Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Administrator Of The Estate Of Late Shri ... on 19 May, 1993
Equivalent citations: [1993]47ITD232(MUM)
ORDER
V.K. Sinha, Accountant Member
1. These fifteen appeals relating to three assessees are being consolidated for the sake of convenience, since common issues are involved. Ten appeals out of the above have been filed by the Department and five have been filed by the assessee.
2. The main contention in the Departmental appeals relates to the question whether surplus from sale of land should be treated as income from long-term capital gains or as income from business. The basic facts forming the background of the issue are that late Shri F.E. Dinshaw was a partner in a firm of solicitors and was also Financial Adviser to the House of Gwalior. He purchased large tracts of land at Malad and Borivli about 70 years ago, having area of about 2500 acres. He died in 1936 leaving a son Shri E.F. Dinshaw and a daughter Smt. Bachoobai Woronzow, both of whom were non-residents in India and also non-citizens for a long time. They became joint owners of the land left by their father and did not carry out any physical division. Shri E.F. Dinshaw did not marry and died in 1970 leaving a will, according to which he bequeathed his half share in the land to his sister Smt. Bachoobai Woronzow for her life-time and the reversionary rights were given to two charities, viz., the Salvation Army, New York and the American Society for Prevention of Cruelty to Animals, New York. Initially, three Administrators were appointed, but consequent to a judgment of the Bombay High Court dated 21-12-1972, Shri Nusli M. Wadia was appointed as the sole administrator of the estate.
3. On the other hand, Smt. Bachoobai Woronzow leased out 72 acres of land jointly owned by her and her brother to one M/s. Haven Kores Real Estate Pvt. Ltd. for 99 years on 27-12-1973. Thereafter, on the next day, on 28-12-1973, she created three charitable trusts, as under :-
(i) F.E. Dinshaw Foundation - with corpus consisting of reversionary interest of herself and the Administrator in the land leased to Haven Kores Real Estate Pvt. Ltd.
(ii) F.E. Dinshaw Charities - consisting of corpus of mostly tenanted properties jointly owned.
(iii) F.E. Dinshaw Trust - with corpus consisting of mainly leased and unencumbered free land of F.E. Dinshaw Estate jointly owned by her and her late brother.
4. From early times, different portions of the property were leased out to different persons on ground rent for the purpose of building house properties on them. Subsequently, a number of encroachments came upon the land and from about 1968 or so, agreements to sale were executed in respect of different portions of the land. However, before the conveyance for sale could be executed, permission was required from the Charity Commissioner under Section 36 of the Bombay Public Trust Act, since the ownership vested in equal measure in the estate of late Shri E.F. Dinshaw on the one hand and one of the three charitable trusts created by Smt. Bachoobai Woronzow on the other hand. Further, both Smt. Bachoobai and the administrator Shri N. Wadia were not citizens of India and, therefore, permission was also required under Section 31 of the Foreign Exchange Regulation Act. At the same time, clearance was also required under the Urban Land Ceiling Act. This was not all and a further clearance was required under the provisions of Chapter XX-C of the Income-tax Act, relating to purchase by Central Government of immovable properties in certain cases of transfer with effect from 1-10-1986. After the necessary permissions and finalisation of conveyances for sales and their registration, there was surplus and the assessee claimed that it was nothing but long-term capital gains. As an illustration, the computation of long-term capital gains by the assessees for assessment year 1987-88 is tabulated below :-
Entity Total sale Fair market Capital gain
price value as on
1-4-1974
Rs. Rs. Rs.
