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TaxTMI 
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2018 (8) TMI 662
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....011 - A.Y.2006-2007 (Shri Mohinder Puri). 3. The Revenue has filed the appeal on the following grounds : 1. On the fact and in the circumstances of the case, the CIT(A) has erred in law and on facts in holding that sale of land by the assessee was of capital assets and the profit thereon was in the nature of capital gain as against business profit held by the Assessing Officer. 2. On the facts and in the circumstances of the case, the CIT(A) has erred in law1 and on facts in directing the AO to allow to the assessee the benefit of section 54F of the Income Tax Act, 1961. 3. On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 77,04,873/- made by the Assessing Officer on account of bogus land development expenditure. 4. The facts of the case are that assessee is an individual and filed return of income on 31.01.2007 declaring total income of Rs. 55,94,790/- which was later revised to Rs. 55,94,770/-. The total income included long term capital gain of Rs. 37,12,316/- on the sale of land admeasuring 1.31 acres at village Wazirabad, Sector 53, Gurgaon. The A.O. after considering the explanation of asse....
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.... Assessee was not a dealer in land. The period of holding shows that the assessee intended to earn capital gain by realizing a better price. Conditions of Circular No.4 of 2007 are applicable to show sale was of capital asset. The assessee claimed benefit of deduction under section 54F which goes to show that the intended sale was by way of sale of capital asset. PCL was only authorised to sell the subject land along with land owned by it. It did not mean that the nature and intention of sale by the assessee was the same as the nature and intention of sale by PCL. Just because the land was held by PCL as a stock-in-trade would not ipso facto lead to the inference that the land owned by the assessee was also held by way of stock-in-trade. The A.O. did not accept the explanation of the assessee and held that the income was to be assessed under the head "Business" and denied exemption under section 54F of the I.T. Act. The assessee challenged the assessment order before Ld. CIT(A). The Ld. CIT(A) reproduced the written submissions of the assessee in the appellate order which is as under: (i) "One of the earliestenunciation on the subject finds place in the case of Californian Copper....
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....ature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture, for instance, a man who purchases a large quantity of aeroplane linen and sells it in different lots, and, for the purpose of selling starts an advertising campaign, rents offices, engages an advertising manager, a linen expert and a staff of clerks, maintains account books normally used by a trader, and passes receipts and payments in connection with the linen through a separate banking account : Martin v. Lowry [1926] II Tax Cas 297; a person who caries on a money-lending business purchases very cheaply a vast quantity of toilet paper and within a short time thereafter sells the whole consignment at a considerable profit: Rutldege v. IRC [1929] 14 Tax Cas 490: and a person, even though he has no special knowledge of the trade in wines and spirits, purchases a large quantity of whisky and sells it without taking delivery of it at a considerable profit: ITC v. Fraser 1942] 24 Tax Cas 498, may be presumed, having regard, to the nature of the commodity and extent of the transaction coupled with the other circumstances, to be c....
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....difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realized on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realizing his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction." (iv) The Hon'ble Bombay High Court in the case of CIT v. Principal Officer, Laxmi Surgical P. Ltd. reported in [1993] 202 ITR 601 after applying the test laid down by the Hon'ble Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 and other cases has held that any transaction undertaken with an intention to earn profit is not enough to give it the character of stock-in-trade or to bring the transaction within the ambit of an adventure in the nature of trade. (v) In Taylor v. Good 49 TC 277, 296-297 (CA),....
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....i Estates (P) Ltd. 62 ITR 578 Madras, is a judgment which is truly relevant for deciding the controversy in the present case for more than one reason. In the first place it has considered the three judgments of which the reference has been made (supra) viz. cases of (a) Californian Copper Syndicate v. Harris; (b) Janaki Ram Bahadur Ram v. CIT and (c) G. Venkataswami Naidu & Co. v. CIT. Secondly, the law on the very controversy as appearing in the present case has been discussed at length. Further, the facts in this judgment are in fact a degree away from the facts of the present case and yet it has been held that it was not a case of adventure in the nature of trade, but the profit was taxable as capital gain. Since the case has dealt with the matter eloquently and comprehensively, it is considered proper to refer to this judgment at some length hereinafter for assistance in deciding the present appeal. * The assessee in this case had parcelled into plots, one of the pieces of land in the city, incurred expenses for laying roads, corporation survey, centage, filling up and other matters and sold 30 grounds. The transaction resulted in a surplus of Rs. 27,568/-. The question was w....
