Income Tax Appellate Tribunal - Bangalore
Fifth Income-Tax Officer vs R.M.B. Aradhya on 18 October, 1993
Equivalent citations: [1994]49ITD14(BANG)
ORDER
A.V. Balasubramanyam, Judicial Member
1. This appeal by the revenue is directed against the order passed by the Commissioner of Income-tax (Appeals), dated 20-5-1987, pertaining to assessment for the year 1982-83.
2. There is only one ground in the appeal and we may state facts germane thereto in a simplified manner. The assessee is an individual. The previous year terminated on 31-3-1982. The assessee had entered into an agreement to purchase agricultural lands situate in Nagasandra and Dasarahalli Villages, Yeshwanthpur Hobli, Bangalore Rural District, with certain Chandrabai Daga, Shankerlal R. Daga; Shankerlal R. Daga and Shivlal R. Daga. For some reason the sale transaction did not go forward. The sellers agreed and paid damages to the assessee and the details are:
(i) Smt. Chandrabai Daga and Shankerlal Daga Rs. 3,50,000
(ii) Shankerlal Daga and Shivlal Daga Rs. 1,60,562 The aggregate of the above is Rs. 5,10,562.
3. It was claimed by the assessee that Rs. 5,10,562 received as damages is not taxable. The Income-tax Officer rejected this plea. In appeal, the Commissioner of Income-tax (Appeals) held that compensation was in respect of agricultural lands and the same was not taxable either as business profit or capital gain. The assessee got relief in respect of Rs. 5,10,562. The revenue challenges the view taken by the Commissioner (Appeals).
4. Before coming to the pleas advanced before us we should note one thing. The appeal had been posted to 16-8-1993. On that day an application was moved on behalf of the assessee to seek time. The appeal was adjourned to 15-9-1993 and his representative was not only informed of the next date of hearing but about the order that a final chance was being given. On 15-9-1993, when the appeal was taken up for hearing, there was no representation on his behalf. Shri Puniha, the learned departmental representative, took us through all the factual aspects and addressed on the question of law involved.
5. The Income-tax Officer has, in his order, referred to various other transactions the assessee had entered into not only in this year but also in the years past to demonstrate that he had been in the line of purchasing property for development and that was his main trading occupation. The Commissioner (Appeals) considers that many of the transactions were done as investment. In regard to his effort to acquire certain extent of agricultural lands situate in Nagasandra and Dasarahalli villages, the Commissioner (Appeals), disagreeing with the Income-tax Officer, holds that an intention that he (assessee) had embarked on an adventure in the nature of trade cannot be attributed merely because he was not an agriculturist and that his purpose was to purchase and keep them as agricultural lands. In para. 12, he proceeds to observe :
... Above all, the most important aspect of the matter which has missed the attention of the Income-tax Officer is the nature of the damages received. There is no dispute that the land was agricultural in character. Its character was not changed during the subsistence of the agreement. The appellant has not changed its character by any means. When such was the intention, the damages received were perse towards compensation of the loss of agricultural land, not developed or undeveloped non-agricultural land.
As liquidated damages paid were recompense owing to the fact that assessee did not succeed in acquiring agricultural lands which he proposed to purchase, the Commissioner (Appeals) proceeded to hold that the amount was not taxable either as business profit or as capital gain. He sought to support this conclusion mainly relying on CIT v. Ashok Marketing Ltd. [1986] Taxation 32(3)-117. In the final, he deleted the addition of Rs. 5,10,562.
6. We have, at great pains, examined the very many factual aspects relevant to the controversy and we cannot queer round to the view the Commissioner (Appeals) has taken.
7. First of all let us look to the past history.
(a) In 1974, the assessee (along with one C.V.L. Sastry) purchased an agricultural land (survey No. 64/3) in Nagasettihally. The land was got alienated into non-agricultural purposes in November 1975. This property was sold during the previous year relevant to assessment year 1981 -82. On the showing of the assessee himself he should have made much more income than what he had returned (Rs. 34,640) as long term capital gain.
(b) The assessee had purchased another agricultural land (survey No. 68/6) situate in Nagasettihally in 1973-74 and got the same converted into plots. He had agreed to sell the same to a housing co-operative society and received an advance also in 1975-76. The said transaction did not click and the assessee had to pay damages of Rs. 17,500 to the society. Subsequently the plot was sold to one Nandalal Ramdas. While calculating the income derived from that transaction for the purpose of tax, the assessee had deducted the amount paid to the housing society as damages.
