Where intention of assessee from inception was to carry on agricultural operation on land in question, gain from its sale could not be taxed as profit arising from adventure in nature of trade, merely because of short period of holding
[2013] 36 taxmann.com 545 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
Tulla Veerender
v.
Additional Commissioner of Income-tax, Range-6*
SAKTIJIT DEY, JUDICIAL MEMBER
AND CHANDRA POOJARI, ACCOUNTANT MEMBER
AND CHANDRA POOJARI, ACCOUNTANT MEMBER
IT APPEAL NOS. 550 & 551 (HYD.) OF 2012
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JULY 4, 2013
Section 2(13), read with section 2(14), of the Income-tax Act, 1961 - Adventure in nature of trade [Land dealings] - Assessment year 2007-08 - Assessee purchased land and leased it for purpose of cultivation - Soon after, lease was cancelled and land was sold - Assessing Officer held that amount received on sale was on account of adventure in nature of trade, and taxed same as business income - Whether, where land in question was classified as agricultural land in revenue records, mere future possibility of non-agricultural use would not change character of such agricultural land at time of sale - Held, yes - Whether, therefore, mere fact that land in question was bought by a developer cannot be a determining factor to say that land was converted into use for non-agricultural purpose - Held, yes - Whether presence of intention to trade at inception is an essential prerequisite in an adventure in nature of trade - Held, yes - Whether, therefore, where intention of assessee from inception was to carry on agricultural operations on land in question, which was later sold due to compelling circumstances, gain from sale of such land could not be taxed as profit arising from adventure in nature of trade, merely because land was sold in a short period of holding - Held, yes [Para 78] [In favour of assessee]
FACTS
| ■ | The assessee, along with other co-owners, acquired agricultural land used for cultivating grapes on 8-9-2005. Thereafter, the assessee floated a company, VVT Ltd. for carrying on agricultural operations. The assessees and the co-owners entered into a lease agreement with VVT Ltd., whereby the entire land was to be given on lease for purpose of cultivation. Later, the lease was cancelled on 29-9-2006 and the agricultural property was sold soon thereafter. | |
| ■ | The Assessing Officer held that the amount received on sale of the agricultural property was on account of adventure in the nature of trade and taxed the same as business income. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer, holding that the assessee was not a regular agriculturist and earned income from business and other sources. | |
| ■ | On assessee's appeal: |
HELD
| ■ | In the facts of the present case, the land in question is classified in the revenue records as agricultural land and there is no dispute regarding this issue. Actual cultivation has been carried out on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the assessee had not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land. [Para 66] | |
| ■ | It is an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon, or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee, does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped, and mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. [Para 68] | |
| ■ | No material or evidence in support of the fact that the assessees had put the land in use for non-agricultural purposes was brought on record. The nature of the crop and the person who cultivated the land are duly mentioned in the assessment order, which shows that at the relevant point of time the land was used for agricultural purposes only. In view of the decision of the High Court in the case of Gopal C. Sharma v. CIT(209 ITR 946) (Bom), it is also clear that the profit motive of the assessee in selling the land without anything more by itself, can never be decisive to say that the assessee used the land for non-agricultural purposes. The fact that agricultural land in question is included in urban area is not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by a developer, cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes. [Para 68] | |
| ■ | Gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. [Para 73] | |
| ■ | It is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii), as the land is outside of any municipality. Clause (b) of section 2(14)(iii) prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette. [Para 76] | |
| ■ | In the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality. Therefore, assessee's land does not come within the purview of section 2(14)(iii) either under sub-clause (a) or (b), hence, the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. [Para 77] | |
| ■ | From the facts and circumstances of the case, the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time, is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception which 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 purchase. The mere circumstances that a property is purchased in the hope that when sold later, it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case 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 offset 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. In the present case, considering the facts and circumstances of the case, it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations, and with this intention assessee entered into lease agreement with VVT Ltd. on 25-10-2005 and even there was no intention to sell the land in future at that point of time. It was due to certain compelling circumstances which came into picture at a later stage that the assessees were forced to sell the land. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade. [Para 78] | |
| ■ | Further, it is clear that when the land which does not fall under the provisions of section 2(14)(iii), and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land on 'as it is and where it is basis', in such circumstances, such transfer cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, the ground raised by the assessees is allowed. [Para 79] |
CASES REFERRED TO
G. Venkataswamy Naidu & Co. v. CIT [1959] 35 ITR 594 (SC) (para 34), CIT v. Jawahar Development Association [1981] 127 ITR 431 (MP)(para 35), Smt. Indramani Bai v. Addl. CIT [1990] 200 ITR 594/70 Taxman 67(SC) (para 35), P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) (para 35), Hemachand Hirachand Shah v. CIT [1994] 206 ITR 55/[1995] 83 Taxman 626 (Guj.) (para 35), Mahaveer Enterprises v.UOI [2000] 244 ITR 789/[1997] 95 Taxman 220 (Raj) (para 43), Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631/70 Taxman 301 (SC) (para 45), M.K. Abdul Rehiman v. Dy. CIT [2011] 16 taxmann.com 406/[2012] 49 SOT 267 (Coch) (para 46), Rockman Cycle Industries Ltd. v. CWT [2010] 191 Taxman 399 (Punj. & Har.) (para 46), ITO v. Anthony John Pareira [2008] 24 SOT 459 (Mum) (para 47), Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) (para 48), CIT v. Smt. Debbie Alemao [2011] 331 ITR 59/196 Taxman 230/[2010] 8 taxmann.com 243 (Bom) (para 49), K. Radhika v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 (Hyd.)(para 50), CIT v. Siddharth J. Desai [1983] 139 ITR 628/10 Taxman 1 (Guj) (para 59), CWT v. Officer-in-charge(Court of Wards) [1976] 105 ITR 133 (SC) (para 60), Dr. Motibhai D. Patel (No. 2) v. CIT [1981] 127 ITR 671/5 Taxman 147 (Guj.) (para 61), CWT v. H.V. Mungale [1984] 145 ITR 208/[1983] 12 Taxman 201 (Bom) (para 62), CIT v. Manilal Somnath [1977] 106 ITR 917 (Guj) (para 63), Gopal C. Sharma v. CIT [1994] 209 ITR 946/72 Taxman 353 (Bom) (para 64),CWT v. E. Udayakumar [2006] 284 ITR 511 (Mad.) (para 65), CIT v. Smt. Savita Rani [2004] 270 ITR 40/[2003] 133 Taxman 712 (Punj. & Har.) (para 65), N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 (para 68), CIT v. Madhukumar N. (HUF) [2012] 208 Taxman 394/23 taxmann.com 341 (Kar) (para 69), Dy. CIT v. Arijit Mitra [2011] 48 SOT 544/16 taxmann.com 66 (Kol) (para 70) and M.S. Srinivasa Naicker v.ITO [2007] 292 ITR 481/[2008] 169 Taxman 255 (Mad) (para 77).
S. Rama Rao for the Appellant. D. Sudhakara Rao for the Respondent.
ORDER
Chandra Poojari, Accountant Member - The above two appeals by different assessees are directed against different orders of the CIT(A)-IV, Hyderabad dated 31.1.2012 for A.Y. 2007-08.
2. The assessees have raised various grounds of appeal. However, the crux of the grounds is that the CIT(A) erred in treating the income arose out of sale of agricultural land as business income being adventure in the nature of trade though it is an exempted income as capital gain. The facts in both the cases are similar in nature. For convenience purpose, we consider the facts narrated in the case of Sri Tulla Veerender, Hyderabad in ITA No. 550/Hyd/2012.
3. Brief facts of the case are that the assessee in his return of income for A.Y. 2007-08 had declared total income of Rs. 5,51,23,570 which included long term capital gain of Rs. 5,33,41,751. In the note given in the computation of income the assessee had stated as under:
"The assessee owns the agricultural lands admeasuring 25 acres and 34 guntas in survey No. 227, 228, 229 bearing patta No. 562, pass book No. 431863 situated at Mankal village in Maheswaram Mandal of R.R. Distt. whose cost as already reported in the earlier A.Y. 2006-07 is Rs. 5,25,61,860. During the year, i.e., 2007-08, the assessee has sold the entire land on 1.12.2006 to M/s. Prajay Holding Pvt. Ltd. for a total consideration of Rs. 24,81,60,000. A Photocopy of the sale deed is herewith enclosed.
The said lands are situated more than 8 Km from the local limits of any Municipality or Cantonment Board. Mankal village, having less than 10,000 population due to which the agricultural lands in question are outside the definition of the asset within the meaning of sec. 2(14) of the IT Act. The Agricultural lands are actually grape gardens which are assessed to revenue also, as such any gain whether Long term or short term is not gain taxable under the Act. These lands were purchased by the assessee during the A.Y. 2006-07 for a total consideration of Rs. 5,25,61,860 and the same fact had been disclosed in the IT Return filed for the A.Y. 2006-07. The net gain of Rs. 19,55,98,140 is not taxable as such the same is not considered in the computation of income."
