Income Tax Appellate Tribunal - Pune
Baramati Taluka Sahakari Doodh ... vs Assistant Commissioner Of Income Tax on 22 November, 1999
Equivalent citations: (2001)69TTJ(PUNE)79
ORDER
K. C. Singhal, J.M.:
The only issue arising out of this appeal is whether the activity of assessee of purchase and sale of land tantamounts to an adventure in the nature of trade.
2. The assessee is a society registered under Maharashtra State Co-operative Society Act. It is a Taluka level society and its members are primarily co-operative societies of village level. The main activity of the assessee is to collect the milk from its member societies and supply the same to the Government of Maharashtra. In addition, it derives income from the sale of cattle feeds, animal medicine and dairy products. In 1985, the assessee decided to expand its business, i.e., manufacturing of cattle-feed. Accordingly, it purchased a land measuring 4 hectares 22 B. from Baramati Sahakari Soot Girni, Baramati against consideration of Rs. 47,000 in July, 1985. However, in the year under consideration, the assessee decided to sell the said land by plotting the same. The total sale consideration received by the assessee in this year was Rs. 12,23,721. Since this land was held for more than 3 years, the assessee declared the long-term capital gain of Rs. 4,96,182 in the return filed by it.
3. The assessing officer examined the nature of transaction with reference to the facts on the record and explanation of the assessee and came to the conclusion that activity of the assessee of purchase and sale of land was in the nature of trade and therefore, the same was assessed by him as business income amounting to Rs. 11,01,808. This issue has been discussed by him in paras 6 to 9. In coming to this conclusion, he took into consideration various facts, namely-(1) that the land was sold in plots in order to earn the maximum amount of profits which is one of the aspects of the commercial transaction, (2) the sales transactions were repeated from time to time as is apparent from the fact that plots were sold on different occasions in different years, (3) the price initially offered by the assessee for sale did not attract any customer and therefore, it was reduced later on, (4) the purchase of land at cheaper rates and selling the same at higher rates was part of commercial activity, (5) that the plots were not sold to the members of the society, but to the general public, and (6) it had been earning rental income from this property constructed out of societies funds.
4. The matter was carried before the Commissioner (Appeals), who has confirmed the order of assessing officer on this issue. He has considered the definition of the word 'business' as defined in section 2(13) of Income Tax Act and held that it should be considered in wider sense as explained by Supreme Court in the case of Mazgaon Dock Ltd. v. CIT/CEPT (1958) 34 ITR 368 (SC). It has also been observed by him that motive of making profit or the actual earning of profit is not a essential ingredient of the business as held by the Supreme Court in the case of P. Krishna Menon v. CIT (1959) 35 ITR 48 (SC). He then proceeded to consider the meaning of the word 'adventure' as per dictionary meaning which implies a pecuniary risk, a venture, a speculation, a commercial enterprise, etc., Then it was held by him that it was not necessary that there should be a series of transactions of purchase and sale and a single transaction of purchase and sale outside the assessee's line of business may constitute an adventure in the nature of trade. Neither repetition nor continuity is necessary to constitute a transaction as an adventure in the nature of trade. Reference was made by him to the decision of Supreme Court in the case of CIT v. Sutlej Cotton Mills Supply Agencies Ltd. (1975) 100 ITR 706 (SC). Lastly, he referred to the decision of the Bombay High Court in the case of Bhogilal H. Patel v. CIT (1969) 74 ITR 692 (Bom) for the proposition that the issue has to be decided on a consideration of all the relevant facts and circumstances which are established in a particular case. He, then, considered the relevant factual aspects of the case and came to the conclusion that activity of the assessee amounted to an adventure in the nature of trade. In coming to this conclusion, he was influenced by the various factors, namely-(1) that the assessee had purchased the land with intention to set up a cattle-feed factory, but decided to sell the same the moment it received a bigger land at cheaper rate, and (2) the land was sold in plots to members of general public who were not the members of the society. According to him, the assessee should have either surrendered the land to the government or sold the same to any other co-operative society. In his view, the decision of the society to sell the land in plots constituted the activity of the assessee in the nature of trade. He, then distinguished the decision of the Supreme Court in the case of Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC) and in the case of G. Venkataswamy & Co. v. CIT (1959) 35 ITR 594 (SC) and other decisions of High Courts relied upon by the assessee. Aggrieved by the aforesaid decisions of the Commissioner (Appeals), the assessee preferred this appeal before the Tribunal.
