts, KASS, development expenses and loans etc. and assessee is not an agriculturist as is evident from the activities. Mr. Amitabh Kumar further argued that 7 acres of land was purchased in 1992 just prior to plotting, as plotting was not possible without this adjoining 7 acres. Mr. Amitabh Kumar also argued that significant changes were made before the sale. He also invited our attention to the sizes of the plots and further argued that the activity of the assessee is in the nature of trade and also relied upon the decision, such as, 172 ITR 84, 154 ITR 441, 200 ITR 594, 206 ITR 55 and 120 ITR 343. Mr. Amitabh Kumar also argued that the original intention of the assessee is not relevant if the same is changed at the later stage.
8. As have considered the rival submission. 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 snowing 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. 194,159.73
-----------------------------------
Rs. 0.00 Rs. 3,487,397.82
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The assessee is aggrieved by the treatment of sale of agricultural land as adventure in nature of trade and addition of Rs. 18,63,096/- and further challenged the disallowance of expenditure on maintenance of officer in connection with trading the shares and financing and also disallowance of interest paid. The assessee purchased the land right from the year 1977 onwards upto 1992, some plantation was made and was converted into smaller size of plots and after incurring development expenses, sold the same to different parties. The value of each plot was worked out at Rs. 1,39,544/- and made 159 plots, out of which 115 plots were sold during 1996-97 leaving behind about 45 plots. The assessee also sold 19 plots out of 45. The main argument of the revenue is that the transaction carried on by the assessee indicate an intention to earn profit which is in the nature of trade. The main argument of the learned senior representative for the revenue is that the transaction clearly indicate that the land was plotted/developed and then sold with the intention to earn profit and the profit arising out of this transaction is liable to tax as business income as the same amounts to adventure in the nature of trade, while the main argument of the learned counsel for the assessee is that the assessee is basically an agriculturist and the plantation land was made into smaller pieces so that it is easy to sell the smaller pieces of land/plots in comparison to bigger size of land. Mr. Amitabh Kumar has strongly argued that the assessee purchased the land from 1977/78 to 1992 and sold the same after plotting in successive years and huge borrowed funds were used for purchase as well as development of land and is negative of adventure in the nature of trade, to which the learned counsel for the assessee strongly opposed by arguing that the plotting was done to clear the huge liability incurred on account of purchase of land and development thereof as is borne out from the record and the liability towards loan and sundry creditors are increased to Rs. 50,26,598/- as on 31/3/200. we do not agree with the contention of the learned counsel for the revenue that the assessee was waiting for passing of Karnataka Prevention 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 an the entire land purchased was agricultural land and not a converted land . The assessee also enclosed purchase documents along with the mutation record and also the agriculture tax paid receipt. The assessee also informed the department of having started cultivating coffee, papaya, coconut and pepper in the said land. The assessee also enclosed a certificate/document issued by the Tahsildar of Anekkal as a proof that the entire land is plantation land owned by the assessee. The assessee has also responded to the letter of the Dy. Commissioner of Income-tax. Circle-2(1), Bangalore dt. 23/11/000 vide its letter dated 13/12/2000 wherein it was mentioned that the assessee purchased the land for regular plantation and also stating that “at the time when the land was purchased it was never the intention of the assessee to make into plots and sell. The coffee plants, coconut trees and other trees like pepper etc. were grown regularly. The expenditure shown as development expenses is also partly in the nature of drip irrigation, construction of compound, plantation, crops, manuring, levelling of land —-. These are all part of the agricultural operation expenses only”.
09. The Bangalore Bench of the Tribunal in the case of Hotel Sreeraj v. CIT (ITA No. 290/Bang/1998 order dated 30th January, 2002 has thrown light in a similar situation. In this case the assessee firm was established with the sole object of carrying on the hotel business and the land was transferred to the firm by the partnres as their capital thereby the firm became the owner of the property. Primarily the intention of the partners was to construct a hotel upon the said property and to carry on the business of hotel, restaurant etc. But later on the firm sold the land after entering into an agreement with a developer and the agreement of development was amended later on. The revenue argued that by entering into the agreement with the developer, the assessee had converted the land into its stock-in-trade and such conversion attracts capital gains and also that the sale of plots, the assessee has earned income from business. The order of the CIT(A) was set aside in favor of the assessee.
