T.D.RAJAN vs. ITO,

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER and SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA No.1587/Bang/2013 (Assessment year:2010-11) and ITA No.1588/Bang/2013 (Assessment year: 2010-11) 1. Shri T D Satyan (HUF), TDS Residency, Kadur, Chikmagalur. PAN:AABHT 8587 J 2. Shri T D Rajan (HUF) TDS Residency, Kadur, Chikmagalur. PAN:AABHT 8586 K … Appellant Vs. Income-tax Officer, Ward-1, Chikmagalur. … Respondent

Assessees by: Shri Rajaram Kote, CA. Revenue by: Shri M.Vijay Kumar, ACIT(DR). Date of hearing : 23/11/2015 Date of pronouncement: 29/12/2015. O R D E R Per VIJAY PAL RAO, JM:

These two appeals by the two connected assessees are directed against the composite order dated 16/9/2015 of the CIT(A) for the assessment year 2010-11.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 2 of 17 immovable properties in the form of residential sites in Kadur were found. The assessee HUF filed their return of income and computed income from capital gain by claiming the exemption u/s 54F. Thus the assessee offered the profit on sale of the land as capital gain and also claimed the exemption u/s 54F. The AO noticed that for assessment years 2007-08 to 2009-10, assessments framed by the AO were revised u/s 263 vide order dt.31/1/2013 by the CIT whereby the assessment order passed for the 2007-08 to 2009-10 were set aside and the AO was directed to pass fresh assessment order after affording reasonable opportunity of hearing to the assessee. The CIT, in the revision order, directed in these cases the assessees to assess profit on sale of agriculture land after converting into stock-n- trade as business income. The assessees are two brother HUF and having Coffee estates apart from agricultural land at Kadur town which they got by way of partition deed dated 11/9/2003. Both the assessees converted agricultural lands into residential sites by order of DC dated 29/4/2004 and sold the same. Following the revision order for A Y 2007-08 to 2009-10 the AO treated the act of converting agricultural land into residential sites as stock in trade and consequently treated the profits on sale of the residential sites as the profit and gains from business. Thus, the AO assessed the profits arising from sale of sites as business income instead of long term capital gain and consequently denied deduction u/s 54F.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 3 of 17 3. The Assessees challenged the action of the AO before the CIT(A) but could not succeed. The CIT(A) has given emphasis to the revision order of CIT passed u/s 263 in the cases of the assessees for the assessment years 2007-08 to 2009-10 and held that conversion is clearly for commercial exploitation and not for just realization of better price.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 4 of 17 was only the fetch better price for his ancestral agricultural land. 5. The learned Assessing Authority and the First Appellate Authority have erred in treating that conversion of ancestral agricultural land amounts to business activity. 6. The learned First Appellate Authority has erred in law in concluding, without assigning valid reasons, that the cases relied upon by the appellant are based on the facts of their cases and the facts of the cases of the appellant are distinguishable where in fact the cases relied upon by the appellant are applicable to the facts of the case of the appellant.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 5 of 17 already set aside the revision order passed by the CIT u/s 263 by holding that the view taken by the AO in the original assessment whereby the claim of capital gain was accepted was a possible and rather more plausible view. He has thus submitted that that the Tribunal has accepted the claim of the assessee being capital gain from the sale of ancestral agricultural land by converting the same into residential plots. Thus, the learned AR of the assessee has submitted that the issue is covered by the order of this Tribunal in assessee’s own case for assessment years 2007-08 to 2009-10. He has also relied upon various decisions and submitted that the issue is otherwise covered in favour of the assessee when the land in question was an ancestral agricultural land which was sold by the assessees by converting the same into residential plots. Thus merely conversion of agricultural land which is not purchased by the assessee but it was an ancestral property into residential sites will not convert the capital asset into stock in trade. On the other hand, learned Departmental Representative has submitted that it is not a mere act of sale of agricultural land but the assessee has converted agricultural land into non-agricultural land and formed a layout for residential and commercial purposes. Therefore, the assessee had a clear intention to indulge in commercial exploitation of agricultural land by converting the same into non agricultural land and then by dividing the same into sites or lots for residential layout. Thus, the learned

