Income Tax Appellate Tribunal - Jabalpur
Raj Kabra vs Income-Tax Officer on 12 November, 1986
Equivalent citations: [1987]20ITD464(JAB)
ORDER
H.S. Ahluwalia, Judicial Member
1. These four appeals though they relate to two different assessees involve a common issue. They are, therefore, disposed of by this single order.
2. There was a firm known as Laxminarain Raghunath, which was dissolved with effect from 1-3-1980. As per dissolution deed the two assessees received approximately 13 acres of agricultural land in village Deogao Pipariya, now Piparia municipal town. Out of this land, one acre of land was sold for Rs. 1,09,150 in the first year. The ITO sought to tax this sale for capital gains accruing as a result thereof. The assessee in the first case, namely, Shri G.L. Kabra contended that agricultural land could not be called to be 'capital asset' in view of the decision of the Gujarat High Court in the case of Sercon (P.) Ltd. v. CIT [1981] 6 Taxman 340. The ITO was, however, of the opinion that the dissolution deed clearly showed that the agricultural land was situated within the municipal limit of Piparia town. The population of Pipaiia was also more than 10,000 according to the latest census. Therefore, agricultural lands in dispute were capital assets within the meaning of Section 2(14)(iii) of the Income-tax Act, 1961 ('the Act'). He, therefore, brought to tax a sum of Rs. 33,715, which accrued to the first assessee in the first year. On the same basis, he brought to tax the other share in the hands of the second assessee in the first year again amounting to Rs. 33,716.
3. In the second year, he was further of the opinion that the two assessees had prepared, laid out and identified various plots of different sizes. They took steps for demarcation thereof and, therefore, the activities of sales conducted by them were business activities for the purpose of computation of the gains arising as a result thereof. Keeping in view the all over facts and circumstances of the case, he concluded that these assessees had earned business income from sale of plots of this agricultural land and in this year he brought to tax a sum of Rs. 10,507 in the hands of each of the assessee, as his/its business income.
4. Both the assessees went in appeals to the AAC for both the years. In the first year the AAC was of the opinion that there could be no two opinions that the income arising on sale of agricultural land was the result of the assessee having engaged themselves in regular enterprises of converting these lands into small plots and thereafter selling them to various buyers. Therefore, the activities of the assessees and their subsequent sale constituted an adventure in the nature of trade. The AAC, consequently, issued a notice under Section 251(1)(c) of the Act, requiring the assessee to show, as to why the income arising out of the sale of lands be not determined and included in their hands as income under the head 'Profits and gains of business or profession' instead of income under the head 'Capital gains' and the deduction granted by the ITO under Section 80T of the Act be not withdrawn. The assessees filed their objection and urged that the notice of enhancement given under Section 251(1)(a) is illegal and unwarranted. The AAC, however, rejected this contention, set aside both the assessment orders and restored the matter back to the file of the ITO with the direction that he should examine this issue afresh and record a finding whether an income arising from sale of agricultural land was assessable under the head 'Profits and gains of business or profession' or the head 'Capital gains'. Thereafter, the ITO was directed to pass fresh order after giving an opportunity of being heard to the assessee. On the same line of reasoning, he dismissed the appeals of the assessees in the later year. The assessees have come up in second appeal before the Tribunal.
5. Notice of the hearing of these appeals was sent to the assessees, whose representatives submitted written arguments in support of the various grounds raised therein. I have gone through these arguments and heard the departmental representatives. The first question for my consideration is as to whether the income arising to the assessees should be taxed as business income or income from capital gains. As I have mentioned above in the first year, the ITO had only taxed the income as capital gains and not as business income. It was only in the later year that he formed an opinion that the assessee had entered upon a regular activity of developing the land into plots and his/its activity amounted to regular business activity rendering it/him liable to tax under the head 'Income from business or profession'. To my mind, the AAC's order in the first two years is not correct in law. Firstly, it has been held by the Supreme Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 that it was not open to the AAC to travel outside the record of the case itself. No doubt, under Section 251(1)(a) the AAC or the Commissioner (Appeals), as the case may be, has unlimited powers to set aside the assessment and refer the case back to the ITO for making a fresh assessment in accordance with the directions given by him and after making such further inquiries as may be necessary, but the order of the AAC should be on the basis of the material on the record and ordinarily the AAC is not expected to direct the ITO to collect fresh material for the purpose of enhancing the assessment which in normal course of events would be done by the Commissioner on proceedings under Section 263 of the Act. It goes without saying that the effect of taxing the income of the assessee as business income instead of capital gains as has been proposed by the ITO definitely amounted to enhancement, since the effect thereof would be to deny some of the exemption available to the assessee under Section 80T. In any case the order of the AAC is bad on the ground that there was nothing more left for enquiry by the ITO, because on she same material in the later year, the AAC has dismissed the appeals of the assessees altogether. It means that the material on record was sufficient to hold that the income from the sale of this land was taxable under the head 'Income from business' and if there was enough material already, there was no fun in restoring the matter back to the file of the ITO. The AAC should have been courageous enough to enhance the assessments and revise the head under which the income in question should be taxed. The fact that he did not do so, shows that he was not fully satisfied about the existence of sufficient material and the procedure adopted by him is rather abnormal, because in his opinion more material was required, to change the head 'Income from other sources' in question.
