Sale of Land after dividing into plots - whether "business income" or "capital gains"

Assessee had purchased the chunk of land in 1970 under a valid document.

During the year 1994-95, assessee sold the land after dividing into plots.

The case was taken up for scrutiny, and ultimately, it was found that certain number of plots were sold, and the assessee had shown the income therefrom, as long term capital gain.

AO found that the land was under the cloud of ceiling laws, and after it got cleared therefrom, the assessees picked up the idea of disposing it of by making the best profit, i.e. by ensuring that it fetches the best price, and accordingly, the site plan was prepared, showing the land to be divided into different plots, and the plots were accordingly sold.

Accordingly, AO found the sale to be not taxable as capital gain, but it was found to be a business income.

The Rajasthan High Court while rejecting the contention of the department and declaring that the income should be taxed as capital gains held that:

"In our view, one of the most significant considerations would be, the regularity of transaction of purchase and sale. Mere fact that there was a series of transactions of sale only, by selling the part of the whole land, purchased in one go, or purchased once upon a time, in piecemeal, would not render the activity of sale to be an "adventure in the nature of trade". In the present case, there is nothing to show, that the land was purchased with intention to sale it at a profit, or with requisite intention, to bring it within the parameters of "stock in trade". It is not shown, that the assessee is a regular dealer in real estate. It appears, that the land was purchased in 1970, which was under cloud of Land Ceiling Laws, and after that cloud was cleared, and other adjoining lands had been developed, and since the land was not yielding any return, it was decided to be sold in piecemeal, by earmarking plots, but then nonetheless it would remain a disposal of the capital asset only, and not a transaction of any "stock in trade" so as to be described as "adventure in the nature of trade". Obviously therefore, it is liable to be taxed only, as the capital gain."

(For full text of judgment - visit 2008 -TMI - 30571 - RAJASTHAN HIGH COURT)