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 6 of 17 Departmental Representative has argued that the assessee has also constructed the building and invested in construction of large hotels and various commercial complexes. The sale proceeds of residential sites has been used by the assessee in construction of large hotels and other commercial complexes, therefore, it clearly shows the intention of the assessee to venture into commercial activity. He has relied upn the orders of the authorities below.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 7 of 17 the provisions of sec.263 of the Act and accordingly set aside the assessment order while passing revisionary order dated 31/1/2013 with a directing to the AO to redo the assessment by considering the profits earned by assessee from sale of agricultural land as business income instead of capital gain. The revision order passed by the CIT u/s 263 for the assessment years 2007-08 to 2009-10 was challenge by the assessee before this Tribunal and this Tribunal vide its order dated 31/7/2015 in ITA 1482 to 1484 & 1485 to 1487/Bang/2014 in cases of both the assessees quashed the revision order by giving a detailed finding and analysis of the facts in para.8 to 14 as under: “8. We have considered the rival submissions as well as relevant material on record. We have also given our deep thought on various judgments relied upon by either parties in the cases before us. The assessment proceedings were initiated consequent to a survey u/s 133A conducted on 20- 10-2010 and till then, the assessee, did not file the return of income. Therefore, on the basis of information gathered by the AO during the survey proceedings after recording the statement of the assessee issued a notice u/s 148 on 22-12-2010. These facts have been duly recorded by the AO in the beginning of the assessment order in para-1 as under; “ A survey u/s 133A of the IT Act 1961 was conducted in this case on 20- 10-2010. During the course of survey, certain evidences relating to immovable properties in the form of residential sites in Kadur, construction of lodging and business complex (Pooja Complex) Nagarjun Complex, Krishna Towers and other papers relating to agricultural activities were found. On verification of the documents impounded it is noticed that the assessee has sold sites

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 8 of 17 converted out of ancestral agricultural lands and derived capital gains thereon. However, the assessee has not filed the return of income for the assessment year 2007-08 even though the last date for filing such return was over. As the assessee’s income chargeable to tax has escaped assessment, notice u/s 148 was issued on 22-12-2010 calling for return of income. The assessee HUF filed return of income on 04-07-2011 declaring total income of Rs.11,24,990/- being capital gains on sale of sites and agricultural income of Rs.34.62,376/- 9. Thus, it is clear that the assessment proceedings are based on the outcome of the survey conducted on 20-10-2010. It is manifest from the record that the AO has conducted an investigation during the survey u/s 133A and also the recorded statement of the assessee on the issue of the taxability of the income from sale of agricultural land after converting the same into sites. There is no quarrel on the point that lack of enquiry renders the order of the AO as erroneous sofar it is prejudicial to the interest of revenue and the CIT has the jurisdiction u/s 263 to revise such erroneous orders passed by the AO without application of mind. However, lack of enquiry does not mean inadequate enquiry. In the case on hand, when there is investigation u/s 133A of the Act followed by issue of notice u/s 148 of the Act. We further note that the reasons for issuing the notice u/s148 is nothing but the income assessable to tax on account of sale of land by the assessee’s was in the opinion of the AO escaped assessment. Therefore, the subject matter of the investigation u/s 133A of the Act as well as the notice u/s 148 was the income on sale of land by the assessee. Therefore, this cannot be a case of lack of enquiry when there is enough investigation and enquiry conducted by the AO. The issue was examined by the AO during the survey proceedings and applied his mind while issuing the notice u/s 148. Further, the AO has recorded that a notice u/s 143(2) was issued to the assessee and after considering the details furnished by the assessee