5. The learned counsel for the assessee Mr. Joshi has vehemently assailed the order of Commissioner (Appeals). He took us through the factual aspects relating to the transactions of purchase and sale of land. He drew our attention to the various resolutions passed by the assessee for acquiring the land for the purpose of erecting a cattle-feed plant. It was also submitted by him that the assessee could not purchase or sell the land of its own without obtaining the approval of the Registrar of Co-operative Societies. He also drew out attention to the permission granted by the Registrar of Co-operative Societies for the purchase and sale of such land. According to him, the land was not purchased with the intention to sell it in future for earning the profit, but the sole purpose of acquiring the land was to erect a cattle-feed plant. The land was sold because the assessee was able to purchase another land which was located in a better position beneficial to the assessee. According to him, it was a case of mere realization of the capital. It was also submitted by him that the land was held by the assessee for a long period and enjoyed the rental income from the superstructure on the land. It was clarified by him that such super-structure was not constructed by the assessee, but was purchased along with the land itself. No doubt, the land was sold in plots in order to realise the better price, but that fact by itself cannot justify to hold that transaction was in the nature of trade. Further, the assessee had not made any improvement on the land so purchased. Lastly, it was contended by him that the question whether the transaction of purchase and sale of the land is an adventure in the nature of trade or not has to be decided by taking into consideration the total effect of the entire facts and circumstances on the record and not a single factor. In support of his contention, he relied on the decision of Bombay High Court in the case of Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386 (Bom) and the decision of Supreme Court in the case of Khan Bahadur Ahmed Alladin & Sons v. CIT (1968) 68 ITR 573 (SC) and in the case of Janki Ram Bahadur Ram v. CIT (1965) 57 ITR 21 (SC). On the other hand, the learned Departmental Representative has supported the order of Commissioner (Appeals) and relied on the reasonings given by the assessing officer as well as Commissioner (Appeals). Therefore, the same need not be repeated as we have mentioned them in our order while stating the facts of the case.
6. Rival submissions of the parties, the materials placed before us and the case law referred to have been considered carefully. The question whether the transaction of purchase and sale of land is an adventure in the nature of trade or not is a question of mixed facts and law and therefore, has to be decided on the facts of each case and no hard and fast rules can be laid down in deciding such question. Such observations have been made by the Hon'ble Supreme Court in various cases and it is sufficient to quote the observation of their Lordships of the Hon'ble Supreme Court in the case of P. M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735 (SC) :
"It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant facts and circumstances proved therein and which determine the character of the transaction."
7. It is also the settled law that in deciding such issue one has to consider that the onus is on the department to prove that particular transaction is an adventure in the nature of trade and therefore exigible to tax. Reference can be made to the decision of Hon'ble Supreme Court in the case of Saroj Kumar Mazumdar (supra) and the decision in the case of Janki Ram Bahadur Ram (supra). In the later case, the following observations were made :
"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."
8. It is also important to note that it was the intention of the assessee at the time of acquiring the land which is relevant for deciding the issue whether the transaction was in the nature of trade. Reference can be made to the decision of Hon'ble Supreme Court in the case of Ram Narayan Sons (P) Ltd. v. CIT (1961) 41 ITR 534 (SC) and the decision of Bombay High Court in the case of Bhogilal H. Patel, (supra). Following observations of the Bombay High Court are relevant to note:
"Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade, that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception."
9. As already mentioned, various factors are to be taken into consideration while deciding this issue though no hard and fast rule can be laid down. However, we would like to mention the observations of Hon'ble Supreme Court in the case of G. Venkataswami Naidu & Co. (supra) which are being reproduced as under :
"If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. 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. A person may purchase a piece of art, hold it for some time and if a profitable offer is received sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction ; and if such a claim is upheld that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade, but it is not a matter of merely counting the number of facts and circumstances pros and cons; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
In cases where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is off set by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. "
10. Let us now examine the factual aspects of the case. There is no dispute about the fact that main activity of the assessee was to collect the milk from its members and supply the same to the Government of Maharashtra. It was not the business of the assessee to deal in the land. The material placed before us clearly shows that the land was purchased with the intention to erect a cattle-feed plant in order to expand its business. At page 14 of the paper-book is the resolution of the assessee society dated 15-2-1985 wherein it was resolved that in order to expand the business, the land of Soot Girni near the Industrial Estate, Baramati, which is offered for sale be purchased. At page 16, there is another resolution dated 13-3-1985 wherein it was resolved that the land measuring 4 hectares 22 Bs. in Survey No. 132, near Industrial Estate, owned by Baramati Taluka Soot Girni Ltd. be purchased at the market rate of Rs. 3,47,000 along with the construction thereon, the well, the pipeline, the electric motor, compound wall and the standing trees of coconut and guava. It was further resolved that approval may be obtained from the Sub-registrar Co-operative Societies (Milk), Pune. As page 18, is another resolution, dated 2-6-1985 wherein it was resolved that part payment of Rs. 2,00,000 be made for the time-being since the permission from the Sub-registrar Co-operative Societies was not yet received. It was further resolved that for the time being Sathe Khat may be obtained in favour of the assessee, and thereafter, possession of the land may be taken. At page 20, is the permission letter issued by Deputy Registrar, Co-operative Societies (Milk), Pune dated 5-7-1985. While granting the permission certain conditions were imposed upon the assessee, which are enumerated as under :
(1.) The land purchased is to be used for the expansion of the Sangh.
(2.) It should be ensured from the revenue and other departments that the land is free from encumbrances, as per the existing laws.
(3.) The land be purchased out of the Building Reserve. The amount taken from the reserve be recouped to the reserve by transfer in the next three years.
(4.) Balance of the amount be raised by the Sangh.
(5.) There should be no discrepancy between the price paid for the land than the market rate of land in the area.
