TaxTMI 
TaxTMI 
2019 (9) TMI 807
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of income for ay 2015-16 in question declaring total income at Rs. 1,39,32,720/- which inter alia included long term capital gains of Rs. 51,62,050/-. The return filed by the assessee was subjected to scrutiny assessment. In the course of the assessment proceedings, the AO inter alia noticed that the assessee has sold an immovable property being non-agricultural (NA) land bearing RS No. 1719 situated at Village Panchot, Dist. Mehsana, Gujarat vide sale deed dated 27.11.2014 held alongwith other four co-owners and that the assessee is having 25% share in the total consideration of Rs. 12,30,49,800/-. The share of assessee in sale consideration thus worked out to Rs. 3,07,62,451/-. The AO disputed the nature and character of transaction declared to be of capital nature by the assessee. According to the AO, the purchase and sale of land parcels by the assessee requires to be treated as 'business venture' and the profits arising on sale of land is taxable under the head 'business income' rather than under the head 'capital gains' as declared by the assessee. 3.1 For holding so, the AO traversed through the whole gamut of sequential events from purchase of land parcels up to the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the entire act of the assessee was to provide possession of land with ready commercial use to the buyer to enable it to construct the Mall. It was thus inferred that all series of act are purely business oriented and therefore, the profits arising on sale of land is required to be treated as 'business income'. The AO incidentally also noticed that the initial Banakhat amount of Rs. 21 Lakhs was received from the buyer after application for modification in land use plan for commercial purposes was moved and therefore the assessee was under no compulsion to act on behest of the proposed buyer as claimed. The AO inferred the merger and change of land use plan thrice adverse to the assessee and an indication of business leaning for exploitation of land. The AO also noted that the assessee has derived extraordinary profits in a short time horizon which also suggests the element of commerciality in the act of the assessee. The AO accordingly treated the amount of Rs. 2,97,02,410/- to be 'business income' of the assessee arising from such land sale which is susceptible to taxation under the head 'business income'. The AO accordingly denied the concessional tax treatment available to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uyer's request was found incorrect, etc. He ultimately held that the sale of land is an adventure in nature as defined in section 2(13) of the Act and therefore, the profit on sale of the land as required to be taxed u/5.28 of the Act. 4) The appellant has contended that the appellant along with other coowners had fulfilled the demand of the buyer of the land for getting the necessary permissions for which correspondence was made through email on 13.08.2014 and 18.08.2014 wherein small layout plans were provided by the buyer of the land. The appellant also objected to the proposition put forth by the AO that the intention of the appellant was business only for the reason that he applied for N.A. on 19.12.2012 and second one on 04.04.2013 and also the A.O/s finding that some expenses had been incurred for getting the land converted into N.A. and the appellant contended that the said expenses were on account of payment of brokerage for the sale of land only. The expenses for approving the lay out plan were also compulsory and based on the agreement made with the buyer of land, for which a copy of agreement has also been filed with the written submissions. The appellant h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CTR (Guj.) 647, after analyzing various decisions of Apex Court, the Hon'ble High Court of Gujarat has formulated certain tests to determine as to whether an assessee can be said to be "carrying on business in their decision in the case of CIT Vs. Revashanker A Kothari (2006) 155 Taxman 214 (Gujarat) which are as under:- (a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... conditions of development of land or not? 6.3 First the tests applied in the case of Ajitkumar T Patel (nonreported case of ITAT, Ahmedabad) have been perused and it has been noticed that in that case, the applicant before the Hon'ble ITAT the facts have been summarized as under:- a) The applicant was a director in several companies and disclosed salary income, dividend income and income from other sources. b) He purchased the two plots of agricultural land on 28.02.2005 and 14.02.2005 which were consolidated on 16.05.2005. c) The application for transfer of agricultural land to commercial purpose land (NA land) was made on 17.07.2007 and conversion fees and other charges were paid by the applicant. d) Final order was passed by the AUDA after deduction of 20% and 40% as per order dated 24.07.2007 and there was some commercial loss in terms of land area on account of deduction. e) These two plots of land were sold on 23.08.2007 to one Urbanedged Hotels Pvt. Ltd. after retaining the said plots of land for about 2½ years and sold. f) The A.O. observed that investment in the purchase of plots from own funds did ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Shri Ajitkumar T. Patel, the majority of the tests fail in the case of the appellant. These facts are distinguished as under: - Sr. No. Appellant's case Case of Ajitkumar T. Patel 1. The said land has been purchased by the co-owners during the FY 2011-12 through five different sale deeds, all falling in old Revenue No. 1724/2 of Sim of Panchot village, Mehsana. The land so purchased had been("merged,, with new Revenue Survey No.1719 and sold to M/s Avenue Super Market Ltd. He purchased the two plots of agricultural land on 28.02.2005 and 14.02.2005 which were consolidated on 16.05.2005. 2. The appellant along with other co-owners got this land approved for residential purposes for which the first plan was approved on 05.08.2013 and the revised plan on 06.02.2014 for converting the land for residential and small business centre and lastly on 15.09.2014 for converting the entire plot of land for commercial purpose only. The application for transfer of agricultural land to commercial purpose land (NA land) was made on 17.07.2007 and conversion fees and other charges were paid by the applicant. 3. No such deduction has been made as the land was not fall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee had left for Saudi Arabia and he could not have done any agricultural activity, being a Non-Resident Indian (NRI) without obtaining permission of RBI under Foreign Exchange Management (Acquisition & Transfer of Immovable Property in India) Regulations, 2000. The Assessing Officer thus held that the transaction was 'Adventure in the nature of Trade' and accordingly brought to tax income in question under the head 'income from business'. The Tribunal upheld the order of Assessing Officer: HELD The question of law arising in this appeal is whether the sale consideration was liable to be treated as business income of the assessee under section 28 or whether being the sale of an agricultural land, he was entitled to be exempted from capital gains tax under section 45. [Para 5] It is an undisputed fact that the assessee had purchased agricultural land on 16-8-2006 while he was still a nonresident Indian and thereafter he did not do any agricultural operations on that land. After retaining it for about two years, he sold it to T, In the meanwhile, he had also leveled the land. Admittedly, he did not obtain the permission of the RBI ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RI) without obtaining permission of RBI under Foreign Exchange Management (Acquisition & Transfer of Immovable Property in India) Regulation, 2000. The assessing officer held that the transaction was "Adventure in the nature of Trade" and accordingly brought to tax the property under the head "income from business" and determined the total income of the appellant at Rs. 56,19,593/- apart from the agricultural income return of Rs. 28,17,500/- as per Annexure A. Aggrieved by the order, the appellant filed JTA No.345/10-11 before the Commissioner of Income Tax(Appeals)-I, Kochi, who confirmed the assessment and dismissed the appeal as per Annexure B. The appellant challenged the said order before the Income Tax Appellate Tribunal, Kochi Bench as ITA 484/Coch/2013 and it was once again confirmed that the land in question was indisputably not an agricultural land, as per Annexure C. It is this finding, which is under challenge. 3. We heard the learned counsel for the appellant and the counsel appearing for Government of India (Taxes) and records were perused. 4. It is submitted by the learned counsel for the Appellant that there is no capital gains accrued, as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 2(14) read with section 45. b) The Assessing officer observed that (i) the land was not purchased with any intention to hold it for capital accretion, enjoyment and own use but were purchased with the sole motive of earning huge profits on immediate sale thereof as a trading asset, (ii) Major portion of these agricultural lands were not useful for cultivation (Hi) Occupation of assessee was not primarily of an agriculturist (iv) Land was acquired out of borrowed funds. Thus, the Assessing Officer concluded that entire activity of purchase and immediate sale of land by the assesses falls within the domain of 'adventure in nature of trade'. He accordingly treated the profit relatable to assessee arising on sale of land as 'business income' under sect/on 28(i) read with section 2(13). c) On appeal, the Commissioner (Appeals) held that the intention of the assessee was never to purchase the aforesaid lands with a view to cultivate the same. Hence, she confirmed the action of the Assessing Officer in holding that activities carried out by the assessee towards purchase and sale of impugned land as 'adventure in nature of trade' and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of an adventure in the nature of trade referred to in section 2(13) and, therefore, it is akin to 'business' giving rise to its taxability under section 28. [Para 7.1] c) The question of determination of other issues namely whether the land is agricultural land and if so whether the impugned land is outside the definition of 'capital asset' to claim exempt/on from applicability of section 45 will arise only if the impugned transaction do not bear the trappings of adventure in the nature of trade or commerce etc. Thus, in the context of case in hand, first and foremost controversy that calls for adjudication is whether the impugned transaction is a business transaction or a capital transaction. [Para 7.2] d) In this context, it is noted that there is a qualitative difference between profits arising from sale of capital assets and that of trading assets. Section 2(13) defining 'business' and section 2(14) defining capital assets operates in mutual exclusion. To put it differently, capital assets and trading assets or stockin-trade are treated differently under the scheme of the Act. They cannot be compared on par with each other as a similar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oduce the impugned agreement before revenue authorities. No perceptible reasons have been assigned. Notwithstanding, purported agreement for sale of other agricultural land was not acted upon at all. No advance was received against such purported agreement either. The entire explanation for initial intention to return borrowed money which failed is thus bald and unverifiable. It also does not coincide with a normal behavior of a person of ordinary prudence. The entire explanation based on a dumb document not acted upon, thus, has no rational probative value of the purported intention to return friendly borrowals. Whether the value of existing land recorded in the purported agreement was capable of matching the borrowals is also not available on record. The relevant financial data proving the financial capacity of the assessee is not available to justify the stand. Mere averments of generic nature based on some documents which were neither verified by the revenue nor acted upon in any manner cannot be taken as source of explanation for transaction of such magnitude. The