Income Tax Appellate Tribunal - Hyderabad
Pydah Suryanarayana Murthy vs Income-Tax Officer. on 9 November, 1995
Equivalent citations: [1996]58ITD225(HYD), (1996)56TTJ(HYD)1
ORDER
Per M. Ramakrishna, Judicial Member :- This appeal by the assessee is directed against the order of the CIT (A), Vijayawada, dated 13-1-1989 for the assessment year 1984-85.
2. The effective grievance of the assessee in this appeal is that the CIT (A) erred in confirming the action of the Income-tax Officer, in treating the income a rising on sale of agricultural lands as business profits, and that he was not justified in concluding that the transaction entered into by the assessee was an adventure in the nature of trade and should be taxed as income from pursuit of a trade or business.
3. Brief facts that led to the filing of this appeals are as follows -
(a) During the previous year relevant to assessment year 1984-85, assessee sold certain lands for a consideration of Rs. 1,67,180 and the sale proceeds thereof were invested in the National Rural Development Bonds. In this view of the matter, while filling the return, disclosing an income of Rs. 53,900 and agricultural income of Rs. 10,811 assessee has not disclosed the capital gains on the sale of the above lands. Though the assessment was originally completed on 27-3-1986 under section 143 (1), with the prior approval of the IAC, a notice under section 143 (2) of the Act was served on the assessee, and thereafter fresh assessment by the order dated 26-3-1987 under section 143 (3) read with section 143 (2)(b) was framed. In the course of said re-assessment, the Assessing Officer noted that in the statement enclosed to the return, the assessee mentioned that during the year of account, he hold ten sites for a sum of Rs. 1,67,180 and that the total sale proceeds were invested in National Rural Development Bonds and, hence, no capital gains were disclosed. During the course of hearing, the Assessing Officer obtained particulars of sale of land and the same were extracted in para (c) of the assessment order on pages 2-3 thereof. He noted from the said particulars that the assessee sold the land belonging to him in square yards. On examination of couple of sale deeds, copies of which were furnished in the course of assessment, the ITO noted that the land sold by the assessee was described in those deeds as Nivesana Sthalam, meaning thereby that the site meant for constructing houses. On perusal of records of earlier assessment, he noted that the assessee was in the habit of selling house-sites by giving plot nos. also. Since in the year under appeal, since the land was sold in square yards, the ITO inferred that the assessee must have plotted out the lands for purpose of identification, so that the purchaser could easily take possession of the land. He noted from a letter of the assessee dated 18-3-1987 that the assessee entered into agreement for sale and signed necessary papers for layout etc., on behalf of the purchaser in respect of some of the plots that were sold in the year of account. He observed that letter of 18-3-1987 itself indicated the positive action of the assessee to pool out the lands, and in the absence of assessees plotting and dividing the lands into separate sites, no purchaser would come to purchase the plots; that since the assessee sold the plots in square yards, he must have fixed up necessary marks of identification on each plot; and that the sales executed by the assessee constituted an adventure in the nature of trade, and as such the assessees claim that the sales were capital in nature was not acceptable. Accordingly, he held that the realisation of Rs. 1,67,180 represented the business realisation of the assessee from the adventure in the nature of trade on sale of residential plots. Since the assessee claimed that the lands were acquired considerable number of years ago by his ancestors and since there was steel increase in the lands cost subsequent to the year 1980, the ITO estimated the cost of the land to the assessee at 10% of the sale price and gave a deduction of the above sum of Rs. 16,718 from the sale consideration received by the assessee, and treated the balance of Rs. 1,50,462 as income of the assessee from business.