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....he subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does. (2) The Length of the period of ownership. - Generally speaking, property meant to be dealt in is realized within a short time after acquisition. But there are many exceptions from this as a universal rule. (3) The frequency or number of similar transactions by the same person. - If realizations of the same sort of property occur in succession over a period of years or there are several such realizations at about the same date, a presumption arises that there has been dealing in respect of each. (4) Supplementary work on or in connection with the property realized . - If the property is worked up in any way during the ownership so as to bring it into more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising there is some evidence of dealing. For, when there is an organized effort to obtain profit, there ....
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.... on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade." (viii) In CIT v. MLM. Mahalingam Chettiar 107 ITR 236 Madras, on almost identical facts, the decision in Kasturi Estates Pvt. Ltd. (supra) was followed. (ix) Vesta Investments & Trading Co. (P) Ltd. v. CIT [1999] 70 ITD 200 (Chd) Kind attention is invited to para 5 of the order where the Hon'ble Bench has referred to the guidelines for deciding the issue whether the profit is by way of capital gain or business profit. The conclusion is in para 7. This judgment lucidly explains some of the contours of controversy and basis for deciding the issue and is also helpful in the present case for arriving at the conclusion. (x) In Asstt. CIT v. Ashok Motilal Kataria [2009] 308 ITR (AT) 298 Pune Reference is invited to this judgment which explains the true concept of adventure in the nature of trade. (xi) Reference may also be invited to a recent Circular 4/2007 dated 15/6/2007, (161 Taxman 330 (Statute)}, where the Board have laid down instructions for applying the tests to determine whether the income is from business or capital gain. Although this circular is in res....
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....ude that it was not an adventure in the nature of trade. Way back in Janaki Ram Bahadur Ram (supra) it was laid down that the mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade. 7.2 We derive strength (as we have done by citing and relying upon CBDT Circular No. 4/2007 dt. 15/6/2007) by referring to the "badges of trade" summarized by the Royal Commission on "The Taxation of Profits and Income" in their final report in 1955. The present transaction, if tested on the principles laid down by the Royal Commission, it is submitted, does not give rise to a profit taxable as business income as we explain hereinafter: (i) Viewed objectively it cannot be said that the isolated transaction of the purchase of land by the assessee was subject matter of trading. The land was not acquired with the purpose of dealing in land. (ii) The length of the period of ownership (for 1995-97 to 2005) speaks for itself. (iii) The test of frequency or number of similar transactions by the same person is factor in favour of the asssessee inasmuch as this was only an isolated transaction undertaken. ....
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....state Finance Ltd., M/s. Larsen & Toubro Ltd. and M/s. Ansal Housing Construction Ltd., and from this has inferred that the assessee was in joint business collaboration with PCL in respect of the land. No doubt such agreements were entered into in the past and in fact a comprehensive account of such agreements is also mentioned in the Agreement dated 4th April, 2005. But, it is notable that none of these agreements were acted upon and they were terminated/cancelled/rescinded and brought to end before entering into agreement with PDL. This is clear from para l(q) at page 12 of the agreement dated 4th April, 2005, where it is clearly mentioned that PDL is in full and peaceful possession of the entire 23.815 acres of land in Sector 53, covered under the said agreement. Also in para 3(b) at page 17 of the agreement it is clarified that land owners have already settled their disputes with ITC, ITC REF and AHCL. It is emphasized that even though some agreements were entered into in the past, they were not implemented/carried out, and accordingly that matter is non-issue for deciding the present transaction Those agreements, which were conceived in the past, but not implemented, cannot,....