(6.) The price of the land be paid to the owner of the land (institution) by crossed cheque.
(7.) The land be got registered in the name of the Sangh and its entry be made in the property/register of the Sangh.
(8.) The land purchased should not be sold/transferred without the permission of this office.
(9.) After purchase of the land, a compliance report be sent to this office by the Sangh within 3 months of the date of the purchase."
The land was finally purchased on 28-7-1985 as is apparent from the copy of the revenue record filed at page 21 of the paper-book. The perusal of the above material clearly established that the intention of the assessee in purchasing the land was to erect a cattle-feed plant in order to expand its business and not with the intention to resale the same in future.
11. The perusal of the material on record further shows that the land had to be sold on account of certain circumstances which came into existence subsequently. The Governemnt of Maharashtra established a big dairy at Malegaon in Baramati Taluka. Since the business of assessee was connected with this dairy, it asked the government to allot 6 acres of land in Gram Panchayat area of village Malegaon, A resolution was accordingly passed on 11-11-1986 wherein this factory was mentioned and it was decided to erect cattle-feed plant in the land to be purchased in Malegaon. It was further resolved to construct of its building, tanker carriage, cane factory and residential quarters for workers on this proposed land. Since huge funds were required for purchase of the land, and erecting the plant, it was resolved to sell the land purchased earlier in the year 1985 by sub-dividing the same in plots. It was further resolved that permission to sell the land may be obtained from the Deputy Collector, Baramati as well as the permission of the Co-operative Department. The permission to sell the land as non-gricultural land was granted by the Sub-Divisional Officer, Baramati vide letter, dated 6-2-1983.
The copy of the same appears as page 26 of the paper-book. At page 29 of the paper-book is the resolution dated 15-4-1987 in which it was resolved that price of plot be reduced since there was no response from the buyers. At page 31, is the copy of the permission letter, dated 11-6-1987 issued by the Deputy Registrar, co-operative societies (Milk), Pune. Perusal of this letter shows that permission to sell the plots was given subject to certain conditions. The minimum price of each plot was fixed. Another condition was that the sale proceeds of the land could not be used for day-to-day expenses of the assessee, but was to be used solely for the erection of the cattle-feed factory. At page 35, is the sanction letter dated 18-1-1988 issued by the District Collector, Pune for purchase of land admeasuring 1 hactare and 61.87 Bs. (i.e. 4 acres) out of survey, No. 1107, Village Malegaon, Tal.: Baramati, for erection of its office building, ice-factory and cattle-feed factory. The perusal of the above material clearly shows that the land at Malegaon was purchased for erecting its cattle-feed factory and in the opinion of the assessee, it was better located than the earlier land and was beneficial to the assessee. Due to this decision, the assessee was forced to sell the earlier land in order to raise funds. All the purchase and sale of the land was with the prior approval of the revenue authorities as well as Co-operative Department.
12. From the above discussion, following facts emerge :
(1.) The assessee was not dealer in land. Its main activity was to collect milk from its primary members and supply the same to Government of Maharashtra. In addition, it was dealer in animal medicines and cattle-feed.
(2.) The activities of the assessee were regulated by the Registrar, Co-operatives, Maharashtra Government.
(3.) The land was purchased to construct a factory for installing cattle-feed plant in order to expand its business.
(4.) The purchase of land is fully supported by various resolutions passed by its board from time to time.
(5.) Prior approval was obtained from the Registrar of Co-operative Societies without which it could not purchase the land.
(6.) The permission was granted subject to certain conditions. Some of the important conditions were that land was to be used for expansion of the assessee's business and the same could not be sold without the prior permission of that office.
(7.) Later on, a dairy was established by the Maharashtra Government at village Malegaon and it was thought better to purchase land at Malegaon since its activity was connected with the dairy established by the government.
(8.) Since the funds were required for purchase of the land at Malegaon, the assessee was compelled to sell the land purchased earlier. The permission to sell the land was obtained from the Registrar of the Co-operative Society, which was subject to the condition that sale proceeds of the land shall be utilised by the assessee for erection of the cattle-feed factory and same shall not be used to meet the day-to-day expenses of the assessee.
(9.) The permission was obtained from the revenue authorities i.e. Sub-Divisional Officer, Baramati for selling the land in plots for residential purposes.
(10.) Ultimately, a part of land was sold in plots in the year under consideration.
13. After considering the above facts and the case law referred to by us, we are of the view that transactions of purchases and sale of land cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to purchase the land with a view to expand its business by erecting a cattle-feed factory. There was no intention even to sell the land in future. It was due to the circumstances coming into existence in future that assessee was compelled to purchase another land and sell the land purchased earlier. In our considered opinion, it was mere realisation of capital. Merely because of the fact that the land was sold in plots, it cannot be held that income arising from the sale of land was taxable as profits arising from the adventure in the nature of trade. Considering the facts as a whole, it is held that income arising from sale of land cannot be considered as profits from the adventure in the nature of trade. The profits would be assessable under the head "capital gains". Accordingly, we set aside the order of Commissioner (Appeals) and direct the assessing officer to assess the profits under the head "capital gains" in accordance with law.
14. In the result, appeal of the assessee is allowed.