2007 (4) TMI 387 - AT - Income Tax

Sale of land - Nature of land at the time of transfer - income from agriculture, rent, interest from bank etc. - Capital gain Or Income from business - expression in the nature of trade - agricultural lands converted into non- agricultural lands - sold by cutting it into smaller pieces of plots - HELD THAT - In this case, undisputedly, the assessee acquired the land by way of inheritance in 1980 and not even by way of purchase. Thereafter, the assessee continued to hold the land as agricultural land and deriving income therefrom as such. Notably, there was no intention manifested in assessee to acquire and hold the land so as to realize profits or for an adventure in the nature of trade. It is not uncommon to find that due to rapid growth of urban areas, more and more rural agricultural lands are being converted into cities. The holder of such agricultural lands ostensibly does not have a control over the process of urbanization. The only intention of the holder of such agricultural land under the circumstance is to maximize his realization from sale of such land. All along the holder of such lands looks upon the gain only as a capital accretion. The intention at the time of acquiring the land ( i.e., inheritance) and holding it thereafter is not to deal in real estate. In any case, the subsequent sale cannot represent adventure in the nature of trade. In the instant case, clearly, it cannot be said that when the assessee inherited the land in 1980, it had intention to undertake adventure in the nature of trade by becoming a dealer in lands. Similarly, at the time of getting the lands converted into non-agricultural lands also the only intention of the assessee to maximize his realization from disposal of a capital asset. To reiterate, the character of land firstly is ancestral and secondly there is no material to hold that prior to such sale transaction undertaken the assessee had undertaken any such dealing in sale and purchase of land. Therefore, there is nothing to infer that the assessee ever acquired the land to deal in the same as a businessman. Thus, in our view, the revenue has not discharged its onus to categorically prove that the dominant intention of the assessee was to embark on adventure in the nature of trade when the assessee sold the lands in question and earned surplus. We conclude by noticing that in view of the discussion, the impugned transactions have to be accepted as resulting in gain assessable under the head Capital gain .

Issues Involved:
1. Nature of income from the sale of land: capital gains vs. business income.
2. Alleged understatement of sale price by the assessees.

Issue-wise Detailed Analysis:

1. Nature of Income from the Sale of Land: Capital Gains vs. Business Income

The primary issue was whether the income from the sale of land should be treated as capital gains or as business income. The assessees, three HUFs, declared the income from the sale of land as capital gains. However, the Assessing Officer (AO) treated these transactions as an adventure in the nature of trade, thus categorizing the income as business income.

The Tribunal observed that the assessees inherited the agricultural land in 1980 and had been declaring agricultural income from it. The land was later converted into non-agricultural land by paying development charges to the Municipal Committee, Rewari, and sold in smaller plots. The Tribunal noted that the assessees had no prior or subsequent involvement in the real estate business and relied on several judicial precedents to support their claim that the transactions were not in the nature of trade.

The Tribunal emphasized that the onus was on the revenue to prove that the transactions were an adventure in the nature of trade, especially since the assessees were not engaged in any trade or business. The Tribunal referred to the Supreme Court's judgments in Saroj Kumar Mazumdar v. CIT, G. Venkataswami Naidu & Co. v. CIT, and Sree Meenakshi Mills Ltd. v. CIT, which highlighted the importance of the dominant intention behind the transaction.

The Tribunal concluded that the revenue had not discharged its onus to prove that the dominant intention of the assessees was to embark on an adventure in the nature of trade. The transactions were held to be resulting in gains assessable under the head 'Capital gains.'

2. Alleged Understatement of Sale Price by the Assessees

The revenue appealed against the deletion of additions made by the AO on account of alleged understatement of sale price. The AO concluded that the assessees had sold plots at a higher rate than declared in the sale deeds based on statements from individuals and property dealers, adopting Rs. 1,750 per sq. yd. as the sale rate instead of the declared Rs. 1,100 per sq. yd.

The Tribunal noted that the CIT(A) had deleted the additions, finding the evidence relied upon by the AO unreliable. The Tribunal upheld the CIT(A)'s findings that the AO did not provide the assessees with an opportunity to cross-examine the property agent and that the agreements to sell were not credible. The Tribunal referred to the legal principle that mere photocopies of documents are not reliable without the originals and that evidence collected at the back of the assessee without cross-examination is not admissible.

The Tribunal also observed that the revenue had not taken any action to tax the alleged higher consideration in the hands of the purchasers, further weakening the revenue's case.

For the assessment year 1996-97, the Tribunal upheld the CIT(A)'s deletion of additions, noting that there was no evidence to infer understatement of sale consideration for that year. The AO's reliance on evidence from a different assessment year was deemed unjustified.

Conclusion:

The appeals of the assessees were allowed, treating the income from the sale of land as capital gains. The appeals of the revenue were dismissed, upholding the deletion of additions made on account of alleged understatement of sale price.

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