4. On verification of facts and records, it was noticed by the Assessing Officer that the assessee, along with his brother Sri Vijayender Tulla, aunt Dr. E. Adilakshmi, and brother-in-law Sri M. Ravindcr, had purchased total area of acres 85.23 guntas agricultural land from Sri B.K. Khosla, his wife Satish Khosla and his two daughters, Vani Kumra and Richha Mahindru of New Delhi vide various registered deeds dated 08-09-2005. The details of the purchase of property by the assessee and the three other relatives were as below:
| S.No. | Name of the buyer | Name of the seller | Address | Land (Acres: Guntas) | Consideration |
| 1. | T. Veerender | Vani Kumra | 26, Bungalow, Kamala Nagar, New Delhi | 25.34 | 5,25,61,860 |
| 2. | T. Vijayender | B.K. Khosla | -do- | 13.19 | 2,42,55,000 |
| 3. | T. Vinayender | Satish Khosla | -do- | 6.32 | 1,22,40,000 |
| 4. | T. Vijayender | Vani Kumra | -do- | 6.23 | 1,18,35,000 |
| 26.24 | 5,29,22,580 | ||||
| 5. | E. Adilakshmi | Richa Mahindru | -do- | 24.07 | 5,00,00,000 (approx) |
| 6. | M. Ravinder | -do- | -do- | 6.10 | 1,20,00,000 (approx) |
| 85.32 | 17,00,00,000 (approx) | ||||
5. The Assessing Officer found that on these lands agriculture in the form of cultivating grape gardens was being carried on for past several years. On acquiring these lands, a company by the name, M/s. VVT Agritech Pvt. Ltd., (hereinafter called as M/s. VVT) was incorporated on 26.10.2005, whose promoters and shareholders were the assessee and his brother, Sri Vijayender. The company was incorporated to carry on the business of agriculture and several other related activities, which have been mentioned in detail in the Memorandum of Association of the company. The Assessing Officer noticed that the authorized and the paid up share capital of the company was Rs. 1,00,000, which had been subscribed by the two brothers Sri Veerender and Sri Vijayender in the ratio of 50% each.
6. On 25.10.2005, a lease deed had been entered between all the four owners of freshly purchased land, viz., Dr. E. Adilakshmi, Sri Veerender Tulla, Sri M. Ravinder and Sri Vijayender Tulla, as lessors, with M/s. VVT as lessee, wherein the entire grape orchard admeasuring acres 85 and 22 guntas was given on lease with effect from 25.10.2005 on the following terms:
| (a) | Yearly rent for this entire land was fixed at Rs. 12.80 lakhs. Each lessor was to receive following annual lease rent: |
| Dr. E. Adilakshmi | - Rs. 3,50,000 | |
| M. Ravinder | - Rs. 1,50,000 | |
| T. Vijayender | - Rs. 3,97,500 | |
| T. Veerender | - Rs. 3,82,500 |
| These payments were exclusive of all taxes and other maintenance of the premises. | ||
| (b) | That the lease is commenced from 26.10.2005 for a period of one year. However, lessee shall be entitled to exercise his option by giving 2 months advance written notice to the lessors to continue the lease for a maximum period of three years, subject to the condition that 10% of the lease shall be increased every year. | |
| (c) | That the lessee shall pay regularly electricity consumption charges, other taxes etc. | |
| (d) | That the lessee will carry on the agricultural activity in the name and style of VVT AGRITECH PVT. LTD. | |
| (e) | That the lessee shall not run any business other than the development of grape garden as specified in this agreement. |
7. On further verification, it was found by' the Assessing Officer that M/s. VVT had filed its returns for two years only, i.e., A.Ys. 2007-08 and 2008-09. On calling for information from M/s. VVT, it is seen that all the receipts and expenses for the period from the start of lease in October, 2005 to 31.03.2006 had been included in the return for A.Y. 2007-08. It was noticed that the total sale of grapes had been shown for A.Y. 2007-08 at Rs. 39,15,951, while expenses were claimed at Rs. 65,86,309, thereby declaring the net loss of Rs. 26,67,142. The payment of lease rent of Rs. 12,80,000 had been debited to the expenses of the company. Expenses under the head material and direct expenses had been debited at Rs. 22,59,806, diesel expenses at Rs. 6,13,368, salaries at Rs. 1,65,555 and labour charges at Rs. 16,90,423, various administrative expenses were debited at Rs. 4,90,651. For the A.Y. 2008-09, sale of grapes is shown at Rs. NIL and no expenses under the head material and direct expenses, salaries and wages were shown, except for small administrative expenses of Rs. 22,450.
8. It was further noticed that the four owners of the land, including the assessee and M/s. VVT had later entered into a deed of cancellation on 29.09.2006, wherein it was mentioned that since the lessors proposed to sell the scheduled property and had informed the lessee in this regard and the lessee has accepted the same, the lessors and the lessee had mutually came to an understanding to cancel the said lease deed and reduce the same into writing. Therefore, it was found that the lease deed had been cancelled w.e.f. 29.09.2006, as the assessee and the other three persons intended to sell the land. However, it was noticed that the lease amount of Rs. 12,80,000 was shown as payable to the four persons.
9. The Assessing Officer further noticed that subsequently, a Memorandum of Understanding was signed on 15.9.2006, that is exactly within one year of purchase of the land by assessee, between Sri M. Ravinder, E. Adlakhshmi and Sri T. Vijayender and a private limited company viz., M/s. Prajay Holding Pvt. Ltd., wherein it is mentioned that due to various financial commitments of the party of the first part, the owners have decided to sell the scheduled property. It was also mentioned that the company, being a leading developer in the city and a renowned construction company, anticipating good development opportunity in the said property, have decided to buy the scheduled property from the owners. A second Memorandum of Understanding was entered between Sri T. Vijayender and the same company i.e., M/s. Prajay Holding Pvt. Ltd., expressing the intention to sell and buy the property on the same date. At the time of these MOUs on 15.09.2006, an advance of Rs. 3,00,00,000 was received by Sri Vijayender, besides the advance of Rs. 2.5 crore each by Sri T. Veerender and Dr. E. Adilakshmi and one crore by Sri M. Ravidner.
10. It was noticed that the sale consideration had been fixed at Rs. 96 lakh per acre and the entire amount of Rs. 23,54,40,000 was received by Sri T. Vijayender at the time of final registration of the sale deed in January, 2007. The entire land of Ac. 79. 32 guntas purchased by four persons, including the assessee, had been sold/entered into agreement with M/s. Prajay Holding Pvt. Ltd., for Rs. 76 crores approximately, as below:
| S.No. | Purchased from | Address | Type of documents No. & Date | Survey Nos. | Extent (Ac : GTS) |
| A. Purchase | |||||
| 1. | Dr. A. Adilakshmi | -2-598, Rd. No. 8, Banjara Hills, Hyderabad-34. | SD No. 586/ 2007 dated 10.1.2007 | 43, 49, 65, 66, 67 | 23.07 |
| 2. | Mr. T. Veerender | 8-2-503, Rd. No. 7, Banjara Hills, Hyd-34. | SD No. 990/ 2007 dated 20.01.2007 | 27, 28, 29, 30, 31 & 32 | 25.34 |
| 3. | Mr. Vijayender | -do- | SD No. 3059/2007 dt.31.3.2007 | 65, 66, 67, 69, 70 & 71 | 13.19 |
| 4. | Mr. Vijayender | -do- | SD No. 3061/2007 dt.31.1.2007 | 43, 65, 66, 67, 70, 71, 72 | 06.32 |
| 5. | Mr. Vijayender | -do- | SD No. 3060/2007 dated 31.3.2007 | 65, 66, 69, 70 & 72 | 04.10 |
| 6. | Mr. M. Ravinder | 3-6-100/1, West Marredpally, Secunderabad-26 | SD No. 2051/2007 dated 1.2.07 | 41 & 42 | 06.10 |
| Sub Total | 79.32 | ||||
| B. Development Agreement | |||||
| 7. | Mr. M. Ravinder | 3-6-100/1, West Marredpally, Secunderabad-26 | Dev. Agt./ GPA Doc No. 3700/07 dt. 1.2.2007 | 41 & 42 | 03.27 |
| 8. | Mr. Vijayender | 8-2-503, Rd. No. 7, Banjara Hills, Hyd-34. | Doc. No. 3699/07 dt. 31.1.2007 | 02.13 | |
| Total | 85.32 | ||||
11. On a consideration of the above facts, the Assessing Officer observed that land of about 25 acres had been purchased for more than Rs. 5 crore in September, 2005, given on petty lease to a newly created company, and sold after one year in September, 2006 for about Rs. 24 crore to a real-estate builder. Significantly, she noted that the assessee and Sri M. Ravinder had kept about 2.13 and 3.27 acres of land, respectively, with them and had given it for development purposes to the same company, within the same Integrated Township. They were to get back 30 to 40% of the constructed area from the developer in the said Township. She, therefore, opined that the entire arrangement with the leading real estate developer of the city showed the acumen of the assessee as a seasoned business person to exploit the then over-hyped real-estate economy of Hyderabad and its surrounding areas.