(c) Examination of the assessee by the Income-Tax Officer revealed that the assessee had purchased three plots of orchard agricultural lands in the outskirts of My sore with the object of exploiting the same for non-agricultural purposes. It would appear that permission had been sought from the Government for using the land for industrial purposes and that had been refused by the Assistant Commissioner. Later, there was a writ proceeding and ultimately the State Government itself converted the land into industrial purposes vide order passed in June 1984. Subsequently, the assessee had filed a statement under the Urban Land (C & R) Act, 1976, and had sought for exemption under Section 20 of the Act and to accord permission to sell the land for industrial purposes. The assessee, as record shows, had exerted a great lot in this regard incurring heavy expenditure.
(d) Material is present to show that the assessee was indulging in purchase and sale of urban properties in Bangalore and we extract here what the Commissioner (Appeals) has said in his order:
... According to the appellant's representative purchase of house at Jayanagar in 1967, sale of the same and purchase of the house at Rajajinagar, shops at Malleswaram, Residential house at Madhavnagar etc. are for the purposes of investment and the Income-tax Officer has not been able to show how these transactions could be regarded as business transactions or an adventure in the nature of trade.
8. It is possible that the purchase of house in Jayanagar and the sale of the same to purchase another in Rajajinagar may be sheer instance of change of residential place. Frequent purchases of agricultural lands at various places not with the object of carrying on cultivation, but with the specific purpose of converting the same for industrial purposes or colonising and selling the plots would show that the assessee was in the line of trading as a developer. It may be that in all these transactions he had returned the income under the head 'capital gains'. But that is not conclusive of the fact that the assessee had in all those cases made it as an investment. An investment, normally, would be for a time. But here is a case where the assessee was regularly attempting in purchase of agricultural lands and getting them alienated for non-agricultural purposes so that they can be marketed for better price upon sale. This undoubtedly suggests that he, who was a dealer in real estate, had ventured in the same way to acquire the lands in question.
9. With this background we now proceed to examine the surroundings of the transactions made in regard to Nagasandra and Dasarahalli villages. The Commissioner (Appeals) says that it was a proposed investment. This conclusion is most unwarranted. The assessee was indisputably not an agriculturist by profession and his principal source of income was from business. The following stated by the Income-tax Officer in his order is worth of note:
... The assessee is also running his contract business in the name and style of M/s. Best Builders. He is also a partner in a firm M/s. Vishu Enterprises whose objects are to buy land and develop into sites for sale. In addition to this the assessee runs a xerox printing unit in the name and style of Bright Blue Printers for which income is only estimated.
10. The Commissioner (Appeals) was inclined to accept the argument advanced on behalf of the assessee that the fact that the assessee was not an agriculturist earlier is irrelevant as a non-agriculturist could also take to agricultural occupation and finally he concluded that the appellant's intention to purchase agricultural lands was to keep them as agricultural lands. This conclusion is contrary to facts apparent on record. The share income from the firms in this year was little above Rs. 13,000 leaving away the loss from another firm. It is not that every one can purchase agricultural land and there is stipulation in Section 79A of the Land Reforms Act according to which the income from sources other than agriculture should not exceed a sum of Rs. 12,000 as the provision then stood. No person other than a person cultivating the land personally shall be entitled to hold agricultural land and there cannot be a sale contrary to that, vide Section 79B, Land Reforms Act. No sale shall be lawful if made in favour of a person who is not an agriculturist; vide Section 80, Land Reforms Act. A person who is bonajide intending to take to agriculture and wants to acquire land for such purpose, permission has to be obtained from the Assistant Commissioner having jurisdiction who may grant upon conditions according to proviso to Section 80, Land Reforms Act. Registration of sale deed in respect of agricultural land will not be made unless a declaration is made before the registration authority in this regard; vide Section 81 A, Land Reforms Act. The revenue agency will report any transaction which is illegal according to the provisions of the Land Reforms Act and it will become void if action is initiated and order passed under the provisions of Sections 82 & 83 of Land Reforms Act by the revenue authority. In the face of these stringent provisions in the Land Reforms Act one would seriously doubt whether the assessee would have embarked upon an enterprise of making investment on agricultural lands which is open for all risk as he is basically not an agriculturist.
11. It cannot be said that the provisions of Land Reforms Act were not applicable. The lands were assessed to payment of land revenue and entered in the revenue record. Whether the assessee could have held the lands as agricultural lands in spite of the provisions of the Land Reforms Act to which we have referred earlier is itself doubtful. The purpose of acquiring was not to take to cultivation and his intention was to the contrary is clear from Clause 8 of the agreement dated 9-4-1980. It is extracted by the Commissioner (Appeals) in para 5 of his order and it reads :
The Vendors declare that the said properties are at present agricultural lands. The Purchaser shall be entitled to prepare layout plans for development of the said properties for non-agricultural and/or Industrial use at his own cost. The purchaser shall obtain at his entire cost all consents, permission for sub-division sale, development and other permission and sanctions as may be necessary under any statute Central or State or Rules, Regulations, Bye-Laws, Notifications or any Municipal Town Planning or Local Body or authority.
It surpasses one's mind as to how the intention of holding the lands as agricultural assets could be attributed in the face of Clause 8.
12. Permission for alienation of the land for non-agricultural purposes should have been sought from the revenue department under the land revenue regulations. The assessee could not have approached any authority for alienation before obtaining a sale deed in his favour. The sellers had made an application to the State Government to seek exemption under the provisions of the Urban Land (C & R) Act and the Department of Development had passed an order on 17-1 -1981 whereby such exemption had been granted to sell the lands subject to certain conditions. One of the conditions was that the purchaser shall utilise the lands for the purpose of agriculture only and that there should be no change in the user of the land. Obviously, the sellers had sought for permission as if they were holding "vacant land" in excess of the ceiling limit under the Urban Land (C & R) Act. The land mainly used for the purpose of agriculture is not "Vacant Land" as per Section 2(q), Urban Land (C & R) Act. It is very clear from the record that these were lands mainly used for agriculture and it is not known why the sellers should have sought exemption under the said Act. Taking for granted that they were "Vacant Land" for the purpose of Urban Land (C & R) Act, then the Government had granted exemption and the sellers were free to sell.
13. On April 24, 1981, four sellers and the assessee made an agreement in writing. By then another thing had happened. The sellers had by and between effected a partition and according to that the lands in Nagasandra Village had fallen to the share of Chandrabai Daga and Shankerlal R. Daga and the lands in Dasarahalli Village had come to the share of Shankerlal R. Daga and Shivlal R. Daga. Under the document dated 24-4-1981 the assessee gave up all his right, claim, etc., in respect of Nagasandra village lands and the assessee agreed to receive - Chandrabai Daga and Shankerlal R. Daga agreed to pay - Rs. 3,50,000 in full and final settlement.
14. Under the same document, the assessee, on one part, and Shankerlal R. Daga and Shivlal R. Daga, on the other part, agreed to extend the time for completing the sale agreement dated 9-4-1980 up to 31-10-1981 in respect of the lands in Dasarahalli village.
15. The assessee had paid Rs. 1,00,000 as earnest money or advance at the time of agreement on 9-4-1980. Shankerlal R. Daga and Shivlal R. Daga agreed to treat that advance as having been paid towards Dasarahalli village lands and the other two sellers were given a discharge from their obligation of returning their moiety out of the advance paid. Though the parties had time till 31-10-1981, the assessee, Shankerlal R. Daga and Shivlal R. Daga, made another agreement on 10-6-1981. According to this agreement, the assessee gave up all his right, claim arising out of the agreement for sale dated 9-4-1980 in respect of Dasarahalli village land and the aforesaid two sellers agreed to pay Rs. 1,60,562 to the assessee in addition to returning Rs. 1,00,000 which they had held as advance.
16. The upshot of the two agreements, dated 24-4-1981 and 10-6-1981, to which the assessee is a party, is that the agreement for sale made with the Dagas was, by mutual agreement, cancelled in respect of both Nagasandra and Dasarahalli village lands and the amount received by the assessee was consideration for his agreeing to give up his right, claim, etc., arising out of the agreement dated 9-4-1980. In other words, the amount was consideration in the shap of damages or compensation paid to the assessee for the consent he gave to rescind the contract.
17. On 10-6-1981 the assessee had terminated the contract in respect of Nagasandra village land agreeing to receive liquidated damages from Chandrabai Daga and Shankerlal R. Daga. At that time, it is true, the assessee was aware that the lands, if sold, should be used for agricultural purposes only. Despite this, the assessee extended the time frame for completing the sale transaction in respect of Dasarahalli village lands. The Commissioner (Appeals) has sought to make out a point from the above and he held that the assessee must have contemplated a change in the investment and this is what he observes in para 6:
... The appellant was contemplating change in the investment. In fact his policy can be called to be that of nursing the investment. Thus the very fact that the appellant entered into and continued the agreement even after the order under the Urban Land Ceiling Act was passed and the very fact that his business in real estate was showing loss would only lead to the conclusion that the appellant was only investing in agricultural land as part of his strategy to preserve the assets.