(b) On appeal before the CIT (A), it was contended for the assessee that the agricultural land was held by the assessee by virtue of inheritance and the same was sold as it was not advantageous to maintain and yield good income therefrom. In that process, it was contended that the assessee might have done little improvement to obtain a better price, but that cannot be treated as an adventure in the nature of trade. It was submitted that the assessee has not purchased any lands and made any plots for the purpose of selling and even in the case of two instances noted in the assessment order, the assessee has not done any plotting. It was also contended that the cost price was not there for arriving at the income from the adventure in the nature of trade, and the reasoning adopted and the cost price determined by the Assessing Officer were unjustified. It was also the contention of the assessee that there were only capital gains in the hands, and even those capital gains were not taxable in view of the A. P. High Court decision in the case of J. Raghottama Reddy v. ITO [1988] 169 ITR 174. Keeping in view, the plea of the assessee that the assessee itself has not done anything for the layout or divided the plots, etc., the CIT (A) noted that further enquiries were got conducted by contacting four of the persons, viz, D. A. Narasimha Prasad Varma, Sagiraju Pukhraju, D. Bhaskara Reddy and Smt. D. Padmavathi W/o. D. Bhaskara Reddy, who stated that there was no agreement before the purchase of sites and they purchased layout plots; that was already done by the assessee and the purchase consideration was paid to the assessee and only then, the registration was made. Out of these four persons, D. Bhaskara Reddy and Smt. Padmavathi purchased the sites from the assessee during the relevant accounting period. He also noted that the assessee applied for granting of the certificate under section 230A of the Income-tax Act for gifting of 5240 sq. mts. valued at Rs. 10,48,000 to Kakinada Municipality for the purpose of approving of the layout plan. When questioned at that time whether any application to Kakinada Municipality for the purpose of approving of the layout plan was made, the CIT (A) noted that the assessee sated that a layout plan in L. P. No. 540/83 was made, but the proceedings of the Municipal Commissioner were not furnished to him, which according to the CIT (A), indicated that the assessee had applied for approval of the layout of the plots in 1983 itself and that it was in this connection that the assessee wanted to gift a part of the land for purpose of laying roads and parks. Considering these facts, the CIT (A) rejected the contentions of the assessee that the assessee has not made out the plots in different sizes or layout etc. Since the assessee inherited the land in question, and it was only subsequently, that he converted it into plots of different sizes for house construction, the CIT (A) held that the lands were no more agricultural lands, after conversion and as such the ratio of the decision relied upon for the assessee was not applicable. Since the assessee has sold the land by dividing the same into plots, etc. and has received the sale proceeds, the CIT (A) concluded that it was clearly an adventure in the nature of trade, and the same was not liable to capital gains though contended to be so at some point of hearing. Further, considering that the land bearing R. S. No. 205/1 (8) and R. S. No. 197/10 measuring 10239 Sq. Mt. and 4050 Sq. Mts. belonging to the assessee was accorded layout approval as per the register of layout approval maintained in the office of the Kakinada Municipality and that the applications in that regard were dated 5-9-1983 and April 1984 respectively, the CIT (A) concluded that the assessee himself had taken positive action for laying out the plots and getting the approval of the Municipality. Considering all these aspects, the CIT (A) held that the transactions entered into by the assessee was clearly covered as an adventure in the nature of trade and as such the income from such an adventure was liable to be taxed under the head Business income. The CIT (A) also upheld the estimation of the allowable deduction out of sale proceeds at 10%, holding the same to be fair and reasonable. He, accordingly, sustained the addition made by the Assessing Officer.
(c) Aggrieved by the order of the CIT (A) in this behalf, assessee came up with this appeal before us.
