2007 (1) TMI 90 - HC - Income Tax

Sale of agricultural land by converting it in plots this activity is not in the nature of business so main earning is in nature of capital gain so not assessable as income from business revenue can t file appeal when tax liability is below 2 lac

Summary

Issues Involved:
1. Nature of income from the sale of plots (capital gain vs. business income).
2. Validity of the appeal under Section 260-A of the Income Tax Act considering the monetary limits prescribed by the CBDT circular.

Issue-wise Detailed Analysis:

1. Nature of Income from the Sale of Plots:

The primary issue was whether the income from the sale of plots by the respondent constituted "capital gain" or was an "adventure in the nature of trade" and thus assessable as business income.

The facts established that the respondent received the land as a gift, initially agricultural, which was later converted to non-agricultural land and developed into plots. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the activities undertaken by the respondent, such as levelling the land, constructing roads, and installing drainage systems, indicated a business venture. They categorized the income from the sale of plots as business income.

However, the Income Tax Appellate Tribunal (ITAT) reversed this decision, holding that the gain from the sale was not from business activity but was a capital gain. The ITAT referenced several decisions, including CIT v. A. Mohd. Mohideen, CIT v. Shashi Kumar Agrawal, and Bhagirath Prasad v. CIT, to support that the transaction did not amount to an adventure in the nature of trade.

The High Court reviewed the evidence and found that the respondent's actions of developing and selling the plots were to secure a better price and did not constitute regular trading activity. The court noted that the land was a gifted property, not purchased for the purpose of resale, and thus the income should be treated as capital gain. The court emphasized that an isolated transaction does not qualify as a business activity under Section 2(13) of the Income Tax Act, 1961, which defines "business."

2. Validity of the Appeal under Section 260-A Considering CBDT Circular:

The second issue was whether the appeal filed by the Revenue was maintainable under Section 260-A of the Income Tax Act given the monetary limits prescribed by the CBDT circular dated 27.3.2000, which restricts filing appeals if the tax effect is below Rs. 2.00 lakhs.

The respondent's counsel argued that the appeal was not maintainable based on the CBDT circular and supported this with decisions from the Bombay High Court in CIT v. Camco Colour Co. and CIT v. Pithwa Engg. Works. The High Court upheld this objection, stating that the circular is binding on the Revenue, and appeals contrary to the circular should not be entertained. The court referenced the Supreme Court decisions in Navnit Lal C. Javeri v. Sen (K.K.), Ellerman Lines Ltd. v. CIT, and Varghese (K.P.) v. ITO, which reinforced that CBDT circulars are binding on tax authorities.

Conclusion:

The High Court concluded that the respondent's activity of selling plots was not an adventure in the nature of trade but a capital gain transaction. The court also held that the appeal filed by the Revenue was not maintainable due to the monetary limits set by the CBDT circular. Consequently, all three appeals were dismissed.