12. During the course of assessment proceedings, the Assessing Officer proceeded to find out the intention of the assessee behind these transactions, whether the same was to hold the land as an investment and earn agricultural income therefrom or it was a venture in the nature of trade wherein the intention was to sell the land from the beginning itself in the ever spiralling real estate market of Hyderabad at the relevant time.
13. On delving into the Agricultural history of the impugned lands, the Assessing Officer noticed that all these agricultural lands were owned by the family of Sri B.K. Khosla, consisting of his wife Smt. Satish Khosla, and daughters Richha Mahindru and Vani Kumra. They were in possession of these lands for close to one and half decade and grape cultivation was being carried out on these lands. There were three farms, by the name M/s. Eastern Farms, M/s. Khosla Farms and M/s. Vani Farms, wherein all these four family members were partners. These farms were showing agricultural income from the sale of grapes. It was significantly noted that for years together grape cultivation was being done on these lands and the sale proceeds from the grapes grown in these farms were shown as under:
Eastern Farm
| Financial year | Gross Proceeds (Rs.) | Net Proceeds (Rs.) |
| 2005-06 | 74,81,086 | 62,74,518 |
| 2004-05 | 17,39,000 | |
| 2003-04 | 52,63,191 | 26,44,710 |
| 2002-03 | 54,56,338 | 26,88,602 |
| 2001-02 | 46,97,634 | 22,05,440 |
Khosla Farm
| Financial year | Gross Proceeds (Rs.) | Net Proceeds (Rs.) |
| 2005-06 | 64,81,880 | 49,45,534 |
| 2004-05 | 17,00,000 | |
| 2003-04 | 92,78,372 | 40,04,137 |
| 2002-03 | 96,27,396 | 43,90,582 |
| 2001-02 | 81,02,480 | 33,02,827 |
Vani Farm
| Financial year | Gross Proceeds (Rs.) | Net Proceeds (Rs.) |
| 2005-06 | 52,23,077 | 45,64,808 |
| 2004-05 | 33,61,610 | 13,87,509 |
| (It was created during the year) | ||
| 2003-04 | 7,16,142 | 3,18,141 |
14. The Assessing Officer noted that since entire land was with the said three firms, and on the entire land grape gardens had been grown, the year-wise income from these lands was almost more than Rs. 50 lakhs, consistently for several years. In some years, in fact, it was close to Rs. 70 lakhs to Rs. 80 lakhs also. The Assessing Officer felt that these figures are significant to know the true capacity of the lands to give agricultural revenue and to arrive at the intention of assessee by seeing what treatment was accorded by assessee to land of such productivity.
15. It was further noted by the Assessing Officer that the crop grown was of a high quality and was being exported to Europe by M/s. Eastern Exports, a family concern of the earlier owners. A certificate of quality production had also been issued by EUREPGAP, some European body. The details of income from grape cultivation on these lands for all the above years clearly showed that rich harvests were being received year after year. The land, therefore, was very strongly established for its good quality grape cultivation.
16. However, the Assessing Officer noticed that immediately on purchase of the land, the total land of acres 85.24 guntas, was given on lease rent of merely Rs. 12.8 lakhs per year to M/s. VVT, even though the total cost of purchase of land for all the four persons was Rs. 17 crore. She noted that M/s. VVT shares were wholly owned by Sri Veerender and Sri Vijayender in the ratio of 50% each and, therefore, Sri M. Ravinder and Dr. E. Adilakshmi, the two other owners of the land, were not to get a single penny more than the lease rental income of Rs. 1.5 lakhs and Rs. 3.5 lakhs per year. She particularly noted that this petty income was accepted by these persons from M/s. VVT, even though the actual agricultural income from this land was several times more consistently for past one decade. Even M/s. VVT had reported a net loss of Rs. 26 lakhs out of gross receipts of Rs. 39,15,000 in the A.Y. 2007-08 while nil income/receipts was shown for A.Y. 2008-09 by them. Further, it was seen that the lease deed entered with M/s. VVT was only for one year initially.
17. In view of the above facts, the Assessing Officer observed that the facade of M/s. VVT got fully exposed from the above arrangement. She further noted that as per accounts of M/s. VVT, the said company had incurred various expenditures mentioned below, up to various dates, which are broadly as under:
| Labour charges | - up to 03.05.2006 |
| Misc. Expenses | - up to 02.05.2006 |
| Printing and Stationery | - up to April, 2006 |
| Repair and maintenance | - up to April, 2006 |
| Salaries | - up to 02.05.2006 |
18. From the above, the Assessing Officer noticed that after April, 2006, no activities on the said agricultural land were undertaken. Therefore, she concluded that these facts showed that the assessee did not have the intention to actually carry on agriculture on the said lands since the very beginning. She noted that at the time of purchase of the said land in September, 2005, a new crop started to come. However, after harvesting the same, no agriculture activity was continued with. The Assessing Officer opined that the intention of not carrying out agricultural activities did not come in April, 2006, but existed since the time of purchase of land itself, as otherwise, no prudent agriculturist would have given the land on rent of merely three lakh Rupees per year, even though it was giving income of several more times consistently for past several years.
19. In view of the above findings, the Assessing Officer issued a show-cause letter dated 05-11-2009 to the assessee, requiring him to explain as to why the deal should not be considered as an adventure in the nature of business in the light of facts of the case. The submissions of the assessee vide his letter dated 13-11-2009 have been reproduced in the assessment order as under:
(b) Basically assessee is from agriculture family and the land was purchased as an investment. The main view in purchasing the grape gardens was to export grapes. Since, it is difficult to export grapes individually and also to export grapes in huge quantity the assessee has floated a company with himself and brother as promoters. Further, both the promoters have taken on lease the grape gardens from their auntie (Dr. E. Adilakshmi) and brother-in-law (M. Ravinder). These lands were taken on lease to export more quantity of grapes. The very reason in floating the company shows that the purchase of land is for investment and not for re-sale. Therefore, in appreciating these facts your opinion of taking adverse opinion is not correct. By floating a company it cannot be said or come to the opinion that the assessee has purchased land for business purposes. There is no bar in law that two persons float a company take on lease the land from other persons and it should not be a decisive factor. The land in question is a grape garden, was existing at the time of purchase. Nobody while purchasing the lands ever dreamt that rise in market price will be manifold i.e., four to five times in a short period ...
The Central Board of Direct Taxes in its instruction No. 1827 dated 31.8.1999 had laid down certain test of distinguishing between properties held as stock-in-trade and as an investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader or an investor -
Land is not a commercial commodity. Land alone is also not a trade in itself. Normally the purchase of land represents investment of money in land. A transaction of purchase of land cannot be assumed without more facts to be a venture in the nature of trade. An investment in purchasing a property is also made with a view to earning returns on the same investment. Therefore, the mere fact that a person invested money for the purpose of reselling whenever a suitable opportunity arises does not give a substantive ground to hold that the transaction is in the nature of trade. Deep Chandra & Co. v. CIT 107 ITR page 716 (All), CIT v. Jawahar Development Association, 127 ITR 431 (MP), Bhageerath Prasad Pilgaiyav. CIT 139 ITR 916 (MP.)
And lastly your observation is of no use in citing the case laws is in correct and it appears only that you have predetermined mind in the case.
20. The assessee made the following further submissions vide his letter dated 11-12-2009:
"If a person invests money in land with an intention to hold it enjoys its income for some time and then sells it at profit, it would be a clear case of capital accretion and net profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale though profitable, are clearly outside the domain of adventure in the nature of trade. In deciding the character of such transactions several factors are treated as relevant—
The following case laws have been quoted;
| (a) | Venkata Swamy Naidu & Co. v. CIT, 35 ITR 594 (SC) | |
| (b) | Michael A. Kallivayalil v. CIT, 102 ITR 202 (Ker) | |
| (c) | Saroj Kumar Mazumdar v. CIT, 37 ITR 594 (SC) | |
| (d) | Janaki Ram Bahadur Ram v. CIT 57 ITR 21 (SC) | |
| (e) | CT v. Dhable, Bobde, Parose, Kale, Lute and Choudary, 202 ITR 98 (Bom) | |
| (f) | Fort Properties Pvt. Ltd. v. CIT 208, ITR 232 (Bom) | |
| (g) | CIT v. Kasturi Estates Pvt. Ltd., 62 ITR 578 (Mad) | |
| (h) | CIT v. Mohanuned Mohiddeen, 176 ITR 393 (Mad) | |
| (i) | ACIT v. Ashok Motilal Kataria, 308 ITR (AT) 298 (Pune) |
7. To sum up ordinarily whether a person acquired land with a view to selling it later after developing it and actually divided the land into plots and sold the same in parcels the activity could only be described as a business adventure. Generally, speaking the original intention of the party in purchasing the property, the magnitude of the purchase of the property, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transaction afforded valuable guides in determining whether the assessee was carrying on trading activity and whether a particular transaction should be stamped with the character of a trading adventure. CIT v. V.A. Trivedi, 172 ITR 95 (Bom) ...