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....blish that a certain transaction is an adventure in the nature of trade. (vii) In Paras 5.6 and 5.7 the AO has referred to the judgment of the Supreme Court in G, Venkataswami Naidu (supra). Referring to selectively some observations the AO, without adding anything more, has concluded that in the present case the transaction was an adventure in the nature of trade. It is submitted that the AO has been less than fair in not explaining the correct impact of judgment. In fact we have quoted in extenso in para 6 (vi) above extract from the judgment the observations of Gajendragadkar J. (as his Lordship then was) which speaks for itself. That was the analysis made by the learned judge, which in fact applies in our case to conclude that the transaction resulted in capital gain. We reiterate and refer to those observations at the cost of repetition. However, in all fairness it may be mentioned that the case of G. Venkataswami Naidu (supra) was decided against the assessee. In fact after laying down the propositions as mentioned above, the court took considerable pains to give reasons, by bringing out elaborate facts obtaining in that case (where the question was held to be a mixed q....
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....on and it contains a formidable exposition on the question in issue, We shall advert to it infra. 5. In the initial part of the judgment it is stated that the question whether a transaction is an adventure in the nature of trade is a mixed quest of facts and law. It is therefore permissible to challenge the conclusion on the ground that inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence. 6. At pages 609 and 610 of the report, the Court after pointing out that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction, laid down broad principles to assist in determining the character of the transaction bearing on the point in issue. It may kindly be seen that the AO has been less than fair in tearing apart the passage from pages 609 and 610 and reproducing it selectively. If the entire passage at pages 609 and 610 is read it shows that it only lays down the guidelines by way of assistance to come to the conclusion about the character of a transaction. Instead the AO after referring to the passage half way through, and without giving any basis whatsoever, conclud....
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....e idea that it was carrying on a trade in land rather than with the idea that it was throughout holding it as an investment only to be realized if at all when it desired to meet some financial need. In repelling the plea that the transaction showed investment, the Lord President added that the Commissioners "with their knowledge and experience of these matters, have come to the conclusion that the intention was to hold this estate not as an investment but as a trading asset and in order to develop it and to market it" It would thus appear that the conduct of the assessee in incurring a large amount of expenditure on the development of land consisting mainly in the construction of roads and sewers was held to justify the inference that the transaction was an adventure in the nature of trade, though the property purchased and sold was land." 7.2 There can be no dispute that the judgment in Cayzer's case (supra) applies to PCL and the income was from business. But this case does not apply to the facts of assessee's case. We have submitted in earlier submission at length and we reinstate that the land purchased was a solitary transaction. It was not developed subsequently with the ob....
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....the first item of property by the appellant had been made in the name of Mr, V. G. Raja, assistant manager of the Janardana Mills Ltd., who is the son-in-law of G. Venkataswami Naidu, one of the partners of the appellant firm. Naturally when this property was sold to the mills the document was executed by the ostensible owner v .G. Raja. It is not disputed that the purchase in the name of V.G. Raja was benami for the appellant. All the plots which were thus purchased by the appellant piecemeal are contiguous and they adjoin the mills. On the plot purchased on June 29, 1942, there stood a house of six rooms which fetched an annual rent of about Rs. 100; and, after deduction of taxes, it left a net income of Rs. 80 per year to the appellant. The other lots are vacant sites and they brought no income to the appellant. During the time that the appellant was in possession of these plots it made no effort to put up any structures on them or to cultivate them; and so it was clear that the only object with which the appellant had purchased these plots was to sell them to the mills at a profit. It was, however, urged by the appellant that the properties had been bought as an investment. Thi....
