2009 (11) TMI 491 - HC - Income Tax

Purchased agricultural lands - acquired immediately - by the State Government - received compensation - assessees did not have any intention to hold the lands and to cultivate it -surplus received by the assessees, in respect of the lands purchased by the assessees and acquired by the State, is liable to be taxed as a business income, terming the said transaction as adventure in the nature of trade , as defined under the provisions of section 2(13) of the said Act - interest received, during the years under consideration, on enhanced compensation, was liable to be treated as a business income and, therefore, liable to be taxed, as such, within the meaning of section 28 of the said Act Held that -the transactions, in question, were adventure in the nature of trade and as such, chargeable to income-tax under the head Profits and gains of business or profession

Issues Involved:
1. Whether the transactions were "adventure in the nature of trade" and taxable as business income.
2. Validity of reassessment proceedings under section 147 if no notice under section 143(2) was issued within 12 months.
3. Applicability of interest under section 234B.
4. Taxability of interest on enhanced compensation upon reaching finality.
5. Classification of interest on enhanced compensation under "income from other sources" or "profits and gains of business or profession".

Detailed Analysis:

Issue 1: Whether the transactions were "adventure in the nature of trade" and taxable as business income.
The court examined whether the transactions involving the purchase and subsequent acquisition of agricultural lands constituted an "adventure in the nature of trade" under section 2(13) of the Income-tax Act, 1961. The Tribunal found that the assessees engaged in a series of land transactions with the knowledge that these lands were likely to be acquired by the government, indicating a profit motive. The court upheld this finding, noting that the lands were not purchased as "capital assets" but with the intention of earning profits from their acquisition. The court referenced the apex court's observations in G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594 (SC) and concluded that the transactions were indeed "adventure in the nature of trade."

Issue 2: Validity of reassessment proceedings under section 147 if no notice under section 143(2) was issued within 12 months.
The assessees contended that reassessment proceedings under section 147 were invalid because no notice under section 143(2) was issued within 12 months from the end of the month in which the return was filed. The court noted that section 148 was amended by the Finance Act, 2006, with retrospective effect from October 1, 1991, which saved notices issued under section 143(2) after the expiry of 12 months, provided they were issued before the time limit specified in section 153(2). Since the notices in question fell within this period, the court rejected the assessees' contention and upheld the validity of the reassessment proceedings.

Issue 3: Applicability of interest under section 234B.
The court examined whether interest under section 234B was applicable. The assessees argued that they could not estimate the interest on enhanced compensation and thus could not include it in their advance tax calculations. The court referred to the Division Bench's ruling in CIT v. Kotak Mahindra Finance Ltd. [2004] 265 ITR 119, which held that the difficulty in computation does not negate the liability for advance tax. The court concluded that interest under section 234B was compensatory and applicable in this case, rejecting the assessees' argument.

Issue 4: Taxability of interest on enhanced compensation upon reaching finality.
The Tribunal had held that interest on enhanced compensation would not be taxable until it was finally determined. The court referred to the apex court's judgment in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC), which held that enhanced compensation, including interest under section 28 of the Land Acquisition Act, 1894, is taxable in the year of receipt. The court found that the Tribunal's decision was incorrect and that the interest was taxable upon receipt, regardless of final determination.

Issue 5: Classification of interest on enhanced compensation under "income from other sources" or "profits and gains of business or profession".
The Tribunal had classified the interest on enhanced compensation as "income from other sources." The court, referencing the apex court's ruling in CIT v. Ghanshyam (HUF), held that the interest under section 28 of the Land Acquisition Act is a component of the enhanced compensation and should be taxed under the head "profits and gains of business or profession." The court found that the Tribunal erred in its classification and corrected it accordingly.

Conclusion:
1. The transactions were "adventure in the nature of trade" and taxable as business income.
2. The reassessment proceedings under section 147 were valid despite the delay in issuing notice under section 143(2).
3. Interest under section 234B was applicable.
4. Interest on enhanced compensation is taxable upon receipt, not upon final determination.
5. Interest on enhanced compensation should be classified under "profits and gains of business or profession."

The appeals by the assessees were dismissed, and the appeals by the Revenue were allowed in these terms. The court denied the assessees' request for a stay on the judgment.

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