The Hon’ble High Court of Bombay in the case of CIT v. T. A. Trivedi (173 ITR 95) wherein the nature of land is relevant in determining whether the land is agricultural land or not. In this case the assessee obtained permission to convert the land to non-agricultural use and thereafter an agreement to 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(75 ITD 284) in the case of Baramati Taluka Sahakari Doodh Purvatha Sangh Ltd. v. ACIT 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 was converted into plots which was treated by the A.O. as profit arising out of the sale of land into business income, treating the profit as arising from adventure in the nature of trade. The Hon’ble Tribunal held that the mere making plots and sale cannot be considered as adventure in nature of trade because the intention of the assessee was to put up a factory and it was not the intention to sell the land by making plots, also supports the case of the assessee. Certainly in the present case before us the assessee purchased the land from 1977 onwards so we do not agree with the argument of the learned counsel for the revenue that the intention of the assessee was to develop the land for plotting etc. Even during argument before us the learned counsel for the assessee opined that the land can be inspected even today. As the assessee was incurring huge losses and incurred huge liabilities and to clear such liabilities, the land was made into plantation/plots/smaller plots and was sold because every time the availability of purchaser may not be so easier for bigger plots. Even before the learned CIT(A) the assessee produced a certificate from Tahsildar to the effect that land is agricultural land and the assessee is cultivating coffee, papaya, tomato, coconut etc. proving that the assessee was carrying on agricultural operation, further supports the
The Income-tax Appellate Tribunal, Hyderabad Bench in the case of Smt. Sujeet Kaur v. ITO (119 Taxman 33) Wherein the assessee received certain amount on sale of land, which the assessee claimed to be exempt because any capital gains arising on sale of agricultural land is not liable for taxation. In this case the land was purchased in 1968, the assessee was carrying on agricultural operation and due to certain circumstances, the assessee sold the land. The Tribunal held that the test for treating the land as agricultural or non-agricultural is:
i) acquisition and assessment of land to land revenue
ii) whether agricultural operations are carried on
iii) intention of the owner
iv) character of the adjoining land
In this case, the revenue records classify the land as agricultural land and it was being used for agricultural operations and the land was not sold as agricultural land to a company. It was held that just because the buyer was a company could not alter 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. Mr. Krishna Kumar Kapur 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 had 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 trade. The assessee in its letter dated 4/2/2002 written to the learned CIT(A) also stated some facts and details which is self-evident. Regarding agricultural operation, subsequently stating that the assessee is still carrying on agricultural operation and on the balance land deriving income from agricultural operation. Nothing prevented the revenue to order for spot inspection regarding the land use. The assessee has also produced before us the statement of number of mini plantations sold during the period 1993-94 to 2000-01 and also consolidated list of sundry creditors from the year 1981-82 to 1986-87. The assessee has also drawn our attention towards sundry debtors from the year 1997-98 to 2000-01. We have also gone through the agricultural income and expenditure from 1991-2001 showing the income at Rs. 22888182.81 p. and the expenditure at Rs. 10623870.04 p. We have also gone through the facts of (SIC) Smilee Greens, sale of agricultural lands/plantation, lands and its history of 22 years and the Survey nos. We have also gone through the copy of Circular No. R04111.M.O.7 dated 2/4/87 regarding clarification on farm house, from the officer of the Special Dy. Commissioner, Bangalore (N) District and the restriction or prohibition on transfer of Agriculture land below less than minimum standard extent, which is reproduced as under:
“Prior to 5/2/1991, the agricultural land could not be transferred less than minimum standard fragments. Through Karnataka Prevention of Fragmentation and consolidation of holding (Repeal) Act, 1990 (Karnataka Act of 1991), Karnataka P&C of holding Act, 1966 (Karnataka Act of 1967) has been repeated from 5/2/1991. Therefore now there is o bar for transfer of agriculture land by sale, by mortgage or gift etc., irrespective of the extent. Because of repeal of the said Act, now the agriculture land can be transferred to even the extent of one gunta or less also.”.
