DCIT, NEW DELHI vs. SH. MOHINDER PURI, NEW DELHI

PER BHAVNESH SAINI, J.M.

Both the Departmental Appeals are directed against

the different orders of the Ld. CIT(A)-3, Delhi, Dated 15.02.2011

for A.Y. 2006-2007 in the case of two different assessees on the

identical question.

the parties and perused the material on record. Learned

Representatives of both the parties mainly argued in the case of

assessee Shri Mohinder Puri ITA.No.2310/Del./2011 and

stated that order in this case may be followed in the case of

other assessee Shri Arjun Puri. Therefore, for the purpose of

disposal of both the appeals, the appeal in the case of Mohinder

Puri is decided as under.

ITA.No.2310/Del./2011 – A.Y.2006-2007 (Shri Mohinder Puri).

grounds :

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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 assessee held that the

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transactions in question is an adventure in nature of trade as

defined under section 2(13) of the Act and that profits arising

therefrom are chargeable to tax under the head “Profits and

Gains of Business or Profession” under section 28 of the I.T.

Act. Correspondingly, assessee was not allowed to claim

deduction under section 54F of the Act against the income from

sale proceeds of the land which is held to be business income

of the assessee.

4.1. The assessee challenged the order of the A.O. before

the Ld. CIT(A) by contending that A.O. erred in holding the

profits on sale of land at Village Wazirabad, Sector-53, Gurgaon

as income under the Head “Business” and not accepting the

same as “Long term capital gains” shown at Rs.37,12,316/-.

The A.O. also erred in not granting exemption under section 54F

of the I.T. Act.

4.2. The A.O. noted that under an agreement dated

04.04.2005, the total land admeasuring 28.815 acres situated

in Wazirabad, Sector 53, Gurgaon, was sold to M/s. Parsvnath

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Developers Ltd., (“PDL”). Out of the subject land, the assessee

owned 1.31 acres and M/s. Puri Construction Ltd., (“PCL”), of

which, assessee is a Director, owned 10.53 acres. The

remaining land was owned by 04 other persons. All the land

owners collectively Authorised PCL to enter into and execute

the said Agreement and to do all acts, deeds and things in

pursuance thereto. The sale proceeds were received in the name

of PCL, out of which, the sale consideration received by the

assessee in respect of the land owned by him and sold, worked

out to Rs.8,36,90,787/-. After deducting brokerage, cost of

acquisition, cost of improvement and indexation, long term

capital gain of Rs.3.40 crores was shown. After claiming

exemption of Rs.3.03 crores under section 54F of the I.T. Act,

long term capital gains of Rs.37,12,316/- was shown in the

return of income. The A.O. asked the assessee as to why the

income from sale proceeds of the aforesaid land be not treated

as business income instead of income from long term capital

gains.

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4.3. The assessee filed the detailed submissions before

A.O. The crux of the submissions of the assessee was that the

land was purchased as a capital asset and continued to remain

so till it was sold. It was not acquired as stock-in-trade of a

business. It was a solitary transaction entered into with

intention of earning profit on accretion. 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

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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 Syndicate Vs Harris, 5 STC 159, 165- 66 in the following passage:

‘It is quite a well settled principle in dealing with questions of assessment of income-tax that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change in investment, but an act done in what is truly the carrying on, or carrying out, of a business....... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realizing a security or is it a

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gain made in an operation of business in carrying out a scheme for profit-making”, (ii) In Janaki Ram Bahadur Ram V. CIT 57 ITR 21 (SC) it was held that the nature of the transaction must be determined on the consideration of all the facts and circumstances which are brought on the record of the Income Tax Authorities. The court observed that a transaction of purchase of land can not be assumed without more to be venture in the nature of trade. 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. It was pointed out that the facts that the assessee made a profitable bargain when it purchased the property and that it had a desire to sell the property, if a favourable offer was forthcoming, could not without other circumstances justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade. The following passage from the judgment is illuminating.

“If for instance transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of

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purchase, the nature 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 carrying on an adventure in the nature of trade. These are cases of commercial commodities. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. A Director of a company carrying on the business of warehouseman purchasing a number of houses with a view to resale, and selling them at a

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profit some years after the purchase : IRC v. Reinhold [1953] 34 Tax Cas 389: a person carrying on business in various lines, including an engineering works, purchasing land which before the land was derequisitioned, and selling it after the land was released: Saw] Kumar Majumdar v. CIT [1959] 37ITR 242 (SC): and a syndicate formed to acquire an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit: Leeming v. Jones [1930] 15 Tax Cas 333, may not be regarded as commencing a venture in the nature of trade These are cases in which the commodity purchased and sold is not ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture

In the light of the above observation made by the Hon’ble Supreme Court, it is clear that the Hon’ble Supreme Court in this case made a distinction between transaction in commercial commodities and transaction on purchase of land distinguishing the transaction on purchase of land from the cases dealing with commercial commodities.