12. Actually the intention of the assessee at the time of purchase of agricultural land with grape garden was to export grapes as the grape garden is of seedless grapes and high quality. With that view only in order to have export benefit on the export of huge quantity of grapes the assessee along with his brother have formed a private limited company by taking also on lease the agricultural lands which were adjacent to the assessee's lands with grape garden as already submitted after exporting the seedless grape for 7 days it caught the viral mealy bug resulting thereby the grapes were not fit for export. Meanwhile the market price of the lands has gone up to such an extent that in order to make good profit the assessee has sold the lands in question and by selling the very character or nature of the lands has not changed and as was in the case of Deepchandra & Co. v. CIT,107 ITR 716 (All) and CIT v. Jawahar Development Association, 127 ITR 431 (MP) land is not a commercial commodity. Land alone is not a trade and itself. Normally the purchase of land represents investment of money in land. The transaction of purchase of land cannot be assumed without more facts to be a venture in the nature of trade ...
14. As already submitted in the computation of income the agricultural lands in question are 16 Km. away from the local limits of Greater Hyderabad Municipal Corporation at Mankhal (v) of Maheswaram Mandal of R.R. District. These lands are not an asset within the meaning of capital asset u/s. 2(14)(iii)(a) or (b). As such they are not capital assets under the Income-tax Act, and on sale of agricultural lands the capital gains whether Long/ Short are not taxable"
21. The assessee made further submissions vide his letter dated 24.12.2009 as under:
"2. The assessee claimed the said gain as 'revenue derived from land' exempt from income tax under section 10(1) in terms of Explanation 1 under clause (1A) of section 2, since the said lands are agricultural lands upon which agriculture has been carried on and these lands are not situated in any of the areas specified in sub-clause (iii) of clause 14 of section 2.
5. The lands are classified as agricultural lands in the revenue records. The land has not been subjected to any plotting or development by way of roads and other facilities. In fact the lands have farm buildings comprising of workers' quarters and office besides machinery to grade and process the grapes for export. The lands are used exclusively for agricultural operations for growing grapes and processing them for export. No other activities are permitted on the said lands by the assessee or the lessee (VVT Agritech).
6. On the basis of the above facts it is submitted that the land is agricultural land and the gain sale. thereof is characterized as agricultural income in terms of section 2(1A) and exempt under section 10(1) of tile Act. In this connection, the assessee draw support from the decision of Bombay High Court in the case of CIT v. Minguel Chandra Pais (282 ITR 618) (2006) wherein the court laid certain criteria for deciding whether a land constitutes agricultural land on the basis of Supreme Court decision in the case of Sarifabibi Mohmed Ibrahim v. CIT (204 ITR 631) [1993). The agricultural lands owned by the assessee fulfil all the conditions in this regard. The court also cited the decisions of Gujarat High Court in the case ofCIT v. Manilal Somnath. (106 ITR 917) and held that merely because a purchaser may be prepared to pay a large price for the potential non-agricultural value of the land, it would not detract from the character as agricultural land on the date of sale.
8. Once the land is held to be agricultural land, the gain on sale of the same would be classified as agricultural income falling under section 10(1) of the Act. The Supreme Court in the case of CIT v. Williamson Financial Services (297 ITR 17) (2008) held that once an income is treated as agricultural income, the same is not only exempt but is also to be excluded from computation of total income and therefore, does not fall under section 14 and under the various computation sections, sections 15 to 59. it is, therefore, submitted that on the gain being classified as agricultural income, the contention that it is an adventure in the nature of trade and taxable under the head 'income from business' is not correct.
11. As the yield from the crop has been drastically affected due to 'mealy buy' disease, the assessee could not continue the business and instead proposed to sell the lands together with the standing crop to others to mitigate future losses. The sale is made with an intent to mitigate the losses arising from grape plantation. The gain is incidental to the intent of disposing the property and is a capital accretion which cannot be termed us 'adventure in the nature of trade'. The sales are mode in the measure of acreage and not yardage. The assessee has sold the grape garden: along with the appurtenant farm buildings and equipment."
22. On a consideration of the submissions of the assessee, a final show-cause notice letter was issued to the assessee on 24.12.2009. In response, the assessee made further submissions vide letter dated 29.12.2009 as under:
| "(1) | In your above reference letter in para-02 your observation that the assessee not taken any steps either preventive or treatment of Mealy bug is not correct. Mealy bug is a common pest and once affected it will destroy the grape within two weeks. The assessee who has started exporting grapes to U.K. and the container of grapes for export from India to U. K. will normally take two to three weeks to reach its destination and by the time they reached the grapes are unfit for human consumption. Mealy bug which has affected the assessee farm severely and in spite of treatment could not be eradicated completely. The assessee has taken preventive medicines like Methomyl 40 SP (Trade name Lannate 40 SP), Dichlorvos (Trade name Nuvan) other medicines and predators (Useful insects). Though all the records relating to VVT Agritech are with you out of remembrance we are able to furnish the above information. The above medicines have been purchased by the assessee adequately from M/s. Vanasri Seeds (P) Ltd., Hyderguda, and Rekha Corporation Pvt. Ltd., Basheerbagh, Hyderabad for the prevention and eradication of Mealy bug. In spite of his efforts the assessee could not totally eradicate the pest mealy bug and it is only on the advice of Grape Consultant Mr. A. Appa Rao, MSc. (Agri), Banjara Hills, Hyderabad was seriously contemplating to destroy the entire plantation. This was happened in the later part of April-2006. | |
| (2) | Due to the mealy bug the assessee could not supply the grapes for exports to its capacity. It is only the supply for export was affected for only 7 days due to which the revenue from sale was minimum which could not even meet the expenditure and finally VVT Agritech ending up in losses. | |
| (3) | It is at this stage the land prices in and around area where the farms are located risen to maximum and the assessee and co-owners of farmland have received good offers for the sale of land which was under the active consideration of the assessee and other co-owners. Ultimately the assessee and others co-owners have agreed to sell the farmland to M/s. Prajay Holding Pvt. Ltd. and others. Due to this reason only no significant activity was undertaken by the assessee from May, 2006. Due to this reason only no adequate labour payments or other payment were made from May, 2006. It must also be noted that the assessee and others have received advance money for sale in September, 2006. | |
| (4) | What we submit that due to sudden rise in the market prices of the lands in that area the assessee and other co-owners like many others in that area have sold the properties. | |
| (5) | It was never the intention of assessee and other co-owners at the time of purchase of lands to make profit out of it by selling but they wanted to have income earning by exporting the grapes as the lands were with the grape gardens. If at all the assessee and other co-owners could visualize increase in the market price at the time of purchase, so also original sellers of the farmland whose lands were there from long time could have visualised the same and in that case why should they sell the same particularly when they are financially well placed, | |
| (6) | The assessee and other co-owners have purchased the properties with an intention to enjoy the income by making efforts to export the grapes. It is only on the favourable conditions the assessee has sold the properties. It is only a chance sale for the assessee. | |
| (7) | We once again bring to your kind notice to para (17) of our letter dated 13.11.2009 wherein we submitted that land is no commercial commodity. Land alone is also not a trade in itself. Normally the purchase of land represents investment of money in land and it cannot be ventured in the nature of trade. | |
| (8) | Lastly the claim of the assessee that the land in question is not an asset within the meaning of section 2(14) of the IT Act is correct and justified. There is no justification to hold the profit from the sale of land as business profit instead of capital profit." |
23. The Assessing Officer has summarised the assessee's contentions in the above submissions as under:
| "(a) | Intention of the assessee in the beginning was to do agriculture. | |
| (b) | Low income from sale of grape in Assessment Year 2007-08 was due to Mealy Bug disease. | |
| (c) | Due to the disease the crop was destroyed and assessee decided to sell the land. | |
| (d) | At this time assessee started getting good price for the land and therefore decided to sell it. | |
| (e) | Assessee is an agriculturist and he is from an agricultural family. | |
| (f) | He is not a dealer in real estate business. | |
| (g) | Assessee is basically an investor. | |
| (h) | Since it is difficult to export grapes individually a company was floated with brother and had taken grape gardens from Aunt and Brother-in-law. | |
| (i) | The reason for floating company shows that land was for investment and not for sale. | |
| (j) | Agriculture land was shown as investment in the balance sheet. | |
| (k) | CBDT's instruction No. 1827 dated 31-08-99 was quoted in his defence. | |
| (l) | Commodities sold in short time itself will not indicate nature of trade. | |
| (m) | Land is not an asset within section 2(14)(iii)(a & b). | |
| (n) | They have purchased agricultural land in the subsequent years. | |
| (o) | If assessee and co-owners could visualize increase in market price, at the time of purchase, so also earlier owners could have visualized this increase. Then why did they sell it. | |
| (p) | Various case laws have been quoted in defence of assessee's arguments." |
24. On a consideration of the above contentions, however, the Assessing Officer opined that those were not sufficient to dispel the presumption that the assessee's intention since the beginning was to sell the land on profits and not to hold as an investment and derive agricultural income from this. She opined that from the written words but by the chain of his actions, from the time of purchase of the property.
