2010 (12) TMI 281 - AT - Income Tax

Capital Assets or Adventure in the nature of trade - AOP - co-ownership of property - Held that that there is no written agreement amongst the parties to form an association of person to purchase the land, convert into residential plot and then sell it. No tangible evidence is available to establish any such intention that AOP has been formed. Merely because inherited ancestral land found in different name of family members would be wholly inferential/assumption. In our view therefore it would be too sweeping a conclusion to make that only because some persons have inherited agricultural land they have thereby formed an association of persons. - In view of the case of Smt Jaswant Kaur Sehgal v. CIT (2004 -TMI - 10858 - GAUHATI High Court), held that there was no AOP Re assessment - Notice u/s 148 - Held that - the AO s jurisdiction to reopen an assessment u/s 147 of the Act would depend upon the issuance of a valid notice. It the notice issued by him is invalid for any reason then the entire proceedings that would be taken by him pursuant to such notice would be void for want of jurisdiction. - From the notice in this case it cannot be ascertained who is the assessee. Further, it cannot be ascertained whether the service is being effected as prescribed by s. 282 of the Act on the persons addressed in their capacity a principal officers or members of an association. No doubt, the words others appear in the body of the notice but there is nothing in the notice by which the assessees can be connected with this association. Lastly, from the language of the notice it is also not clear whether the association is sought to be assessed or the addressees. If it is presumed that it is the association which was sought to be assessed, there is no indication in the notice as to the particular item of business or activity regarding which the fresh assessment was sought to be made. - Notice is not in accordance with law and therefore quashed. Nature of transaction - There is no evidence that the assessee has purchased the agriculture land at any rate which bears any comparison to its vast assets. Nor is there any evidence that the assessee has engaged in a series of sales of land or other property belonging to it. When the property was originally acquired in the form of ancestral and there was no intention to resale it at a profit. Sales of land have not been frequent feature of the assessee. If a land owner develop his land, expanded money on it, laid roads, converted the land in to house site with the view to get better prize for the land, eventually sold the plots for consideration yielding a surplus, it could be hardly said that the transaction is anything more than a realization of a capital investment of conversion of one form of assets in to another. - such ancestral agriculture land can not be held as business assets - Decided in favor of assessee.

Issues Involved:
1. Validity of notice issued under Section 148 of the Income Tax Act.
2. Classification of the assessee as an Association of Persons (AOP) versus Co-owners.
3. Treatment of the sale of capital asset as an adventure in the nature of trade.
4. Estimation of sales for the whole land, including the unsold plot.

Detailed Analysis:

1. Validity of Notice Issued Under Section 148:
The Assessee challenged the validity of the notice issued under Section 148, arguing it was issued without specifying the status of AOP. The Tribunal considered the precedent set by the Calcutta High Court in Bhagwan Devi Saraogi v. ITO, which held that a notice must clearly specify the status of the assessee to be valid. The Tribunal found that the notice in question did not meet this requirement, rendering the proceedings void for lack of jurisdiction. Consequently, the Tribunal quashed the order of the AO.

2. Classification as Association of Persons (AOP) vs. Co-owners:
The Assessee contended that they were co-owners of inherited agricultural land and not an AOP. The Tribunal examined the definition of "association" and concluded that there was no evidence of a formal agreement among the parties to form an AOP for the purpose of buying, converting, and selling the land. The Tribunal agreed with the Assessee, stating that merely inheriting land together does not constitute forming an AOP. This view was supported by the judgment of the Gauhati High Court in Smt. Jaswant Kaur Sehgal v. CIT.

3. Treatment of Sale as Adventure in Nature of Trade:
The Tribunal analyzed whether the sale of the land should be treated as an adventure in the nature of trade or as a capital gain. The Tribunal noted that the land was inherited and used for agricultural purposes initially. It was not acquired with the intention of resale for profit. The Tribunal concluded that the transaction was a realization of a capital asset and not an adventure in the nature of trade. This conclusion was supported by several precedents, including G. Venkatswami Naidu & Co. v. CIT and CIT v. Premji Gopalbhai.

4. Estimation of Sales for the Whole Land:
The Assessee argued that the AO incorrectly estimated the sales for all 14 plots, while only 13 plots were sold, and one remained in possession. The Tribunal found that the Assessee provided evidence, such as electricity bills, confirming the possession of the unsold plot. Therefore, the Tribunal disagreed with the revenue's estimation and set aside the orders of the revenue authorities on this issue.

Conclusion:
The Tribunal allowed the appeal of the Assessee, quashing the AO's order due to the invalidity of the notice under Section 148, rejecting the classification of the Assessee as an AOP, treating the sale as a capital gain rather than an adventure in the nature of trade, and correcting the estimation of sales to exclude the unsold plot. The order was pronounced in the open court on 03/12/2010.

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