In the said decision, the Hon’ble Supreme Court has further held that a profit motive in entering into a transaction is not decisive to decide the issue. The Hon’ble Supreme Court emphasized that (page 26 of 57 ITR):

“It may be emphasized from an analysis of these cases that a profit motive in entering into a transaction is not decisive, for an accretion

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to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit. ”

(iii) In Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253, the Hon’ble Supreme Court again reiterated that (at page 262): “Where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax” In this case, it was further observed that (page 262):

“If the transaction is in the ordinary line of the assessee’s business there would hardly be any 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

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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 Vs. Good 49 TC 277, 296-297 (CA), 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 point out to an adventure in the nature of trade.

(vi) In G. Venkataswami Naidu & Co. V CIT 35 ITR 594 (SC), the following extract is relevant for deciding the question whether the profit is by way of capital accretion or is income from an adventure in the nature of trade. This is what Gajendragadkar J. (as his Lordship then was), who spoke for the court, observed at page 609.

“If a person invests money in land intending to hold it, enjoy 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 realization 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 relevant, such as, e.g., whether the purchaser was a trader, and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a

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design or purpose; the incidents associated with the purchase and resale; the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold it for some time and, if a profitable offer is received, sell it. During the time that the purchaser had its possession, he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld, that would be a factor against the transaction being in the nature of trade The presence of all these relevant factors may help the court to drawn an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all the relevant factors and circumstances that determines the character of the transaction

(vii) CIT vs. Kasturi 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 Vs. Harris; (b) Janaki Ram Bahadur Ram vs. CIT and (c) G. Venkataswami Naidu & Co. Vs. 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,

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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 whether it was profit from business or capital gain. • The precise question was whether the assessee plunged in the water of trade so as to construe the transaction as an adventure in the nature of trade. • At page 585 their Lordships made the following observation

“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

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an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them, Sales of land, in those circumstances, as we are inclined to think, are no more than a realization of capital or conversion of one form of it into another.” • The court took cognizance of final report of the Royal Commission on “The Taxation of Profits and Income” and observed thus at pages 586 & 587 :

The Commission went on to enquire whether there was any general rule that could advantageously be propounded as a simple test that would separate taxable case from the non-taxable one but concluded that it was not possible in the circumstances to formulate any such rule, and finding, however, that the general line of enquiry which has been favoured by appeal commissioners and encouraged by the courts is to see whether a transaction that is said to have given rise to taxable profit bears any of the “badges of trade ”, summarized what they regarded as the major relevant circumstances that bear upon the identification of these "badges of trade”:

“ (1) The subject-matter of the realization. - While almost any form of property can be acquired to be dealt in, those forms of property, such

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as commodities or manufactured articles, which are normally the 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 is a source of taxable income But if nothing at all is done, the suggestion tends the other way.

(5) The circumstances that were responsible for the realization. – There may be some explanation, such as a sudden emergency or

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opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase

(6) Motives. - There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realized clearly that it can be inferred from surrounding circumstances, in the absence of direct evidence of the seller’s intentions, and even, if necessary, in the face of his own evidence.

• The Judgment was concluded by observing this at pages 600-601 :

“If a land owner developed his land, expended money on it, laid roads, converted the land into house sites and with a view to get a better price for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realization of a capital investment or conversion of one form of asset into another Obviously, the surplus in such a case will not be trading or business profit because the transaction is one of realization of asset in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade The case of the assessee can stand on no different footing, as we think, only because it is a company which has among its objects power to trade or traffic in land. There is here no evidence of a venture or adventure. The transaction involved no risk or speculation; nor can it be truly said that it is a “plunge in the waters of trade. It is a transaction which

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any prudent owner of land will engage in and which is, therefore, no more than realization of capital investment, conversion of land into money, not a venture in the nature of trade. Having regard to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along and all other facts including absence of evidence of any trading activity or speculative venture, we are of the view, therefore, that the Tribunal was right in its conclusion that the surplus from sale of the land did not result from any trade or business in land carried on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade.

(viii) In CIT Vs. 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 [1990] 70 ITR 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 Addl. CIT v. Ashok Motilal Kataria 308 ITR 298 (AT) Pune Reference is invited to this judgment which explains the true concept of adventure in the nature of trade.

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(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 respect of the transaction in shares, yet the broad principle stated therein apply even in the case of any other asset. The three principles laid down in para 8 are relevant.

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Clause (ii) is also applicable. The condition in Clause (iii) also applies inasmuch as the land was purchased in year 1995-96 and 1996- 97 and the same was sold in the year 2005. The period of holding shows that the assessee was aware that there will be accretion and there will be a good price which can be fetched after holding it for a substantial period. Moreover, the assessee sold the land in order to utilize the increase in purchase of another land, which fact also goes to show that the land was sold as a capital asset.

7.1. We invite kind attention particularly to the judgment in the case of Kasturi Estates Pvt. Ltd. (supra). In that case the assessee had even parcelled the lands 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. The assessee’s case is far stronger on facts to conclude 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,

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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.