Estate of late
E.F. Dinshaw 9,17,882.50 6,73,043.50 2,44,839.00
F.E. Dinshaw
Charities
(1 to 5, 7 to
13, & 15 to 18) 8,93,020.00 6,61,180.50 2,31,839.50
F.E. Dinshaw
Trust
(Case Nos. 6 27,362.50 13,121.00 14,241.50
and 14)
Total 18,38,265.00 13,47,345.00 4,90,920.00
5. It was urged before the Assessing Officer that the surplus was capital gains and not income from business, since the sales were taking place on account of compulsion due to encroachments, etc. and thus there was no business motive. The magnitude of the transactions was also insignificant in the background of total holdings. Further, in a business there would be both purchases and sales, whereas in this case, there was only sale and no purchases by the present owners. It was submitted that the transactions were not even an adventure in the nature of trade, relying on the decision of the Supreme Court in the case of Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765. The Assessing Officer held otherwise. He observed that the steady, systematic and continuous sales consisted of an operation for making profits in real estate and relied on the decision of the Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253. He also listed out some other cases, but did not discuss them. The Assessing Officer also highlighted the nature of expenses debited to the income and expenditure account, the quantum and the activities and the manner in which the value of trust properties was reduced. He pointed out the gradual decrease in rental and leased income. He also mentioned that the properties disposed were not insignificant because the realisation ran into a few crores. He also observed that the land would not have been purchased with a view to earn income by way of ground rent because only a small portion was let out and the large portion was in the nature of forest land. In his opinion, late Shri E.F. Dinshaw had great business acumen looking to his profession and he could foresee that land around Bombay would command high prices in future. Thus, in his opinion, the lands were purchased with the only intention of earning profits. He further referred to the scale of operations which was, according to him, an indicator of the intention of the owners to earn profits. The manner of disposal was also a pointer in the same direction. The construction of a compound wall costing more than Rs. one crore was a business activity, according to him. For these reasons, he held that the surplus was nothing but business income and computed the income accordingly. The profit on sale of land treated as business income for assessment year 1987-88 was as below :-
Entity Profit on sale of land Estate of late Shri E.F. Dinshaw Rs. 8,01,523 F.E. Dinshaw Trust Rs. 19,689 F.E. Dinshaw Charities Rs. 7,81,834
6. The CIT (Appeals) examined the matter further. He observed that a large body of case law had developed around the subject of the nature of income from sale of lands. He referred to the decision of the Madras High Court in the case of CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 at page 585. Some guidelines were given therein 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 a trading activity. However, ownership of land by itself was not a trade and purchase in expectation that the land may appreciate in value, did not make any difference. Such transactions were incidental to ownership and there was nothing commercial about them.
7. The CIT (Appeals) also referred to the guidelines in the judgment of the Supreme Court in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21. Relevant extract is given below :-
If a 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 sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade.
8. The CIT (Appeals) also took guidance from the judgment of the Supreme Court in G. Venkaiaswami Naidu & Co. v. CIT [1959] 35 ITR 594. Relevant extract is given below :-
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 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.
9. The CIT (Appeals) thereafter referred to the following observations of the Bombay High Court in CIT v. V.A. Trivedi [1988] 172 ITR 95 :-
It is not possible to evolve a single test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade. In cases of purchase and sale of land, generally speaking, the original intention of the party in purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions offers a valuable guide in determining whether the assessee is carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading venture. There has to be an intention to trade at the time of purchase and the onus of establishing it is on the Revenue.
10. The facts of the present case were thereafter analysed by the CIT (Appeals). He noted that none of the assessees purchased the land themselves and it was purchased by late Shri F. E. Dinshaw about 70 years back, when the growth of Bombay to its present state could not have been foreseen. The land was purchased as a source of earning income from ground rent. The encroachment started after independence in 1947 and it was difficult to protect open land. The assessees were selling the land motivated more by the desire of protecting their corpus than for earning profits. Further, the assessees were trusts or the administrator and they would not enter into business of selling land because there is nobody to enjoy such income.
11. The CIT (Appeals) also referred to the decision of the Gujarat High Court in CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507, where it was held that the land had become a commodity of trade and commerce and purchase and sale constituted an adventure in the nature of trade. In that case, there was no safety of the capital investment and no certainty of regular return. The previous owners had purchased the land for business purpose and within a short period of about three weeks the land was again sold to the assessee. The assessee took the risk of clearing disputed and defective title. Judicial notice was also taken of the fact that after the formation of the State of Gujarat, there had been a spurt in building activity in Ahmedabad and land had ceased to be a commodity of investment and had become a commodity of trade and commerce. The CIT (Appeals) observed that there were no such special facts in the present case and, therefore, the ratio of the above judgment could not be applied in preference to the other case law relied upon by him. He, therefore, directed that the income should be taxed as capital gains and not as business income in all three cases. The revenue objects to this decision and is in appeal before us.
