2013 (12) TMI 1256 - HC - Income Tax

Land sale surplus classified as long-term capital gain, not trade. Intention key. Cost deduction upheld.

The court determined that the surplus amount from the sale of land should be classified as long-term capital gain rather than an adventure in the nature ... Whether surplus amount of sale of land is assessable as long term capital gain or adventure in trade - Held that:- The CIT (A) considered the facts and relied upon relevant principles of law, as well as the case laws in arriving at a conclusion that in the given circumstances, the agreement with the coloniser, who had to develop the plots and ultimate sale of the plots to the nominees of the colonisers, at a price to be fixed by the coloniser in which the assessee had no share of excess profits, was not in the nature of any adventure in the nature of trade - The assessee was not engaged in any trade or business of selling land - The transaction was only to get best price of his land, which the coloniser was ready to pay - The ITAT did not commit any error on facts or in applying the principles of law in upholding the findings of CIT(A) - Following Ram Narain Sons (P) Ltd. v. IT Commissioner [1960 (12) TMI 3 - SUPREME Court] - In consideration whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the 'legal requirements, which are associated with the concept of trade or business - Decided against Revenue. Issues Involved:1. Classification of the surplus amount from the sale of land as long-term capital gain versus an adventure in the nature of trade.2. Direction to ascertain the cost of land as on 1.4.1974 and deduct the same to work out the capital gain.Issue-wise Detailed Analysis:1. Classification of Surplus Amount from Sale of Land:The primary issue was whether the surplus amount from the sale of land should be assessed as long-term capital gain or as an adventure in the nature of trade. The Assessing Officer (A.O.) argued that the transaction was an ongoing one and the plots were not capital assets but stock in trade, thus taxable as business income. The A.O. based this on the fact that the land was sold in parts over time, with the developer handling the development and sale of the plots.However, the CIT (A) and the Income Tax Appellate Tribunal (ITAT) disagreed. They found that the assessee had inherited the land and was not in the business of selling land. The agreement with the developer was to sell the land at a fixed price, and the developer was responsible for all development and sale activities. The assessee did not share in the profits from the sale of individual plots. The CIT (A) concluded that the transaction was not an adventure in the nature of trade, as the assessee's intention was to sell ancestral land, not to engage in land trading. The ITAT upheld this view, agreeing that the income from the sale of land was taxable under the head 'capital gains.'2. Direction to Ascertain Cost of Land as on 1.4.1974:The second issue was whether the ITAT was justified in directing the A.O. to ascertain the cost of the land as on 1.4.1974 and deduct the same to work out the capital gain. The ITAT confirmed the CIT (A)'s order, which directed the A.O. to ascertain the cost of the land as on 1.4.1974 and deduct it from the sale proceeds to calculate the capital gain. This directive was based on the finding that the sale was a capital transaction, not a business transaction.Legal Reasoning and Precedents:The judgment referenced several legal precedents to support its conclusions. It cited cases like G. Venkataswami Naidu & Co. v. Commissioner of Income-Tax and CIT v. Sutlej Cotton Mills Supply Agency Ltd., which dealt with the interpretation of 'adventure in the nature of trade.' These cases established that the intention at the inception of the transaction and the nature of the activities involved are critical in determining whether a transaction is a business activity or a capital transaction.The court also referenced CIT v. Kasturi Estates Pvt. Ltd., where the Madras High Court held that developing land into building sites to realize the best price is consistent with the realization of capital investment and not necessarily a business activity.Final Judgment:The court concluded that the CIT (A) and ITAT correctly applied the law and facts in determining that the transaction was not an adventure in the nature of trade. Therefore, the surplus amount was rightfully assessed as long-term capital gain. Consequently, the ITAT's direction to ascertain the cost of land as on 1.4.1974 and deduct it to work out the capital gain was upheld.Conclusion:The court decided both questions against the revenue and in favor of the assessee, affirming that the surplus from the sale of land should be treated as long-term capital gain and that the cost of the land as on 1.4.1974 should be deducted to calculate the capital gain. The reference petition was decided accordingly, directing the A.O. to carry out the order of the CIT (A).