25. The Assessing Officer opined that for an agricultural land purchased for around Rs. 5 crore and having consistent healthy agricultural income for over a decade, the annual lease rent deed of Rs. 3.5 lakh could not be considered as genuine. She held that such a low value deed exposed the hollowness and falseness of the arrangement. She felt that the lease rent of as low as an amount as Rs. 12.8 lakh, exposed the fact that assessee never actually wanted to do agriculture on this land which in the past was producing high quality grapes which was being exported abroad. Besides, she noted that the lease deed was only for one year, which again highlighted the nature of the stopgap arrangement which was created till the land was sold. The Assessing Officer agreed that the investment in the land will be of higher value than the income received from it, but in the assessee's case the actual income being earned in the earlier years was several times more than Rs. 12.80 lakh of rentals fixed in the lease deed. She, therefore, held that this one act at the time of purchase of property singly brought out that from the day one the true intention was not to do the agriculture on this land.
26. The Assessing Officer opined that if the assessee did not know the real income being received from this land at the time of its purchase, it could only lead to the conclusion that the intention was never to do agriculture on this land. She observed that any agriculturist, who buys land with an intention to do agriculture, will invest in the land only after knowing what returns it will give to him as return. In the instant case, however, considering the agreed lease rentals of Rs. 12.8 lakh it was clear that the assessee was not even aware of potential of income from the land, or, in fact, he was not bothered about it. She, therefore, concluded that if the assessee knew the real income being generated from this land, a low rental of Rs. 12.8 lakh could not be justified. She held that the ignorance or carelessness on account of assessee to know the extent of income being generated clearly showed that his intention was never to earn agriculture income from this land. He actually wanted to sell it from the beginning and earn profit from the sale. That is why extent of agricultural income was immaterial to him.
27. The Assessing Officer further observed that even if a disease hits the crop, a genuine agriculturist will not immediately sell away the land, especially in the light of consistent agricultural income being drawn from it. She noted that the National Research Centre for Grapes (NRCG), Pune, which is an arm of Indian Council of Agriculture and Research, in its official site on the internet have enumerated various fungal diseases like Downy Mildew, Powdery Mildew, Anthracnose, various fungal diseases and pest based diseases like mealy bug, flea beetle, Thrips and hoppers etc., which regularly hit the grape crop in the country throughout the year and there are established treatments for them. Therefore, the attack of mealy bug disease in the assessee's case could not be said to be an exceptional feature, but a regular thing which has to be dealt with by any agriculturist of grape gardens. She, therefore, concluded that the argument of mealy bug disease is only an afterthought for explaining the sale of land. In fact, NRCG has stated that mealy bug is a disease which occurs throughout the year and since grape is a perennial crop, one has to look after full one year cycle of crop both in the vegetative growth period and fruit development period.
28. She further noted that the agricultural activity in this case was stopped in April, 2006, i.e. almost within 6 to 7 months of its purchase. Even though the agreement to sell land was entered in September, 2006 and the lease deed was cancelled in September, 2006. She felt that this showed that the assessee was never interested in the agriculture on this land. Therefore, after harvesting the crop in March/April 2006, for which the fruit had appeared at the time of purchase of the land, all the agricultural activities were abandoned.
29. It was further noted by the Assessing Officer that even though the assessee had stated in his reply that he is an agriculturist and is from an agricultural family, the facts of the case were totally different. She observed that the assessee himself had admitted that he is a businessman, as was apparent from all the sale/purchase deeds of the land, wherein the occupation of the assessee was mentioned as business. She noted that such a reference was not causal or by default, but a true indicator of the assessee's own version about himself. She noted that in an agricultural economy like India, a link with some agricultural family in some village alone cannot make a person an agriculturist.
30. In addition to the above observations, the Assessing Officer opined that even though ups and downs in agriculture is an accepted fact, the floating of a company by itself cannot prove the intention of doing agriculture. Similarly, the treatment of land as 'investment' in the balance sheet is also immaterial, particularly when the assessee's conduct speaks otherwise. She felt that even in view of the CBDT Circular dated 31.8.2009, the real conduct of the assessee is to be seen and in the assessee's case, it was clear that the real and true intention at the time of purchase of land was to sell it to earn profit from it. Similarly, she opined that purchase of land in subsequent year is also inconsequential
31. As regards, the argument of the assessee that the earlier owners also could have anticipated the price rise. The Assessing Officer opined that the same is only an attempt to put various facts of the case in a distorted way. She felt that there cannot be any comparison between status of earlier owners and the assessee, because there are crucial differences between them. She noted that the earlier owners were all residents of Delhi and Sri Khosla was doing his business from far-off Delhi in all the three years. Since they were not residents of Hyderabad, and their knowledge of the city and the economic boom could not be compared with first hand knowledge of the assessee in this regard. Besides, she noted that the earlier owners had purchased the land way back in mid-nineties and had been regularly doing grape cultivation in it. They had purchased it for very small amount, and the subsequent sale for several crore, had definitely fetched them multiple times of the value.
32. As regards the assessee's argument that the land under consideration was an agricultural land, and the same was situated in areas specified in sub-clause (iii) of clause 14 of section 2, and therefore, its income will be exempt u/s. 10(1), the Assessing Officer opined that such argument was of no significance. She noted that in this case neither the agricultural produce was being assessed as taxable income nor the transaction was being assessed as capital gains. She observed that in the instant case, purchase and sale of property, by its specific nature, was being assessed as an adventure in the nature of trade as per section 2(13) of the IT Act. The fact that the land is agricultural land is of no significance for being treated as adventure in the nature of trade.
33. The Assessing Officer also felt that the conduct of assessee was to be interpreted in the entire economic context of city of Hyderabad during the relevant period. She noted that the period when there was real estate boom in Hyderabad and its surrounding areas and the Urban Development Authorities had notified various villages including the Maheswaram village for special development meant for various in and around international Airport and Shamshabad. There were various specific notifications in this regard, which have been placed by her in the file. However, without going into the details, she considered it fit to mention that the overall conduct and intention of the assessee was to be examined in the overall economic context of that time and his intention to enter into this adventure to make quick profit.
34. Examining the facts of the case in the light of various legal pronouncements on this issue, the Assessing Officer noted that one basic principle which flows from each one of the case law, including those not quoted by assessee in his submission, is that the specific facts, considered in totality alone, will determine the conduct of assessee and will prove whether a particular transaction was in the nature of adventure of trade or not. She observed that even though the courts have laid down certain principles, those have to be interpreted in the light of particular facts and it is only with the conjunction of facts with the principles that a particular decision can be arrived at in a particular case. She particularly noted the decision of the Hon'ble Supreme Court in the case of G. Venkataswamy Naidu & Co. v. CIT[1959] 35 ITR 594, wherein it was opined that ".... The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise 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 no doubt a relevant factor and unless it is offset 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 an adventure in the nature of trade. We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances." She, therefore, opined that in view of such judicial pronouncements, a single transaction of purchase and sale outside assessee's line of business may constitute an adventure in the nature of trade. It is not essential for assessee to be in business in the line of real estate. She felt that the assessee's case falls in the category of adventure in the nature of trade, precisely because real estate transactions are not his regular business and assessee's conduct and intentions in the purchase and sale of this particular property puts him in the category of adventure in the nature of business.
35. The Assessing Officer noted that in various cases, such as CIT v. Jawahar Development Association [1981] 127 ITR 431 (MP) , Smt. Indramani Bai v. Addl. CIT [1990] 200 ITR 594/70 Taxman 67(SC), P.M. Mohammed Meerakhan v. CIT [1994] 73 ITR 735 (SC) andHemchand Hirachand Shah v. CIT [1994] 206 ITR 55/[1995] 83 Taxman 626 (Guj.), on the specific conduct of assessee, it was held to be adventure in the nature of trade.
