1999 (11) TMI 125 - AT - Income Tax

Cooperative society's land sale deemed capital gains, not business income.

The Tribunal held that the purchase and sale of land by a cooperative society did not amount to an adventure in the nature of trade. The society initially ... Adventure In The Nature Of Trade Issues Involved:1. Whether the activity of the assessee of purchase and sale of land tantamounts to an adventure in the nature of trade.Detailed Analysis:1. Nature of the Assessee's Activity:The assessee, a society registered under the Maharashtra State Co-operative Society Act, primarily engages in collecting milk from its member societies and supplying it to the Government of Maharashtra. Additionally, it derives income from the sale of cattle feeds, animal medicine, and dairy products. In 1985, the assessee purchased land intending to expand its business by manufacturing cattle feed. However, in the year under consideration, the land was sold in plots, leading to a significant profit.2. Assessing Officer's Findings:The Assessing Officer concluded that the assessee's activity of purchasing and selling land was in the nature of trade, thus assessing the income as business income amounting to Rs. 11,01,808. The key factors considered were:- The land was sold in plots to maximize profits, indicating a commercial transaction.- Sales transactions were repeated over different years.- The initial sale price was reduced to attract customers.- The purchase and resale of land at higher rates were deemed commercial activities.- The plots were sold to the general public, not society members.- The society earned rental income from the property constructed on the land.3. CIT(A)'s Decision:The CIT(A) upheld the Assessing Officer's decision, interpreting the term 'business' broadly as per Section 2(13) of the I.T. Act and relevant Supreme Court rulings. The CIT(A) emphasized that a single transaction outside the assessee's usual business could still constitute an adventure in the nature of trade, considering the intention to make a profit and the manner of the transaction.4. Assessee's Argument:The assessee's counsel argued that the land was initially purchased to erect a cattle-feed plant, not for resale. The sale occurred due to the availability of a better-located land at a cheaper rate. The counsel emphasized that the land was held for a long period, and rental income was earned from the existing structure. The sale in plots was merely to realize a better price, not indicative of a trading intention. The counsel cited various judicial precedents to support the argument that the transaction was a capital realization, not an adventure in the nature of trade.5. Tribunal's Analysis:The Tribunal carefully considered the submissions, materials, and case laws. It noted that determining whether a transaction is an adventure in the nature of trade depends on the totality of facts and circumstances. The onus is on the Department to prove that the transaction is taxable as business income. The Tribunal referred to several Supreme Court judgments emphasizing the importance of the assessee's intention at the time of acquiring the land.6. Factual Examination:The Tribunal found that the land was purchased with the intention to expand the assessee's business by erecting a cattle-feed plant. The subsequent sale was necessitated by the acquisition of a better-located land at Malegaon, connected with a government-established dairy. The sale of the land in plots was approved by the relevant authorities, and the proceeds were used solely for the new cattle-feed factory, not for day-to-day expenses.7. Conclusion:The Tribunal concluded that the transactions of purchase and sale of land did not constitute an adventure in the nature of trade. The intention at the inception was to expand the business, not to resell the land for profit. The sale was a realization of capital due to subsequent circumstances. Therefore, the income from the sale should be assessed under 'capital gains,' not as business income.8. Final Judgment:The Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to assess the profits under the head 'capital gains' in accordance with the law. The appeal of the assessee was allowed.