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.... cents and it could yield no return whatever to the purchaser. It is clear that this purchase was the first step taken by the appellant in execution of a well-considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit. Just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resaleable is a relevant factor in determining the character of the transaction, so would his conduct prior to the purchase be relevant if it shows a design and a purpose. As and when plots adjoining the mills were available for sale, the appellant carried out his plan and consolidated his holding of the said plots. The appellant is the managing agent of the Janardana Mills and probably it was first thought that purchasing the plots in its own name and selling them to the mills may invite criticism and so the first purchase was made by the appellant in the name of its benamidar V.G, Raja. Apparently the appellant changed its mind and took the subsequent sale deeds in its own name. The conduct of the appellant in regard to these plots subsequent to their....
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....9. The facts of the case of the assessee, as we have already submitted in our earlier submission, are totally different. The judgment in Naidu's case thus is not applicable to assessee's case and does not make any inroad to the contention that there was capital gain. On the contrary if the principles laid down are applied the case supports assessee's contention. 10. Before closing we would like to refer to the judgment in CIT v. Hoick Larsen 160 ITR 67 (SC). In this judgment also the judgment of Naidu's case was referred to. It was held that the real question is not whether the transaction lacks the element of trading but to see whether the first step of the transaction was not taken as, or in the course of, a trading transaction. Applying the said principle it may kindly be appreciated that when the land was originally purchased there is nothing to show that this first step (of purchase of land) was taken in the course of a trading transaction. Assessee no doubt is a director of M/s, Puri Construction Ltd. which is engaged in the business of real estate. But like Hoick Larsen (who was the founder of the company and purchased the shares of his own company), the assessee did purch....
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.... estate and the transaction was of capital asset only and not a transaction of any stock-in--trade. (ii) CIT v. R.V. Gupta [2002] 258 ITR 261/124 Taxman 191 (Delhi) In this case assessee a Senior IAS Officer was allotted a plot of land by the DDA jointly with his brother with a stipulation that the allottee(s) should construct a residential house. The assessee constructed six flats and sold four flats retaining remainder two for their own use. The Assessing Officer treated the transaction as adventure in the nature of trade. The High Court referred to the judgment in Naidu's case (supra). It was held that the plot was retained for 18 years, that there was no change in the said plot, and that the cost was shown as investment in the return. That there was no material on record to show that assessee ever had intention to exploit the plot as a commercial venture. The profit was held to be liable to capital gain. (iii) Asstt. CIT v. Ashok Motilal Kataria [2009] 119 ITD 282 Pune. In this case it was held that the assessee was not a dealer engaged in real estate business and the land was not held as a stock-in-trade. Merely because the assessee had the intention to make good profit on....
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....context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances. On a careful consideration of all the facts and circumstances and the case law on the point, 1 agree with the appellant and hold that it cannot be construed that the transaction was an adventure in the nature of trade, resulting in profit liable to be taxed as income under the head "business", but manifestly was a transaction of sale of a capital asset giving rise to a long term capital gain for the reasons set out hereunder : (i) The Assessing Officer has largely based his order on the judgment in Naidu's case (supra) in holding that the transaction was adventure in the nature of trade. On behalf of the appellant it has been submitted (which submissions have been extracted supra in para 6.6 above) that the assessing officer has only referred to some passages from that judgment and has not taken into consideration the entire judgment which, as has been explained, in fact goes in favour of the appellant. It is true that Naidu's case (supra) was decided against the assessee, but the final conclusion was based on the r....
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....etails of which are given in the agreement dated 4/4/2005 itself. The observations of the AO that there was a joint venture amongst the co-owners of land also does not emerge from the reading of the sale agreement. As noted supra a joint venture is in the nature of a partnership where two or more persons join together to carry on business and share profits. There is nothing on record to show that the co-owners entered into a joint venture in the nature of a partnership. Each co-owner purchased the land in his individual capacity and sold it also in the same capacity. The expenses for acquisition of land were incurred individually and the sale consideration were also received individually. There is nothing to show that a common profit and loss account was maintained and the profits were drawn up after the sale and were divided amongst the co-owners. Merely because the land was sold under a common agreement to sell for the sake of convenience does not make the transaction a joint venture. The observation of the AO that since PCL has shown the land as stock-in-trade the holding of land by the appellant would ipso facto become stock-in -trade in the hands of the appellant is without an....
