2022 (3) TMI 27 - AT - Income Tax

Correct head of income - Capital gain or business income - income from sale of land - Making huge profit from sale - Whether transaction was an adventure in the nature of trade? - HELD THAT - We are in complete agreement with the CIT(A) that there is no reasonable basis with the A.O. for holding the transaction of sale of land as being in the nature of adventure in the course of business. On the contrary, we find that the A.O. has only referred to certain decisions of the Hon ble Apex Court and the Hon ble High Courts to infer that the impugned transaction was an adventure in the nature of trade, which finding, we find are not based on appropriate appreciation of the ratio laid down in the said cases. AO has made absolutely no effort to examine the facts of the case in the light of the proposition laid down by the various judicial authorities referred to by him for holding a transaction to be an adventure in the nature of trade. Though, admittedly he has gone on to interpret the said term in Para VI of his order but has failed to apply the same appropriately in the facts of the present case. Now the facts on the basis of which the A.O. has held the transaction to be an adventure in the nature of trade are merely that the asset was bought in 2006 and sold in the impugned year, that it was bought for consideration of ₹ 14 lakhs and sold for 6 crores. Merely because, the assessee earned huge profits thereon cannot alone be the criteria or basis for understanding the intention of the assessee in undertaking the transaction. If this be so, then every transaction involving transfer of capital asset where consideration is multiple times the purchase value, it would be treated as an adventure in the nature of trade. CIT(A), we find ,has noted that except for the facts as stated above, there was nothing else indicating that the transaction was undertaken by way of or with the intention of conducting it by way of a business. He has pointed out that this was the solitary transaction undertaken by the assessee, and had not frequently such transactions nor had the asset sold ever been claimed as a business asset and depreciation claimed thereon, the assessee having treated the said land as investment all throughout. We agree with the CIT(A) that there was no basis at all with the A.O. for treating the transaction as an adventure in the nature of trade. We therefore see no reason to interfere in the order of the CIT(A) allowing the assessee s claim of treating the transaction as that of transfer of a capital asset income earned thereon being in the nature of capital gain. - Decided against revenue.

Issues Involved:
1. Treatment of Long Term Capital Gain as Business Income.
2. Consideration of the ratio of the Supreme Court's judgment in G. Venkatswami Naidu & Co.
3. Justification for reversing the Assessing Officer's decision.
4. Request to set aside the CIT(A) order and restore the Assessing Officer's decision.

Issue-Wise Detailed Analysis:

1. Treatment of Long Term Capital Gain as Business Income:
The primary issue concerns whether the sale of land should be treated as a Long Term Capital Gain or as Business Income. The assessee sold a plot of land for ?6 Crores, which was purchased in 2006 for ?14 lakhs. The profit was declared as Long Term Capital Gain, and taxes were paid accordingly. The Assessing Officer (AO) treated the transaction as an adventure in the nature of trade, thereby classifying it as Business Income, which led to the denial of benefits such as indexed cost of acquisition and reduced tax rates applicable to Long Term Capital Gains.

2. Consideration of the Ratio of the Supreme Court's Judgment in G. Venkatswami Naidu & Co:
The AO relied on the Supreme Court's judgment in G. Venkatswami Naidu & Co, which states that even an isolated transaction could be an adventure in the nature of trade if it possesses essential features of trade. The AO argued that selling the land at a significantly higher value than the purchase price indicated a profit-earning motive, thus classifying it as Business Income.

3. Justification for Reversing the Assessing Officer's Decision:
The CIT(A) reversed the AO’s decision, finding no justification for treating the transaction as a business activity. The CIT(A) noted that the land was held for eight years without any development or improvement, indicating it was an investment rather than a business asset. The assessee had never shown the plot as a business asset or claimed depreciation, and this was a solitary transaction, not part of any frequent trading activity.

4. Request to Set Aside the CIT(A) Order and Restore the Assessing Officer's Decision:
The Revenue appealed against the CIT(A) decision, arguing that the AO's classification of the transaction as Business Income should be upheld. However, the Tribunal found that the AO's decision was based on selective application of judicial precedents without properly examining the facts. The Tribunal agreed with the CIT(A) that the transaction was an investment and not an adventure in the nature of trade.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) that the transaction was indeed a transfer of a capital asset, resulting in Long Term Capital Gain. The Tribunal found no basis for the AO's classification of the transaction as Business Income and upheld the CIT(A)'s decision to allow the assessee's claim. The appeal of the Revenue was thus dismissed.

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