2008 (3) TMI 386 - AT - Income Tax

Tribunal Partially Allows Appeal: Disallowance Deleted, Land Sale Loss Classified as Capital Loss Due to Lack of Evidence.

The Tribunal partially allowed the revenue's appeal. It upheld the CIT(A)'s decision to delete the disallowance of Rs. 5,00,000 in the business of M/s. ... Loss incurred on sale of plot of land - assessable under the head 'Business' or 'Capital loss' - Whether the transaction by the assessee was an adventure in the nature of trade or a capital investment - Increase in the consumption of raw materials as well as labour charges - HELD THAT:- Applying the tests laid down by the Hon'ble Supreme Court in the case of Janki Ram Bahadur Ram [1965 (3) TMI 19 - SUPREME COURT] and in the case of Principal Officer, Laxmi Surgical (P.) Ltd. [1992 (11) TMI 49 - BOMBAY HIGH COURT] to the facts of the present case, we are of the considered opinion that merely because the assessee had intention to make good profit on the basis of the information that the land was to be converted from agricultural zone or non-industrial zone to industrial zone, and assessee would be able to make a good profit that by itself is not enough to assume that the assessee had purchased the land as an adventure in the nature of trade. It is well-settled that the transaction of purchase of land with a view to make good profit cannot by itself be assumed without anything more to be an adventure in the nature of trade. The profit motive of the assessee having regard to his information that the land would be converted into the industrial land is not decisive factor to hold that the transaction of purchase of land made by the assessee was an adventure in the nature of trade. The assessee's case is the case of realization of investment with profit and cannot be termed as an adventure in the nature of trade. Even, mere carving out the plots and selling it to different persons cannot also be assumed to be an adventure in the nature of trade unless something more activities in the nature of business are carried out. It is found that the assessee has submitted that the transaction to purchase the land was undertaken with the intention to earn profit on its sale either in the same form or after carving out the plot after the land was converted by the State authority into industrial land, but as already observed above, that factor by itself is not enough or sufficient to bring the transaction within the ambit of an adventure in the nature of trade. The fact that the land in question was an agricultural land when it was purchased by the assessee is not in dispute. Therefore, the fact that the gain or loss in sale of land was clubbed with the business income in assessment year 1998-99 though the same was worked out as short-term capital gain in Annexure to the computation of income, cannot be a decisive factor to prove the assessee's case that the transaction in question was an adventure in the nature of trade unless it is otherwise proved or established by cumulative effect of all the factors related to the present case. The facts of the present transaction have been examined by us. We find that the assessee has purchased the land only with a view to earn profit by selling the same after on its conversion from agricultural land to industrial land nothing more as so contended by the assessee also. Thus, we hold that it is the case of realization of investment and cannot be termed as an adventure in the nature of trade. Therefore, the loss arisen from the transaction of purchase of land and then acquired by the Government is assessable under the head 'Capital loss' and not 'Business loss'. The CIT(A) was not justified in accepting the assessee's claim that the transaction was an adventure in the nature of trade. The appeal filed by the revenue was partly allowed, and the loss was to be assessed as a capital loss. In the result, the appeal filed by the revenue is partly allowed. Issues Involved:1. Deletion of disallowance of loss of Rs. 5,00,000 in the business of M/s. Ashoka Industries.2. Treatment of loss incurred on the sale of a plot of land at Pune as a business loss or capital loss.Summary:Issue 1: Deletion of disallowance of loss of Rs. 5,00,000 in the business of M/s. Ashoka IndustriesThe revenue appealed against the CIT(A)'s order deleting the disallowance of Rs. 5,00,000 out of the loss claimed by the assessee in the business of M/s. Ashoka Industries. The Assessing Officer (AO) made the disallowance due to dissatisfaction with the book results, citing an unexplained increase in the ratio of raw material consumption and lack of evidence for labour unrest. The CIT(A) deleted the addition, stating that the increase in raw material consumption ratio was not significant enough to reject the book results and that the AO's disallowance was based on general observations without a valid basis. The Tribunal upheld the CIT(A)'s order, agreeing that the AO did not point out any substantial defect or discrepancy in the books of account and that the ad hoc disallowance was improper.Issue 2: Treatment of loss incurred on the sale of a plot of land at PuneThe assessee claimed a loss of Rs. 7,95,880 from the sale of a plot of land as a business loss. The AO treated it as a capital loss, arguing that the assessee had not engaged in estate agency business in the past and that the land was purchased as a capital asset. The CIT(A) allowed the assessee's claim, stating that the land was purchased with the intention of trading, supported by evidence of past dealings in land and the nature of transactions by the assessee's group concerns. The Tribunal, however, reversed the CIT(A)'s decision, holding that the transaction was not an adventure in the nature of trade. The Tribunal emphasized that the mere intention to earn profit on the sale of land, without any business activity or development of the land, does not constitute an adventure in the nature of trade. The Tribunal concluded that the loss should be treated as a capital loss.Conclusion:The appeal by the revenue was partly allowed. The Tribunal upheld the deletion of the disallowance of Rs. 5,00,000 in the business of M/s. Ashoka Industries but reversed the CIT(A)'s decision on the treatment of the loss from the sale of land, treating it as a capital loss instead of a business loss.