36. Lastly, the Assessing Officer referred to the Plato's Theory of 'Knowledge' and opined that one should not go by the 'appearance of reality', but comprehend the 'substance of reality'. She also took note of the maxim that "whole" is more than merely the mathematical sum total of the "parts" that constitute it. On a complete analysis of all the facts of the case and the conduct of the assessee since from the time of purchase of land to its sale, besides in the light of the economic scenario of the Hyderabad city during the period and the principles laid by Apex court for analyzing such a case, she concluded that the assessee had not purchased the land with an intention to do agriculture on it. Instead, the land had been purchased with the only intention of selling it at profit in the booming economy of Hyderabad. She had, therefore, summarised her finding in the assessment order as under:
| "(a) | Assessee is not an agriculturist. He is a 'Businessman' by his own admission. | |
| (b) | He purchased the agricultural land with sole motive of selling it on profit in view of, the then, real-estate boom in and around Hyderabad. | |
| (c) | Actually no intention to do agriculture done; the floating of company VVT Agritech was a facade. | |
| (d) | Claim of sale due to destruction of crop by mealy bug is contrary to his stated intention of doing agriculture. Any person doing agriculture of grapes would be dealing with this disease in a routine way. | |
| (e) | Sale within a year to real-estate company for huge profit reflects the true state of entire adventure. | |
| (f) | Keeping of a small part of land by Shri Vijayender & Shri M. Ravinder and giving it on development of Hi-end villas to same real estate company proves the point that it was adventure in trade and, therefore, the profits earned in this transaction are treated as adventure in the nature of trade and held as business income." |
37. In the light of the above, the profit on sale of the impugned land of Rs. 19,55,98,140 was assessed as business income, being adventure in the nature of trade by the Assessing Officer. Similar is the position in the case of Sri T. Vijayender except change in figures.
38. On appeal to the CIT(A), it was observed by the CIT(A) that the assessee is not a regular "agriculturist" and assessee is earning income from business, capital gains and other sources. He has also observed that the assessee mentioned his status and occupation as business in the registered sale deed as business. It is also observed that mere assessees' family background being agriculture cannot lead to the conclusion that the assessees is 'agriculturist'. As in the present case the assessee sold the land in a short time after purchasing the same to M/s. Prajay Holding Pvt. Ltd., which is a construction company, for non-agricultural purposes after cancelling the lease agreement with M/s. VVT for huge consideration which leads to the conclusion that the assessees carried on the business in the land. According to the CIT(A), the intention of the assessee in acquiring the land is not for the purpose of carrying on agricultural activities on his own on the said land and with sole intention of selling the land for profit. According to the CIT(A), the assessees entered into lease agreement with M/s. VVT just to create a facade with a view to give semblance of doing of agricultural operations. Even after taking the land on lease by M/s. VVT there was no agricultural operation on the said land after payment of lease rent. The real intention of the assessee is not to carry on agricultural operations. He further observed that the company, VVT, was floated as it was difficult to export grape individually, it is clear that while the said company did not have any experience therein, the Directors thereof were also inexperienced in this area. As stated earlier, no expert had been employed to handle the agricultural operations or the export thereof. Therefore, floating of such a company itself could not have solved the problems likely to be faced in exporting grapes individually. Rather, the facts of the case clearly go to show that the said company was created as a facade only and not for any real agricultural operations.
39. The CIT(A) observed that one of the reasons cited by the assessee for dis-continuation of agricultural operations and sale of lands is that the grape crop caught the mealy bug virus, which rendered the grapes unfit for export. From the literature available on the internet on this issue, however, it is seen that diseases of this nature are common in grape cropping and effective treatment is available for them. Under the circumstances, mere affliction of the crop by such a disease could not have resulted in discarding of the so-called intention of carrying out agricultural operations altogether, and selling the land acquired at a huge cost. This strengthens the view that the initial intent in purchase of the land was not to pursue agriculture but to earn quick profits from sale of land in view of the emerging market conditions.
40. The CIT(A) observed that the entire scheme of the assessee, therefore, proves that while the basic intention was to earn huge profits by undertaking the above transactions, the assessee arranged the events in a manner to give it the colour of an intention of carrying out agricultural operations on the land acquired as an investment. However, the facts of the case clearly show that in substance the transaction only an adventure in the nature of trade.
41. He further observed that as regards the contention that the land so purchased had been treated as an 'investment' in balance sheet, it is a trite law that the treatment or nomenclature given by the assessee to any transaction in his books of account is not conclusive and is not the sole test to decide the real character of that account / transaction. Similarly, the argument that the assessee is not a dealer in real estate business is of no avail, as in the light of several judicial pronouncements, such as G. Venkataswamy Naidu (supra), even a single transaction can constitute a business. Likewise, the intention of the assessee regarding agricultural operations on the impugned land does not get substantiated from his subsequent purchases of land, as the issue to be determined is whether the impugned land had been purchased as an investment for carrying out agriculture.
42. The CIT(A) observed as regards the contention that the appreciation in the value of land could have been visualized by the earlier owners also, the Assessing Officer has rightly brought out that the assessee and his other co-owners, who hailed from Hyderabad itself, had a better knowledge of the economic boom, while the earlier owners from Delhi might not be having the real life knowledge of the economic scenario. Besides, their expectation of appreciation might also have been achieved, as they had already earned substantial return on their investments, both in the form of substantial agricultural produce over the years and the huge consideration received by them on sale thereof.
43. He observed that so far as the contention that the land under consideration was an agricultural land, sale whereof was to be exempt u/s. 10(1), it is seen that the land was in Maheswaram village, which had been notified, along with other villages by the Urban Development Authorities. Under the circumstances, the true nature of the land sold by the assessee is to be determined by applying the tests laid down by the Hon'ble Courts in this regard. It is seen that the Hon'ble Rajasthan High Court in the case of Mahaveer Enterprises v. UOI [2000] 244 ITR 789/[1997] 95 Taxman 220 have considered the following as the relevant tests, which can act as guidelines in determining the nature or the character of land as agricultural or otherwise:
| (1) | The proximity of the land to building and building sites; | |
| (2) | Sale of land for non-agricultural purposes. | |
| (3) | Sale of land by a measure with reference to square yards and not acres. | |
| (4) | Price being such as to be non-viable, if the land is put to agricultural use by the purchaser, while it is more consistent with the price fetched for urban plots than for agricultural land. | |
| (5) | Character of the land. | |
| (6) | The purpose for which the land was held by the present owner. A firm which holds it may well be presumed to have held it as stock-in-trade and not for carrying out agricultural operations. | |
| (7) | As regards use of the land for agricultural purposes prior to sale, more use in remote past though land revenue is paid, would not make it agricultural. | |
| (8) | Mere capability of being used as agricultural land is not enough. |
44. The CIT(A) observed that applying the tests mentioned above, it can be seen that the land was sold at a time when there was a real estate boom in land around the city of Hyderabad and the Government was issuing various notifications for urban development, which included the Maheswaram village for Special Development meant for in and around the International Airport at Shamshabad. It was for this reason only that it was sold to a construction or Real Estate company, who purchased it not for agricultural operations, but obviously for developing the same. The criteria regarding 'measure of sale of land' in the instant case is not of much importance, as in this case the land was acquired in its entirety in terms of acre for the purpose of massive construction activities by a big construction company. Further, it is also clear that the price of Rs. 96 lakh per acre was non-viable, if the land was to be put to agricultural use by the purchaser. In view of these factors, as held by several judicial pronouncements, the 'character of land' mentioned in the revenue records also fades into insignificance. Even if any agricultural operations were at all carried on the impugned land during the intervening period, it is clear that the assessee was only waiting for an opportune movement for earning the best price in respect of the land, whose very use and status had changed after the notifications. Obviously, the mere capability of the land for being used as agricultural land cannot be considered as a decisive factor.
45. The CIT(A) opined that the Hon'ble Apex court in the case of Smt.Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631/70 Taxman 301 have clearly opined that whether a particular land is agricultural or not is essentially a matter of fact. In this regard their observation is that several tests evolving in the decisions on this issue are "more in the nature of guidelines". The question, therefore, has to be answered in each case, having regard to the facts and circumstances of that case. They had observed that there may be factors both for and against a particular point of view, and therefore, the question has to be answered on a consideration and evaluation of all of them. The inference, accordingly, has to be drawn on a "cumulative consideration" of all of the relevant factors. On a consideration of the relevant facts in the case of the present assessee, it becomes abundantly clearly that almost all of the tests laid down lead to the conclusive inference that the agricultural land sold by the assessee was not an agricultural land at the time of sale.
46. The CIT(A) observed that under similar facts even the Cochin Bench of the ITAT have taken a similar view in the case of M.K. Abdul Rehiman v.Dy. CIT [2011] 16 taxmann.com 406/[2012] 49 SOT 267 (Coch) by relying on the decisions discussed above. Besides, the decision of the Hon'ble P & H High Court in the case of Rockman Cycle Industries Ltd. v. CWT (Appeals)(central) [2010] 191 Taxman 399 also supports the view that the change in the land use is indeed the determining factor. In the case of the present assessee, the Government notifications and the imminent development of the area indeed establish that the land sold by the assessee in the said area was not agricultural land at the time of sale.