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 9 of 17 and verification of such details the total income returned by the assessee was accepted. When it is not a case of complete lack of enquiry then, the CIT can invoke the jurisdiction u/s 263 only in the case when the order passed by the AO is absolutely illegal and contrary to the provisions of law. 10. In the case on hand, when there is enquiry by the AO on the issue of assessibility of income derived from sale of agricultural land by converting into the sites or plots then this case does not fall under the category of complete lack of enquiry rendering the order as erroneous. Once there was an enquiry on the part of the AO and also there is application of mind as manifest from the facts and records as well as the assessment order then, the CIT in order to revise such order has to be establish that the view of the AO is impermissible under law. We find that the assessee sold the ancestral land and there is no activity of purchase of land prior to the sale to the third parties. Therefore, this is the only incidence of sale of the agricultural land by the assessee and prior to this there was no any other business or commercial activity carried out by the assessee. We further note that only after the sale of land in question, the sale proceeds has been invested by the assessee in construction of lodge, hotel etc. The subsequent investment of the assessee of the sale proceedings will not change the character of the sale activity of the agricultural land. 11. Before the CIT, the assessee relied upon various decisions. In the case of CIT Vs Sureshchand Goyal(MP) 298 ITR 277, the Hon’ble Madhaya Pradesh High Court has observed and held that the land was received by the assessee as gift and the land was developed and sold after converting into plots with a view to secure a better price. Therefore, it was held that the isolated activity could not come within the purview of adventure in the nature of trade and business. The earning of sale in the land was in the nature of capital gains and therefore, not assessable as income from business. Similarly, in the case of CIT Vs Sushila Devi (P&H High Court) 259 ITR 671 the Hon’ble P&H High Court held that the land was

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 10 of 17 never purchased by the assessee as the land was acquired on the basis of a will on the death of her husband. She sold the same in parcels because the huge area could not be sold in one transaction. Such an activity would not amount to trade or business within the meaning of the Act. A similar view was taken by the Hon’ble Rajasthan High Court in the case of CIT Vs Sohan Khan (304 ITR 194)(Raj.) and held that the mere fact that there was series of transaction of sale only by selling of plot of land purchased in one go or purchased once upon a time, piecemeal would not render the activity of sale as adventure in nature of trade. The Hon’ble High Court has observed that there was nothing to show that the land was purchased with the intention to sell it at a profit or requisite intention to bring it within the parameters of stock in trade that the assessee was not a regular dealer in real estate. Therefore, the sale proceeds were liable to be taxed as capital gain. The Hon’ble jurisdictional High Court in case of CIT & Another Vs V.Gajanana Enterprises 314 ITR 247 (Kar.)(Supra) while confirming the finding of the Tribunal held that changing the use of land cannot be said that there was any intention to make the profit from the transaction in the nature of trade and the profit earned there from cannot be assessed under the held “business” and it has to be under the head” capital gains”. 11. Apart from the above decisions relied upon by the assessee before the CIT, the assessee has further relied upon various decisions before us. In the case of CIT Vs Hotel Sreeraj, the Hon’ble jurisdictional High Court held in para-6 as under; “6. It is not in dispute that premises of M/s Hotel Sreeraj was a vast extent of property situated in Lavelle Road, Bangalore. It is also not in dispute that the hotel was run by the assessee for several years. After closing the hotel business, it was open for the assessee either to sell the entire property under one sale deed or under different sale deeds by converting it into higher plots or smalller plots. If the assessee with an

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 11 of 17 intention to get more sale consideration has sold the plots to 63 different persons and the remaining property is developed under a joint venture by applying the principles laid down by the Hon’ble Supreme Court in Janaki Ram Bahadur Ram’s case, it cannot be held that it is a business transaction. In Janaki Ram Bahadur Ram’s case, the property was purchased and was sold immediately in order to gain profit. Under such circumstances, the Hon’ble Supreme Court has held that it amounts to business income. But on facts, in this case when the assessee was running the hotel for several years and after closing down the hotel if the assessee has sold the property to different persons for sale consideration, it cannot be said to be business income, since the partnership deed does not permit the assessee to venture into such transaction. Because, the main business of the firm was to run a hotel and not to purchase the property and develop the same and thereafter sold the property for profit. In the circumstances, we are answering the questions of law against the revenue”. Therefore, merely because the sale of the property by dividing into various plots would not alter the nature of activity from mere sale of capital asset into an adventure transaction in the nature of trade, when the other essential ingredients of the transaction in the nature of business or trade are missing. Similarly in the case of CIT Vs Shri M.V.Chandrasekhar (Supra) the issue fell for their Lordship’s consideration being substantial question of law admitted in the appeal was as under; “ Whether the Tribunal was correct in holding that the profits derived from lands owned by the assessee which was converted into small plots and sold to third parties who have put up residential houses cannot be treated as an adventure in the nature of trade and assessed under the head “Income from

