Hon. A. N. Mittal, J.
1. We have heard Shri Shambhu Chopra for the revenue. Shri Faneesh Misra entered appearance on behalf of heirs and legal representative of the respondent assessee.
2. The substitution application was allowed on 26.7.2012 bringing on record the heirs of Shri Devendra Pal Singh-the assessee, who died in the year 2003.
3. The Income Tax Appellate Tribunal, Delhi Bench 'A', New Delhi has referred the following two questions of law in Reference No.116 DEL/98 arising out of the order of the Income Tax Appellate Tribunal dated 28th November, 1997 in ITA No.4994/DEL/92 relevant for the assessment year 1991-92 as follows:-
"1. Whether, on the facts and in the circumstances of the case, Hon'ble ITAT was legally justified in confirming the order of ld. CIT (a) in directing that surplus amount of sale of land is assessable as long term capital gain and not as an adventure in the nature of trade.
2. Whether, on the facts and in the circumstances of the case, Hon'ble ITAT is justified in upholding the order of ld. CIT (A) in directing the AO to ascertain the cost of land as on 1.4.74 and deduct the same to work out the capital gain?"
4. Brief facts giving rise to this reference are that Late Shri Devendra Pal Singh-the respondent assessee was owner of agricultural lands, inherited by him as ancestral properties. He entered into a registered agreement dated 9.5.1989 with M/s Konark Builders for transfer of the agricultural lands for a sale consideration of Rs.1,04,28,000/-. The assessee declared an income of Rs.3,98,180/-, as capital gain on sale of the agricultural land.
5. The Assessing Officer observed that during the relevant assessment year 1991-92 the assessee had sold the area of 3846.73 sq. mtr. out of the area involved of 6516 sq. mtrs. in the land. The assessee had declared the total sale consideration received as Rs.11,31,536, after deducting the cost of land as on 1.1.1974 at the rate of Rs.28.71 per sq. mtr. The assessee had worked out capital gain at Rs.9,36,350/- after claiming deduction under Section 48 and under Chapter VI A. The income was shown as Rs.3,98,180/-.
6. The A.O. issued notice requiring the assessee to explain as to why the sale consideration should not be taken at Rs.13,43,107/- and to furnish evidence of ownership of land, date of acquisition, the basis for valuing the land as on 1.1.1974 and to justify the liability of deduction under Section 48 of the Act. The assessee filed his reply on 4.10.1991, explaining that an agreement to sale was executed with M/s Konark Builders on 19.5.1989. The land in question was agreed to be developed as per specifications of Bulandshahar- Khurja Development Authority. The entire expenses of development were to be borne by the builder. The builder paid Rs.295/- per sq. mtr. and rest of the amount belong to the said builder being the development charges. The sale consideration was paid by M/s Konark Builders through account payee cheque drawn at Vijaya Bank, Bulandshahar out of which Rs.11,31,536/- belong to the petitioner and the rest of the amount of Rs.2,11,570/- belong to the builder, for which it had issued a receipt. The assessee explained the cost of the land as on 1.1.1974 by providing exemplers of the sale of land in the same vicinity. The total area under the agreement was treated as effective area and for the area utilised for road and other public amenities no consideration was received. Since the assessee was in possession of the land for more than 20 years, he was entitled to get deductions under Section 48 of the Act.
7. The A.O. observed that the assessee and M/s Konark Builders had fixed a minimum period of 3 years to execute the agreements and that an amount of Rs.1 lakh had been paid by M/s Konark Builders vide bank draft as earnest money to the assessee. He also observed that as per the agreement the sale deeds were to be executed on or before 18.5.92, on payment of full or proportionate amount of consideration; in para 2 of the agreement it was explained that till execution of the sale deed, the assessee shall continue to be the owner of the land. The A.O. noted that the total area of the land under consideration was 28 bighas and 16 biswas. In view of the above facts the A.O. vide order sheet entry dated 4.10.91 required the assessee to explain as to why income should not be charged under the head "business income", since the assessee had entered into an agreement to sell land over a period of time, for which M/s Konark Builders had merely acted as developers and the assessee had paid required expenses for the development and plotting of the land.
8. The A.O. mentioned that the transaction was not a one time transaction but an on going one in which a major portion of the receipts were to be received in asstt. year 1992-93. He also observed that the plots were not capital assets of the assessee but were stock in trade which the assessee would be selling as and when the buyers are available. He also observed that the entire holding was neither to be sold as one unit nor it was to be transferred as one unit and till the plots are transferred, they continue to remain in the possession of the assessee. He held that the transaction entered into by the assessee with M/s Konark Builders was an adventure in the nature of trade. He thus brought the total sale consideration of Rs.13,43,106/- in respect of plots, whose sale deeds were registered during the year, to tax as income from business.
9. In first appeal, CIT (A) found that the assessee had agreed to sell his agricultural land measuring 23 bighas and 16 biswas in Khasra No.509 to 514 to the colonisers for consideration of Rs.1,04,28,000/-, and thereafter the assessee had nothing to do with the land. Para 5 of the agreement provided the coloniser to do everything and to incur entire expenses for lay out plan, development of the site, and other ancillary expenses. The assessee was required to execute sale deed of various plots either in favour of the colonisers nominees in one or several lots on or before 18.5.1992 on the payment of the said consideration. In case of failure on the part of coloniser to get the sale deed executed, Clause 4 provided that the agreement shall cease to have effect, and shall stand cancelled, on which the colonisers shall not have any right to receive back the earnest money. In case of failure on the part of the assessee the coloniser was given the right to get the sale deeds executed through the Court. The assessee had no concern with the land as soon as he entered into agreement. The coloniser developed the land into residential/ commercial plot and charged the price, with which the assessee had no concern except the receipt of the agreed amount and thus by no stretch of imagination it could be said that the assessee was dealing in land, which could be termed as adventure in the nature of trade or carrying on the business of purchase and selling the land. The CIT (A) referred to 135 ITR 216 and observed that for constituting an adventure in the nature of trade the transaction must be in the line of business. The intention of the purchaser had to be seen, and not the intention, which was formed subsequently. The assessee was not doing any business. He had never dealt with in any business and sale of land. He had sold away his ancestral land without any development, which was subsequently carried out by the colonisers. The CIT (A) relied upon 107 ITR 716 (Alld.) and 62 ITR 578 (Madras High Court) in support of its findings and directed the A.O. to assess surplus land as long term capital gain in the hands of the assessee.
10. The Income Tax Appellate Tribunal did not accept the contention of the revenue that the transaction was in the nature of adventure in the nature of trade. It held in para 4.2 as follows:-
"4.2 We have carefully considered the rival submissions on this issue and have also perused the orders of the departmental authorities. We feel that the submissions made by the learned counsel have force. We agree with the reasoning of the ld. CIT (A) in coming to the conclusion that the income from sale of land is taxable under the head "capital gains" and that in the present case the transactions could not be termed as an adventure in the nature of trade. This ground is, therefore, rejected."
11. The Income Tax Appellate Tribunal confirmed the order of CIT (A) and held in Para 5.4 as follows:-
"5.4 We have carefully considered the rival submissions on this issue and in view of our decision upholding the orders of the ld. CIT (A) that the sale proceeds received by the assessee from sale of agricultural land is taxable under the head "capital gains", we see nothing wrong in the directions of the ld. CIT (A) to the AO to ascertain the cost of land as on 1.4.74. This ground is, therefore, rejected."
.
12. Shri Shambhu Chopra, learned counsel for the revenue submits that the assessee had not sold the land as agricultural land by way of one time transaction, he sold the plots after getting the land developed from the coloniser. The assessee sold the plots by separate sale deeds on which he paid registration charges. The activity of getting the plots sold after development through coloniser even if it is a one time activity, is adventure, which falls within the meaning of definition of business as follows:-
"2 (13) "Business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."
13. Shri Chopra submits the word any adventure will include the sale in the present case, in which the assessee sold the land by entering into agreement with the coloniser. The land was to be developed by the coloniser after obtaining statutory clearances, after which the sale deeds were to be executed by the assessee within the period of agreement. The assessee with party to the sale deeds executed in favour of the purchasers of the plots, as and when such plots were sold and shared in the profits.
14. Shri Chopra has relied upon G. Venkataswami Naidu & Co. v. Commissioner of Income-Tax, 1959 Vol.XXXV 594 (SC) in which the Supreme Court interpreted the expression "in the nature of trade" appearing in the definition of business in Section 2 (4) of the Income Tax Act. The Supreme Court observed that the expression "in the nature of trade" postulates the existence of certain elements in the adventure, which in law would invest it with the character of trade or business, and that would make the question whether a transaction is in the nature of trade and its decision were of mixed question of law and fact. In this case the appellant's firm acting as managing agents purchased four contiguous plots of land adjacent to the mills of the company. The first purchase was made in the name of benamidar. The second and subsequent purchases were made on subsequent dates. The appellant made no efforts to cultivate them or to make any construction on them. It allowed them to remain unutilised except for the rent received from the house on the plots. He sold these plots to the company in two lots. The Tribunal held that the amount was not a capital accretion but was made in an adventure, in the nature of business and was therefore taxable. The High Court held that the transaction was an adventure in the nature of trade and that revenue was justified in taxing the amount. The Supreme Court held that the Appellate Tribunal was right in inferring that the appellant knew that it would be able to sell the land to the managed company, whenever it thought it profitable to do so. The appellant purchased four plots of land for sole intention of selling them, at a profit, which raises a strong presumption in favour of the view taken by the Tribunal. The finding was on question, which was a mixed question of law and facts. The High Court would no doubt have to accept the findings of the Tribunal on the primary question of fact, but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not.
15. The Supreme Court further held that where the question is whether a transaction is in the nature of trade, even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on the question of fact, the Tribunal had undoubtedly and necessarily to address itself to the legal requirement associated with the concept of trade or business.