47. The CIT(A) observed that the case laws relied upon by the representative of the assessee, it is seen that the Assessing Officer has duly distinguished those from the facts of the assessee case. So far as the decision in the case of ITO v. Anthony John Pareira [2008] 24 SOT 459 (Mum) is concerned, it is seen that in the said case 450 acres of agricultural land had been purchased by that assessee between 1986 to 1992 and a part thereof was sold during the year. The land in question was away from the developed area and was in a green zone, surrounding whereof had not been developed. Besides, the assessee had been earning agricultural income therefrom, which was being shown in the returns of income. There was no other activity on the land for the last 9 years, and hence, there was found no intention to do any business. It was under these facts that the Mumbai of ITAT held that the entries in Revenue records gave a presumption in favour of the assessee, which could not be rebutted. Since there was no evidence that the assessee intended to trade, it was held as not been an adventure in the nature of trade. In the case of the present assessee, however, the facts, as discussed in foregoing paragraphs are entirely different and such facts do show that the assessee intended to undertake an adventure in the nature of trade.
48. So far as the reliance of assessee's representative on the decision of the Hon'ble Supreme Court in the case of Janki Ram Bahadur Ram v. CIT[1965] 57 ITR 21 is concerned, in the said case also the assessee had agreed to purchase the Jute Press, subject to litigation pending in the High Court of Calcutta. The Hon'ble Apex Court opined that the nature of transactions must be determined on a consideration of all the facts and circumstances. They noted that there was nothing to show that the assessee desired to convert the property to some other use. He did not employ any brokers for sale, rather the purchaser himself had approached the company from whom the assessee had purchased the Press. He contacted the assessee thereafter, who agreed to sell the Press. The Hon'ble Apex court opined that the Jute Press could have been purchased for own business or for being let out also, and therefore, it could not be said that there was a venture intended. Therefore, it is clear that considering the nature of Jute Press, which was already subject to litigation, the Hon'ble Court opined that the property purchased was not such that an inference that a venture in the nature of trade must have been intended could be raised. In the case of the present assessee, however, the facts are entirely different and these go to show that the assessee only want to make quick profits from the transaction in a land which was very much in demand in the rising real estate market.
49. So far as the decision of the Hon'ble Bombay High Court in the case of CIT v. Smt. Debbie Alemao [2011] 331 ITR 59/196 Taxman 230/[2010] 8 taxmann.com 243 (Bom) is concerned, the Hon'ble High Court noted that Sec. 30 of the Goa, Daman and Diu Land Revenue Code, 1968 provides that no land used for agriculture shall be used for any non-agricultural purpose and no land assessed for one non-agricultural purpose shall be used for any other Non-agricultural purpose, except with the permission of the Collector. They noted that the permission for non-agricultural use of the said land was obtained for the first time by the Verca Holiday Beach Resort P. Ltd., the purchaser, only after the purchase of land. Accordingly, they held that prior to such permission, the land was agricultural only. In the case of the present assessee, however, the facts are totally different, as there was no such restriction regarding exclusive agricultural user of the land. On the other hand, the lands of the area had been notified by the Government for development.
50. Similarly, the reliance of the representative of the assessee on the recent decision of the Jurisdictional ITAT, Hyderabad in the case of K. Radhika & Ors. v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 is misplaced. From the order of the ITAT, it can be seen that the assessee therein had been purchasing lands right from the year 1995, which were sold in subsequent years. The ITAT opined that had the assessee being in real estate business, she would not have kept the land for such a long period. With regard to the lands sold within short time, it was found that sales were made under compelling such circumstances, as those were falling under Bio Conservation Zone/Green Belt, of which the assessee was not aware. Therefore, such lands were sold under compelling circumstances to realize the investments only and avoid any future disputes. It is clear that the above facts are not at all existing in the case of the present assessee. Rather, in this case, the assessee has entered into the land deal and invested a huge sum therein only after analyzing the business prospects with a profit motive in a manner which indeed matches with the conduct of a businessman.
51. In the light of the above discussion, the CIT(A) was of the considered view that the various factors discussed above, including the background of the assessee, commercial potential of the impugned land after Government notifications regarding development, huge investments by the assessee in hitherto unexplored areas, as followed by post-purchase operations of the assessee thereon, indeed establish that the profit of Rs. 19,55,98,140 from the sale of the impugned land was assessable as 'Business income', being an adventure in the nature of trade. Thus, the CIT(A) decided the grounds against the assessees. Against these findings the assessees are in appeal before us.
52. The learned AR submitted that the impugned land is an agricultural land and not covered by the definition of capital assets u/s. 2(14) of the Act. He submitted that the land is situated in an area outside any municipality or cantonment board having a population of not less than 10,000 and also beyond the distance notified by the Central Government from the limit of any such municipality or cantonment board. According to the AR, the said land was purchased by the assessee's along with other co-owners for the purpose of carrying on agricultural activities on 8.9.2005 with the sole intention of carrying on the agricultural activities. According to the AR sale of agricultural land cannot be treated as transfer u/s. 45 to attract capital gain tax and also it cannot be treated as an adventure in the nature of trade treating the income arising out of that transaction as business income. He submitted that the land sold by the assessee was never converted into non-agricultural land. The character of the land remains as agricultural land till the date of sale, unless the character of the land changed, it cannot be treated as non-agricultural land.
53. The learned AR submitted that the lands are classified as agricultural land in the Revenue records, even as on the date of sale and they were sold on acreage basis. In fact, there was actual cultivation at the relevant point of time, not only by the assessees but also by M/s. VVT and the assessee derived agricultural income from such land. Mere selling of land by the assessees for non-agricultural purposes, cannot be a reason for treating the sale of land by the assessee as adventure in the nature of trade. The AR further submitted that the impugned land was sold, in fact, not voluntarily but was made under compelling circumstances. There was a boom in the real estate market and at the same time the yield from the grape garden has been drastically affected due to mealy bug disease. The assessee could not continue agricultural activities instead proposed to sell the land to avoid future loss and to get advantage of higher rising prices. If the assessee misses this opportunity they would have suffered huge financial losses. In view of this he submitted that the assessee used the opportunity and sold the land for better price and mere capability of land being used for other than agricultural purposes cannot be a reason to hold that the assessee is engaged in buying and selling of land. He submitted that the assessees are not dealers in real estate business and they invested in agricultural land. The AR relied on the following case-laws.
54. On the other hand, the learned DR relied on the orders of lower authorities and also on the judgment of Sarifabibi Mohmed Ibrahim's case (supra) wherein their Lordships held as under:
"Whether a piece of land is agricultural land or not is essentially a question of fact. Several tests have been evolved in decisions of the Supreme Court and the High Courts, but all of them are more in the nature of guidelines. The question has to be answered in each case, having regard to the facts and circumstances of that case. There may be factors both for or against a particular point of view. The court has to answer the question on a consideration of all of them - a process of evaluation. The inference has to be drawn on a cumulative consideration of all the relevant facts.
The appellants were co-owners of a plot of land inherited from an ancestor through their father. On March 15, 1967 they agreed to sell the land to a housing co-operative society and, to enable them to complete the transaction, they applied in June, 1968, and March, 1969, for permission to transfer the land for a non-agricultural purpose and the permission was granted in April, 1969. A number of sale deeds were executed in May, 1969 and the purchasing society applied for conversion of the land to non-agricultural purposes, viz., construction of buildings. The question was whether the profit from the sale of the land was assessable to capital gains tax. The facts in favour of the appellants were: the land was registered as agricultural land in the revenue records and land revenue had been paid in respect thereof till the year 1968-69; there was no evidence that the land was put to non-agricultural use and the land was actually cultivated till and including the agricultural year 1964-65; there were agricultural lands abutting the land; and the appellants had no other source of income except the income from those lands. The facts against the appellant were the land was situated within the municipal limits of the Surat Municipality and at a distance of one kilometre from the railway station: the land was not cultivated from 1965-66 until it was sold in 1969; the appellants had entered into an agreement with a housing co-operative society to sell the land for construction of houses, they had applied in June, 1968, and March, 1969, for permission to sell the land for non-agricultural purposes and soon after obtaining permission they executed the sale deeds in May, 1969: and the land was sold at a rate of Rs. 23 per sq. yard and the purchasing society commenced construction operations within three days of purchase. On a consideration of the contending factors the High Court held that the land was non-agricultural land and tax was leviable on the capital gains arising from the transfer. On appeal to the Supreme Court:
"Held, affirming the decision of the High Court, that the entering into the agreement to sell the land for housing purposes, the applying for and obtaining permission to sell the land for non-agricultural purposes, and its sale soon thereafter and the fact that the land was not cultivated for a period of four years prior to its sale, coupled with its location and the price at which it was sold outweighed the circumstances appearing in favour of the appellants' case and established that the land was not agricultural land when it was sold. The appellants had no intention to bring it under cultivation at any time after 1965-66 and certainly not after they entered into the agreement to sell the land to the housing co-operative society. The High Court was right in holding that the land was not agricultural land at the time of its sale and the profit arising from its sale was liable to capital gains tax."
