1987 (10) TMI 102 - AT - Income Tax

Summary

Issues Involved:
1. Nature of income from the sale of plots (business income vs. capital gains).
2. Applicability of res judicata in income tax proceedings.
3. Valuation of opening and closing stock.
4. Treatment of agricultural land for capital gains.

Detailed Analysis:

1. Nature of Income from the Sale of Plots:
The primary issue was whether the income from the sale of plots should be treated as business income or capital gains. The Department contended that the sale was merely a realization of a capital asset, citing that the assessee did not undertake significant development activities such as publicity or brokerage, and thus, should be treated as capital gains. The Inspecting Assistant Commissioner emphasized that converting agricultural land into plots did not inherently change its nature to a business asset, referencing cases like CIT v. Premji Gopalbhai and CIT v. MLM. Mahalingam Chettiar.

Conversely, the assessee argued that the activity was a business venture, supported by the development of a colony with roads and plots, and that this position had been accepted in previous years. The CIT (Appeals) supported this view, noting the organized and continuous sale of plots over five years, and the Department's previous acceptance of this as a business activity. The Tribunal upheld the CIT (Appeals)'s decision, emphasizing the systematic development and sale of plots as indicative of a trading activity, referencing the Supreme Court decision in Raja J. Rameshwar Rao v. CIT.

2. Applicability of Res Judicata in Income Tax Proceedings:
The Department argued that res judicata does not apply in income tax proceedings, allowing the nature of transactions to be reassessed each year. However, the Tribunal found no strong reason to deviate from the Department's earlier acceptance of the business nature of the activity, given the consistent treatment in previous years.

3. Valuation of Opening and Closing Stock:
The valuation of the opening and closing stock was not significantly disputed. The assessee had valued the plots based on market value at the time of conversion in 1976, which the Department had accepted in previous years. The Tribunal concluded that if the activity was accepted as a business, the valuation method used by the assessee, following the Supreme Court's decision in Bai Shirinbai K. Kooka, was appropriate.

4. Treatment of Agricultural Land for Capital Gains:
The assessee alternatively contended that the sale of agricultural land should not be subject to capital gains tax, citing the Bombay High Court's decision in Manubhai A. Sheth v. N. D. Nirgudkar. The Department countered with decisions from the Kerala and Karnataka High Courts, which held that capital gains on agricultural land are taxable. The Tribunal, agreeing with the Department, noted that capital gains on the sale of agricultural land cannot be considered agricultural income, referencing various judicial precedents.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decision that the income from the sale of plots should be treated as business income, given the organized and continuous nature of the activity. The Department's appeals were dismissed, and the cross objection by the assessee regarding the non-applicability of capital gains on agricultural land was also dismissed.