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 12 of 17 Business Profession” but should be treated as capital of the assessee and assessed under the head “Capital Gains”. While deciding the said question of law the Hon’ble jurisdictional High Court has observed in para-3 as under; “3.We have carefully heard the learned counsel for the parties. Perused the records. The facts of the case are as under; The respondent-assessee is an agriculturist for last many decades. He had purchased about 41 acres of land between the period from 1978 to 1979 and only about 7 acres of land was purchased by him later on. He was cultivating the same for a period of about 20 years ever since he purchased the same. As he was in need of money, he sold about 35 acres of land, but still retained 14 acres of land with him. That the various sales which were executed by the assessee from time to time were treated was adventure in nature of trade and an addition of Rs.18,63,096/- was added to his income. Aggrieved by the order passed by the Assessing Officer, he filed an appeal before the Commissioner Income-tax (Appeals). The appeal also came to be dismissed. He thereafter preferred further appeal before the Income Tax Appellate Tribunal, Bangalore Bench, which has since been allowed giving rise to the appellant to file the instant appeal under section 260A of the Act. As has been mentioned in the above case, that similar question of law has already been answered in favour of the assessee in the matter of Hotel Sreeraj (Supra) the facts of this case are identical to the facts of the case of Hotel Sreeraj (Supra). For the same reasons, we are satisfied that there is no merit of substance in this appeal also”.

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 13 of 17 13. Thus, there are series of binding precedence of the Hon’ble High Court on the point that merely because, the property which otherwise a capital asset is sold by converting into small plots to third parties would not change the character of the transaction from sale of capital asset into an adventure in nature of trade. An identical issue was also considered by the Co-ordinate Bench of this Tribunal in case of ITO Vs D.N.Krishnappa (Supra) in para-5 as under; “ 5. We have heard the rival submissions and perused the material on record. We have also perused the authorities relied upon by the parties before us. It is not always easy to describe what are the circumstances that render a transaction as an “adventure in the nature of trade”. In dealing with the question, the Supreme Court in G.Venkataswami Naidu &Co’s case (Supra) observed that no principle can be evolved which would govern the decision of all cases in which the character of such a transaction falls to be considered. Sec.2(13) of the IT Act defines business as including any adventure or concern in the nature of trade, commerce or manufacture. With reference to this definition, the Supreme Court observed that when he section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade. If a person invests money in land intending to hold it, enjoys its income for some time and then sells it at a profit, the Supreme Court holds that it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Several tests were laid down in this decision for deciding g the character of such transactions: (a) Was the purchaser a trader and were the purchase of the

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 14 of 17 commodity and its resale allied to his usual trade or business or incidental to it? The answer to this in the present case is in the negative because there is no evidence to show that the assessee at any time did any business. (b) If the commodity purchased is generally the subject matter of trade and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment. In the present case, what was purchased was agriculture land and that too in a small quantity of 2acres and 11 guntas. There is a strong inference to be drawn that there was no intention to resell. Further, the assessee was carrying on agriculture operations on the said land. Coupled to this is the fact that the assessee held the land for a long period of 40 years or more, which is against the inference that the assessee intended to trade in the land. The further tests laid down in the above judgment are; (c) Did the purchaser by an act subsequent to the purchase improve the quality of the commodity o make it more readily saleable? Here it could be possibly argued that the assessee by obtaining permission from the authorities for developing residential sites made the land more readily saleable, but it could be equally argued that this single fact cannot turn the decision against the assessee because the conversion of agricultural land into residential plots by law requires permission from the concerned authorities and the assessee was merely following the procedure. The other important test laid down was, (d) Are the transactions of purchase and sale repeated? This test is answered negatively in the present case as the assessee has not purchased any other land in the period of 40 years. In the aforesaid decision Supreme Court has held that in each case it is the total effect of all relevant factors and circumstances that determines the character of the