Construction of Farm House in Agriculture Land –
“Under Section 95(1) of the Karnataka Land Revenue Act of 1964, the occupant and owner of an agriculture land is entitled by himself, his servants, tenants, agents or other legal representatives to erect farm buildings for the better cultivation of the land or its more convenient use for he purpose of agriculture/improvement of the land”.
For construction of Farm House in agriculture land no sanction or permission 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 a agriculturists
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 Karnataka 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 constructed on the land is its user by the cultivator for the purposes of dwelling, tethering of the cattle, storing of the agriculture implements and the agricultural produce, the nature of the building the material used, its size or the comforts provided therein will be immaterial. Form Building used in Section 95 of the Land Revenue does not mean a poor agriculturist but without amenities. It can be a modern structure with all facilities”.
The order further assess-
“Under Section 95 of the Land Revenue Act, an occupant of land assessed or held for the purpose of agriculture is entitled to erect Farm Buildings construct wells or Rank or make any other improvements thereon for the better cultivation of the land or its more convenient use for the purpose aforesaid. The phrase “Farm Buildings” is not defined anywhere. The analogous provision Section 65 of the Bombay Land Revenue code also uses the phrase “Farm Buildings”. “Farm Buildings” we think is not one which is used by very poor agriculturists. 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 constructed on the land is its user by the cultivation for the purpose of dwelling, tethering of the cattle, storing of the agricultural implements and the agricultural produce, the nature of the building, the material used, its size or the comforts provided therein will all be immaterial. “Farm Building” used in Section 95 of the Land Revenue Act does not mean a poor agriculturist’s hut without amenities. It can be a modern structure with all facilities. It is enough if the occupier is engaged in the cultivation of the land on or near which the building is erected. The Bombay Revenue Tribunal has held in case No. 698/41 that two pucca houses erected by the holder of an Inam village, one for his own use and the other for tethering cattle were purely “Farm Houses”.
11. The learned counsel for the revenue Mr. Amitabh Kumar relied upon the decision of the Hon’ble High Court of Karnataka in the case of CIT v. B Narasimha Reddy (150 ITR 347). In this case the assessee along with his son jointly purchased a plot of land in 1962 from an agriculturist as agricultural land, which was located within the urbanised area adjacent to big factories, but no attempt was made to cultivate 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 realised 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 uncultivated and fallow continuously for 5 years. The assessee obtained permission for conversion of the land to non-agricultural purposes and formed (SIC) formed a layout for house sites and sold the sites to workers in nearby factories. These events clearly established that the assessee purchased the land with a view to sell it as attractive house sites at a profit. Therefore, the transaction was an adventure in the nature of trade and the profit realised from the sale was assessable as business profits. But in the case before us the land was purchased from 1977 to 1992. In the facts before us the assessee is an agriculturist, the land is on green belt, never applied for conversion of land use, not surrounded by factories etc. The assessee cultivated the land and never obtained permission for conversion of land to non-agricultural purposes. In the case of B Narasimha Reddy (supra), the land was situated in an urban area adjacent to big factories but in the present case before us, it was far away from the urbanised area. We can very well imagine the urban limitation and size of the city of Bangalore in the year 1977. The assessee never immediately sold the land which was purchased from 1977 to 1992 as the assessment before us (SIC)A.Y. 1998-99. From the facts and circumstances narrated before us, we can safely presume that it was not the intention of the assessee to sell the agriculture land for the purpose of trade which can be regarded in the nature of trade or business. The facts are clearly distinguishable from the facts before us.
12. The learned counsel for the Revenue also relied upon the decision of the Hon’ble High Court of Karnataka in the case of P Kannan v. CIT (154 ITR 441). In this case the assessee purchased on March 15, 1968, land measuring 20.131 sq yds. For a consideration of Rs. 2 lakhs. The assessee divided the land into plots and sold the same during the previous year ending March, 31, 1970, relevant to the asst. year 1970-71 and realised a sum of Rs. 1,30,625/- The assessee purchased the land to build a theatre or hotel converted the land into house sites and sold thereof. The Tribunal held that the intention of the assessee was to divide the land into house sites and to sell the same on profit and, therefore, the profit realised therefrom was assessable as income. It was held that the transaction of purchase of sale of land was an adventure in the nature of trade and the profit realised 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 for agricultural purposes. But in the case of P. Kannan, the land was purchase 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 (SIC) 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 and another v. CIT (Addl) (200 ITR 594). 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 purchased 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 the sale deeds were executed in pursuance thereof on October, 9, 1954 and November 30, 1964. It was held that the transaction of the appellants was an adventure in the nature of trade and that the profit derived therefrom was liable to income-tax and assessment could be made on them in the status of an association of persons, but the facts of the case before us is quite distinguishable as discussed above.
14. The learned counsel for the revenue also relied upon the decision of the Hon’ble High Court of Patna in the case of Eclat Construction (P) Ltd. v. CIT (172 ITR 84). In the case the assessee company was formed with varied objects of buying, selling, manufacturing, repairing, letting on hire and dealing in plant, machinery and appliances. The project was undertaken to set up factory for manufacture of mosaic tiles. The factory was passing through gestation period. Bulldozer was purchased after taking loan from financial institutions and let out on hirs for short period and ultimately sold. It was held that the transaction amounts to an adventure in the nature of trade. As we have discussed in the above paras, the facts of the case are quite distinguishable from the facts present before us.
15. The learned counsel for the revenue also relied upon the decision of the Hon’ble Supreme Court of India in the case of CIT v. H Holck Larsen (160 ITR 67). In this case it was held that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact. In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step – the purchase of the shares – was not taken as, or in the course of a trading transaction. The facts of this case are also distinguishable as discussed above from the facts present before us.
16. The learned counsel for the revenue has also relied upon the decision of the Hon’ble High Court of Allahabad in the case of ITO v. Rani Ratnesh Kumari (123 ITR 343). In this case, the assessee, an individual, had purchased a house property of an area of about 20,000 square yards comprising two bunglaws, a servants’ quarters and a vast piece of vacant land in the city of Jaipur. The consideration was Rs. 87,999/-. Later on, 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 v. CIT (206 ITR 55). 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 business operations and the profit arising from the sale of such lands as taxable income and this as upheld by the Tribunal on reference, on the facts of the case and from the material on record that the explanation offered by the assessee for disposing of the lands soon after purchase were not acceptable. A situation could not be accepted where such agriculturist would purchase a land for the purpose of agriculture, on an assumption or on an observation that it would be fit for agriculture, and immediately after the purchase, arrive at a conclusion that it would be uneconomical to develop the same for agriculture and would, therefore, be required to dispose of the same. The assessee had entered into a series of transactions of purchase and sale, and in each case the sale was within a reasonably short times of the purchase. The Tribunal was right in law in holding that the assessee was carrying on an adventure in the nature of trade when he purchased and sold the lands immediately after the purchase. But in the present case before us, the case is distinguishable as discussed in detail in the above paras.
18. The Bangalore Bench of the Tribunal in the case of Hotel Sreeraj v. CIT in ITA No. 290/Bang/98 and ITA No. 323/Bang/97 and also ITA No. 255/Bang/2001 has discussed some of the decisions (supra) set aside the order of the learned CIT(A). In the present case before us, the assessee purchased agriculture land at Goolimanagala village, Sarjapura Hobli. Anekal Taluk from the years 1977 to 1992 and the entie land purchased was the agricultural land and not a converted land. The land in question is also a green belt area and even the assessee never applied for conversion of land use. To prove its stand that the land in question is an agricultural land, the assessee produced before the Department some documents, mutation record, agriculture tax paid receipt and the proof that the assessee was cultivating coffee, papaya, coconut and pepper etc. along with a certificate from the village Tahsildar of Anekal to prove that the entire land in a plantation land owned by the assessee. The assessee made regular plantation since beginning and there is no iota of evidence to show that thee was an intention of the assessee to make plots and to sell the same at later stage. The coffee plans, coconut trees and other trees like papaya, pepper etc. were grown regularly and from the expenditure shown by the assessee, it is clear that all these activities are agricultural 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 and 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 v. ACIT (2000) (75 ITD 284) (Pune) 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.),
e) Saroj Kumar Mazumdar v CIT (1959) 37 ITR 242 (SC),
f) G Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC),
g) Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386 (Bom.),
h) Khan Bahadur Ahmad Alladin & Sons v. CIT (1968) 68 ITR 573 (SC),
i) Janki Ram Bahadur Ram v. CIT (1965) 57 ITR 21 (SC),
j) P M Mohammed Meerkhan v. CIT (1969) 73 ITR 735 (SC) &
k) Ramnarain Sons (P) Ltd. v. CIT (1961) 41 ITR 534 (SC).
Referred by the learned representatives and held that the question whether the transaction of purchase and sale of land is an adventure in the nature of trade or not is a question of mixed facts and law and therefore has to be decided on the facts of each case and no hard and fast rules can be laid down in deciding such question. It is also the settled law that in deciding such issue one has to consider that the onus is on the department to prove that particular transaction is an adventure in the nature of trade and therefore exigible to tax. It is also important to note that it was the intention of the assessee at the time of acquiring the land which is relevant for deciding the issue whether the transaction was in the nature of trade. The Tribunal held that the profits would be assessable under the head `capital gains’.
20. From the facts and circumstances narrated before us, it is important to note that what was the intention of the assessee at the time of acquiring the land, date of purchase, interval between the purchase of land and the improvements made in relevant for deciding the issue whether the transaction was in the nature of trade. Reference may be made to the decision of the Hon’ble Supreme Court of India in the case of Ramnarain Sons (P) Ltd. v. CIT (1961) (41 ITR 534) and the decision of the Hon’ble High Court of Bombay in the case of Bhogilal H. Patel, the following observation of the Hon’ble High Court of Bombay is relevant to note:
“Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception”.
Various factors are to be taken 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 trade and the purchase of the commodity and its resale were allied t 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 similarity of the transaction to operation as usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold it for some time and if a profitable offer is received sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the transaction being in the nature of trade. The present of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade, but it is not a matter of merely counting the number of facts and circumstances pros and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines that character of the transaction.
In cases where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted”.
21. After considering the facts and the case laws referred before us, we are of the view that the sale of land, under the present facts and circumstances before us, cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to purchase land with a view to extend its business by planting various trees and plants and even there was no intention to sell the land in future, keeping in view the duration of period etc. It was due to certain compelling circumstances came into picture at a later stage the assessee was forced to purchase another land and to sell the same along with the land purchased earlier. Merely because the fact that the land was sold in plot, it cannot be held that income arising from 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 Holck Larsen (160 ITR 67) (SC).
The Hon’ble High Court of Madras in the case of Sri Gajalakshmi Ginning Factory Ltd. v. CIT (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 supports the case of the assessee.
The Hon’ble Supreme Court of India in the case of Janki Ram Bahadur Ram v. CIT (57 CIT (57 ITR 21) (SC) has held that “if a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated, or repaired and sold, or is converted into a different commodity and sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. The profit motive in entering a transaction is not decisive, for an accretion to capital does not become taxable income (SIC)rely because an asset was acquired in the expectation that it may be sold at a profit” support the case of the assessee.
The Hon’ble Apex Court in the case of Saroj Kumar Mazumdar v. CIT (37 ITR 242) (SC) has held that “where a transaction was not in the line of the business of the assessee but was an isolated or single instance of a transaction, the onus was on the Department to prove that that transaction was an adventure in the nature of trade ———– that as at the time he entered into the agreement with the society the appellant was doing good business, as was shown by the large amounts on which he was assessed to tax, it was not unnatural for him to lock forward to continue his business in as prosperous a way as he had been doing in the recent past, and to raise sufficient funds to build his own residential house or to construct a workshop for his own engineering business; and, therefore, the probability that the sight might appreciate in value did not necessarily lend itself to the inference that the transaction was a venture in the nature of trade, as distinguished from a capital investment ————– that the transaction was not an adventure in the nature of trade and the amount was not assessable to tax under the Act”, also supports the case of the assessee.
Under the facts and circumstances of the present case and also from the argument initiated by both the learned representatives, we are of the considered view that the transaction should be regarded in the nature of capital asset and not a business transaction.
In the light of above discussion, the appeal of the assessee is allowed and the order of the first appellate authority is reversed.