4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the lands were of agricultural nature, inherited by the assessee and they were sold to various persons only as agricultural lands and there was no intention on the part of the assessee to carry on business in lands. He submitted that it was not the assessee who got the agricultural lands converted into house-sites, and that the application to the Town Planning authorities were made and signed by the assessee only because the assessee continued to be the owner of the lands, till execution of the documents of sale and had undertaken to do so only on behalf of the agreement-holder under clause 3 of the agreement of sale dated 7-7-1982, and that all other works with regard to the layout were done only by the agreement holder and the assessee was bound only to execute the sale-deeds in favour of the purchasers of the land. It is further contended that as per the agreement dated 7-7-1982, if the approval of the town planning authorities could not be obtained by the agreement-holder or if the dropped the proposal to form a layout, the entire land had to be taken for the stipulated price. He submitted that in the year of account, land was sold in square yards because of the insistence of the registering authorities apparently due to the fact that the neighbouring areas were being sold as house-sites. He contended that the mere fact that the agreement holder got the lands converted into house-sites and sold them, cannot militate against the assessees claim that the excess should be treated only as capital gains when there was no evidence of any earlier or subsequent sales of land by the assessee to show an intention on the part of the assessee to carry on an organised and regular course of activity amounting to business. Considering the fact that the assessee was merely realising an asset inherited by him without any business motive and in the absence of any purchase of land by the assessee in any year, the CIT (A) was not justified in holding that the assessee had pursued an adventure in the nature of trade. He also submitted that the sale of agricultural lands effected during the previous year was liable to be treated as only capital gains and not as business profit, which position was accepted by the Department for the assessment year 1983-84. In the alternative, the learned counsel for the assessee submitted that the deduction for cost of the lands at 10% allowed by the Assessing Officer, and confirmed by the CIT (A) is too low and without any basis. In the context of this plea, the assessee has also filed a petition under rule 11 of the Appellate Tribunal Rules, seeking to raise an additional ground contending that in the event the profits are to be assessed as income from business, cost of the lands to the business should be taken at the value on the date of conversion of lands sold as stock in trade from investment and not the value as on the date of acquisition or value as on 1-1-1964. In any event and without prejudice, it was contended, in the said additional ground, that the fixation of cost at 10% of the sale value is too low, arbitrary and without any basis. The learned counsel for the assessee has filed exhaustive memorandum of submissions reiterating the above contentions, a copy of which is filed at pages 1-37 of the paper-book. The said paper-book filed on behalf of the assessee contains inter alia, particulars of agricultural lands of the assessee as on 14-4-1974, copy of computation for estate duty purposes in the matter of estate of Late Pyda Suryanarayana Murthy, copy of estate duty assessment order dated 14-11-1983, copy of agreement to sell dated 7-7-1982, alongwith free translation therefore, a copy each of the show-cause notice issued under section 263 dated 18-5-1987, assessees explanation in response thereto for the assessment year 1983-84 and the order of the Commissioner (Appeals), Vijayawada for the assessment year 1985-86 and 1986-87 dated 28-10-1992, copies of consequential orders for the assessment years 1985-86 and 1986-87 dated 30-3-1993, and the copy of order of the Tribunal in ITA No. 738/Hyd/89 for the assessment year 1984-85 in the appeal filed by the Department.
5. The learned counsel for the assessee has relied upon the following decision -
(a) Mrs. D. M. Alexander v. CIT [1952] 22 ITR 379 (Mad.)
(b) Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC)
(c) Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC)
(d) Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 (SC)
(e) Khan Bahadur Ahmed Alladin & Sons v. CIT [1968] 68 ITR 573 (SC)
(f) Michael A. Kallivayalil v. CIT [1976] 102 ITR 202 (Ker.)
(g) Ajax Products Ltd. v. CIT [1961] 43 ITR 297 (Mad.)
(h) Kaur Singh v. CIT [1983] 144 ITR 756/[1982] 11 Taxman 207 (Punj. & Har.)
(i) Cit v. Jalannagar Tea Estate (P.) Ltd. [1962] 45 ITR 626 (Assam)
(j) Deep Chandra & Co. v. CIT [1977] 107 ITR 716 (All.)
(k) CIT v. Shashi Kumar Agarwal [1992] 195 ITR 767 (All.)
(l) CIT v. Principal Officer, Laxmi Surgical (P.) Ltd. [1993] 202 ITR 601 (Bom.)
(m) Smt. Indramani Bai v. Addl. CIT [1993] 200 ITR 594 (SC)
(n) Bhogilal H. Patel v. CIT [1969] 74 ITR 692 (Bom.)
(o) B. Narasimha Reddy v. ITO [1993] 46 ITD 398 (Hyd.) and
(p) CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad.)