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....the sale which has been shown towards land development expenditure. This, however, cannot be taken as converting a land, which was held by the appellant as a capital asset, into a trading asset. Way back in Jankiram Bahadur Ram v. CIT 57 ITR 21 SC, it was held that the mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade. In the case of CIT v. Kasturi Estates Pvt. Ltd, 62 ITR 578 (Mad.) the assessee had even parceled the land into plots and incurred expenses for laying roads on filling up, corporation survey, centage and other matters, yet the court held that these steps were no more than enabling the assessee to earn a better price rather than plunging into the waters of trade. In ACIT v. Ashok Motilal Kataria (supra) even the carving out of the plots and selling them to different persons was not held to be adventure in the nature of trade unless more activities in the nature of business were carried out. As noted supra even m the case of CIT v. R.V. Gupta (supra) the facts of which have been taken note of, herein above, it was held that there was no adventure in the nature of tr....
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....der of the A.O. He has submitted that land was partially owned by PCL. It was a solitary transaction of the assessee. PCL is in business of land deals and major share belongs to the assessee and PCL. The assessee is in joint business collaboration with the PCL, in which, assessee is a Director. PCL held the land as stock-in-trade. The sale consideration was taken in common kitty account. Sale consideration was received by PCL for all the co-owners and later on, it was transferred to all the shareholders. The intention of the assessee was to do business activity. 7. The Ld. D.R. relied upon decision of the Hon'ble Supreme Court in the case of G. Venkataswamy Naidu & Co. (supra). The Ld. D.R. referred to PB-11-A, to show the cost of acquisition and improvement in the land in question is in crores which was acquired in the A.Ys. 1995-96 and 1996- 97. He has submitted that PB-28 is assessment order in the case of co-owner of the land Ms. Gurleen Manchanda who was engaged in the business of event management. Therefore, that decision would not support the case of the assessee. The Ld. D.R, therefore, submitted that the assessee was in the business of land. Therefore, it was correctly he....
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....s an investment only. The sale consideration was invested in purchase of residential plot in Palem Springs in Gurgaon. The assessee expended as development expenses in 9% of the sale price only. He has relied upon the decision of the Hon'ble Supreme Court in the case of Jankiram Bahadur Ram v. CIT [1965] 57 ITR 21 and CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad.), which is accepted by the Department by not filing SLP before the Hon'ble Supreme Court. There were no material available on record to establish that assessee was indulged in trading of lands. The profit motive is wrong. He has also relied upon decision of Hon'ble Gujarat High Court in the case of Pr. CIT v. Bhanuprasad D. Trivedi (HUF) [2017] 87 taxmann.com 137 in which it was held as under : "Where assessee had purchased shares with clear intention of being an investor and held shares by way of Investment, gain arising out of transfer of shares should be treated as capital gains and not business income." 9. We have considered the rival submissions and perused the material available on record. It is not in dispute that assessee purchased the land in his own name which is proved by purchase deed executed in ....
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.... Merely because the land has been sold under a Common Agreement to Sell for the sake of convenience, would not, make the transaction as Joint Venture. Each land owner had received sale consideration from PCL. It was also alleged by the A.O. that prior to it, assessee had agreements with some other parties, but such agreements were never acted upon between the parties. PCL has substantial land holding as against land holding of the assessee. The assessee incurred small expenses on the property in question which was only 9% of the value. Therefore, decision of the Hon'ble Madras High Court in the case of Kasturi Estate (P.) Ltd. (supra), squarely apply to the facts and circumstances of the case, where, even the expenditure incurred for laying roads, corporation survey, centage filling-up, parceling into plots and others was not held as 'activity of business' but 'expenditure' for realising better sale price of the capital asset. Further, the decision in the case of Janakiram Bahadur Ram (supra), also apply to the facts of the case, in which, it was held that "mere fact that owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventu....