1980 (1) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the land sold by the assessee was agricultural land, the surplus on the sale of which was not chargeable to tax under the Income-tax Act, 1961.
2. Whether the surplus realized on the sale of lands represented merely a return of capital investment, not liable to tax.
3. Whether the surplus amounts arose to the assessee-firm from an adventure in the nature of trade and hence the said amounts are chargeable to tax as income in the hands of the assessee-firm.

Summary:

Issue 1: Agricultural Land and Taxability
The Tribunal held that the land in question was agricultural land and its sale was not chargeable to tax under the I.T. Act, 1961. However, the High Court opined that if the activity of purchasing the land and selling it as plots constituted an adventure in the nature of trade, the mere fact that the land was agricultural could not make the profits arising from sales exempt from income-tax. The Court emphasized that the real question was whether the purchase and sale of land constituted an adventure in the nature of trade.

Issue 2: Return of Capital Investment
The Tribunal concluded that the surplus realized from the sale of the land was merely a return of capital investment and not liable to tax. The High Court disagreed, stating that the purchase and subsequent sale of the land as plots indicated an intention to resell at a profit, thus constituting an adventure in the nature of trade. The Court noted that the partners were not agriculturists and had divided the land into plots soon after purchase, which was a strong indication of a business venture.

Issue 3: Adventure in the Nature of Trade
The High Court held that the purchase of land and its sale as plots during the relevant years constituted an adventure in the nature of trade. The Court observed that the partners had no intention of holding the land for agricultural purposes and had taken steps to develop and sell it as building plots. The Court also noted that the assessee had filed returns showing profit from the sale of plots as business income and had executed partnership deeds indicating a business venture. The Court concluded that the surplus amounts realized from the sale of plots were taxable as business income.

Conclusion:
1. The land at the time of purchase was agricultural land but was sold in plots for building purposes, and the income from sales was assessable to tax as business income.
2. The surplus amounts realized from the sale of plots constituted income from an adventure in the nature of trade and not a return of capital investment. The amounts were taxable as business income of the assessee.