SANJAYSINH PRAVINSINH CHUDASAMA,BHAVNAGAR vs. THE ITO, WARD-1(5), BHAVNAGAR

Learned CIT(A) has erred in law and on the facts in changing the head of income without affording any opportunity to the Appellant. Under the facts of the case, the transaction in question was a sole transaction and thus CIT(A) ought not to have changed the head of income. 5. Learned CIT(A) has erred in law and on facts of the case in not appreciating that the land in question was an agriculture land within the meaning of S.2(14) of the Act, and thus outside the purview of S.45 of the Act. 6. Learned CIT(A) has erred in law and on the facts in confirming the action of AO in charging interest u/s.234A/B/C/D. 7. Learned CIT(A) has erred in law and on facts in confirming the action of AO in initiating penalty u/s.271(1)(b), u/s. 271(1)(c) and u/s. 271F of the Act which is wholly unsustainable in law and on facts of the case.” 4. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee had entered into a registered sale transaction of immovable property during the impugned assessment year, for a consideration of ₹30,92,000/-, but had not filed the return of income within the time prescribed under section 139(1) of the Act. Based on information from NMS and subsequent verification through the Sub-Registrar’s office, the Assessing Officer found that the assessee had purchased land on 25.08.2010 for a sum of ₹4,90,000/- and sold it on 18.11.2010 for a sum of ₹30,92,000/-, resulting in short-term capital gain of ₹26,02,000/-. However, despite issuance of notices under sections 148 and 142(1) of the Act, the assessee failed to respond and neither did he participate in the assessment proceedings. Since no return was filed and no explanation or supporting evidence was Shri Sanjaysinh Pravinsinh Chudasama vs. ITO Asst.Year –2011-12 - 3– submitted by the assessee to establish the nature and source of the transaction, the Assessing Officer proceeded to finalize the assessment ex parte under section 144 of the Act. The officer held that the gain from the property transaction remained unexplained and the Assessing Officer added a sum of ₹26,02,000/- as “short-term capital gain” to the income of assessee. The Assessing Officer also initiated penalty proceedings separately.

In appeal, Commissioner (Appeals) primarily looked into the nature of income earned by the assessee from the sale of a piece of land. The assessee contended that the land in question was agricultural, located under Mundi Gram Panchayat, approximately 36 kilometers away from the nearest municipality, Dhandhuka, and falling within a village with a population of less than 2,000. In support of this, the assessee submitted the sale deed and a confirmation letter from the Mundi Village Panchayat. However, upon examination of the facts, CIT(Appeals) was of the view that the assessee had purchased the land on 25.08.2010 for Rs. 4,90,000/- and sold it shortly thereafter on 18.11.2010 for Rs. 30,92,000/-, resulting in a substantial gain of approximately Rs. 26,00,000/- within a span of less than three months. The CIT(Appeals) observed that the quick resale and the significant profit which was earned by the assessee within such short span of time clearly indicated that the transaction was not undertaken with the intent of engaging in agricultural activities but rather with the purpose of resale for profit, thereby falling under the category of an "adventure in the nature of trade." To support this conclusion, CIT(Appeals) relied on Shri Sanjaysinh Pravinsinh Chudasama vs. ITO Asst.Year –2011-12 - 4– the Supreme Court's decision in the case of Indramani Bai vs. Addl. CIT (200 ITR 594), which held that quick resale of land with profit initiated trading motive. Similarly, Kerala High Court’s in V.A. Jose vs. DCIT (89 taxmann.com 2) held that resale of land with enhancements to increase saleability and realization of huge profits pointed to a business transaction rather than a capital gain. Thus, in view of the nature of transaction, short time period between purchase and sale and high profitability of the transaction, CIT(Appeals) held that the assessee's conduct was indicative of a business activity rather than a capital investment. Accordingly, the income derived from the sale of the land was held to be taxable under the head "Income from Business" and not as "Capital Gains." Therefore, the order of the Assessing Officer was upheld, and the grounds raised by the assessee were dismissed.

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the Counsel for the assessee submitted that the land sold was rural agricultural land situated over 36 kilometers from the nearest municipality, as certified by the Gram Panchayat, and thus did not fall within the definition of a "capital asset" under Section 2(14)(iii) of the Income Tax Act. It was contended that the original addition was wrongly made under Section 45 of the Act without verifying whether the transaction was even taxable, and that the CIT(A) further erred by recharacterizing the transaction as "business income" without conducting any independent inquiry or issuing a notice of enhancement under Section 251(2) of the Act, thereby violating Shri Sanjaysinh Pravinsinh Chudasama vs. ITO Asst.Year –2011-12 - 5– principles of natural justice and settled legal precedents. The Counsel for the assessee submitted that no development or commercial activity was carried out on the land, the sale was due to financial distress and not for profit, the transaction was a one-time isolated event with no prior or subsequent land dealings, and the land was always treated as a passive investment. It was further argued that the best judgment assessment under Section 144 of the Act was passed without granting any opportunity of hearing. In response, the Ld. DR placed reliance on the observations made by the CIT(Appeals) in the appellate order.

We have heard the rival contentions and perused the material on record. The assessee is in appeal against the order of the Commissioner of Income Tax (Appeals), whereby the addition of ₹26,02,000/- was sustained by characterising the transaction as “business income”. It is the case of the assessee that the land sold was rural agricultural land located more than 36 kilometers away from the municipal limits of Dhandhuka, as certified by the Gram Panchayat, and thus did not fall within the ambit of "capital asset" under Section 2(14)(iii) of the Income Tax Act. The assessee submitted that the Assessing Officer mechanically invoked Section 45 without verifying whether the land constituted a capital asset, and passed the assessment order ex parte under Section 144 of the Act, without affording any opportunity of hearing or calling for relevant documentary evidence. Further, the Counsel for the assessee submitted that the Commissioner (Appeals), while disposing of the appeal, did not issue any notice of hearing to the assessee and proceeded to recharacterize Shri Sanjaysinh Pravinsinh Chudasama vs. ITO Asst.Year –2011-12 - 6– the transaction under the head "business income" without conducting any independent inquiry or verification, and without issuing a notice of enhancement under Section 251(2) of the Act. Furthermore, the assessee has submitted that the transaction was an isolated sale made under financial stress, with no development activity, no prior or subsequent land transactions, and no intention to undertake business, has not been adequately examined either by the Assessing Officer or the Commissioner (Appeals).

In the result, the appeal of the assessee is allowed for statistical purposes. This Order pronounced in Open Court on 28/07/2025