TARUN HARSHI MOTTA ,MUMBAI vs. DCIT CENTRAL CIRCLE-6(1) , MUMBAI

During the year under consideration assessee declared Long Term Capital Gains from Sale of Flat at Ekta Terrance (Residential) for Rs. 1,01,50,000/- and Sale of Plots at Toobarahali (Bangalore) for Rs. 8,65,71,000/- after indexation. The plot at Bangalore was admeasuring 1 acre agriculture land bearing survey no. 6/1. This land was converted into non agriculture land by the assessee by obtaining appropriate permissions from the authorities. This land was bifurcated into 14 plots admeasuring 33,339 sq. feet by constructing the approach road admeasuring 10,221 sq. feet. Assessee sold 10 plots to various buyers for aggregate consideration of Rs 8, 65, 71,500/-. This land was purchased by the assessee on 11-01-2007 and always shown this plot as investment and not as business asset/ stock in trade.

Vide para-3 of page no. 2 AO mentioned schedule-A (Fixed assets) wherein total 14 flats /land /bungalow/office premises/house etc. were given. In addition to this AO also mentioned on page no. 4 the names of the 9 partnership firms in which assessee is a partner.

The sale of plot at Bangalore after bifurcation, AO treated the same as adventure in the nature of trade and accordingly treated the same under the head business and profession. Whereas assessee claimed the same as long term capital gain. Being aggrieved with this order of AO assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) also confirmed the view of the AO and treated the same as business income.

Being aggrieved with this order of Ld. CIT (A), Assessee further preferred an appeal before us. We have gone through the order of AO, order of Ld. CIT (A) and submissions of the assessee along with case laws relied upon by assessee and revenue. To have a clear view of the whole matter, relevant facts are enumerated herein below:

The main strength AO is gaining from the fact that the partnership firms, in which assessee is a partner are involved primarily in the field of real estate transactions, hence this transaction also, of assessee, is in the nature of business transaction. Considering, all the facts and circumstances of the case, in our opinion this fact rather goes in assessee’s favor, as assessee has managed his affairs in such a segregated manner that he always runs business of real estate through partnership firms and only investment of real estate in individual capacity.

No repetitive transactions of similar nature have been undertaken. Therefore, it is a clear case of investment and the same has been realized after a gap of almost 10 years and same was resulting in long term capital gains. There is nothing more than the activity of dividing the plots in smaller sized units which has led the Assessing Officer to believe that the assessee was carrying on an adventure in the nature of trade. What he has overlooked is a whole bunch of factors which reasonably demonstrate that not only the assessee was never engaged in the business of dividing the large plots of land into smaller end use units, but also that what was sold by the assessee was the land possessed by the assessee for a long period of time. Due to a fundamental change in the use of land in the areas concerned, over the long period during which the assessee held the land, the sellable standard unit size had indeed considerably came down, and, in order to get the market price for land, he had to essentially divide the land holding into plot size for which there is end user market. While it may have been common to buy the land in the size that the assessee did in 2007 as the use of land was agricultural at that point of time, with the passage of time, and rapid urbanization and this land now being in the residential area, where smaller sized plots were required by the end users, the assessee had no choice but to sell the land plots in smaller size to get the market price. No other approach would have enabled the assessee to get the right price in the end user market, and anything other than end user market would have reduced the selling price to factor for profit by the business which would have bought entire land just to buy it, divide it into smaller plots and sell to the end users. It was clearly a one-off activity for the assessee as the assessee did not go beyond selling what he already held for the long years, and even the sale consideration was not ploughed back in land investments all along the gains on the sale of these plots was treated as capital gains, and, beyond any dispute or controversy, this land was held as capital assets.

The burden of proving that the particular transaction was an adventure in the nature of trade is on the revenue. Of course, that burden can be discharged by pointing to circumstances which lead to the conclusion that the transaction is an adventure in the nature of trade. However, even if land which is not a commercial commodity is purchased and it can be shown that the purchase of the land was made solely and exclusively with an intention to resell it at a profit, it would be a strong factor that the transaction would be an adventure in the nature of trade. In the instant case no such strong factor emerged from the facts of the case. It was not possible to hold that the assessee was a dealer in land or was treating land as his stock-in-trade.

In the present case there was nothing to show that the land was purchased with an intention to sale it at a profit or with requisite intention, to bring it with the parameters of stock in trade. It is not shown that the assessee is regular dealer in real estate. It appears that the land was purchased in 2006-07, the other adjoining land has been developed, and since the land was yielding better returns, it was decided to be sold in piecemeal, by earmarking plots but then nonetheless it would remain a disposal of the capital asset only, and not as transaction of stock in trade so as to be described as adventure in nature of trade.

The transaction itself should be looked at to see if it is essentially of a commercial character. A purchase and sale of land may be of that character but not necessarily so. If a person is systematically engaged in a series of transactions of purchase and sale of lands with a view to make profit out of them that may indicate that he is occupied in a trading activity. But it is well settled that ownership of land by itself is not a trade. And so, a person may purchase property, hold and enjoy it, derive income from it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, there date, at a profit. But that could hardly make any difference. Sale of land, in those circumstances is no more than a realization of capital or conversion of one form of it into another. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light, of course, of the objects and the surrounding circumstances and facts at the time of purchase and holding period. There is no evidence that the assessee has purchased the agriculture land at any rate which bears any comparison to its vast assets. Nor is there any evidence that the assessee has engaged in a series of sales of land or other property belonging to it. When the property was originally acquired in the form of investment and there was no intention to resale it at a profit. Sales of land have not been frequent feature of the assessee. If a land owner develops his land, expanded money on it, laid roads, converted the land in to house site with the view to get better prize for the land, eventually sold the plots for consideration yielding a surplus, it could be hardly said that the transaction is anything more than a realization of a capital investment of conversion of one form of assets in to another. Obviously, the surplus in such case will not be trading or business profit because the transaction is one of realization of assets in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade. Having regard to the nature of property, length of its ownership and holding, actual conduct of the assessee or all other facts including absence of evidence of any trading activity, the surplus from sale of land did not result from any trade or business in land carried on by assessee or from any transaction which may properly be described as an adventure in the nature of trade. If we apply the above discussions to the facts of the case, we find that it is an investment in agriculture land in the hand of the assessee. It was neither purchased nor acquired with the intention or for the purpose of any business or adventure in nature of trade.

Case laws relied up on by the revenue is distinguishable as the facts of the case under consideration and what discussed therein are altogether different. Revenue relied up on following decisions of Hon’ble Apex Court and Hon’ble Karnataka High Court along with coordinate bench, Ahmadabad as under: i). Raja J. Rameshwar Rao vs. CIT [1961] 42 ITR 179 (SC.) II). CIT vs. R. Ramaiah [1984] 17 Taxman 164 (Kar.) iii). HarshadkumarAmrutlal Patel vs. DCIT, Mehsana [2019] 111 taxmann.com

Case laws relied up on by the assessee are found to be relevant and exactly on the issue under consideration. Assessee relied up on following case laws as under: i). CIT vs. AhmedbhaiUmarbhai& Co. 18 ITR 472 (SC.) ii). Barendra Prasad Roy vs. CIT 129 ITR 295 (SC.) iii). Bhogilal H. Patel vs. CIT 74 ITR 692 (Bom.)

In view of the facts discussed (supra) and considering the decisions of various Hon’ble Courts, we are of the considered opinion that inference drawn by the AO and further confirmed by the Ld. CIT (A) is not sustainable on the given set of facts. As the assessee invested in the land almost 10 years ago and there is no further activity on the same or any other assets of the assessee as described by AO himself in his assessment order. After a long time, because of rapid urbanization and enhanced requirement of residential plots, assessee planned to convert the same in end user size plot with necessary modifications. Applying prudence to enhance the gain of assessee, can’t be equated the transaction with Adventure in the nature of trade. In the light of above and decided case laws, we allow the ground raised by the assessee and AO is directed to treat the transaction as income under the head Capital Gains with consequential deductions.

In the result, appeal of the assessee is allowed.