55. We have heard both the parties and perused the material on record. In the present case there is no dispute that the assessees along with other co-owners acquired landed property of 85 acres 23 guntas of agricultural land on 8.9.2005. There is also no dispute that there was cultivation of grape in this land before sale of this land and there is no dispute regarding the fact that the assessee herein floated a company by name of VVT Agritech Pvt. Ltd. on 26.10.2005. The main object of that company was to carry on agricultural operations. Later, the assessees and the other co-owners entered into a lease agreement on 25.10.2005 with M/s. VVT wherein the entire grape orchard measuring 85 acres 23 guntas was given on lease that company with effect from 25.10.2005 on rental basis for the purpose of cultivation.
56. M/s. VVT has filed return of incomes for A.Ys. 2007-08 and 2008-09 declaring nil income. Later there was cancellation of lease deed dated 29.9.2006 wherein the lease of the agricultural property was cancelled as the lessor intend to sell the agricultural property. Accordingly, this agricultural property was sold to one M/s. Prajay Holding Pvt. Ltd. The Revenue authority are of the opinion that the amount received on sale of this agricultural property is nothing but on account of adventure in the nature of trade and the same was brought into income from business. In these cases, the assessee held the land always as investment and not at all converted into stock-in-trade. The character of the land in the hands of the assessee has not changed. There is no material on record to show that the assessee carried on activities of buying and selling of land in a systematic manner so as to justify the action of the Revenue authorities in treating the activities of the assessee as adventure in the nature of trade. The land was sold by the assessees in acreage and not by making plots.
57. Now the question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.
58. The expression 'agricultural land' is not defined in the Act, and now, whether it is agricultural land or not has got to be determined by using the tests or methods laid down by the Courts from time to time.
59. The Hon'ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim (supra) has approved the decision of a Division Bench of the Hon'ble Gujarat High Court in the case of CIT v. Siddharth J. Desai [1983] 139 ITR 628/10 Taxman 1 (Guj) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has got to be decided or answered. We reproduce the said 13 tests as follows :
| "1. | Whether the land was classified in the Revenue records as agricultural and whether it was subject to the payment of land revenue? | |
| 2. | Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time? | |
| 3. | Whether such user of the land was for a long period or whether it was of a temporary character or by any of a stopgap arrangement? | |
| 4. | Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land? | |
| 5. | Whether, the permission under S. 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date? | |
| 6. | Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cesser and/or alternative user was of a permanent or temporary nature? | |
| 7. | Whether the land, though entered in Revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes? | |
| 8. | Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural? | |
| 9. | Whether the land itself was developed by plotting and providing roads and other facilities? | |
| 10. | Whether there were any previous sales of portions of the land for non-agricultural use? | |
| 11. | Whether permission under s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale or intended sale to such non-agriculturists was for non-agricultural or agricultural user? | |
| 12. | Whether the land was sold on yardage or on acreage basis? | |
| 13. | Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?" |
60. A reference could be made to the case of CWT v. Officer-in-charge(Court of Wards) [1976] 105 ITR 133 (SC) wherein the Constitution Bench of the Hon'ble Supreme Court stated that the term 'agriculture' and 'agricultural purpose' was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance. The Hon'ble Supreme Court has observed that the term 'agriculture' is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term 'agriculture' receives a wider interpretation both in regard to its operation as well as the result of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon'ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.
61. The Hon'ble Gujarat High Court in the case of Dr. Motibhai D. Patel (No. 2) v. CIT [1981] 127 ITR 671/5 Taxman 147 referring to the Constitution Bench of the Hon'ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon'ble Gujarat High Court further held that there was nothing on record to show that the presumption rose from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.
62. The Hon'ble Bombay High Court in the case of CWT v. H.V. Mungale [1984] 145 ITR 208/[1983] 12 Taxman 201 (Bom) held that the Hon'ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue. The Hon'ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.
63. We may also refer to the case of CIT v. Manilal Somnath [1977] 106 ITR 917 (Guj), wherein the Division Bench of the Hon'ble Gujarat High Court observed that the potential non- agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.
64. We may also refer to the case of Gopal C. Sharma v. CIT [1994] 209 ITR 946/72 Taxman 353 (Bom), in which, the case of Smt. Sarifabibi Mohamed Ibrahim (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.
65. We may refer to a judgment of the Hon'ble Madras High Court in the case of CWT v. E. Udayakumar [2006] 284 ITR 511 where the Hon'ble Madras High Court has referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Smt. Savita Rani [2004] 270 ITR 40/[2008] 133 Taxman 712 and has observed and held as under :
"8. It is well settled in the case of CIT v. Smt. Savita Rani [2004] 186 CTR (P&H) 240 : [2004] 270 ITR 40 (Punj. & Har.), wherein it is held that the land being located in a commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.
9. In the abovesaid case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years. The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim. Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.
10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant."
66. Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the assessee has not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land.
67. The provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. If by a Government Notification, the nature and character of land changes from agriculture into non-agriculture then there is no question of conversion of this land for non-agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by any State Government notification and the landowners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by State Government Notification.
68. It is also an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also an admitted position that the assessee had not applied for conversion of the land in question into non-agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessee herein to put the same for non-agricultural purposes at time of their ownership that land. No such finding has been given by the Department. No material or evidence in support of the fact that the assessee have put the land in use for non-agricultural purposes has been brought on record. The nature of the crop and the person who cultivated the land are duly mentioned in the assessment order shows that at the relevant point of time the land was used for agricultural purposes only and nothing is brought on record to show that the land was put in use for non-agricultural purposes by the assessee. In view of the decision of the Hon'ble High Court in the case ofGopal C. Sharma (supra), it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non-agricultural purposes. We may also refer to a decision of the Hon'ble Supreme Court in the case of N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by Developer cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.
69. Recently the Karnataka High Court in the case of CIT v. Madhukumar N. (HUF) [2012] 208 Taxman 394/23 taxmann.com 341 (Kar) held as follows:
"9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.
10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a Notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a "Capital Asset.
11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.
12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any Notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion."
70. Further the Kolkata Bench of the Tribunal in the case of Dy. CIT v. Arijit Mitra [2011] 48 SOT 544/16 taxmann.com 66 (Kol) held as follows:
"7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of 'capital asset', if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above Notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross-objection of the assessee is allowed."
71. It was held in the case of Manilal Somnath (supra) as follows:
'Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of " capital asset" and any gain from the sale thereof was not to be included in the total income of an assessee under the head "capital gains". In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land. If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non-agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.
The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:
Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.'
72. Further the word "Capital Asset" is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—
(iii) agricultural land in India, not being land situate—
| (a) | in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or | |
| (b) | in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by Notification in the Official Gazette; |
73. It is very clear from the above that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words 'whether known as' clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.
74. We also perused the meaning of the term local authority as referred in section 10(20) of the Act.
'(20) the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.
Explanation. - For the purposes of this clause, the expression "local authority" means —
| (i) | Panchayat as referred to in clause (d) of article 243 of the Constitution; or | |
| (ii) | Municipality as referred to in clause (e) of article 243P of the Constitution; or | |
| (iii) | Municipal Committee and District Board, | |
| legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or | ||
| (iv) | Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);' |
75. It is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural lands located within the jurisdiction of a municipality in the definition of the expression 'Capital Asset'. The relevant portion of the said memorandum is reproduced hereunder:
'30. ... The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term "capital asset" in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such Notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term "capital asset". Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term "capital asset".
76. Further it is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.
77. We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by Notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions. In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from the Notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of 'capital asset'. Central Government in exercise of such powers has issued the above Notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (supra), Harish V. Milani (supra) and M.S. Srinivasa Naicker v. ITO [2007] 292 ITR 481/[2008] 169 Taxman 255 (Mad). By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (supra).
78. From the facts and circumstances of the case, as narrated before us, it is important to note that what was the intention of the assessee at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances 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. In a case 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 offset by the presence of other factors it would raise as 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. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and with this intention assessee entered into lease agreement with M/s. VVT Agritech on 25th October, 2005 and even there was no intention to sell the land in future at that point of time. It was due to certain compelling circumstances came into picture at a later stages, the assessees were forced to sell the land. Merely because of the fact that the land was sold in a short period of holding, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade.
79. Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, the ground raised by the assessee is allowed.
80. In the result, assessees' appeals in ITA No. 550 and 551/Hyd/12 are allowed
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