Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Ajit Vikram Singh on 9 October, 1987
Equivalent citations: [1988]24ITD365(DELHI)
ORDER
K.C. Srivastava, Accountant Member
1. There are two appeals by the Department against the order of the OIT (Appeals) for the assessment years 1980-81 and 1981-82. There is a cross-objection by the assessee for the assessment year 1980-81. The assessee is an individual and for the last few years he had been declaring income from the sale of lands in Vikram Colony in Dhampur, District Bijnor. The assessee had treated this activity as his business activity and he had been assessed in respect of this business income with effect from 5-7-1976. It appears that the assessee had some agricultural land in Dhampur, which he decided to develop as a residential colony. For this purpose a plan of development was made out. The lands were divided into convenient plots for the purpose of sale. The assessee started selling plots of land from 1976. The first accounting year ended on 30-6-1977. For the purpose of converting this agricultural land into his stock-in-trade the assessee got the area intended to be used in the development of the colony valued by a valuer. For this purpose the market value as on 5-7-1976 was adopted the value of the opening stock of the plots. It was out of this stock that the plots had been sold from year to year. It is not in dispute that for first two years this position had been accepted by the Department and the business profit on the sale of land was worked out. In this year also when the matter came before the Income-tax Officer he was of the view that whereas there was a business profit on the sale of some of the plots in the opening stock, the assessee in addition earned a profit by way of capital gains which was worked out on the basis of the value of the plot without converting into stock-in-trade as reduced by the value of the land in the books. Thus, the initial proposal of the Income-tax Officer was to assess Rs. 1,71,714 as capital gains in addition to an estimated amount of Rs. 13-,000 as business income on the sale of the plots. However, when the matter came before the Inspecting Assistant Commissioner under Section 144B he considered the whole matter and he was of the view that the whole contention of the assessee regarding deriving his income from business in sale of plots was not acceptable, and the assessee's reliance on the decision of the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 was not helpful to the assessee as there was in fact no carrying on of business in plots and all what had happened was to realise capital value of the capital asset in the form of the land, which for the purpose of convenience had been bifurcated into plots of lands. He did not accept the plea of the assessee that in 1976 the assessee made it into an adventure in the nature of trade. There was some dispute before us as to how the land in question was acquired by the assessee. The Inspecting Assistant Commissioner has noted that it was received by him by way of any inheritance or succession whereas the assessee had stated that he had purchased it in 1970. On being questioned further we came to ascertain that the land was purchased in 1970 from the grandmother of the assessee and though it was a family land, it had not been inherited by the assessee. The Inspecting Assistant Commissioner was of the view that agricultural operations earlier were carried on in this land which was 1.15 km. from the municipality limit of village Allehpur. This, according to him, was a capital asset and the sale of such land would result in capital gains and not in a business profit. According to him, the division of the land into various plots was not enough to convert the capital asset into a business asset. The plea of the assessee that he has been selling several plots of land with different areas and this activity has been carried on for almost five years had not impressed the Inspecting Assistant Commissioner, who held that it was not a business of the assessee and the sale of land was not a trading activity. He held that the assessee had not taken any steps to improve the land with a view to enhance its resale value and no publicity was made for the sale of plots to attract best possible customers. He also mentioned that no advance was received from prospective buyers and no brokerage or commission was paid. According to him, it was mere realisation of capital investment. The mere fact that a person invested for the purpose of reselling whenever suitable opportunity arose was not a sufficient ground to hold that the transaction was in the nature of trade. According to him, the assessee did not carry out operations which are carried on in the business of landed property to improve the sale-price of the commodity being sold. In this connection, he referred to certain case laws also. In the case of CIT v. Premji Gopalbhai [1978] 113 ITR 785 (Guj.), it was found that the assessee had converted his agricultural land into non-agricultural and sold the plots as and when the purchaser was available. It was held that the profit earned was a capital gain. He also relied on the decision of the Madras High Court in the case of CIT v. M.L.M. Mahallngam Chettiar [1977] 107 ITR 236. In this case it was held that where agricultural land was plotted and sold for a fixed consideration it would result only in capital gain and not in a trading profit.
2. The Inspecting Assistant Commissioner, therefore, came to the conclusion that the assessee never carried on any trade or business on sale of land. He, therefore, was of the view that the book value has no relevance in the matter unless the book value is the cost of acquisition for the purpose of working out the capital gains. The Inspecting Assistant Commissioner, therefore, directed that deduction under section SOT may be allowed and capital gains should be worked out in the year in which the transaction of the sales completed in respect of the land in question. It was also observed by him that principle of res judicata did not apply in the income-tax proceedings. As it was held that the assessee was not carrying on any business the question of taking the value of the stock on the basis of market value would not arise.
3. On the basis of the directions given by the Inspecting Assistant Commissioner, the Income-tax Officer worked out the capital gains in respect of plots of land totalling to 13,383 sq. yd. by deducting the proportionate cost of acquisition at Rs. 2,650, which was the purchase price in 1970. This was, however, assessed as a protective measure with the Department's right to treat it otherwise in the light of the decision of the Allahabad High Court in the case of Addl. CIT v. Madan Lal Ahuja [1982] 136 ITR 640.
4. When the matter came before the CIT (Appeals) he found that the assesses had made out a regular plan for developing the colony known as Vikram Colony and developed the land intended to be sold for the purpose of convenient plots by making roads for the purpose. He also noted that such business profit had been accepted in earlier two years. After giving the facts and the rival submissions, it was noted that in the earlier two years the working of the trading accounts and treatment of the plots of land as closing and opening stocks had been accepted by the Department. It was also found that in this year the assessee had sold part of the plots which was shown in the closing stock in the earlier year whereas some other plots were taken to the trading account in this year. It was contended before the CIT (Appeals) that what was a closing stock of a trading activity in the earlier year could not become a capital asset on the opening day of the next year. A reference was also made to the decision of the Supreme Court in the case of Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 relied upon by the Karnataka High Court in a later decision where it was observed that even a single venture could be in the nature of trade where the intention to trade becomes apparent. The observation of the Supreme Court was that where land was obtained with a view to making profit after developing it and by trading in those pieces of land it could be termed as trading activity. If it is sold to a large number of persons according to the availability of the purchasers it establishes the nature as a trading activity. It was also pointed out that this position had been accepted by the Income-tax Officer but has only. been changed by the Inspecting Assistant Commissioner. It was also contended that in case the Income-tax Officer was to work out the capital gains it could not be treated as capital gains as the land would continue to be agricultural. The plea of the assessee for developing into plots was rejected. For this reliance was placed on a decision of the Bombay High Court in the case of Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITE 87 and the decision of the Gujarat High Court in the case of Manibhai Motibhai Patel v. CIT [1981] 131 ITR 120.
5. The CIT (Appeals) was of the view that in developing the piece of land in dividing it into covenient plots and developing it into a colony by the assesses, was a business activity spread over a period of five years when large number of plots were sold from time to time according to the availability of the purchaser and attractive price. He held that the Department itself had accepted the existence of business activity in the earlier two years and had not doubted it in those years. It was also held by him that the appointment of brokers or non-receipt of advances were not very relevant for deciding the nature of the transaction. He, therefore, directed that the profit on the sale of plots should be determined on the basis of it being a business activity and on the basis of the profit and loss account as maintained by the assessee. The CIT (Appeals) did not consider the further contention of the asses-see regarding the non-applicability of capital gains or agricultural lands.
6. The learned Departmental Representative submitted before us that it was a fact that in the earlier two years the existence of business in the plots of lands had been accepted by the Department. He, however, submitted that there was no res judicata in income-tax proceedings and the real nature of the transaction can be determined in any year by the income-tax authorities. Strong reliance was placed on the reasons given by the Inspecting Assistant Commissioner for treating the whole transaction as realisation of capital asset and against the treatment of the transaction as a business asset. It was contended that in 1976 when the assessee showed it as a part of trading activity he had not brought on record any order or permission for conversion of this agricultural land into a commercial asset for developing a colony. It was submitted by him that in 1976, 55 plots were brought in the trading account and after the sale of 26 plots 29 plots remained at the beginning of the year. In the course of this year some plots were sold out of the earlier pieces of land and 44 more plots were brought in on 1-1-1979. In all 27 plots of land were sold in this year. There were some more sales in the next year and in the year 1980-81 the balance of the lands were disposed, of. he submitted that merely because the assessee divided the land in plots could not convert the activity of realisation of capital asset into a business activity. He pointed out that in the earlier year the Assessing Officer had not made relevant inquiries. He, however, submitted that such inquiry had been made in this year and it had been found that this was merely a realisation of capital asset which had been acquired by the assessee in 1970. It was contended that the reliance of the assessee on the decision of the Supreme Court in the case of Bai Shirinbai K. Koolca (supra) will have no relevance unless it is accepted that in fact the assessee intended to trade in the plots of land. In the same way he distinguished from the decision in the case of CIT v. Gros-Beckert Saboo Ltd. [1979] 116 ITR 125 (SO). He submitted that the intention to carry out trade was not established by merely incurring of certain expenses and as a result of the plotting of the land. He also relied on the reasons given in the assessment order which was not discussed by the CIT (Appeals) as he did not consider it to be relevant. He, therefore, supported the order of the assessment. Reliance was placed on the decision of the Allahabad High Court in Deep Chandra & Co, v. CIT [1977] 107 ITR 716 and another decision in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC).
7. The learned Counsel for the assessee, on the other hand, submitted that from the beginning in 1976 itself the assessee had made it clear that it was intending trade in the plots of land and for this purpose he had approached a valuer who had determined the market value at the time of intention to deal in those plots. He determined the value of the plots on the main road at Rs. 9 per sq. yd. and at Rs. 7 for other plots. It was on the basis of this valuation which was made on the basis of the rates prevailing at that point of time that the plots were valued by the assessee. He also submitted that the assessee incurred expenses on constructing the roads and in travelling expenses and other such expenses. He drew our attention to the site plan of Vikram Colony where large number of plots were developed by the side of roads specially carved out for this purpose. He submitted that in the earlier two years the position had been acccepted by the Income-tax Officer and if he had challenged it at that time, the assessee could have advanced his contentions before him. He, however, submitted that now there was a trading account having a closing balance which was shown in the assessee's balance-sheet. Like a trading person the assessee has made out a profit and loss account and balance-sheet. He also submitted that the assessee had not converted the whole land in that village and another part of land continued to be agricultural land but as he intended to develop a part of the land into a colony he took various steps for carrying on his trade in the land. It was further contended by him that in the earlier years due inquiry had been made and even in this year the Income-tax Officer had accepted the position of there being a trade. He submitted that the reasons given by the Inspecting Assistant Commissioner were without any force. He contended that the Inspecting Assistant Commissioner exceeded his limit in giving directions to the Income-tax Officer in Section 144B proceedings. He submitted that the activity of the assessee was not an one time activity of realisation of capital asset but the activity was carried on for full five years when 99 plots fit for residential purposes were sold. He relied on the decision in MLM. Mahalingam Chettiar's case (supra) where it had been held that sometimes even a single transaction could not be held as an adventure in the nature of trade. The learned Counsel relied on the decision of the Karnataka High Court in the case of CIT v. R. Ramaiah [1984] 146 ITR 39. This was a case where some brothers had purchased agricultural lands lying on the outskirts of Bangalore city and carried on agricultural operations for 10 years. In the year 1967 all the assessees converted their lands for non-agricultural purposes. They simultaneously formed a lay-out plan and converted their lands into a building size and sold the sites year after year realising more profit. The assessee had shown this profit as capital gains in the assessment year 1975-76. The Income-tax Officer, however, assessed it as a business income on the ground that it arose out of an adventure in the nature of trade. Though the appellate authorities agreed with the assessee, the High Court held that the assessee had made the land into convenient building size and sold them. They did not dispose of all the sites in one year. They went on selling the sites year after year realising more and more profits. The action by the assessee to convert their lands into building size simultaneously was an indication of their intention to trade in the lands was a venture. They made it commercially more attractive, by converting and dividing into plots. From this it appears that they had no intention to hold the lands as an investment and it was their stock-in-trade. While deciding that case the Karnataka High Court relied on the decision of the Supreme Court in Raja J. Rameshwar Rao's case (supra) which has already been referred to above. In Janki Ram Bahadur Ram's case (supra), the Supreme Court had observed that the magnitude of the transaction of purchase the nature of the commodity, the subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of trading venture. The learned Counsel submitted that his case squarely fell under the ratio of the above decision of the Karnataka High Court and Supreme Court. In fact the case here was a stronger one as the Department itself had accepted the existence of trading activity in the earlier two years.
8. The learned Counsel addressed us in respect of the cross-objection and submitted that the Bombay High Court had held that the capital gains on the sale of agricultural land could not be assessed to tax as it was in fact an agricultural income.
9. The Departmental Representative replied to the cross-objection by relying on the decision of the Kerala High Court in CIT v. T.K. Sarala Devi [1987] 167 ITR 136 and Karnataka High Court in B.S. Jayachandra v. ITO [1986] 161 ITR 1.90, where it had been held that even sale of agricultural land would be chargeable to capital gains under the Income-tax Act. Replying to the contention of the assessee's Counsel that even in computing capital gains the cost of the capital asset has to be taken as the market value on the date on which the asset in question was converted into a capital asset, the Departmental Representative relied on the decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81ITR 446 and again in B.N. Vyas v. CIT [1986] 25 Taxman 133.
10. It was admitted before us that in the assessment year 1982-83 the facts were similar when four plots had been sold after the balance had been disposed of in the assessment year 1981-82. Both the sides have relied on same arguments for that year.
11. Having heard the parties and having gone through the position in the earlier years as well as the case-laws, we are of the view that the order of the CIT (Appeals) has to be upheld. Apart from the fact that for two years in the assessments made the Department had accepted the position that there had. been a conversion of the capital asset into a trading asset. There has hardly been any argument before us by the Department, on the question of valuation of the opening stock or the closing stock. The basic challenge was to the claim of the assessee that he was carrying on a business from 197(5. If it is accepted that the assessee was carrying on a trading1 activities in plots of lands from 1976 and continued to carry on for five years, the matter will end and there will be no conflict on the question of the valuation of the opening stock or the adoption of the market value following the decision of the Supreme Court in the case of Bai Shirinbai K. Kooka (supra). From the assessment order itself it is apparent that the piece of land had been purchased by the assessee in 1970. Up to 1976 the assessee had carried on agricultural operations on this land. At that time there was a possibility of commercial exploitation of that land by developing a colony. The assessee, therefore, decided to develop a colony by laying down roads and dividing it into plots for residential purposes. Such an activity was also carried on by the other members of the family who had adjoining pieces of land. The lay out plan was drawn out by an Architect and the market value was determined by a valuer on the basis of the per square yard value of the land in. that area meant for the purpose of the housing colony. Normally in such matters, we find that it is the assessees who are claiming the profit to be a profit under capital gains whereas the Department makes an effort to assess it as a business profit. In this case, however, the position has been reversed because of the benefit which the assessee has taken in valuing the stock of lands on the basis of market value. As already stated above, the fact that the market value was taken has not been disputed before us. The plots had been valued according to their location and if they were on the main road, larger value was put on such plots. The activity of the assessee in ploting the lands and selling1 it for five years has been continued as an organised activity and depended on the availability of purchasers from time to time. The land has not been sold as an agricultural land and it is not in dispute that a colony known as Vikram Colony, was developed on that land. The character of the land, therefore, changed because of the potential of the land and because of the intention of the asses-see to trade in this land exploiting it commercially. Having accepted this position for the first two years, the Department has changed its stand in this year on the ground that the earlier stand of the Department was wrong. There may not be any legal bar for such action but we do not find any strong reasons for the same. The assessee has gradually converted pieces of land in two instalments once in 1976 and again in 1979 for dealing in plots of land for residential purposes. In the year under consideration also the Income-tax Officer had not departed from the stand that some business was being carried on. He, however, had taken the view that the balance of the profit earned by the assessee by converting agricultural land into residential plots should be assessed as capital gains. In other words, on the same transaction of sale in this year a part of the profit was considered as business profit by him and another part of capital gains. This was, however, not approved by the Inspecting Assistant Commissioner. It is true that where the capital value of the land is realised by its sale, it may generally result in a capital gain. However, where there is a concerted activity for developing a colony in accordance with a plan and where plots of lands are developed for construction of residential buildings and such plots are sold over a period of five years, bit by bit, it cannot be denied that such activity could be in the nature of trade. It is not necessary that there should be such transactions by the assessee in other pieces of land. We have already referred to the decision of the Karnataka High Court where the facts appear to be similar. The Karnataka High Court has relied on a decision of the Supreme Court. In our view, the ratio of that decision is applicable to the facts of this case. It is not necessary that for the sale of plots the assessee should employ brokers and should receive advances. As and when the purchasers came forward the plots of lands were sold and such sales have continued for a period of five years. As pointed out by the assessee, where a colony is developed according to plan staff was appointed to look after the business activity and such activity has continued for a period of five years, it has to be accepted that such activity was a trading activity. There cannot be any doubt about the intention of the assessee in trading in these plots of land and this intention was accompanied by the valuation of the stock of land according to the market value taking advantage of the principles laid clown by the Supreme Court in the case of Bai Shirinbai K. Kooka (supra). The Allahabad High Court has also taken a similar view in Baijnath Hari Shanker v. CIT [1973] 91 ITR 208 following the decision of the Supreme Court in P.M. Mohammed Meemkhan v. CIT [1969] 73 ITR 735. We, therefore, agree with the CIT (Appeals) that the assessment of the profit should be on the basis that it was a business profit. The computation of such profit is not in dispute before us as there are no grounds challenging the computation of business income.
12. Coming to the assessee's alternative contention, we may observe that in view of our finding, it is not necessary to decide that issue. However, we agree with the Departmental Representative that having regard to the various decisions, capital gains on the sale of agricultural land cannot be considered to be an agricultural income. On the second ground also, we do not find any force in the submission of the. learned Counsel for the assessee. As already stated, our observation in this regard is only for the proper disposal of the matter. For both the years, therefore, we dismiss the Departmental appeals and the cross-objection is also dismissed.