(iv) The test of supplementary work on or in connection with the property is a strong factor in favour of the assessee. No organized effort was undertaken or no special exertion was made to attract purchasers such as opening of an office, large scale advertising or any evidence of dealing.

(v) The circumstances do show that the assessee wanted to realize the proceeds to invest in another land, i.e. a residential plot in the Palm Springs in Gurgaon and to seek benefit u/s. 54F.

(vi) As far as the motive is concerned the facts on record clearly show that the motive right from the time of acquisition of the lot was to realize profit on accretion and not to plunge in the waters of trade.

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(i) In para 5.1 it is alleged that the land sold was owned jointly and collectively by PCL, Mr. Mohinder Puri, Mr. Arjun Puri and other related concerns. The aforesaid observations are wrong and incorrect on facts, ft is clearly mentioned in para 1(d) of the agreement dated 4th April, 2005, that each of the land owners is individually the owner of the land and the extent of area owned by each of the land owners was mentioned therein. Therefore, the very premise of the AO that the lands were owned jointly and collectively is incorrect. The fact of the matter is that lands were owned individually by the land owners and this fact is also evident from the mention of the fact that land was purchased by each landowner separately for which each landowner got a separate registration executed, the details of which are given in the agreement dated 4th April, 2005 itself.

(ii) In para 3 the Assessing Officer has mentioned that the sale of land is between PCL and M/s. Parsvnath Developers Ltd. (PDL). Though there is a single agreement but it is a matter of fact, which is self evident from the record, that each land owner has been separately mentioned, giving his separate holding and each landowner has signed the agreement. Merely because the land has been sold under a common agreement to sell for the sake of convenience, does not make the transaction a

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joint venture. Each landowner was full owner of the land sold and each owner was entitled to receive - and in fact also received - his/its share of the sale consideration.

(iii) The Assessing Officer in para 5.2 has referred to certain agreements with ITC Classic Real Estate 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

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accordingly that matter is non-issue for deciding the present transaction Those agreements, which were conceived in the past, but not implemented, cannot, it is submitted, cast any shadow on the present transaction which has to be examined and interpreted on its own facts. There is nothing to show that there was a joint venture involved in the sale of land to PDL.

(iv) The observations of the Assessing Officer in para 5.3 are stoutly challenged. It is not correct on the part of the AO to state that the land was purchased in joint collaboration with PCL. As stated earlier the land was purchased by the assessee in his own name as a transaction entered into by him for his own benefit. The observation of the AO that since PCL has shown the land as stock-in-trade, the holding of land by the assessee should ipso facto become a stock-in-trade in the hands of the assessee, is without any merit. The assessee was full owner of the land purchased by a separate deed of registration and he held the same as investment till it was sold.

The Assessing Officer has been influenced by the fact that there being a single sale deed for the lands having been executed with PDL, it was a case of joint collaboration between assessee and PCL. This proposition does not emerge from the agreement. Each landowner being a

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separate and distinct owner it does not make the sale as having been made in joint collaboration. The Assessing Officer has failed to appreciate that the assessee owned only a small portion of the land i.e. 1,31 acres at Village Wazirabad, Sector 53, Gurgaon. This land though separate was contiguous to the larger portion of the land owned by PCL. In order to obtain a better price it was decided to enter into a single sale deed, because the purchaser was same. This intention of earning a better price cannot be equated to carrying on of the business.

(v) The reason given in para 5.4 again is not relevant. No doubt the sale proceeds were received in a common account maintained by PCL. This fact, by itself cannot lead to an inference that there was a joint venture. It has not been appreciated that the assessee received his share of the proceeds, albeit through PCL. This is infact a relevant matter which cannot be ignored. The mention in para l(i) of the agreement dated 4/4/2005, as already stated, is a non-issue because that agreement was never implemented.

(vi) The observations in para 5.5 are subjective and not backed by any evidence or material on record. The highest court has held that it is for the revenue to establish that a certain transaction is an adventure in the nature of trade.

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(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 question of law and facts) to hold why on facts it was a case of adventure in the nature of trade. Kind attention is invited to pages 622 to 624 of the report (Copy enclosed).

27 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

Incidentally the facts of the assessee are far more strong and the judgment in G. Venkataswami Naidu’s case, rather supports the assessee.

(viii) The observations in para 5.9 do not make any inroads into the claim of the assessee of the transaction resulting in capital gain. It is wrong on the part of the AO to say that the cost of Rs. 77,04,873/- incurred also included cost for making roads and laying sewers. It is wrong to say that the expenditure was large. Looking to the sale price of Rs. 8.37 crores, the expenditure was only 9%, Reference is invited to the case of Kasturi Estates Pvt. Ltd. (supra) where even the expenditure incurred for laying roads, corporation survey, centage, filling up, parceling into plots and other matter was not held on activity of business but expenditure for realizing better sale price of the capital asset. (ix) The observations in para 5.9 are incomprehensible and in any case do not advance the case of the A.O. (x) The observations in para 5.10 are academic and subjective and not based on any material in support. (xi) The observations in para 5.11 are again subjective remarks. The fact that the land was purchased by a single purchaser and who was a builder ipso facto does not make the transaction as an adventure in the nature of trade in so far as the assessee was concerned. The assessee had a

28 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

small part of land compared to the land owned by PCL. When PCL, who admittedly is a builder found a purchaser, the assessee got an opportunity to offer his land with a view to obtaining a better price. This did not make the assessee as a co-adventurer.