6. On the other hand, the learned Departmental Representative strongly supported the orders of the lower authorities, and submitted that the assessee having sold the land by dividing the same into plots, and having sold the same by square yards, the assessee was clearly engaged in an adventure in the nature of trade. The enquiries made by the lower authorities clearly disproved the contention of the assessee of having not made out the plots of different sizes, or layout, etc. He further submitted that the case-law relied upon by the learned counsel for the assessee has no application to the facts of the case on hand. &&&&& 7. We have considered the rival submissions and perused the orders of the lower authorities, besides the written submissions of the assessee, catena of decisions relied upon by the learned counsel for the assessee and other papers filed before us in the paper-book. The main issue that arises for consideration in this appeal is whether the income derived by the assessee on the sale of the land in question was an income from adventure in the nature of trade, or was only a surplus on the realisation of capital. Section 2 (13) of the Income-tax Act, gives an all-inclusive definition to the term business, and it includes any adventure in the nature of trade. The expression business is of wide important and it means an activity carried on continuously and systematically by a person by the application of his labour and skill for the purpose of earning profit. Trade connotes the idea of buying and selling. Activities organised on normally accepted commercial lines constitute the essence of any business. It can embrace within its fold dealings in real property also. However the paramount consideration which should weigh is whether the acquisition of the property was by way of investment and whether property was sold out because of the assessee having a title in the same or whether the acquisition and sale of property constituted the business or trading activity of the assessee. Where owner of an ordinary investment choses to realise it by sale and obtain higher price for it than for what he acquired, then the enhanced price is not profit from business, unless it is shown that the enhanced price was not obtained not merely by realisation of investment, but by a act of carrying on business. For determining whether a transaction is an adventure in the nature of trade or not, what has to be seen is whether it is a gain made from a mere enhancement of value by realising the security or is it a gain made in an operation of business in carrying out a scheme for profit making. In the absence of trading activity in the case of purchases and resale of property, the profit arising from resale would be an accretion to capital. Normally, purchase of land is always an investment and mere sale itself does not automatically indicate its nature as an adventure in the nature of trade.
8. It is settled law that it is for the Revenue to establish that the profits earned in a transaction is within the taxing provision and is on that account, liable to be taxed as income under that particular head. Revenue has not only to establish that the transaction is an adventure, but it has also to go further to establish that it is in the nature of trade. In each case, it is total effect of all relevant facts and circumstances cumulatively that go to determine the character of the transactions. In the case of G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594, the Supreme Court has laid down certain tests to find out whether a particular transaction of purchase and sale would amount to an adventure in the nature of trade or not, and at the same time cautioned that in each case, it is the total effect of all relevant factors and circumstances that determine the character of the transaction. The Supreme Court in that case observed that the following factors are relevant for deciding the character of a transaction -
1. Was the purchaser, a trader and whether the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ?
2. What is the nature of commodity purchased and sold and in what quality was it purchased or resold?
3. Did the purchaser by any act subsequent to the purchase improve the quality of commodity purchased and thereby made it more readily resalable?
4. What were the incidences associated with the purchase and sale and whether they are akin to the operations usually associated with trade or business?
5. Are the transactions of the purchase and sale repeated?
6. In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture?
In the case of Mrs. D. M. Alexander (supra), the Madras High Court, inter alia observed as follows -
"... Though a dominant or even a sole intention to resell is not by itself conclusive proof, it is certainly a relevant factor in deciding whether the transaction of purchase and resale was an adventure in the nature of trade, and in conjunction with other circumstances including the conduct of the assessee, such an intention might well establish beyond doubt that the adventure was in the nature of trade. As we have already pointed out, courts have never treated such a question as one capable of easy solution by the taxing authorities. Our task, however, it should be remembered, is more limited in scope. Did the evidence on record justify the finding of the Tribunal, that the purchase and sale of Cottangady group of estates by the assessee constitute an adventure in the nature of trade."
In the case of Saroj Kumar Mazumdar (supra), the Supreme Court observed as follows -
"... It has also not been disputed that in a case where a transaction under examination is not in the line of the business of the assessee, and is an isolated or a single instance of a transaction like that, the burden lies on the revenue to bring the case within the words of the statue, namely, that it was an adventure in the nature of trade."
