Income Tax Appellate Tribunal - Panji
The Ito, Ward-1,, Bhuj vs Shri Jaydevsinh N. Jadeja,, on 4 December, 2017
आयकर अपील य अ
धकरण, राजकोट यायपीठ, राजकोट ।
IN THE INCOME TAX APPELLATE TRIBUNAL
RAJKOT BENCH, RAJKOT
BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER
AND
SHRI RAJPAL YADAV, JUDICIAL MEMBER
आयकर अपील सं./ ITA Nos. 486 & 496/RJT/2013
नधा रण वष /Assessment Years: 2009-10
Jaydevsinh Navalsinh Jadeja ITO,
Jay Villa, Plot No.4, Vs Ward - 1,
Sanskar Nagar Bhuj
Bhuj-Kutch 370 001.
PAN : AHIPJ 7554 K
अपीलाथ / (Appellant) यथ / (Respondent) and
Cross Objector
Assessee by : Shri Kalpesh Doshi, CA
Revenue by : Shri C.S. Anjaria, DR
सन
ु वाई क तार ख/Date of Hearing : 02/11/2017
घोषणा क तार ख /Date of Pronouncement : 04/12/2017
PER RAJPAL YADAV, JUDICIAL MEMBER:
The assessee and Revenue are in Cross Appeal against order of ld. Commissioner of Income Tax (Appeals)-II, Rajkot dated 30.09.2013 passed for Assessment Year 2009-10.
2. The Grounds taken by both the appellants are not in consonance with Rule 8 of ITAT Rules, they are descriptive and argumentative in nature. In brief short common question involved in both the appeals relates to determination of nature of income derived by the assessee on sale of land, i.e. whether the profit on sale of land is to be assessed as business income or under the head capital gain.
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3. The brief facts of the case are that assessee has filed his return of income on 2.10.2009 declaring total income at Rs.3,49,630/-. His case was selected for scrutiny assessment and notices u/s. 143(2) and 142(1) were issued and served upon the assessee. On scrutiny of accounts it revealed to the Assessing Officer that land at Survey No.101/1 admeasuring 3.38 hector was purchased on 25.5.2005 for Rs.54,500/-. Similarly land at survey 108 admeasuring 1.58 hector and land at survey no.110 admeasuring 1.77 hector were purchased by the assessee on 13.5.2007. These land were sold by the assessee on 13.5.2007 to Coastal Gujarat Power Ltd. ("CGPL" for short) for Rs.1,21,72,438/-. The assessee had earned a profit of Rs.1,20,21,138/-. The land were mentioned as agriculture land and situated at village Sukhpur, Tal. Mundra-Kutch. Assessee has claimed the gain as exempt on the ground that said land was not a capital asset within the meaning of section 2(14) of the Income Tax Act, and therefor, gain was not liable to tax under section 45 of the Act. The ld.AO did not accept contentions of the assessee and treated him as a trader in the land. He assessed the alleged profit and sale of land as business income. On appeal, the ld.CIT(A) has observed that gain arisen to the assessee on transfer of land at Survey No.107/1 purchased on 25.5.2005 will be treated as capital gain, and since the land was agriculture land situated beyond 8 kms. From municipal limit, and therefore, it was not capital assets within the meaning of section 2(14) of the Act. Profit arose to the assessee on sale of this land will not be taxable under section 45 of the Act or business income. However, with regard to the profit earned on sale of land comprised in survey no.18 and 110, the ld.CIT(A) treated the assessee as ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -3- trader in land and assessed the profit as business income. In this way, both parties are challenging order of the ld.CIT(A). Thus, the issue before us is, whether total amount of Rs.1,20,21,138/- earned by the assessee as profit from sale of land is to be assessed as business income or it is to be assessed as a capital gain, which is exempt from tax under section 2(14) r.w.s. 45 of the Act.
