2012 (10) TMI 363 - HC - Income Tax

Computation of capital gain - treatment of conversion of asset into stock-in-trade and realization of profits was not acceptable - Held that - Revenue have applied the principles of law and have arrived at the finding that the land in urban area for which the Zamindari was abolished on 1.7.1961 was partly inherited by the assessee from his father. The remaining part was purchased by him by sale deeds dated 16.12.1958 and 16.5.1959. The assessee along with his co-partners had filed suit for declaration, which was decreed on 5.6.1968. The sons of Shri Narain Rao Sapre had filed suits for cancellation of sale deeds and for possession. The suit was decreed cancelling the sale deed to the extent of 2/3rd share but claim for possession was not allowed. In the circumstances, the stand taken by the assessee that the property was inherited as H.U.F., was rightly disbelieved. No agricultural operations were carried on - the assessee had evened out the land with the help of tractor and had sold the plot after leaving the roads and drainage system and thus in view of the provisions of Section 45 (2) of the Act the profits and gains arising out of transfer by way of conversion by the owner of capital asset into, or its treatment by him as stock-in-trade of business carried on by him is for and from the assessment year 1985-86 be charged to tax under the head capital gains in the previous year in which such stock-in-trade is sold or otherwise transferred by him. The income tax authorities committed no error in applying Section 45 (2) for the purposes of assessment and by adopting a notional value for the purposes of fixing the price for land as on 1.4.1974 for stamp duty for working out business income from the sale of land and applying the depreciated value by 10% of every year for the purposes of arriving at value in the year 1984 - against assessee.

Summary

Issues Involved:

1. Legality of the Tribunal's confirmation of the Assessing Authority's computation of capital gain.
2. Legality of the Tribunal's confirmation of the Assessing Authority's estimation of business income from the sale of land.

Detailed Analysis:

1. Legality of the Tribunal's Confirmation of the Assessing Authority's Computation of Capital Gain:

The appellant-assessee sold agricultural land during the financial years 1984-85 to 1990-91, which was allegedly part of a Hindu Undivided Family (H.U.F.). The land was sold in small plots through 43 sale transactions. The Assessing Officer (AO) issued notices under Sections 148, 143(2), and 143(1) of the Income Tax Act, 1961, and assessed the income under capital gains and business income for the assessment years 1989-90, 1990-91, and 1991-92.

The Tribunal upheld the AO's computation, stating that the land was situated in an urban area and was fragmented and sold with facilities like passage and drainage, indicating the intention to reap business profits rather than selling agricultural land. The Tribunal found no infirmity in the AO's method of taking the actual sale consideration for computing income and disallowed the deduction of notional value of land covered under passage and drainage.

The High Court agreed with the Tribunal, noting that the land was an urban asset and the appellant's actions of fragmenting and selling the land indicated a business activity. The Court also referenced Section 45(2) of the Act, which deals with the conversion of capital assets into stock-in-trade, and found that the income tax authorities correctly applied this provision.

2. Legality of the Tribunal's Confirmation of the Assessing Authority's Estimation of Business Income from the Sale of Land:

The AO assessed the business income from the sale of land for the relevant years, considering the land as stock-in-trade. The Tribunal supported this view, stating that the appellant's activities of selling the land in small plots with necessary facilities were aimed at making business profits.

The appellant argued that the land was inherited and not purchased for business purposes. However, the High Court found that the appellant's long litigation history and subsequent actions of developing and selling the land in small plots over several years indicated a business venture. The Court cited various judgments, including G. Venkataswami Naidu & Co. v. CIT and Deep Chandra & Co. v. CIT, to emphasize that the nature of the transaction and the intention behind it are crucial in determining whether it constitutes a business activity.

The High Court concluded that the income tax authorities and the Tribunal did not err in treating the land sales as a business activity and applying Section 45(2) for assessment purposes. The Court found the method adopted by the authorities to be fair and reasonable in arriving at the value of the land.

Conclusion:

Both questions of law were decided in favor of the revenue and against the assessee. The High Court dismissed all three income tax appeals, upholding the Tribunal's confirmation of the Assessing Authority's computation of capital gain and estimation of business income from the sale of land.