assessee has made out a case that owning to the pressure from family 'P' to return their loan amount which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is best known to the parties involved. The governing factors in the form of purchase financed entirely by the ultimate buyer and consequent transfer of land to the ultimate buyer almost immediately on its acquisition cannot be simply brushed aside. Clearly, the assessee was interested in exploiting commercial opportunity for quick gains in a very short time horizon. The attendant facts also points out that the purchase of land was far beyond the earning capacity of the assessee and, thus, claim of the assessee that the land was intended for personal use and its exploitation and for appreciation with efflux of time is utterly improbable and thus is devoid of merits. A combined reading of all connected facts warrant for an inescapable conclusion that the motive for purchase itself was for embarking in an adventure in the nature of trade. [Para 7.5] f) It is also noted that the other contentions of the assessee were that the assessee owns other tract of agricultural land apart from the impugned land and is holding these lands with a view to carry out agricultural operations and, therefore, adverse inference against the assesses is not justified. However, thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the totality of facts and circumstances, it is to be held that the impugned land was purchased with an intent/on to sell the same to the identified buyers to achieve commercial objectives outright. As noted earlier, section 2(13) seek to explain the term of 'business' by way of inclusive definition. As per section 2(13) expression 'business' include not only trade or commerce, etc. but definition further extends to encompass within its ambit an 'adventure in the nature of trade'. The entire gamut of action of the assessee in engaging in such big ticket land purchase without employing any fund of his own and almost immediate resale thereof clearly demonstrates the implicit intention of the assessee that the transaction entered was nothing but an 'adventure in the nature of trade' i.e. a business transaction under extended definition of section 2(13). Consequently, profits arising therefrom acquires the character of 'business income' chargeable under section 28. [Para 8] k) Thus, the view of the Assessing Officer and the Commissioner (Appeals) in bringing the income arising on sale of land under the head 'business income....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thus submitted that merely because the property was sold at a high profit would not give rise to any presumption towards an adventure in the nature of trade. The learned AR for the assessee relied upon the decision of the co-ordinate bench in Ram Saroop Saini HUF vs. ACIT ITA No. 1409/Del/2005 order dated 27th May, 2007 to contend that where a portion of agricultural land was converted into NA land and thereafter sold, the surplus arising therefrom should not be regarded as 'business activity'. The learned AR assailed the action of the lower authorities and submitted that such action of the Revenue was guided by consideration of Revenue alone to gather unlawful taxes from the assessee. The learned AR accordingly urged for reversal of the action of the lower authorities and restoration of claim of the assessee for taxability of surplus arising from sale under the head 'capital gains'. 7. The learned DR, on the other hand, relied upon the order of the lower authorities and submitted that the relevant facts have been objectively analyzed by the CIT(A) while affirming the action of the AO. The learned DR for the Revenue submitted that when all the facts as narrated by the AO and CIT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral land at the time of purchase faced legal restriction of sale (only to agriculturists) and therefore, the lands were converted into NA land as per the prescribed procedure. The converted land was sold in FY 2014-15. Thus, a solitary transaction giving rise to surplus was rightly offered under the head 'capital gains' in the circumstances of the case. 8.2 The Revenue, on the other hand, contends that the transaction of purchase and sale of land parcels is an adventure in the nature of trade as defined in Section 2(13) of the Act and consequently, the profits arising on sale of land is required to be taxed under s.28 of the Act. The pre-dominant contention of the Revenue is that the assessee has indulged in not merely purchase and sale of land but has undertaken measured steps in tandem to significantly improve the value of the land for its commercial exploitation and consequently, the extraordinary profits arising from sale of land in a short time horizon do not support the claim of the assessee for its chargeability under the head 'capital gains'. 8.3 On a perusal of the assessment order, we observe that the AO has tabulated the parcels of land purchased by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee that the land parcels were held as capital asset prior to sale, such contention appears to be shallow. It is an admitted position that the land parcels were not subjected to wealth tax as applicable to capital assets. Coupled with this, we also fail to see anything on record to suggest the use of the land for agricultural purpose or for any purpose to enable the assessee to generate any regular yield altogether thereon. The absence of any yield also gives an impression that assessee never intended to exploit the land for its own use or enjoyment. The concerted and measured action of the assessee as noted above underscores the overriding motive of the assessee to maximize the profit with systematic action. It is thus tough to debunk the perception that the lands were purchased as 'trading assets' indeed to reap profits commercially. Such inference also gains traction from the fact that the assessee has reported a profit in the vicinity of Rs. 3 Crores on investment of Rs. 10.60 Lakhs within a span of the 3-4 years. Such profits are possibly attributable to the intermediate steps of substantial nature undertaken by the assessee for commercial exploration. The whole approach of t....