4. With the assistance of ld. Representative, we have gone through the record. The issue, whether gain from sale of agricultural land is to be assessed as a business income or short term capital gain/long term capital gain, is a highly debatable issue. It always puzzled the adjudicator even after availability of large numbers of authoritative pronouncements by the Hon'ble Supreme Court/Hon'ble High Court. The reason for the puzzle is, one has to gather the intention of an assessee while he entered into the transaction. The expression "intention" as defined in Meriam Webster Dictionary means, what one intends to accomplish or attain, it implies little more than what one has in mind to do or bring out. It suggests clear formulation or deliberation. Thus, it is always difficult to enter into the recess of the mind of an assessee to find out the operative forces exhibiting the intention for entering into the transaction. This would give rise a debate. Nevertheless, we have to look into the curious features of this case which will goad us on just conclusion.
5. Before we embark upon an inquiry on the facts of present case so as to find out, whether assessee is to be termed as involving in the ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -4- trading of land or to be treated as a simplicitor agriculturist. We would like to refer the three basic questions formulated by ld. first appellate authority for adjudicating the controversy. These questions are as under:-
i. Is the sold land 'agricultural land' ?
ii. Whether the transaction carried out by the appellant was
'adventure in the nature of trade' and the profits thus required to be taxed as business income ?
iii. Is the transaction a sham transaction and can it be labeled as a colourable device ?
6. Ld. first appellate authority has made a lucid enunciation of law and facts under each question. She accepted that the land sold by the assessee was agricultural land. She also accepted that the transaction was not sham or colourable transaction.
7. The parties are not disputing on these conclusions. Thus, the controversy between assessee and revenue boils down to question 2 formulated by the ld.CIT(A). The Ld. first appellate authority has partly treated the assessee as indulged in adventure in the nature of trade and thus the profit resulted to him has been assessed as a business income. Ld. first appellate authority accepted the assessee as an investor in agriculture land, same would not result any capital gain, because the asset possessed by the assessee was not a capital asset within the meaning of section 2(14)(iii) of the Act.
8. While appreciating the controversy, ld. First appellate authority took into consideration. The broad principles laid down by the Hon'ble Jurisdictional High Court in the case of CIT vs. Siddharth J. Desai [1983] ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -5- 139 ITR Page 628/10. Alongwith the test propounded by Hon'ble jurisdictional High Court, ld. first appellate authority has considered the reply given by the assessee as to how his transactions do not fall within the ambit of an adventure in the nature of trade. We deemed it appropriate to take note of those tests as well as the reply given by the assessee, which has been reproduced by the ld.CIT(A) in the impugned order on Page 9. They read as under:-
"1. Several factors are relevant and are weighted against each other while determining the true nature and character of the land. The major factors which are considered as having a leaning on the determination of the question are as follows :-
a. whether, the land was classified in the revenue record as agricultural and whether it was subject to the payment of land revenue, but this factor alone will not be conclusive;
In the appellant's case, the land has been classified as agricultural land in revenue records. .
b. whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time;
In the appellant's case, the land was actually used for agricultural purpose at the time of purchase as well as sale.
c. whether such user of the land was for a long period or whether it was of a temporary character or by way of stop-gap arrangement;
In the appellant's case, the three pieces of land were held for 14 months & 3 years & 2 months, respectively. It is therefore difficult to say that this was by way of a stop-gap arrangement.
d. whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land; , ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -6- The agricultural income shown by the appellant is proportional to the investment made by the appellant considering the terrain and the lack of irrigation facilities.
e. whether the permission under section 65 of the Bombay Land Revenue Code, was obtained for the non-agricultural use of the lands: if so, when and by whom; whether such permission was in respect of the whole or a portion of the land; if I he permission was in respect of a portion of the land and if it was obtained in past, what was the nature of the user of the said portion of the land on the material date;
In the appellant's case, this is not applicable as the land was not converted into NA and was sold as agricultural land only. It is converted into NA by the purchaser after a period of three years from the date of purchase.
f. whether the land, on the relevant date, had ceased to be put to the agricultural use', if so, whether, it was put to an alternative use; whether, such a alternative user was of a permanent or temporary nature;
In the appellant's case, this is not applicable as the land was not converted into NA and was sold as agricultural land only.
g. whether the land, though entered in revenue record, had never been actually used for agriculture; whether the owner meant or intended to use it for agricultural purposes;
In the appellant's case, the land has been used as agricultural land till the date of sale.
h. whether the land was situate in a developed area; whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural;
In the appellant's case, the adjoining lands were also agriculture in nature. There was a possibility of this area being converted into an industrial area due to setting up of the Ultra Mega Power Project (UMPP) by Tata Power in 2006.
ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -7- i. whether the land itself was developed by plotting and providing roads and other facilities;
In the appellant's case, the land was used as agricultural land till the date of sale and no plotting or other developmental activities were done.
j. whether there were any previous sales of portions of the land for non- agricultural use;
In the appellant's case, this is not applicable.
k. whether permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, was obtained because the sale or intended sale was in favour of a non-agriculturist: if so, whether the sale or intended sale to such non-agriculturist was for non-agricultural or agricultural user:
No such permission appears to have been obtained by either seller or the purchaser. The land was purchased by Coastal Gujarat Power Ltd. (.CG'PU). a subsidiary of Tata Power with the declared intention of using it for non-agricultural purpose."
9. It is pertinent to observe that ITAT Lucknow Bench in the case of Sarnath Infrastructure (P) Ltd. v. ACIT (2009) 120 TTJ 216 has also considered issue, whether an assessee deserves to be treated as a "trader" or "investor". Though the issue involved in that case relates to investment/trading in shares, but broad principle carved out by the ITAT is applicable on all sorts of transactions, where adjudicator is required to find out whether transaction was entered into by the assessee with a pre-dominant intention of trading or investment. The following tests are worth to note:
"13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:
ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10 -8- (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.
(2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining.
(3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if would indicate trade. Habitual dealing in that particular item is indicative of intention of trade.
Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).
(4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.
(5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.
(6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice verse.
7. It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.
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8. The mere fact of credit of sale proceeds of shares ( or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.
9. One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made?
10. It is permissible as per CBDT's Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.
11. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen."
10. The Hon'ble Gujarat High Court had also an occasion to consider this issue in the case of Commissioner of Income Tax vs. Riva Sharkar A Kothari reported in 283 ITR 338. Hon'ble court has made reference to the test laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647. These tests read as under:
"After analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business.
(a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.
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(b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.
(c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive.
(d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation.
(e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity.
(f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transaction of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proposition to the strength of holding then an inference can readily be drawn that the activity is in the nature of business."
11. In the light of the above, let us examine order of the ld.CIT(A). A perusal of the impugned order would indicate that the ld.CIT(A) has devoted much energy towards highlighting position of law laid down in various judgment viz. G. Venkataswami Naidu & Co. Vs. CIT, 35 ITR 594 (SC) and Janki Ram Bahadur Ram Vs. CIT, 57 ITR 21 (SC). Conclusions briefly drawn by the CIT(A) are on page no.35 of the impugned order. It reads as under:
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"1. The appellant's case is required to be broken into two parts to get the correct perspective.
2. The appellant has purchased three pieces of land. The first one (Land- A) was purchased in May, 2005 while the other two (Land-B & C) were purchased in May, 2007 adjacent to Land-A. The three pieces of land were sold in July, 2008.
3. The appellant has sold the Land-A after 3 years & 2 months and Land-
B & C after 14 months. There has been a massive increase of about 800% in the price of the land within a very short span of time. There are two possibilities. Either the purchase price has been doctored or there are some exceptional circumstances leading to such an abnormal increase in price. The first possibility cannot be commented upon as no efforts have .been done by the A.O. in this regard. However, there has been a substantial change about the location of the land. This is the land in whose vicinity the UMPP of Tata Power was being established. Mundra Ultra Mega Power Project (Mundra UMPP) is a subbituminous coal-fired power plant in Tunda village at Mundra, Kutch district, in Gujarat, India. The coal for the power plant is imported primarily from Indonesia. The source of water for the power plant is sea water from Gulf of Kutch. The power plant is owned by Tata Power. The special purpose vehicle Coastal Gujarat Power Ltd (CGPL) was incorporated on 10 February 2006. The distance between the appellant's land and the Tata Power plant is about 10 Kms.