12. The learned departmental representative submitted before us that there was a steady, systematic and continuous activity of sale of lots of land and it was not a case of a few isolated sales. The assessees had started getting earnest money from assessment year 1975-76, when the sum of earnest money was Rs. 13.53 lakhs. The increase in the activity could be judged from the fact that the earnest money in assessment year 1989-90 exceeded Rs. six crores. According to him, this was a clear indicator of commercial activity. Further, it was not true that the assessees had confined themselves to sale of existing land and not made fresh purchases. He submitted that some land had been declared surplus under the Urban Land Ceiling Act and the assessee had option to purchase the same. This option had been exercised and the assessee had re-purchased its own property. In any case, there could be a business and commercial activity without making any fresh purchases, e.g., the process of weaving cloth. In that case, the processing constituted a commercial activity. Similarly, the assessee had carried out improvements on the land in the sense that fencing had been erected around it and this was also a pointer towards commercial activity.
13. The learned departmental representative submitted further that certain observations in the case law relied upon by the CIT (Appeals) in fact supported the revenue's case. With reference to Kasturi Estates (P.) Ltd.'s case (supra), he observed that repurchase of land declared excess under the Urban Land Ceiling Act should be accepted as a commercial activity. With reference to Janki Ram Bahadur Ram's case (supra), he submitted that fencing of the property and the plotting for sale, should be treated as commercial activity.
14. The learned departmental representative then referred to the decision of the Supreme Court in the case of Khan Bahadur Ahmed Alladin & Sons v. CIT [1968] 68 ITR 573, where large areas of land and building were purchased from the Government. It was held that the purchase of the site and the buildings was an adventure in the nature of trade and was in the course of a profit making scheme. He submitted that the decision supported the case of the revenue.
15. The learned departmental representative thereafter invited attention to the decision of the Gujarat High Court in the case of Smt. Minal Rameshchandra (supra), which had been distinguished by the CIT (Appeals). According to him, the case was not distinguishable and just as there was a spurt in building activity at Ahmedabad after formation of the State of Gujarat, there was a very fast development in Borivli, Bombay after 1970. He, therefore, submitted that the ratio of that decision would be applicable in the present case also.
16. For the above reasons, he submitted that the decision of the CIT (Appeals) should be reversed and the surplus on sale of land should be treated as business income.
17. The learned counsel for the assessee, on the other hand, supported the order of the CIT (Appeals). He submitted that a history of the land showed that late Shri F.E. Dinshaw had himself leased out some land during his life-time and the ground rent was being assessed as income from other sources. Further, after 1947, there was dearth of land and encroachments became frequent on the land. He submitted that suits were filed for eviction in various courts and the number of such suits ran into hundreds, leading to expenditure of Rs. 3 to 4 lakhs peryear. The assessee claimed that the expenditure was deductible under Section 57 of the Income-tax Act and should be set off against income under the head "other sources", but the Department had declined to set if off, treating it as capital expenditure. He emphasised that late Shri F.E. Dinshaw was not a dealer or a builder, but a solicitor and the land had been purchased only as an investment.
18. The learned counsel continued that up to assessment year 1985-86, there was always a deficit and, therefore, disposal of land became necessary not only to prevent further encroachments, but also to have a fund flow for the cost of establishment and suits. As far as repurchase of land declared surplus under Urban Land Ceiling Act was concerned, he clarified that such surplus was about 200 acres and the maximum compensation payable was only Re. 1 per sq. metre. However, under the law the assessee had an option, subject to certain conditions, to surrender hundred acres free of cost and for the next hundred acres, pay Rs. 50 per sq. metre and retain the land. He emphasised that it was not a case of purchase of new land but only retention of the assessee's own land and the transaction did not amount to a commercial transaction at all. Regarding fencing and compound wall, he clarified that the cost was about Rs. 1.16 crores looking to the vast area of the land, but the purpose was only protection of land and not improvement. He clarified further, that no improvement of any kind, such as bringing water, drainage, electricity, levelling of land or construction of roads was undertaken by the assessees. The sale of the lands was a forced sale.
19. The learned counsel further submitted that the facts of the case of Khan Bahadur Ahmed Alladin & Sons (supra) were quite distinguishable, because in that case the resale had taken place within a short time of the purchase and the assessee had taken loans to pay purchase money. He also submitted that the facts were distinguishable from the facts in the case of Smt. Indramani Bai v. Addl. CIT [1993] 200 ITR 594 (SC), since there also the sales had taken place within a short time and the assessee had to sell silver ornaments in order to provide funds for the purchase.
