SHRI.BABULAL,BANGALORE vs. THE INCOME TAX OFFICER WAD-2(2)(4), BANGALORE

The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in treating a sum of Rs.7,12,016/- and Rs.18,01,718/- which were declared as long term capital gain on which exemption under section 54/54F of the Income Tax Act, 1961 (hereinafter called ‘the Act’) was claimed by the Assessee as income under the head Income from Business and consequently denying the deduction under section 54F of the Act to the assessee.

On verification of the computation of Capital gain submitted by the assessee, the AO found that the assessee has sold i.e one Plot for Rs. 16,10,000/- and computed the long term capital gains of Rs. 25,455. The AO noticed that assessee had sold one more plot during Assessment Year 2012-13 and computed capital gain of Rs.2,53,450/- and claimed exemption under section 54F of the Act. The AO, therefore, verified the details of sites sold by the assessee and he found that the assessee had purchased one vacant residential purpose converted land of 32 guntas in Assessment Year 2008-09 vide registered sale deed dated 07.09.2007 for Rs.17 lakhs. The total cost of purchase of the land including stamp duty was Rs.18,82,190/-. The assessee paid a sum of Rs.5,79,800/- for approval to convert the larger extent into residential plots of different sizes, besides incurring expenditure of Rs.23,500. The total cost of acquisition of the larger extent of land and its conversion to approved sites was Rs.24,85,515 (Rs.1882190 + Rs.5,79,800 + 23,500). The Mysore Development Authority vide letter 21.05.2010 granted permission to convert the 32 guntas of land into a layout. The assessee divided 32 guntas of land into 9 plots of different sizes. Thereafter, the assessee sold the sites i.e., 1 site in the previous year in Assessment Year 2012-13 and 1 site in Assessment Year 2013-14.

The AO took the view that the assessee was engaged in an adventure of the nature of trade and therefore the income declared under the head “capital gains” is to be taxed under the head Income from Business. The assessee took the stand that the land was purchased with an intention of constructing a house for his self-occupation. Since the land was outside Mysore City, the assessee

On appeal by the assessee, the CIT(A) confirmed the order of the AO. Aggrieved by the order of the AO, the Assessee has preferred the present appeal before the Tribunal.

We have heard the submission of the learned AR who reiterated submissions made before the revenue authorities and relied on a decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Hotel Sreeraj dated 6.12.2007 and ITAT Rajkot Bench in the case of ACIT Vs. Narendra J.Bhimani ITA No.411/Rjt/2012 dated 31.1.2018. The learned DR

We have carefully considered the rival contentions. The Assessee purchased 32 Guntas of land on 7.9.2007. The land was originally agricultural land but was converted to non-agricultural use by order of Deputy Commissioner, Mysore District, Mysore dated 22.6.2006. Even prior to purchase the land use became non-agricultural. The Assessee applied for obtained permission for division of 32 guntus into plots of different sizes on 12.10.2010. In previous year relevant to AY 2012-13 he sold one plot (on 16.3.2012) and in AY 2013- 14, he sold two plots (on 20.7.2012 & 26.12.2012 respectively). In AY 2015- 16, three plots were sold by the Assessee (on 2.2.2015 and 6.3.2015). In response to the query of the AO with regard to whether the Assessee has indulged in an “Adventure in the nature of trade” when he sold plots of land, the Assessee submitted a letter dated 24.3.2016 before the AO in which he has clearly explained that he was a trader in paper and KMF products and has not indulged in any business of seeling sites. The Assessee has also explained that he was planning to construct a house for self occupation but since the land was outside Mysor;e and due to financial crunch, he decided to sell the entire property. The Assessee has also explained that because of slow down in real estate, he could not find buyers and sold sites over a number of years. Thus the Page 5 of 9 intention of the Assessee was not to do business in selling sites. The treatment of the larger extent of land in the books of account of the Assessee is as capital asset and not as stock in trade. This plea of the Assessee has not been disbelieved by the AO nor is there any material brought on record to disprove the claim of the Assessee.

The definition of business in the Act is an inclusive definition and includes any trade, commerce or manufacture or any adventure or conern in the nature of trade, commerce or manufacture. The Supreme Court in G.Venkataswamy Naidu (1959) 35 ITR 594 (SC) held that even if there is absence of regularity, frequency or continuity in the transaction/s even an isolated transaction can be regarded as carrying on of business and as an adventure in the nature of trade for the purpose of treating it as business carried on. The supreme court in several cases laid down tests to determine as to when a single or isolated activity can be regarded as resulting in “Adventure in the nature of trade”. The principles for determination of the question whether a particular transaction/s would constitute an adventure in the nature of trade and, if so, what tests would apply to arrive at a decision had also been examined by the Supreme Court in the case of G.Venkataswami Naidu (supra) and it was held that "it is impossible to evolve any formula which can be applied in determining the character of isolated transaction which come before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his

The Supreme Court has also laid down that cases of commercial commodities stand on different footing from land. A transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade Janki Ram Bahadur Ram Vs. CIT (1965) 57 ITR 21 (SC) and P.M.Mohammed Meerakhan Vs. (1969) 73 ITR 735 (SC) It was also held that land is not generally or ordinarily a trading commodity unlike, for example, manufactured articles that are normally the subject-matter of trade. Land, on the other hand, is often the subject-matter of investment CIT Vs. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad).

In cases of purchase and sale of land as laid down by the Hon’ble Supreme Court in the case of Raja J.Rameshwar Rao (supra), a decision on which the learned DR placed reliance, the intention at the time of purchase will be a relevant factor. When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the person goes further and Page 8 of 9 divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as he bought it but in parcles, he is dealing as his stock-in-trade; he is carrying on business and making a profit. In the present case however the intention at the time of purchase was to construct a house for self occupation and that intention was given up due to the fact that the land was outside Mysore city and due to financial crunch. Therefore the tests laid down in the decisions support the plea of the Assessee that he did not do any adventure in the nature of trade when he sold the larger extent of property after dividing them into smaller sites. The dates of acquisition of the property and its conversion into sites and obtaining approval and the dates of sale by the Assessee all go to show his intention at the time of acquisition was not with a view to indulge in an adventure in the nature of trade. The case of B.Narasimha Reddy (supra) is a decision on facts of that case. In paragraph 12 of the decision of the Hon’ble Karnataka High Court, the circumstances of the case have been spelt out and those circumstances are present in the present case.

For the reasons given above, I hold that the gain on sale of land is to be regarded as income under the head “capital gain”. Consequently, the Assessee should be entitled to all the deductions permissible while computing income under the head “Capital Gain”.

The appeal of the Assessee is accordingly, allowed.