1995 (11) TMI 133 - AT - Income Tax

Summary

Issues Involved:

1. Whether the income derived from the sale of agricultural lands by the assessee should be treated as business profits or capital gains.
2. Whether the transaction entered into by the assessee constituted an adventure in the nature of trade.
3. Whether the cost of the land should be estimated at 10% of the sale price for deduction purposes.

Issue-wise Detailed Analysis:

1. Treatment of Income Derived from Sale of Agricultural Lands:

The primary grievance of the assessee was that the CIT(A) erred in confirming the Income-tax Officer's (ITO) action of treating the income arising from the sale of agricultural lands as business profits. The assessee contended that the lands were inherited and sold as agricultural lands without any intention of carrying on business in lands. The CIT(A), however, concluded that the transaction was an adventure in the nature of trade and should be taxed as 'income from the pursuit of a trade or business'. The CIT(A) relied on the fact that the assessee had applied for layout approval and had divided the land into plots, thereby converting it into non-agricultural land.

2. Adventure in the Nature of Trade:

The CIT(A) and ITO inferred that the assessee's actions, such as plotting the land and obtaining layout approvals, indicated an adventure in the nature of trade. The assessee argued that the layout and plotting were done by the agreement holder (M. Gopal Krishna) and not by the assessee. The agreement dated 7-7-1982 specified that the second party (Gopal Krishna) would handle all improvements and layout at his expense, and the assessee was only to sign necessary papers. The Tribunal noted that the sale agreement showed the land was sold to Gopal Krishna for Rs. 75,000 per acre, and all subsequent activities were carried out by Gopal Krishna, not the assessee. Therefore, the Tribunal concluded that the assessee's actions did not amount to an adventure in the nature of trade but were merely a realization of inherited property.

3. Estimation of Cost for Deduction:

The ITO had estimated the cost of the land at 10% of the sale price and allowed a deduction of Rs. 16,718. The assessee contended that this estimation was too low and arbitrary. Since the Tribunal held that the sale of land did not constitute an adventure in the nature of trade, the question of estimating the cost for business income purposes became moot. The Tribunal directed the Assessing Officer to verify the assessee's claim regarding the investment of sale proceeds in National Rural Development Bonds and consider the taxability of capital gains accordingly.

Conclusion:

The Tribunal concluded that the activity of the assessee in selling the land did not amount to an adventure in the nature of trade. The surplus from the sale of land should be treated as capital gains, not business income. The Tribunal set aside the orders of the lower authorities, deleting the addition of Rs. 1,50,462 made by the ITO and sustained by the CIT(A). The Tribunal directed the Assessing Officer to verify the investment in National Rural Development Bonds and assess the capital gains, if any, after providing the assessee with a reasonable opportunity to be heard.

Result:

The appeal by the assessee was allowed, and the orders of the lower authorities were set aside. The surplus from the sale of land was to be treated as capital gains, and the Assessing Officer was directed to verify the investment in National Rural Development Bonds. The alternative plea of the assessee regarding the estimation of the cost was rejected as it became irrelevant.