2005 (5) TMI 23 - HC - Income Tax

Adventure in the nature of trade - sale of land - Whether Tribunal was legally justified in confirming the view of the learned Commissioner of Income-tax (Appeals) who held that the profits arising from the sale of land was not an adventure in the nature of trade and further in directing the Assessing Officer to treat the receipt of Rs. 21,30,175 during the year and the balance being receipts in the subsequent year as capital gains? - we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue

Issues Involved:
1. Whether the profit arising from the sale of land was an adventure in the nature of trade.
2. Whether the receipts from the sale should be treated as capital gains.

Issue-wise Detailed Analysis:

1. Whether the profit arising from the sale of land was an adventure in the nature of trade:

The core issue was whether the sale of land by the assessee constituted an adventure in the nature of trade or was merely a realization of investment. The assessee, a registered firm engaged in the business of cold storage, sold land for a total consideration of Rs. 21,30,173 and declared it under "Capital gains," claiming exemption under section 54E of the Income-tax Act, 1961, due to investment in UTI capital gains units.

The assessing authority initially treated the profits from the sale as an adventure in the nature of trade. However, the Commissioner of Income-tax (Appeals) overturned this, holding that the land sale was not intended for resale at a profit but was a realization of investment. The land was treated as a fixed asset, used for the business, and sold as a whole to M/s. Agarwal Enterprises, who handled the development and sale of plots. This decision was upheld by the Income-tax Appellate Tribunal.

The court considered various precedents, including:
- CIT v. Kasturi Estates (P.) Ltd.: Stated that selling developed land for a better price is a realization of capital investment, not a trading profit.
- Janki Ram Bahadur Ram v. CIT: Emphasized that the revenue must prove a transaction as an adventure in the nature of trade based on all facts and circumstances.
- Kaur Singh v. CIT: Highlighted that merely carving out plots does not make a transaction an adventure in the nature of trade without additional evidence.
- CIT v. Principal Officer, Laxmi Surgical P. Ltd.: Clarified that a single transaction intended for profit does not necessarily constitute stock-in-trade or an adventure in the nature of trade.

The court concluded that the land was not treated as stock-in-trade but as a fixed asset. The sale was a realization of investment, not an adventure in the nature of trade. The development and sale were managed by M/s. Agarwal Enterprises, and the profits were capital gains.

2. Whether the receipts from the sale should be treated as capital gains:

The Commissioner of Income-tax (Appeals) directed the Assessing Officer to treat the receipts from the sale as capital gains. The land was initially owned by partners in their capacities as kartas of Hindu undivided families and was transferred to the firm as a capital contribution. The firm used the land for business purposes, including a brick field business, and treated it as a fixed asset.

The court noted that the land was sold as a whole to M/s. Agarwal Enterprises, not directly to plot buyers. The sale deeds were executed as per agreements, and the development was carried out by M/s. Agarwal Enterprises. The Commissioner concluded that the transaction was a realization of investment, not an adventure in the nature of trade.

The court referenced several cases to support this view:
- Raja Bahadur Kamakhya Narain Singh v. CIT: Differentiated between realization of investment and profit-making activities.
- CIT v. Principal Officer, Laxmi Surgical P. Ltd.: Emphasized that a transaction intended for profit does not automatically become stock-in-trade.

The court affirmed that the land was not purchased with the intent to resell for profit but was a fixed asset sold as a whole. The development costs were borne by M/s. Agarwal Enterprises, and the sale was a realization of investment. Thus, the profits were capital gains, not business income.

Conclusion:

The court upheld the view that the sale of land was a realization of investment, not an adventure in the nature of trade. The profits were to be treated as capital gains, confirming the decisions of the Commissioner of Income-tax (Appeals) and the Tribunal. The question was answered in favor of the assessee and against the Revenue, with no order as to costs.

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