16. Shri Chopra has relied upon CIT v. Sutlej Cotton Mills Supply Agency Ltd., 1975 Vol.100 ITR 706 (SC). In this case the respondent company, a public limited company controlled by Birlas was interested in another company Gwalior Rayon. It subscribed to 3.49 lacs shares in the new issue of Gwalior Rayon and paid the application and call moneys. During the accounting period ending on March 31, 1956, the respondent sold 1,58,200 out of these shares at a profit of Rs.2,13,150. The Appellate Tribunal held that the transaction was in the nature of a business adventure. The High Court held that transaction was not an adventure in the nature of trade, the main reason being that the dominant intention of the respondent in acquiring the shares was to boost the shares of a sister concern. The Supreme Court reversed the decision of the High Court and held that the Tribunal had considered the evidence and applied the correct tests in law and relied upon G. Venkataswami Naidu & Co. v. CIT (Supra) in holding that dominant or even the sole intention to resale has relevant factor and raised a strong presumption by itself, which is not conclusive proof, of an adventure in the nature of trade. The intention to resale would in continuation with the conduct of the assessee, and other circumstances, point to the business character of the transaction.
17. In the present case we find that late Shri Devendra Pal Singh, the assessee had inherited the land from his ancestors. He had not purchased the land nor had entered into any transaction of sale of any part of the land in the past, prior to entering into agreement dated 9.5.1989. The sale consideration in the agreement was fixed. Since the assessee was not in the business of development and sale of land, the purchaser as coloniser with requisite expertise, was required to develop the land after taking statutory clearances. The sale deeds were to be executed in favour of purchaser of the plots, carved out by the coloniser after leaving the land for road for which the assessee was not to receive any sale consideration. The assessee was not entitled to share the profits or the increased price of plots. There was no agreement on the price of plots. It was left at the discretion of the coloniser. The assessee was only required to execute the sale deed to the nominees (allottee of the plots) of the coloniser. In such case there was no profit in addition to the agreed sale consideration. The sale deeds were to be executed on or before 18.5.1992 on payment of full or proportionate amount of consideration. In such agreement of sale there was no adventure or motive to the earn profits beyond the sale consideration. The entire benefits, if any, flowing from the transaction, after the agreement were to be appropriated by the coloniser. There was no element of business, involved in the transaction.
18. The CIT (A) held that the first and foremost element necessary for constituting adventure in the nature of trade is that the transaction must be in the line of business; the second condition is the intention of the purchaser on the inception of the transaction and not one formed subsequently, that is of development of the land and dividing it into smaller plots. The assessee was not doing any business. He had never dealt with purchase or sale of land. When he thought it to sell away the ancestral agricultural land without any development, he entered into a contract with the coloniser. Such transaction cannot be termed as adventure in the nature of trade.
19. The CIT (A) relied upon CIT v. Kasturi Estages Pvt. Ltd., 62 ITR 578 in which the Madras High Court held that developing land into building sites with a view to realise best price without anything more, is consistent with the realisation of capital investment. If a land owner develops his land into housing sites, with a view to get better price, it could hardly be said that the transaction is anything other than realisation of capital investment or conversion of one form of asset into another. The surplus in such a case will not be treating or business profit.
20. We are of the opinion that the CIT (A) considered the facts and relied upon relevant principles of law, as well as the case laws in arriving at a conclusion that in the given circumstances, the agreement with the coloniser, who had to develop the plots and ultimate sale of the plots to the nominees of the colonisers, at a price to be fixed by the coloniser in which the assessee had no share of excess profits, was not in the nature of any adventure in the nature of trade. The assessee was not engaged in any trade or business of selling land. The transaction was only to get best price of his land, which the coloniser was ready to pay. The ITAT did not commit any error on facts or in applying the principles of law in upholding the findings of CIT (A).
21. It would be useful to quote here the observations of Lord Precedent Clyde, in Commissioners of Inland Revenue v. Livingston, (1926) 11 Tax Case 538:-
"If the vendor was one consistent simply in an isolated purchase of some article against an expected rise in price and a subsequent sale, it might be impossible to say that the vendor was in the nature of trade. The test to be applied would be whether the operations involved in the transaction 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."
22. In Ram Narain Sons (P) Ltd. v. IT Commissioner, AIR 1961 SC 1141 it was held that in consideration whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the "legal requirements, which are associated with the concept of trade or business."
23. In the fact and circumstances of the case, the ITAT did not commit any error of law in confirming the findings of the CIT (A).
24. The questions no.1 is thus decided against the revenue and in favour of the assessee. In view of the answer to the question no.1, the ITAT was justified in upholding the order of CIT (A) in directing the A.O. to ascertain the cost of land as on 1.4.1974 and deduct the same to work out the capital gain. Questions no.2 is also decided against the revenue and in favour of the assessee.
25. The reference petition is decided accordingly. The A.O. will carry out order of CIT (A).
Dt.06.08.2012 SP/