6. Coming to the facts, it is admitted case that this land fell to the share of the assessees on the dissolution of the firm Laxminarayan Raghunath. It shows that the assessees had no intention of carrying on any business of purchasing the lands, dividing it into plots and selling them. Only what was owned by them was sold by them. They may have resorted to selling it in the form of plots with a view to secure higher amount of consideration, but it was not part of their business activities. They were not carrying on any other business. Therefore, the mere fact that they sold the land in plots instead of selling it at a stretch does not lead me to the automatic conclusion that it was part of their business activities. Whether a person is carrying on a business or not would have to be seen with reference to all over circumstances of the case. If certain land falls to my share and instead of selling it at a stretch, I think I can secure larger consideration, if I sell it in plots, it does not necessarily mean that I start carrying on the business of developing and selling the land. It still will be sale of my capital assets, because the original assets were capital and they were never converted into business assets. In this behalf, I may point out that this agricultural land was sold without obtaining any sanction of any competent authorities for converting them to non-agricultural use and for this reason also the action of the assessee in selling the land in plots would not amount to carrying on of any business. The orders of the AAC in the first two years are accordingly reversed and the orders of the ITO holding the income arising to the assessees as business income in the other two years is also set aside.
7. I now come to the main issue, viz., whether the assessees are at all liable to tax on the sale of these lands. On behalf of the assessees reliance was placed upon three authorities, namely, Sercon (P.) Ltd.'s case (supra), CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC) and Subhadra v. Narasji Chenaji Marwadi AIR 1966 SC 806. The second case relates to wealth-tax and third does not relate to taxation laws at all. Only the first case is material, but the language of Section 2(14) is quite clear. Capital asset according to this definition means property of any kind held by the assessee whether or not connected with his business or profession, except what is specifically exempted therein. Clause (ii) deals with agricultural land. Only such agricultural lands are exempted, which are not situated in an area, which is comprised within the jurisdiction of municipality or a cantonment board and which has population of not less than 10,000 according to the last preceding census. Now the assessee has not seriously disputed that the lands in question are situated within the municipal limits of Piparia town and the population of the town is more than 10,000 according to the last census. The case relied upon by the assessee in Subhadra's case (supra) dealt with sale of agricultural land, which was sold as agricultural land for agricultural use. Now agricultural land for the purpose of wealth-tax may fall within the municipal limit but unless its use is actually converted, it would be considered as agricultural. As against this for the purpose of capital asset the movement the assessee decides to hold the land as for any purpose other than agricultural and the land is situated within municipal limit, it would naturally become capital assets in his hands even according to the decision relied by the assessee. It is not disputed in the present case that the assessees converted the land into plots and sole intention of the purchasers was to use the plots for non-agricultural purpose. On this core, while there can be two opinions as to whether the assessees selling the plots amounted to carrying on of their business, it cannot be disputed by any stretch of imagination that the sale of this land rendered the assessees liable to capital gains tax, inasmuch as there can be no doubt about the fact that the sale was for non-agricultural use of this land. This part of the order of the ITO is, therefore, affirmed in all these cases.
8. In the result the orders of the AAC in the first two appeals are quashed and orders of the ITO in these appeals are restored. In the later two appeals, the orders of the authorities below are modified to the extent that the sales in question will render the assessees liable to capital gains tax and not as income from business or profession. All these appeals are partly allowed in these terms.