It is really not apparent from the record the real reason for not effecting the sale. The agreement for sale was cancelled by mutual consent. Whether the sellers were not inclined to sell or whether the purchaser was unwilling to purchase, it is a matter for guess. The Government had put conditions while exempting under Section 21B of the Urban Land (C & R) Act and the assessee had no option but to cultivate the lands. Further, the Government had taken up acquisition proceedings in respect of a portion of the land in Nagasandra village for the purpose of making a by-pass road which, as the plan shows, would disfigure the land reducing it into fragments. In respect of this, Shankerlal R. Daga and Shivlal R. Daga agreed to pay compensation to get the contract cancelled with the consent of assessee. In view of this it is difficult to say that the assessee was really interested in making an investment, on the lands and nothing could have come in his way in asserting his right if really he was interested in holding the lands. The fact remains that the sellers agreed to compensate the assessee in substantial sum and, perhaps, they stood to gain by getting the lands freed from the agreement. In this setting it is not possible to think that the assessee had contemplated change in the investment.
18. In IRC v. Livingston [1926] 11 TC 538 at 542, Lord President Clyde formulated the principle as follows :
I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, 'in the nature of trade, is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made. If they are, I do not see why the venture should not be regarded as 'in the nature of trade', merely because it was a single venture which took only three months to complete.
The learned authors Kanga and Palkhivala in their treatise on Income-tax (7th edn., Vol. I, p. 114) state :
Even a single transaction may constitute 'business' under the definition of that word in Section 2(13). It is not essential to constitute trade that there should be a series of transactions, both of purchase and sale. A series of retail purchases followed by one bulk sale, or a single bulk purchase followed by series of retail sales, may constitute a trade. Even a single bulk purchase followed by a single bulk sale may be regarded as business. A single transaction of purchase and sale outside the assessee's line of business may constitute an adventure in the nature of trade even if the assessee does nothing to the article or commodity purchased before he sells it. Neither repetition nor continuity of similar transactions is necessary to constitute a transaction an adventure in the nature of trade. Of course if there be repetition and continuity, the assessee would be carrying on a business and in that case the question will hardly arise whether the activity is an adventure in the nature of trade.
A single transaction could be an adventure in the nature of trade. In the background of the occupational activities of the assessee it should be held that the transaction was a venture forming part of his land development business.
19. The Commissioner (Appeals) refers to some decisions to which we should advert. In the case of D.L.F. Housing & Construction (P.) Ltd. v. CIT 11983] 141 ITR 806 (Delhi), the assessee had purchased agricultural lands in the course of his housing development business. He had not made any development, but only agricultural operations had been carried on. The land was compulsorily acquired by the Government for which compensation was paid. The compensation received was held to be a capital asset as the character of the land remained agriculture. This is not a comparable case. If the assessee has purchased agricultural land and sold them as such then a question would have arisen as to the character of the receipt. Such a situation does not exist here since the assessee had not purchased the lands at all.
20. The facts are the same in the case of D.L.F. United Ltd. v. CIT [19861 161 ITR 714 (Delhi)(App.).
21. We should state the facts in some detail of the case of CIT v. J. Dalmia [1984J 149 ITR 215 decided by the Delhi High Court. The assessee had agreed to purchase the property. There was a breach by the seller and in that connection there was litigation in a court of law. During the proceeding, the purchaser gave up his claim for specific performance, but retained his right to claim damages. At that time, the parties agreed to have the dispute referred to an arbitrator. The arbitrator awarded certain some of money as damages. The question before the High Court was whether the amount received as damages was assessable as capital gains. Their Lordships held that there could not be any income by way of capital gains as there was no transfer of property at all. Even though damages were not assessable to tax under the head 'capital gains', the question whether such a receipt was assessable as business income was not before the High Court. It is this question that is required to be resolved by us and, therefore, J. Dalmia's case (supra) is not an authority.