In the case of CIT v. P. K. N. Co. Ltd. [1966] 60 ITR 65, the Supreme Court, after going into factual, details of the case, held as under -
"... As already observed, determination of the question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a hole or in plots decisive, Profit motive in entering into a transaction is also not decisive. Here, as already pointed out, the primary object of the company was to take over the assets of the P. K. N. firm to carry on the business of planters and to earn profits by sale of rubber. The incidental sale of uneconomic or inconvenient plots of land or houses could not convert what was essentially an investment into a business transaction in real estate."
In the case of Janki Ram Bahadur Ram (supra), the Supreme Court inter alia held as follow -
"It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the income-tax authorities. It has consistently held by this court that the question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact."
In the case of Kaur Singh (supra), the Punjab & Haryana High court inter alia held as follows -
"... The assessee admittedly had purchased the property in the year 1967. The revenue has not at all brought any circumstance or evidence on the record to show that at the time of the purchase of the property in the record to show that at the time of the purchase of the property in the year 1967, the assessee had an intention to sell the property. Merely carving out plots in a portion of the land, without proof of anything more, cannot give rise to the conclusion that the transaction is an adventure in the nature of trade..."
In the case of Bhogilal H. Patel (supra), the Bombay High Court held that where all the circumstances indicate that the agriculturist purchased lands merely to augment his agricultural holdings not based on its potential future value and sold it when he required money, there was no adventure in the nature of trade. The Court noticed in that case that throughout the period, the lands were in the possession of the assessee, who cultivated them and received income from them. The Court also held in that case that the burden lies entirely on the department to establish that the land was purchased with a view to trade, and the said burden was not discharged.
9. In the case of Deep Chandra & Co. (supra), the Allahabad High Court, after analysing the decisions of other High Courts observed at page 727 of the Reports (107 ITR) as follows -
"We, therefore, do not find any substance in the submission of the counsel for the revenue that simply because a purchase is made with an intention to resell in future in case its price rises, that is a ground for holding that the money spent was not by was of investment but was a trading venture. A case of commercial commodity certainly stands on a footing different from that of land. In such commercial commodity it is easier to find the purpose, as such commercial commodities are generally purchased with a view to reselling for the purpose of earning profits."
10. In the case of Shashi Kumar Agarwal (supra) before the Allahabad High Court, assessees father gifted a piece of land to the assessee therein under a gift deed dated 4-3-1968. Sometime thereafter, the assessee proposed to sell the same, but with a view to get better price, got the layout, and the land was carved into some plots and roads and through a broker, the plots were sold. On these facts, the High Court affirming the view taken by the Tribunal held that from the facts on record, it cannot be said that the assessee carried on any adventure in the nature of trade. We may now refer to the decision of the Supreme Court in the case of Smt. Indramani Bai (supra) in contrast. In this case, the Supreme court held that the purchase of land and the activity of the assessee in carving out the land into plots and selling them within a few months is consistent more with the theory of adventure in the nature of trade than to treat it as realisation of capital investment. The distinguishing features of these two cases before the Allahabad High Court in Shashi Kumar Agarwal (supra) and before the Supreme Court in Smt. Indramani Bai (supra) are worth observing. While in the former before the Allahabad High Court Shashi Kumar Agarwals case (supra) the property was gifted in favour of the assessee therein, who get the layout, carved the land into some plots and roads and through a broker sold the plots, in the latter case before the Supreme Court Smt. Indramani Bais (supra) the property was purchased by the assessee, who within a short time of purchase carved out the land into plots and sold them. Similarly, while in the former, the Allahabad High Court held that the activity could not be termed as an adventure in the nature of trade since the property was gifted in favour of the assessee, and as such there could not have been any intention for the assessee to re-sell at the time of acquisition of the same, in the latter case, the Supreme Court branded the activity of the assessee before it as that of an adventure in the nature of trade.
11. In the case of Kasturi Estates (P.) Ltd. (supra) the Madras High Court inter alia held as follows -
"The decision of the question whether profits made by selling land by an assessee carrying on business is profits business or merely capital gains will depend on the cumulative effect of all the facts and circumstances found by the Tribunal...
Developing land into building sites with a view to realise the best price without anything more, is consistent with the realisation of capital investment. 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 be hardly be said that the transaction is any thing more than a realisation of capital investment or conversation of one form of asset into another. The surplus in such a case will not be trading or business profit the transaction is one of realisation of assets in the investment rather that one in the course of trade. The case of assessee can stand on no different footing merely because it is a company which has among its objects power to trade or traffic in land."
In the case if CIT v. A. Mohammed Mohideen [1989] 176 ITR 393, the Madras High Court held as follows -
"In order to hold that an activity is in the nature of adventure in the nature of trade, there must be positive material to prove that the assessee intended to trade in such an activity and in the absence of evidence the sale of immovable property consisting of land could give rise only to capital accretion. A sales of immovable property may possibly be a trading or commercial transaction, but need not necessarily be so. If a land owner developed his land, expended money on it, laid roads for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is any thing more than a realisation of capital investment or conversion of one form a asset into another Obviously, the surplus in such case will not be a trading or business profit because the transaction is one of realisation by the assessee on an adventure in the nature of trade."
The decision of the Madras High Court in CIT v. MLM. Mahalingam Chettiar [1977] 107 ITR 236 is also to the same effect.
12. From a reading of the above decisions of various courts, besides other decisions relied upon by the learned counsel for the assessee, it is clear that the question whether a particular transaction amounts to an adventure in a nature to a trade or not depends on the fact and circumstances of each case. The burden is on the revenue to bring the material on record to prove that transaction in the particular case is in the nature of an adventure in the nature of a trade. Bearing in the mind the various authorities discussed above, let us examine whether in the facts and circumstances of the case, the activity of the assessee before us in the selling the land in question amounts to an adventure in the nature of the trade, and to what extent the revenue has succeeded in discharging the burden cast on it in that behalf.
13. At the outset we may note that the assessee has inherited the lands in the question and such as the question of examining the intention of the assessee at the time of purchase or acquisition of the said lands do not arise. On that aspect, the case of the assessee in this case stands on the better footing than most of the cases discussed above, where the properties were acquired and the intention of the assessee at the time of acquisition of the same was one of the factors that weighted with the various courts for determining the nature of the transactions, before them. For that matter, on that aspect, the facts of the case before us are akin to the facts considered by the Allahabad High Court in Sashi Kumar Agarwal case (supra), where the property was gifted in the favour of the assessee therein.
14. The main factors that led the lower authorities to brand the activity of the assessee as that of an adventure in the nature of the trade are that the assess sold the plots of various sizes measuring the same in square yards; that he was in the habit of selling the plots in earlier years also; and that for selling the agricultural land, by way of plots of various sizes, he must have fixed up necessary identification marks and got the necessary layout, etc. The material evidence on record disproves the contentions of the revenue, and for that matter, non of the above factors can independently and automatically clinch the issue against the assessee, and lead us to the conclusion that the activity of the assessee amounts an adventure in the nature of trade.
15. At this juncture, we may refer to the free translation of the sale agreement, dated 7-7-1982 entered into between the assessee and M. Gopal Krishna, which is filed at pages 58-59 of the paper book of the assessee. Clause-1 of the said agreement dealing with preamble and consideration reads inter alia as follows -
"1.... This property devolved on me from my adopted father after his demise with absolute rights and property is in my possession from that date and since it is a dry land with no proper yield and also it is not convenient for me to cultivate, it is considered better to sell this property and you have offered to... sum of Rs. 75,000 per acre and both of us agreed for this transaction and this agreement executed incorporating the terms agreed upon".
From the above it is clear that the property in question devolved on the assessee by inheritance and he proceeded to sell the same, as if was a dry land with no proper yield, and as the assessee felt it inconvenient to cultivate the same. This agreement indicates that the sale was for a consideration of Rs. 75,000 per acre, out of which Rs. 45,000 was given as advance by crossed cheque of Bank of Baroda at the time of the said agreement for sale.
16. Clauses 2 to 8 of the said agreement that deal with the various terms agreed between the parties, read as follows -
"2. Second party shall have a watchman at his expense from this date of Agreement and also make necessary improvement at the expense of Second Party.
3. Second Party shall at his expense to have/lay outs as per Town Planning rules for the land property in Schedule, and the First Party shall sign all necessary papers only and all the other works are to be done by Second Party only.