4. There has been a massive increase in the price of the land. The appellant purchased it for a dirt-cheap price. Within a span of fourteen months, the price shot up to Rs.1,21,00,000/-. There was no change in the productivity of the land, irrigation facilities and the crop patterns. The agricultural income has also been very marginal. The only reason for this abnormal increase in rate is the setting up of UMPP by Tatas in this region. However, as discussed earlier, this cannot be an instantaneous decision and must have been brewing for a long time. It is quite obvious that the Tata officials must have carried out proper survey of this area, must have visited the area and must have held discussions with the villagers. The Tatas must have drawn up a master plan for the power plant including the actual power plant and the other areas like the residential quarters for the officers and staff. What the appellant has done is utilise his knowledge of the market conditions and scenario to decide ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10
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the correct time for entry and exit so as to earn maximum profit from the transaction. This can definitely held to be the only intention of the appellant for entering into this transaction."
12. Thus, an analysis of complete record would indicate that basic point which weigh with the ld.CIT(A) for treating the assessee partly as trader is the fact that the increase in sale price is 800%. In other words, volume of profit resulted to the assessee persuaded the ld.CIT(A) to habour a belief that the land purchased in the year of 2007 and sold after 15-16 months is to be treated as a trade asset. No doubt the profit on transfer of alleged agriculture land was quite high. But this is one of the corroborative evidences, amongst other, propounded in various case laws noticed by us. Merely if an assessee is getting a higher volume of sale consideration, then it could not be construed that transaction would take colour of a business transaction. The assessee is basically an agriculturist; purchases land at a distance of more than 20 kms. away from municipality and close to his native village. After sale of this land, he has again purchases agriculture land. He has not entered into any sale/purchase of land in earlier period of time or in subsequent period of time. He has not borrowed money for purchase of land and incurred interest expenditure. There might be reasons for all of a sudden spurt in the price of land in the area. There could be change of policy of Government level; introduction of some project, but that type of change in the policy whether, was in the notice of the assessee ? No such factors have been brought on record by the AO. It is also pertinent to observe that whether the assessee could anticipate such substantial increase in the sale price of the land because of any policy introduced by the ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10
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Government, no such factors have been brought on record. Facts are to be viewed keeping in view perspective the assessee, i.e. from where he belongs; whether he has ventured in any trading activities of similar nature; his educational background etc. Even the entire transaction is being looked into with that angle, then it would reveal that he has not been trading in the land, rather it was a simplicitor investment for agriculture operation, but on account of getting good price land has been sold. The ld.CIT(A) has expressed a probability that CGPL might have carried out a recce of the area and during that it could interact with the assessee. Once assessee came to know about proposed requirement of land he could have anticipated huge profit and might have purchased land. To our mind, it is a just probability expressed by the ld.CIT(A) after deal was finalized. The AO has neither recorded statement of any person from CGPL nor recorded when CGPL has started its power plant; how it has expressed its desire to acquire further land for its residential colony. Whether a person of having background like the assessee could have chance to inter-act with CGPL officials and only thereafter purchase land. All these factors are totally missing on record. Department has started inquiry only when huge claim was made by local persons of the area for exemption of capital gain. We have come arose similar type of cases from nearby village particular. We can make reference to the case of Shri Shailesh Gangazram Ramani in ITA No.260 and 294/RJT/2014. Tribunal has earlier decided the case of Shri Dhaval Kantilal Acharya Vs. ACIT, ITA No.378/RJT/2013. The only reason adopted by the Revenue for treating all these persons as traders was that they have earned profit on sale of their land which is more than 800 ITA Nos. 486 & 496/Rjt/2013 Shri Jaydevsingh N. Jadeja A.Y. 2009-10
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times than ordinary profit in this year. In our opinion, it is one of the corroborative factors amongst other. These transactions were boon because of their geographical location of the land near to CGPL. It was not a case that they have anticipated many fold rise of agriculture land price, and therefore, ventured into trade. Therefore, we allow the appeal of the assessee and rejected appeal of the Revenue. We direct the AO to treat the profit of Rs.1,20,21,138/- earned by the assessee on sale of agriculture land as exempt under section 2(14) of the Income Tax Act, 1961.
13. In the result, appeal of the assessee is allowed, and that of the Revenue dismissed.
Pronounced in the Open Court on 4th December, 2017 Sd/- Sd/-
(PRAMOD KUMAR) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated, 04/12/2017