22. The lands remained as agricultural lands in character. The Commissioner (Appeals) remarks that "damages received were per se towards compensation for loss of agricultural land, not developed or undeveloped non-agricultural land" and as such compensation received for non-performance of the agreement is not taxable either as business profit much less as capital gains at the conclusion of para 11 of this order. He tries to draw support from the decision of the Calcutta High Court in the case of CIT v. Ashoka Marketing Ltd. [1987] 164 ITR 664. Ashoka Marketing Ltd. had entered into an agreement with vendor to purchase certain property and there was a breach of contract by the vendors. The purchaser had received damages for the breach committed by the other side. Their Lordships of the Calcutta High Court held that there was no element of cost involved in the acquisition of damages and that the said amount was neither capital gain nor revenue receipt. The question of capital gain did not arise as there was no transfer of an asset. Because there was a breach by the vendor and since the contract provided for payment of liquidated damages of Rs. 1,00,000 in the event of a breach on the part of the vendor, Their Lordships held that compensation paid to the intending purchaser was not a revenue receipt. It is true that to some extent this case supports a thinking that compensation in such situation would constitute capital receipt, though not capital gain.
23. The Supreme Court has said very much in regard to the approach to a problem of this kind in CIT v. Rai Bahadur Jairam Valji(1959] 35 ITR 148 referred to by Shri Puniha during his address. It may be useful to furnish, in brief, facts of this case to understand the principle stated. The respondent in that case had several trading activities one of which was supplying lime-stone and dolomites. He had acquired a quarry and was working it to extract lime-stone. He had entered an agreement with a company to supply its requirements of limestone and dolomite at a certain rate. At a certain point of time the company realised that it was uneconomical to purchase limestone from the respondent at the rates accepted and a notice was given to intimate that the requirements would be purchased from others. The respondent commenced action in a civil court for specific performance of the contract for sale as per the agreement. During the pendency of the litigation, the company and the respondent made a settlement on 9-5-1940. As per that settlement, the quarrying operations had to be carried out in a certain manner. Since the settlement dated 9-5-1940 was found impossible to be carried out in the manner contemplated by the parties, they entered into a new agreement on 2-8-1941. The company had proposed to terminate the contract on certain terms and that had been agreed to by the respondent. As per the agreement dated 2-8-1941, Rs. 2,50,000 was payable to the respondent as solatium for termination of the contract besides other payment, the details of which are not relevant to the present purpose. The question was whether Rs. 2,50,000 constituted a trading receipt and liable to be assessed. Their Lordships, on a review of all English cases, first observed that no single test or single criterion as decisive in the determination of the question could be evolved and that the authorities bearing on the question are of value only as indicating the matters that have to be taken into account to reaching a decision depending upon the facts of the given case.
24. The respondent, in that case, had incurred certain expenditure while executing the contract as per the terms settled and incorporated in the document dated 9-5-1940. Rs. 2,50,000 was not to reimburse the respondent in any of the expenditure he had incurred. The payment in settlement of the right under the contract was an adjustment made by the parties in the ordinary course of business. If an amount is received as compensation for termination of a contract, say for instance agency contract, the character of the receipt may be different for it is linked up directly or indirectly to agency apparatus which could be considered as agency rights which can be said to be of the nature of capital asset invested in business. If such is not the case, compensation paid for termination of the contract entered into by a businessman in the ordinary course of his business. Their Lordships held, would constitute a trading account.
25. Returning to the case before us, the principle explained by the Supreme Court in Rai Bahadur Jairam Valji's case (supra) furnishes a key to the solution to the issue before us. That was not a payment on account of any expenditure incurred by the assessee for executing the contract. The assessee was not infrequently purchasing properties with the object of exploitation of the same after either colonising for housing or for making it available for industrial use. With the object of converting the agricultural lands into housing plots, the assessee embarked upon a transaction to purchase lands with Dagas. It is well known that agreement to purchase does not create any interest in the intending purchaser in the property to be purchased. It merely creates right in persona. That is, it establishes certain rights and obligations between the intending seller and the purchaser. Dagas agreed to pay compensation to the assessee in consideration of the assessee relinquishing or waiving his right he had by virtue of the agreement for purchase. This was, like any other act, in the ordinary course of his business and the amount received had no nexus to the capital apparatus or capital asset invested in business. If one should attend upon these facts in the light of the principle explained in Rai Bahadur Jairam Valji's case [supra), it is impossible to come to any conclusion other than that compensation received is taxable as a revenue receipt. We accordingly hold that on the issue and reverse the order of the Commissioner (Appeals).
26. The appeal is allowed.