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 15 of 17 transaction. A cumulative consideration of the facts of the present case unmistakably points to the transaction of sale being a realization of the investment in land and consequently, the gains are chargeable only to capital gains tax and not to be considered as gains of an adventure in the nature of trade. To repeat, in coming to this conclusion we have duly taken note of the following facts: a) The assessee was an agriculturist and did not carry on any business at any time. b)The agricultural land was purchased in 1961 and the assessee did carry on agricultural operations thereon. c) The land was held by the assessee for more than 40 years. d) The assessee obtained the permission of the concerned authorities for conversion of the land into residential plots only because of the relevant laws requiring him to do so. e) The assessee in these 40 years did not make any further purchase or sale of any land. f)Though I may not be entirely relevant but we cannot ignore the fact that the sale proceeds were invested in approved bonds and were not invested in any business. For these reasons, we are of the view that the CIT(A) was right in holding that the sale proceeds should be assessed as capital gains and since they were invested in bonds approved under sec.54EC, the assessee was entitled to the exemption under that section. 14. From the facts of the case as well as the from the judgment as discussed above, it is clear that the view taken by the AO is certainly a possible view and rather a more plausible view. The CIT placed reliance on the decision of the Hon’ble Supreme Court in case of Indiramani Bai & Others Vs Addl.CIT (Supra) wherein the glaring fact noted by the authorities as well as by the Hon’ble

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 16 of 17 Supreme Court and High Court was that soon after the purchase of land the assessee carved out into plots and sold them within a few months. Therefore, by considering this peculiar fact coupled with other facts and circumstances of the case, it was found that the intention of the assessee even when they purchased the land was to resell the same and not make any investment. In the case in hand, the land in question was an ancestral agricultural land therefore, there was no question of any intention of the assessee while holding the agricultural land or purchased the same for the purpose of resale. Therefore, when there is no purchase of land by the assesses before us, then decisions relied upon by the learned CIT would not render the view taken by the AO a absolutely illegal or impermissible under law. In view of the above facts and circumstances of the case, as well as the above discussion, when the view of the AO is a permissible and one of the possible view taken after a due investigation and examination of the issue then, the CIT has no power to revise such an order of AO merely, because he did not agree with the view taken by the AO. Therefore, the impugned revision orders are not sustainable and are liable to be set aside. Accordingly, we set aside the impugned revision orders passed by the CIT u/s 263 of the IT Act, 1961.

Thus it is clear that the Tribunal has considered the peculiar facts of this case that what was sold by assessee was the ancestral agricultural land and merely conversion of the same into residential sites does not change the character of capital asset into stock in trade. The AO as well as the CIT(A), while treating the profits arising from sale of agricultural land as business profits have relied upon the revision order passed u/s 263 for the assessment years 2007-08 to 2009-10. Thus it is clear that the issue is now covered by the decision of this Tribunal in assessees’

ITA Nos.1587 & 1588/Bang/2013 Shri T.D.Satyan(HUF) & Shri T.D.Rajan (HUF) Page 17 of 17 own case for assessment years 2007-08 to 2009-10 against the revision order passed u/s 263. Accordingly, we allow the claim of the assessee being capital gain arising from sale of ancestral agricultural land. Consequently, the orders of the authorities below qua this issue are set aside.

Pronounced in the open court on 29th December, 2015.

sd/- sd/- (Abraham P George) (Vijay Pal Rao) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore