SH. RAKESH KUMAR AGARWAL,MEERUT vs. ITO, HAPUR

This appeal by the assessee arises out of the order dated 29.10.2012 passed by the Ld.CIT(A), Ghaziabad in relation to the Assessment Year 2004-05. ~ 1 ~

The assessee is aggrieved against the computation of some part of the income from the sale of agricultural land under the head `Profits and gains from business or profession’ and also the computation so made by the ld. first appellate authority under the head `Capital gains’ as well as `Profits and gains from business or profession’.

Briefly stated the facts of the case are that the assessee filed his return declaring business income of Rs.48,400/- and Income from other sources plus agricultural income at Rs.1,66,430/-. The Assessing Officer (A.O.) observed that the assessee sold capital asset, being, the agricultural land at Village Mahmoodpur. This agricultural land was carved into plots and after making roads and leaving open space, the assesee sold various plots. The assessee also incurred expenses on development of land and roads. In the light of the above facts, the A.O. required the assessee to furnish details of computation of income under the head ‘Capital gains’. The assessee submitted the details. Not convinced with certain figures given by the assessee, being the amount of sale consideration and cost of acquisition on 1.4.1981, the A.O. computed long term capital gain at Rs.19,18,096/-. The assessee challenged the computation of income under the head `Capital gains’ before the ld. CIT(A), who came to hold ~ 2 ~ that the transaction of sale of land was in the nature of adventure in the nature of trade. He, therefore, computed business profit as well as capital gains from this transaction as under : - “Business Profit: Actual sale consideration Rs. 12,68,000/- (-) Fair market value as on date of Conversion Rs.363 x 3035.65 sq.mt. Rs. 11,01,933/- (-) Cost of Khadanja incurred for development Rs. 94,861/- ---------------- Rs.11,96,794/- Business Profit Rs. 71,206/- Capital Gain Sale value as per section 50C(ii) as per DVO valuation Rs. 13,01,295/- Being average FMV as discussed above (Rs. 415 x 3035.65 sq.mt.) (in place of Rs.13,35,700/- determined by D.V.O.) (-) Index cost of acquisition Cost of land sold 5.70 per sq.yd. x 3630.13 sq. yd. = 20,700/- (3035.65 sq.mt. when converted is 3630.13 sq.yd.) and, therefore, index cost would be 20,700:- 100x463 Rs. 95,850/- Long term capital gain Rs.12,05,445/-”

The assessee is aggrieved against the decision of the Ld. CIT(A) on two counts, namely, the treatment of part of income

We have heard the rival submissions and perused relevant material placed on record. The Ld. A.R. argued that the Ld. CIT(A) was not justified in taxing part of income as ‘Business profits’ as income arising from adventure in the nature of trade. The factual background concerning this issue is that the assessee was earlier having some land in Village Mahmoodpur which was used for agricultural purposes. Later on, the land came within the municipal limits. The entire plot of land was divided and developed into several plots with roads and drainage facilities and for that purpose, maps were got approved from the Town Authority. The assessee incurred development expenses. A substantial portion of land, namely, 1876 sq. yards out of total land plot area of 8190 sq. yards was used for making roads, which was not separately sold. Under these circumstances, it clearly emerges that the intention of the assessee in carving out plots and then developing the land with full roads and drainage facilities etc. was to earn income by carrying out a commercial venture of selling the plots and not from the sale of agricultural land as an Investment. The Hon’ble Supreme Court in a classic decision in G. Venkataswami Naidu and Co. vs. CIT (1959) 35 ITR 594 (SC) has held that a single and isolated transaction which contains the characteristics of trade should be construed as an adventure in ~ 4 ~ the nature of trade if the isolated transaction satisfies the description of an adventure in the nature of trade. When we consider the factual scenario prevailing in this case, it comes to the fore that the intention of the assessee in selling the land into plots after laying down the roads and drainage facilities etc. has rightly been construed by the ld. CIT(A) as that of earning `Business income’ through an adventure in the nature of trade. We, therefore, jettison the argument of Ld. A.R. in this regard.

Now we come to the computation of income from such transactions. In this regard, section 45(2) of the Act applies as per which the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. When we examine the computation of capital gains made by the Ld.CIT(A), as extracted above, it becomes vivid that he started with a computation of `Capital gain’ by taking `Sale value as per section 50C(ii) as per DVO valuation’ at Rs.13,01,295/-. This figure cannot be taken as correct ~ 5 ~ because of the computation of `Business profits’ by the Ld. CIT(A), who took the fair market value as on the date of conversion at Rs.11,01,933/-. Section 45(2) of the Act clearly indicates that the sale value for the purposes of capital gain shall be the fair market value as on the date of conversion. We, therefore, direct that the sale value taken by the Ld.CIT(A) at Rs.13,01,295/- be substituted with the fair market value as on the date of conversion taken by him at Rs.11,01,933/-.

The next item in dispute is the Cost of land sold taken by the Ld. CIT(A) at Rs.94,850/-. This figure was computed by taking cost of land before indexation as on 1.4.1981 at Rs.5.70 per sq. yard. Relevant discussion in support of calculating this rate has been incorporated in paras 11.2.4 and 11.2.5 of the impugned order. In adopting such value, the Ld. CIT(A) held that the Assessing Officer missed out certain factors, being, the said land coming in Hapur area and the same being of medium high quality. Deducing this rate of Rs.5.70 per sq. yard by the Ld. CIT(A) is in complete contradiction of the value determined by the District Valuation Officer (DVO) of this land at Rs.40 per sq. yard. A copy of Valuation report dt. 14.5.2012 is available on pages 71 onwards of the assessee’s paper book. The DVO, being a competent authority for making valuation of property is naturally more equipped and well informed on the intricacies of valuation. Au contraire, the CIT(A), who is not ~ 6 ~ qualified to act as a Valuation Officer, cannot step into the shoes of the Valuation Officer and reject the valuation so made by the later. When we consider the factual matrix on this issue, the irresistible conclusion, which can be drawn is that the cost of land sold was required to be taken as Rs.40 per sq. Yard, being the value as determined by the D.V.O. We order accordingly.

Now coming to the computation of `Business profits’ as extracted above, it is observed that the Ld.CIT(A) did not allow deduction for a sum of Rs.2,79,720/-, being cost of stamps incurred which is apparent from page 4 of the assessment order. This amount ought to have been allowed as deduction. We, therefore, direct that the cost of sum incurred at Rs.2,79,720/- be reduced for the purpose of calculation of `Business profits’.

The impugned order is set aside pro tanto and the A.O. is directed to compute `Business profits’ and `Capital gains’ in accordance to our above observations.

In the result the appeal is partly allowed. The order pronounced in the open court on 21st September, 2016.