4. It is agreed that First Party shall execute Sale Deeds at the expense of the Second Party for the sale of plots in favour of second party or to any other nominee as requested by Second Party.
5. You have to pay Rs. 75,000 including Roads etc. as per layout rules and balance amount is to be paid out of amount for which sale deeds shall be executed as required by you.
6. If for any reason, if the layout is not approved or the Second Party drops the idea of layout this land has got to be registered as agricultural land only, in favour of Second Party or any other person named by the Second Party at the expense of Second Party.
7. The property in the 2nd schedule is shown as under Master Plan scheme as park and I am trying to get it dereserved from Master Plan, it is agreed between both of us the Advance amount given to me shall be refundable without any interest.
8. For land ceiling purposes, if I have to surrender any lands I will surrender from out of other lands only and lands sold to you shall be retained by me."
From a reading of the clauses of the above agreement, it is clear that as far as the assessee was concerned, the land in question was sold to one M. Gopal Krishna, who was described as Second Party in various clauses of the said agreement, at the rate of Rs. 75,000 per acre. It is also clear from the clauses 2 and 3 of the said agreement that it was the Second Party, viz. the said Gopal Krishna Gokhale, who was to maintain a watchman, spend on necessary improvements and layout of the land, and the assessee was only to sign the necessary papers. As per clause 4 of the agreement, the assessee was to execute sale deeds at the expense of Second Party for the sale of plots in favour of Second Party or to other nominee as required by Second Party. If the assessee signed the applications for layout or any other papers, or even the sale_deeds, it was because the assessee continued to be the owner of the property, and he was obliged to do so under the terms of the agreement the assessee had with Gopal Krishna, with whom he executed the sale agreement dated 7-7-1982. Though the enquiries by lower authorities with the purchasers of various lands indicated that those purchasers have received the plots with due layout and they have not spent anything for that purpose, as evident from the sale agreement dated 7-7-1982, improvement and layout of the land into plots were attended to by Gopal Krishna, who is the real purchaser of the land from the assessee, by virtue of sale agreement dated 7-7-1982. If the sale deeds were executed by the assessee in favour of those purchasers of plots from the said Gopal Krishna, it was because notwithstanding the sale agreement dated 7-7-1982, the land in question continued to be in the name of the assessee, and the assessee in pursuance of clause 4 of the said agreement, was obliged to execute Sale-Deeds at the expense of the Second Party for the sale of plots in favour of Second Party or to any other nominee as requested by Second Party.
17. Thus, as far as the assessee was concerned, the sale of the land in question was concluded by the sale agreement dated 7-7-1982, by which the land in question was sold to the said Gopala Krishna for a consideration of Rs. 75,000 per acre, and thereafter all the activities relating to improvement and layout of the land and further sale of land dividing the same into plots of various sizes were undertaken by the said Gopala Krishna, entirely at his own cost and effort, and the assessee was only a name-lender to the various papers and documents that were to be executed in that process, since the property continued to remain in the name of the assessee, till the assessee executed the sale-deeds in respect of various plots carved out by the said Gopala Krishna in favour of the respective purchasers of the same, as per the request of the said Gopala Krishna, as his nominees.
18. Viewed in the light of this agreement, the lower authorities were not justified in concluding that the assessee sold the land in question in plots of various sizes (sq. yards) after making improvements and layout, and as such the activity of the assessee amounted to an adventure in the nature of trade. Merely because the assessee signed various papers seeking approval for layout, etc. or the sale-deeds in favour of third parties who purchased the plots from Gopala Krishna, it cannot be said that the assessee himself engaged in an adventure in the nature of trade, since the said action on the part of the assessee was in accordance with the agreement he has entered into with the said Gopala Krishna, to whom he sold the land in question for a consideration of Rs. 75,000 per acre.
19. Further, it is evident from the assessment order, that the assessee has shown interest receipt of Rs. 52,566, comprising of the following items alone, under the head Business :
Rs.
"(i) Interest on National Rural Development Bonds 44,439
(ii) Interest received from Banks 2,114
(iii) Interest received from Savisugo Engg. Corpn.
2,875
(iv) Interest on Public Provident Fund 1,426
(v) Interest received from Malludora 1,526
(vi) Interest on Telephone Deposit 186 52,566"
Other than this interest income, against certain expenditure was also claimed as business expenses, assessee has not disclosed any income under the head Business. But for the impugned addition of Rs. 1,50,462 made on account of business on sale of plots, the assessees version that its only income from business comprised of interest receipts noted above, has been accepted. Thus, it is not the case of the revenue that the assessee is engaged in the business of selling plots after developing the land, or that such an activity is connected with normal business of the assessee. In similar circumstances, the Tribunal in the case of B. Narasimha Reddy (supra), held as follows -
"Whether the sale of land amounts to adventure in the nature of trade or realisation of investment would depend on the facts and circumstances of each case. In the instant case, the assessee was never a trader or a businessman. He converted the land into plots and sold them as house-sites simply to get maximum advantage out of it. In the absence of any evidence to the contrary, it had to be presumed that only a meagre or insignificant amount was spent for improvement and getting the layout of the land. Further, though the assessee agreed to realise only Rs. 18 per sq. yd. towards sale price of the carved out plots, the real person who carried on the adventure in the nature of trade was the vendee who secured purchases for amount between Rs. 25 to Rs. 35 per sq. yd. Therefore, applying the ratio of the decision of CIT v. Kasturi Estate (P) Ltd [1966] 62 ITR 578 (Mad.) to the instant case, it was to be held that the assessee never intended to do any business in real estate and that the sale of plots of land in question did not amount to an adventure in the nature of trade. This was, however, a clear case where the assessee tried to obtain maximum price for his land. Intendment of getting plot carved out and get the layout approved by the Gram Panchayat were only steps in that direction..."
In the case also, the assessee has not purchased the land in question, but has got the same as ancestral land on partition of the larger HUF. Applying the ratio of the said decision to the facts of the case on hand, the assessee has sold his land in the case before us only for a consideration of Rs. 75,000 per acre, to Shri Gopala Krishna and it is the said Gopala Krishna, who sold the land in question after arranging necessary improvements and layout, in terms of plots of various sizes for higher price, and in that context, it is the said Gopala Krishna, who can be said to have engaged in an adventure in the nature of trade by purchasing the land from the assessee and after improvements and lay out, selling the same in the form of plots to various purchasers. For that matter, inasmuch as in the case on hand in pursuance of the agreement dated 7-7-1982 it was the said Gopala Krishna who has spent on layout and improvements to land in question and the assessee merely lent his name to various applications and documents since the property stood in his name and as such has not incurred any expenditure either on layout or improvement to the land, assessee stands on a better footing, as compared to the case before the Tribunal in B. Narasimha Reddys case (supra).
20. In the light of the above discussion, considering totality of facts and circumstances of the case, we hold that the activity of the assessee in selling the land in question cannot be termed as an adventure in the nature of trade and it merely amounts to realisation of property acquired by inheritance. In this view of the matter, we set aside the orders of the lower authorities in this behalf, deleting the addition of Rs. 1,50,462 made by the Assessing Officer and sustained by the CIT (A), under the head Business on sale of plots. The surplus if any received by the assessee on the sale of his land, is liable to be taxed only as capital gains in the hands of the assessee. However, it was the contention of the assessee that the sale proceeds were invested in National Rural Development Bonds, and hence no capital gains were disclosed for taxation. In this respect, we direct the Assessing Officer to verify the contention of the assessee with regard to investment of total sale proceeds, in the National Rural Development Bonds and consider the assessability or otherwise of the capital gains, if any, on the sale of the land in question, in the hands of the assessee, of course, after affording the assessee reasonable opportunity of being heard.
21. Since we have allowed the main grounds of the assessee and held that the activity of the assessee does not amount to an adventure in the nature of trade and as such surplus on sale of land is not taxable under the head Business income, the alternative plea of the assessee contained in ground No. 19, and in the additional ground raised during the appellate proceedings before us, do not survive for our consideration. They are accordingly rejected.
22. In the result, since the main grounds of the assessee in this appeal are allowed, assessees appeal is treated as allowed.