20. The learned counsel for the assessee also invited our attention to the decision of the Madras High Court in CIT v. A. Mohammed Mohideen [1989] 176 ITR 393. In this case, the assessee had purchased large plot of land with a dilapidated building. Thereafter, there was sale after conversion into smaller plots. There was no evidence that purchase of land had been made with intention to resell. It was held that the transaction was not an adventure in the nature of trade and the profit would be assessable as capital gains. The learned counsel submitted that this judgment supported the assessee's stand.
21. For the above reasons, it was submitted that the CIT (Appeals) had rightly held that the transactions were nothing but capital gains and his order should be confirmed.
22. We have considered the rival submissions carefully. It has rightly been observed by the Bombay High Court in V.A. Trivedi's case (supra) that it is not possible to evolve a single test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade. Various guidelines are available in the decisions of the Supreme Court and High Courts, which have been discussed above. If the character of the venture is to be treated as trading, then there has to be an intention to trade at the time of purchase and the onus of establishing it is on the revenue - V.A. Trivedi's case (supra): The presence of such a factor would raise a strong presumption that the transaction is an adventure in the nature of trade, but the presumption is not conclusive - G. Venkataswami Naidu & Co. 's case (supra). In the present case, there is nothing to indicate that late Shri F.E. Dinshaw had any intention to trade at the time of purchase. In fact, he died in 1936 without selling any part of it and there were no sales for nearly 35 years thereafter. It has been held that if a transaction is related to the business which is normally carried on by the assessee. an intention to launch upon an adventure in the nature of trade may be readily inferred - Janki Ram Bahadur Ram's case (supra). In this case, late Shri F.E. Dinshaw was far removed from any business in real estate. Any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable, would also point towards an adventure in the nature of trade - G. Venkataswami Naidu & Co.'s case (supra). In the present case, there was no such activity. The learned counsel for the assessee clarified before us that no improvements were carried out such as bringing water or drainage or electricity or levelling the land or constructing roads. It is true that fencing and compound wall were constructed, but we are satisfied that the purpose was to protect the property and not to carry out improvements. It has also been held that 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 trade activity -Kasturi Estates (P.) Ltd.'s case (supra). However, all the revenue is able to say is that the sales were carried out in a steady, systematic and continuous operation. It is true that the extent of sales was increasing, yet compared to the vast extent of holdings, it is not possible to say that there were extensive sales. At the same time, it was a one-sided activity of sales, but no corresponding activity of purchases. Repurchase of 100 acres of land which was declared surplus under the Urban Land Ceiling Act is hardly a purchase in the commercial sense, since it was nothing but retention of one's own property. The property was purchased nearly 70 years ago and it cannot be expected that it should remain invested indefinitely. Adequate reasons have been advanced before us, inasmuch as, there were encroachments, leading to heavy litigation and expenditure, on account of which it became necessary to sell parts of the land. In any case, mere selling does not change the character of the land from investment to stock in trade, because an investment also has to be realised at some time or the other.
23. We have also carefully considered whether the facts in the present case are distinguishable from the facts in the case of Smt. Mincd Rameshchandra (supra). There was a spurt in building activity at Ahmedabad after the formation of the State of Gujarat and the High Court took judicial notice of this fact and held that land had ceased to a commodity of investment and had become a commodity of trade and commerce. To some extent, it can be said that there was a spurt in building activity in Bombay also after 1947, but the change was not so sudden and in any case, the assessee did not start selling immediately after 1947. Further, in that case, when land was purchased, there was risk of clearing disputed and defective title and there was no safety of the capital invested or regular return. The factors of risk, uncertainty, foresightedness to visualize imponderables and capacity to overcome unforeseen hurdles were held to be essential requisites for business activity. In the present case, there were no such risks at the time when land was purchased and difficulties arose and the difficulties of encroachment were forced upon the assessee without being foreseen. We are, therefore, of the opinion that the facts are materially distinguishable and the ratio of the judgment of the High Court will not apply to the facts of the present case.
24. In view of the above and taking into account the total effect of all the relevant factors and circumstances determining the character of the transactions, we hold that the CIT (Appeals) was justified in treating the transactions as capital gains. His decision in this regard is, therefore, confirmed.
25 to 68. [These paras are not reproduced here as they involve minor issues.]