4.4. The assessee further submitted that the decision of

the Hon’ble Supreme Court relied upon by the A.O. in the case

of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC)

was distinguishable on facts and rather help the assessee. The

extract of the submissions of the assessee as reproduced in the

appellate order as under :

“4. Naidu’s case is one of the foremost cases in which the erudite judge dealt with the whole gamut of the complex question 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

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considering inadmissible evidence or after excluding admissible and relevant evidence.

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, concludes against the assessee. He writes without giving any basis, to quote “In the instant case of the above assessee, answers to all the above determinative tests lead to the inevitable calculation that the impugned sale is adventure in the nature of trade....... This inference is as the basis of the total effect of the distinctive character of all relevant factors and circumstances.” These are only vague remarks not backed by any basis or material. The AO then vaguely refers to the various decisions cited in Naidu’s case (without pointing them out). Incidentally all these are English cases decided on their own facts.

30 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi. 7. In para 5.7 the AO has stated thus “5.7 PDL (the buyer), like PCL, is also a company engaged in the business of real estate and construction as promoters, developers and builders. The purpose for acquiring the impugned land from PCL et al by PDL was for construction of a real estate project subsequently called Exotica Project of PDL. In the precedent cases, where land purchased and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset in Cavzer, Irvine and Co. Ltd. v. Commissioners of Inland Revenue as cited in the case of G.V. Naidu (supra). ”

7.1. There is no quarrel on the fact that both PDL and PCL were engaged in the business of real estate. The profit from sale of land by PCL to PDL has duly been shown as business income, But it is wholly inconceivable to presume that the sale of land by the assessee to PDL was an adventure in the nature of trade. In this regard the citation of the judgment in Cayzer, Irvine & Co. Ltd. Vs. Commissioner of Inland Revenue (1942) 24 Tax Cases, 491 is not relevant in so far as the assessee is concerned. We reproduce what was said about this case at page 609.

“ Where land purchased, and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an

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investment, but as a trading asset in Cayzer, Irvin and Co Ltd. v. Commissioners of Inland Revenue. In his judgment, Lord President Normand referred to the large development expenditure incurred by the assessee to improve the property and observed that it appeared to be on the whole consistent with the 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 object of making it more readily saleable. In the case of Cayzer the assessee spent large development expenditure

32 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

to improve the profits. The facts in that case that showed intention was to develop and market it and not hold as investment but a trading asset. Large expenditure incurred 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.

In the case of the assessee we have already submitted in past that the land was purchased with the intention of holding it as investment. It was actually held for more than 10 years. The expenditure incurred was only 9% of the cost. Reference was made to the judgment in case of Kasturi Estates Pvt. Ltd. 62 ITR 578 (Mad) where the judgment of Naidu’s case was considered. The incurring of these expenditure did not turn the holding of land for a period of 10 years from investment to stock-in-trade.

33 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

“We may at this stage briefly indicate the material facts and circumstance es found by the Tribunal and the inference drawn by it in regard to the character of the transaction in question. The appellant purchased the four plots under four different sale deeds. The first purchase was for Rs. 521 and it covered a piece of land admeasuring 28 ¼ cents; the second purchase related to 2 acres 79/2 cents and the price paid was Rs. 1,250; while the third and the fourth purchases were for Rs. 1,942 and Rs. 5,000 and they covered 28% cents and 1 acre and 90 cents respectively. The property purchased under the first sale deed was sold on November 10, 1947for Rs. 2,825 whereas the three remaining properties were sold on September 1, 1947for Rs. 49,775, the purchaser in both cases being the Janardana Mills Ltd. The purchase of 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

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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. This plea was rejected by the Tribunal. The Tribunal likewise rejected the appellant’s case that it had purchased the plots for building tenements for the labourers working in the Janardana Mills. Alternatively it was urged by the appellant that the Janardana Mills decided to purchase the lots because an award passed by an industrial tribunal in June, 1947, had recommended that the mills should provide tenements for its labourers. Thus the appellant's case was that it had not purchased the properties with a view to sell them to the mills and the mills in fact would not have purchased them but for the recommendation made by the award which made it necessary for the mills to purchase the adjoining plots for the purpose of building tenements for its employees. The Tribunal was not impressed even by this plea; and so it ultimately held that the plots had been purchased by the appellant wholly and solely with the idea of selling them at profit to the mills. The Tribunal thought that since the appellant was the managing agent of the mills it was in a position to influence the decision of the mills to purchase the properties from it and that was the sole basis for its initial purchase of the plots. On these findings the Tribunal reached the conclusion that the sum of Rs. 43,887 was not a capital accretion but was a gain made in the adventure in the nature of business in carrying out the scheme of profit-making. The appellant

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contends that, on the facts and circumstances found in the case, it is erroneous in law to hold that the transaction in question is an adventure in the nature of trade. ”

The conclusion is at pages 622 and 624 which interalia reads as under:

“What then are the relevant facts in the present case? The property purchased and resold is land and it must be conceded in favour of the appellant that land is generally the subject-matter of investment. It is contended by Mr. Viswanatha Sastri that the four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realized that cannot impress the transaction with the character of an adventure in the nature of trade. The appellant, however, is a firm and it was not a part of its ordinary business to make investment in land. Besides, when the first purchase was made it is difficult to treat it as a matter of investment. The property was a small piece of 28'A 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,

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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 purchase clearly shows that it was not interested in obtaining any return from them. No doubt the appellant sought to explain its purpose on the ground that it wanted to build tenements for the employees of mills; but it had taken no steps in that behalf for the whole of the period during which the plots remained in its possession. Besides, it would not be easy to assume in the case of a firm, like the appellant that the acquisition of the open plots could involve any pride of possession to the purchaser. It is really not one transaction of purchase and resale It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holding that at a convenient time it sold the lands to the Janardana Mills in two lots. When the Tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment it would have tried either to cultivate the land, or to build on it; but the appellant did neither and just allowed the property to remain unutilized except for the net rent of

37 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

Rs. 80 per annum which it received from the house on one of the plots The reason given by the appellant for the purchase of the properties by the mills has been rejected by the Tribunal; and so when the mills purchased the properties it is not shown that the sale was occasioned by any special necessity at the time. In the circumstances of the case the Tribunal was obviously right in inferring that the appellant knew that it would be able to sell the lands to the mills whenever it thought it profitable so to do. Thus the appellant purchased the four plots during two years with the sole intention to sell them to the mills at a profit and this intention raises a strong presumption in favour of the view taken by the Tribunal In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts the presumption arising from the initial intention; on the other hand, most of them corroborate the said presumption. We must, therefore, hold that the High Court was right in taking the view that, on the facts and circumstances proved in this case, the transaction in question is an adventure in the nature of trade. ” 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.

38 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

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 purchase a plot of land but did not do so as a trading

transaction. The land was kept for well over 10 years and what was

realized was accretion to the capital. There is nothing on the record

of the assessee to show that he in his individual capacity was ever

involved in any activity of purchase/development of land and sale

thereof Being a director of the company the assessee spent whole time

for the business of the company for which he received salary. The

39 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

said purchase of land is a solitary purchase and there is nothing to

show that there was ever an intention to engage in individual business

of purchase/development of land. The first step of purchase was one

which lacked the element of trading. It was not a case where the

assessee can be said to have plunged into the water of trade. It will be

wholly inappropriate to presume that assessee being the director of a

company dealing in real estate would necessarily be taken to be

engaged in business when he purchased some land. There being no

material to show that the first step of purchase of land showed that it

was taken as, or in the course of a trading transaction the profit cannot

be taken as business income.”

4.5. The assessee also relied upon the following

decisions:

(i) CIT vs. Sohan Khan and Mohan Khan [2008] 304 ITR 194 (Raj,).

In this case the assessee purchased a large extent of land. The land

was under the cloud of sealing laws and after it got clear therefrom,

assessee prepared a site plan showing the land to be divided into

different plots and the plots were accordingly sold. The AO held

the profit from sale as transaction in the nature of trade on the

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ground that the land surrounding the original land was owned by

near relatives and family members and the purchasers were

impressed by the fact that the land belong to the same family and

was being planned and sold together, the intention being to gain

profit only. The judgment in Naidu’s case (supra) was referred to

and in fact extract from pg 609 of 35 ITR was quoted in extenso

and it was held that the mere fact that there was a series of

transaction of sale would not render activity of sale as an adventure

in the nature of trade. There was nothing to show that the land was

purchased with an intention to sell it at a profit or with requisite

intention, to bring it within the parameters of a stock-in-trade. The

assessee was not a regular dealer in real estate and the transaction was of capital asset only and not a transaction of any stock-in--trade.

(ii) CIT vs. R.V. Gupta 258 ITR 261 (Del) 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

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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) ACIT vs. Ashok Motilal Kataria 308 ITR (AT) 298 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 the basis of information that the land was to be converted from

agricultural zone or non-industrial zone to industrial zone, that by

itself was not enough to assume that the assessee had purchased

the land as an adventure in the nature of trade. Even, mere carving

out the plots and selling them to different persons could not be

assumed to be an adventure in the nature of trade, unless some

more activities in the nature of business were carried out.”

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4.6. It was further submitted that the observations of the

A.O. that assessee entered into a Joint Venture with PCL and

other is wrong and incorrect and has no basis. A Joint Venture

pre-supposes two or more persons undertaking to combine

their property or labour in conduct of a particular line of trade

or a general business for joint profit. It was explained that no

evidence has been led by the A.O. to show that assessee join

hands with other parties to sold the subject land and there was

a combination between such persons to carry-out business for

joint profits. The very fact that each co-owner separately

purchases their lands but only combined for the purpose of

sale, does not show any element of carrying out any business

for joint profits. The expenditure on acquisition of land, its

improvements were separately incurred by respective owners

and sale proceeds were also separately received by respective

co-owners, therefore, it is a case of capital gains only and

assessee is entitled for exemption under section 54F of the I.T.

Act.

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assessee in the light of material on record held that sale of land

was sale of capital asset and the profit was in the nature of

capital gain. The A.O. was directed to compute the capital gain

and also allow benefit of deduction under section 54F of the I.T.

Act, 1961. The findings of the Ld. CIT(A) in paras 7 and 7.1 of

the order are reproduced as under :

“7. I have carefully considered the facts of the case, the reasons given by the Assessing Officer for holding the transaction as adventure in the nature of trade and the submissions made by the appellant. As observed by the Apex Court in Naidu’s case (supra) in deciding whether a transaction was an adventure in the nature of trade resulting in profit from business or sale of a capital assets giving rise to capital gains, the decision about the character of a transaction in the 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,

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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 relevant facts of the case In concluding para, after recapitulating the relevant facts of the case the court found that the purchase was the first step taken by the appellant therein in execution of the well considered plan, to acquire open plot near the mills, and the whole basis for the plan was to sell the said lands to the mills, at a profit, and then the subsequent conduct of the purchaser was considered, and after appreciating the totality of attending circumstances. it was found to be a

45 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi. series of transactions, undertaken by the appellant therein, in pursuance of the scheme, and it was after the appellant had consolidated its holding, that at a convenient time the land was sold. The appellant was found to be managing agent of the mill, who was in a position to influence the mill to purchase its properties, which cannot be said to be unreasonable. Thus, in view of the principles propounded therein, and on the facts of that case as considered, it is clear, that in order to arrive at a conclusion, as to whether it is to be taxed as capital gain or the transaction is to be treated to be an “adventure in the nature of trade”, things cannot be put in any strait jacket formula, and it was dependent upon the facts and circumstances of each case, to be decided on the basis of relevant consideration.

(ii) One of the reasons given by the Assessing Officer is that the appellant entered into a joint venture with M/s. PCL and other co-owners for the sale of the subject land admeasuring 23.815 acres in Sector 53, Gurgaon and even though it was a solitary transaction for the appellant, essential features of trade are present. It is stated that the subject land was purchased together in collaboration by PCL and the appellant and since PCL has shown the sale of land as business income, it is not understandable why

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the appellant should treat the same sale as capital gains.

The AO’s contention does not appear to be correct. There is nothing to show that the land was purchased in joint collaboration with PCL and was owned jointly and collectively by PCL, the appellant, Mr. Mohinder Puri and other related concerns. Para 1(d) of the Agreement of Sale dated 4/4/2005 clearly mentions that each of the land owners is individually the land owner and the extent of area owned by each of the land owner was mentioned therein; each land owner got a separate registration executed, details 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

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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 any merit. The appellant was full owner of the Sand purchased by a separate deed of registration and he held the same as investment till it was sold. The land was never shown as stock-in-trade by the appellant. Therefore, the indicia of the sale of land being in the nature of a trading transaction do not exist. Appellant’s land, though separate was contiguous to the larger portion of the land owned by PCL. in order to obtain a better price it was decided to enter into a single sale deed, because the purchaser was the same. This intention of earning a better price cannot be equated to carrying on the business. It is a matter of record that the appellant has never been a dealer in land and the present transaction was a solitary transaction of the sale after about 10 years of acquisition,

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In CIT vs. Sohan Khan & Mohan Khan (supra) original land was surrounded by many lands of near relatives and family members of the assessee. If the plots would have been carved out from assessee’s land alone they could not have been sold for want of network of roads available upto the adjoining lands only and that at some distance there was Government road measuring 200 feet. The land owners had planned the sale of plots together. The purchasers were impressed by the fact that all the land belonged to the same family and was being planned and sold together. All these facts were duly considered by the Hon’ble Court and it was held that they did not render the transaction as adventure in the nature of trade. Some of these features also exist in the present case. Since there was a single buyer who wanted to develop the entire tract of land belonging to the various co-owners, it was though prudent to have one single sale deed for the sale of the entire land. In view of the aforesaid judgment of the Rajasthan High Court such feature cannot be construed as rendering the transaction as adventure in the nature of trade in so far as the appellant was concerned.

(iii) Another reason given by the AO is that prior to the sale large amount of expenditure was incurred on the

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development of land. According to the AO the conduct of improving or converting the land so as to make it more readily saleable shows a design and a purpose meaning that it was the intention of the assessee to hold the land not as an investment but as a trading asset.

It is true that expenditure was incurred prior to 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 vs. 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 vs. 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 vs. 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

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the nature of business were carried out. As noted supra even m the case of CIT vs. 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 trade. Accordingly it cannot be held that the expenditure incurred by the appellant prior to the sale was undertaken by the appellant as a trader and holding the transaction to be one as adventure in the nature of trade.

(iv) In CIT vs. Hoick Larsen 160 ITR 67 SC, the judgment of Naidu’s case (supra) 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 this principle there is nothing to show that the first step of purchase of land was taken in the course of a trading transaction. The land was kept well over 10 years, there is nothing on record to show that in his individual capacity the appellant was ever involved in any activity of purchase/development of land and sale thereof. What was realized on the sale of land was accretion to the capital. It is not a case where the appellant can be set to have plunged into the waters of trade.

51 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

(v) The following facts also go to show that it was a case of sale of capital assets, giving rise to capital gains. • There is nothing on record to show that there was a motive right from the time of acquisition of land to plunge in the waters of trade.

• It was a case of a solitary transaction of acquisition and sale of land.

• The length and period of ownership from 1995-97 to 2005 is a strong pointer to the fact that land was purchased by way of investment.

• No supplementary work was done in connection with the property of substantial magnitude. The expenditure on land development of Rs. 77,04,873/- was only 9% of the sale price of Rs. 8.37 crores. • No organized effort was undertaken to attract purchasers.

• The circumstances shows that the appellant wanted to realize the proceeds to invest in a residential house, which was done and benefit u/s 54F was sought. • Appellant never dealt in the trading of land.

52 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

• The land was shown as an investment and not as stock- in-trade.

7.1. For the reasons stated above it is held that the sale of land was sale of capital asset and the profit was in the nature of capital gain. The AO is directed to compute the capital gain and also allow the benefit of Section 54F of the Act.”

these findings of the Ld. CIT(A). The Ld. D.R. relied upon the

order 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.

53 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

Supreme Court in the case of G. Venkataswamy Naidu and Co.

vs. CIT 35 ITR 594. 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-

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 held by A.O. as adventure in

the nature of trade. Therefore, deduction under section 54F was

rightly denied to the assessee.

reiterated the submissions made before the authorities below

and submitted that land was partly held by PCL. However, the

assessee has held the land singly and also conducted the single

transaction only. The property in question was held for 8 to 10

54 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

years. The assessee is not in business of trading of land. The

land was shown as investment. He has relied upon the findings

of the Ld. CIT(A) at page-26 of the order. Learned Counsel for

the Assessee submitted that the land in question was held by

06 persons, out of which, 03 are company and 03 are

individuals. The individuals are the assessees, Shri Mohinder

Puri and Shri Arjun Puri and Ms. Gurleen Manchanda. In the

case of co-owner of the land Ms. Gurleen Manchanda, the A.O.

passed the assessment order under section 143(3) dated

12.12.2008 for A.Y. 2006-2007 under reference, in which, the

co-owner has declared the long term capital gains on account

of sale of the same land and claimed exemption under section

54F of the I.T. Act. The A.O. after due enquiry, accepted the

claim of assessee of capital gains and also allowed exemption

under section 54F of the I.T. Act. He has submitted that the

companies are in the trade of land. However, the assessee is an

individual and assessed in the capacity as individual. PB-5 to

9 are the acknowledgment of filing of the return of income along

with computation of income in the case of assessee for

55 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

preceding A.Ys. 2004-2005 and 2005-2006 to show that

assessee has declared salary income and income from other

sources, which have been accepted by the Department.

Therefore, assessee was not involved in any trading activity to

deal in land. He has submitted that land was acquired in the

year 1995-1997 which was 1.31 acres only. The intention of the

assessee at the time of purchase of the land was only to be seen

which in the case of the assessee was clearly an investment.

The burden was upon Department to show that it was a

business activity of the assessee. No money have been

borrowed by the assessee for any business purposes. There is

no frequency of transactions carried on by the assessee for sale

of land. It was only one transaction conducted by the assessee.

The assessee has shown the capital asset as 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 vs. CIT (supra) and CIT

56 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

vs. Kasturi Estates Pvt. Ltd., 62 ITR 578 (Madras), 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 vs.

Bhanuprasad D. Trivedi (HUF) (2017) 87 taxmann.com 137

(Gujarat) 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.”

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 his favour. There were no

material available on record to show that land was acquired as

stock in trade. It was a solitary transaction entered into by the

57 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

assessee with an intention of earning profit on accretion. The

assessee is not a dealer in land. The assessee entered into the

solitary transaction of purchase of land which could not be

treated as subject matter of trading. The land was not acquired

for the purpose of dealing in land. The length of period of

ownership was from 1995-97 to 2005 which speaks that

assessee purchased the property to make investment in capital

asset. Thus, the intention of the assessee at the time of

purchase of property was to make investment in capital asset

as an investor. The assessee kept the same as an investment

and has never taken into stock-in-trade. No borrowed funds

have been used or interest paid on any amount for the purpose

of investment in the land. There is no frequency of transaction

carried out by the assessee. The assessee made re-investment

in land for claiming exemption under section 54F of the I.T. Act.

