2024 (7) TMI 1496 - HC - Income Tax

Correct head of income - profits from the sale of lands - business income or capital gain - Intention of assessee - Revenue contends that though the primary business activity of the assessee is that of running medical shops under the Trade name Sevana , he had during the relevant assessment years indulged in buying and selling of landed property with a view to earn profit - HELD THAT - When a property kept not for trade, but for an investment purpose is sold, the gain has to fall under head 'capital gains' and such transaction is only taxable under capital gain and not under adventure of trade. If the Revenue intends to prove the contrary, then the burden is upon it to prove it by reliable evidence. Merely because the assessee makes some profit in a particular transaction, it can not be treated as an adventure in the nature of trade so long as the initial intention or a reason investing money was to hold the property and utilise it for a different purpose. Having understood the term adventure in the nature of trade used in Section 2 (13) of the Income Tax Act as above and that the burden of proving it is on the Revenue, we now proceed to consider whether the the assessee s investments in real estate, factual details of which were unearthed during the search would justify terming his involvements in real estate transactions as one on capital account or whether the Revenue has sufficient evidence to prove that the activities of the assessee constituted an adventure in the nature of trade. As noted by the ITAT that the assessee had never treated the properties as stock in trade and the search in the residential and business premises of the assessee had not revealed any material to suggest that the assessee had advertised the sale of properties or that he had made any efforts towards creating or submitting a development plan before any authorities with the objective of developing the property and thus augmenting its value in real estate market. ITAT has noted that no evidence has been procured to reveal that the assessee had done activities such as plotting, consolidation, laying of roads, preparation of development plans, obtaining permits for piling, excavation etc, or preparation of reports for external financing which are typical activities indulged in by real estate traders. As the asseesse had held the landed property as investment and disposal of the same would not convert, what was a capital accretion, to an adventure in the nature of trade. The finding arrived at by the ITAT based on the facts and circumstances available at hand, that the assessee had treated the landed property as an investment acquired over the years and did not choose to carry on any commercial activity with reference to such land and had upon noticing favourable market conditions, sold the land and fetched a good price, does not justify the action of the AO to treat the activities of the assessee as adventure in the nature of trade. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the activities of the assessee constitute an 'adventure in the nature of trade'.
2. Whether the Tribunal was correct in holding that the issue is covered by the judgment of the jurisdictional High Court.
3. Whether the transactions and dealings in land are assessable as business income or capital gains.

Issue-wise Detailed Analysis:

1. Whether the activities of the assessee constitute an 'adventure in the nature of trade':

The Revenue contended that the assessee's activities of buying and selling land should be taxed as 'business income' under Section 2(13) of the Income Tax Act, 1961, which includes any adventure in the nature of trade. The assessee, primarily engaged in running medical shops, was involved in systematic purchase and sale of land, which the Revenue argued was an adventure in the nature of trade. The Assessing Officer (AO) treated the income from these transactions as business income, but the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) disagreed, treating it as capital gains. The ITAT noted that there was no evidence that the assessee had converted the land into stock-in-trade or intended to carry on a real estate business. The ITAT emphasized that the assessee's intention was to hold the property as a capital asset, not for business purposes.

2. Whether the Tribunal was correct in holding that the issue is covered by the judgment of the jurisdictional High Court:

The Tribunal referenced the judgment of the jurisdictional High Court, which was deemed applicable to the case. The Revenue argued that the Tribunal's reliance on this precedent was perverse and illogical. However, the Tribunal's decision was based on a comprehensive analysis of the facts and circumstances, including the assessee's intention and conduct, which aligned with the principles established by the jurisdictional High Court. The Tribunal found that the assessee's activities did not meet the criteria for an adventure in the nature of trade as defined by relevant judicial precedents.

3. Whether the transactions and dealings in land are assessable as business income or capital gains:

The Tribunal examined various factors to determine the nature of the transactions. It noted that the assessee's primary business was running medical shops, and the real estate transactions were not frequent or substantial. The properties were held for a significant period, and there was no evidence of commercial real estate trading activities such as plotting, development, or advertising. The Tribunal concluded that the transactions were investments rather than business ventures, and the profits should be treated as capital gains. The Tribunal's decision was supported by precedents, including the Supreme Court's rulings in G. Venkataswami Naidu & Co. v. Commissioner of Income Tax and Smt. Indramani Bai v. Additional Commissioner of Income Tax, which emphasized the importance of the assessee's intention and the nature of the transactions.

Conclusion:

The Tribunal's decision to treat the income from the sale of land as capital gains rather than business income was upheld. The substantial questions of law were answered in favor of the assessee, and the appeals filed by the Revenue were dismissed. The Tribunal's reliance on judicial precedents and its detailed analysis of the facts and circumstances were found to be valid and sustainable.