The assessee made investment in capital asset expecting

appreciation-in-value in future. The assessee in his individual

capacity was not involved in any trade or business to deal in

lands in earlier years. The assessee has income from salary and

58 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

income from other sources, which have been declared in the

returns of income for preceding assessment years, which have

been accepted by the Department. Therefore, assessee was not

regular in trade for sale of the property. The assessee was a

Director in PCL which is a different legal entity. Merely because

PCL held the land as stock-in-trade, does not prove that

assessee also held the property as stock-in-trade. The assessee

did not make any effort to attract the purchasers, such as

opening of an Office or to make Advertisement to show his

intention to deal in property. The motive of the assessee right

from the very beginning with respect to acquisition of the

property was, to realise the profit on appreciation in its value

and never had any intention to indulge in trading activity. The

A.O. raised several objections in the assessment order to reject

the claim of assessee, which have been met by the assessee

before Ld. CIT(A) in his submissions. The assessee in his reply

before the Ld. CIT(A) specifically pleaded that land was held

individually by all the owners. Merely because the land has

been sold under a Common Agreement to Sell for the sake of

59 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

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

Pvt. 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

adventure in the nature of trade.” It may also be noted here that

60 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

Revenue Department in the case of one of the owner of the land

in question Ms. Gurleen Manchanda in the scrutiny

assessment under section 143(3) of the I.T. Act, accepted

similar claim of capital gains declared by her and claim of

exemption under section 54F of the I.T. Act, have been allowed.

Since in the case of one of the co-owner of the land in question,

Revenue has accepted the claim of capital gains and exemption

under section 54F of the I.T. Act, the case of the assessee

cannot be taken differently who is also an individual and

claimed the investment in property as an investor. Therefore,

case of the assessee cannot be compared with other companies

i.e. PCL and others who were holding the properties as stock-

in-trade. The decisions relied upon by the Ld. D.R. in the case

of G.Venkataswami Naidu & Co. (supra), do not support the

case of the Revenue. Considering the totality of the facts and

circumstances of the case in the light of the above discussion

and in the light of finding of fact arrived by the Ld. CIT(A), we

do not find any infirmity in the order of the Ld. CIT(A) in holding

that sale of land was sale of capital asset and the profit was in

61 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

the nature of capital gain. The claim of assessee for exemption

under section 54F is, therefore, been rightly allowed in favour

of the assessee. Both these grounds of appeals of Revenue are

dismissed.

of the Ld. CIT(A) in deleting the addition of Rs.77,04,873/- on

account of bogus land development expenditure.

expenses were incurred by PCL for entire subject land. The

expenses of Rs.77,04,873/- were incurred on behalf of the

assessee through PCL which were recovered by PCL from the

assessee proportionately on the basis of land holding ratio. The

A.O. referred to the assessment order in the case of PCL for A.Y.

2006-2007, in which, the land development expenses were held

to be bogus. Therefore, A.O. disallowed the deduction of the

above amounts. The Ld. CIT(A) noted that in the case of PCL for

A.Y. 2006-2007, he has deleted the addition. Therefore, A.O.

was directed to allow necessary deduction in favour of assessee

while computing the capital gains as per law.

62 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

find any merit in this ground of appeal of the Revenue. The A.O.

merely relied upon assessment order in the case of PCL, in

which, it was held that development expenditure were bogus.

Since in the case of PCL addition have been deleted, therefore,

there were no justification to sustain the addition. Further, A.O.

has not given any independent findings for the purpose of

making disallowance against the assessee. Therefore, Ld.

CIT(A), correctly allowed this ground in favour of the assessee

and rightly directed the A.O. to allow necessary deduction of

Rs.77,04,873/- by indexing the same and compute the capital

gain as per law. Ground No.3 of the Revenue stands dismissed.

Department is dismissed.

ITA.No.2309/Del./2011 – A.Y. 2006-2007 - Shri Arjun Puri :

grounds :

63 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

have been considered in the Departmental Appeal in the case

of Shri Mohinder Puri ITA.No.2310/Del./2011 for the A.Y.

2006-2007. Following the reasons for the decision in the case

of Shri Mohinder Puri (supra), we dismiss the Departmental

Appeal.

64 ITA.Nos.2309 & 2310/Del./2011 Shri Arjun Puri And Shri Mohinder Puri, New Delhi.

Department is dismissed.

dismissed.

Order pronounced in the open Court.

Sd/- Sd/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Delhi, Dated 19th June, 2018

VBP/-

Copy to

Asst. Registrar : ITAT Delhi Benches : Delhi.