B Venu Madhav, Hyderabad vs Department Of Income Tax

This is an appeal preferred by the Revenue against the order of the CIT (A) VI, Hyderabad dated 15.09.2014 relating to the A.Y 2005-06. The Revenue is aggrieved by the order of the CIT (A) in holding that the land sold by the assessee is capital in nature and the income therefrom is capital gains and not business income as held by the AO.

2. Brief facts of the case are that the assessee, an individual had filed his return of income for A.Y 2005-06 on 23.12.2005 declaring a total income of Rs.16,03,986. The assessee had offered capital gains of Rs.1,24,30,548 on sale of land situated at Nallagandla Village and claimed exemption u/s 54EC of Rs.1,24,30,548 by investing Rs.1,25,00,000 in NABARD bonds.

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The return was processed u/s 143(1) of the I.T. Act. Subsequently, on the basis of the assessment order for A.Y 2006- 07, AO formed an opinion that assessee's income has escaped assessment for the relevant A.Y. Therefore, notice u/s 148 was issued and during the assessment proceedings u/s 143(3) r.w.s. 147 of the Act, the AO has observed that the assessee had divided his agricultural land into plots and therefore the said activity is an adventure in nature and income from sale of plots is to be treated as business income. The Assessee explained that the land was inherited by him after the demise of his late mother and that agricultural operations were carried out on the said land since its purchase in 1979 and therefore, the income from the sale of the land is to be considered as capital gains and not as business income as sought to be held by the AO. AO was however, not convinced with assessee's contentions and held that the income from sale of plots is business income of the assessee and accordingly brought it to tax.

3. Aggrieved, assessee preferred an appeal before the CIT (A), who allowed the same by following the order of the Tribunal in assessee's own case for the subsequent A.Y i.e. 2006-07. Aggrieved by the relief given by the CIT (A), the Revenue is in appeal before us.

4. Having considered the rival contentions and the material on record, we find that the assessment for the year under consideration i.e. A.Y 2005-06 was reopened by the AO based on the assessment order for A.Y 2006-07 and the issue had travelled upto the Tribunal for A.Y 2006-07. The Tribunal vide

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order dated 11.10.2013 has considered the issue at length and has held at para Nos.9 & 10 as under:

"9. We have considered the rival submissions and perused the material available on record. We have also perused the authorities relied upon by the parties before us. It is not always easy to describe what are the circumstances that render a transaction as an 'adventure in the nature of trade'. In dealing with the question, the Hon'ble Supreme Court in G. Venkataswamy Naidu & Co (supra) observed that no principle can be evolved which would govern the decision of all cases in which the character of such a transaction falls to be considered. Sec. 2(13) of the IT Act defines business as including any adventure in the nature of trade, commerce or manufacture. With reference to this definition, the Hon'ble Supreme Court observed that when the section refers to an adventure in the nature of trade, "it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade". If a person invests money in land intending to hold it, enjoys its income for some time and then sells it at a profit, the Hon'ble Supreme Court holds that it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Several tests were laid down in this decision for deciding the character of such transactions:

(a) Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? The answer to this in the present case is in the negative because there is no evidence to show that Assessee at any time did any business on land

(b) If the commodity purchased is generally the subject-matter of trade and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment? In the present, case agricultural land purchased by Assessee's mother, who had no intention of doing any business at the time of purchase and it was she, who sought HUDA permission for sale to obtain better price and Assessee has only inherited the property, therefore, it cannot be ITA No. 1698/Hyd/2012 B. Venu Madhav considered or treated that Assessee has the intention to indulge in trade,

(c) Did the purchaser by any act subsequent to the purchase improve the quality of the commodity to make it more readily saleable ? Here it could be safely stated that Assessee has not obtained any permission from the authorities for developing

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residential plots as the application was made by Assessee's mother and Assessee has simply inherited the land, which is under the process of development as the development agreement was also entered by his mother, therefore, improving the quality of commodity was not done by Assessee, but, by his mother in whose case also, it cannot be considered that she had intended to trade on the land and only for better price realization she had applied for HUDA permission.

Incidentally, the approval came much later and Assessee inherited the property after the death of his mother that does not mean that Assessee has indulged in business as an adventure in the nature of trade,

(d) are the transactions of purchase and sale repeated ? This test is answered negatively in the case under consideration as Assessee has not purchased any other land and has sold the property inherited by him which is itself was agricultural land for more than 20 years.

In the aforesaid decision the Hon'ble Supreme Court has held that in each case it is the total effect of all relevant factors and circumstances that determines the character of the transaction. A cumulative consideration of the facts of the present case unmistakably points to the transaction of sale being a realization of the investment in land and consequently the gains are chargeable only to capital gains tax and not to be considered as gains of an adventure in the nature of trade.

10. In coming to this conclusion we have duly taken note of the following facts:

(a) In the present case, Assessee is an agriculturist and did not carry on any business,

(b) The land was purchased as agricultural land way back in 1979,

(c) Agricultural operations were carried on for more than 20 years and the land was inherited by Assessee which is in the process of development,

(d) Necessary permission for conversion of land in to residential plots was sought by Assessee's mother and just because Assessee stepped into his mother's shoes, it cannot be considered that Assessee is in the business of purchasing and selling of plots, whereas, Assessee has only sold inherited land, therefore, intention to purchase for business was absent, and

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(f) Though, it may not be entirely relevant but we cannot ignore the fact that the sale proceeds/capital gains were invested in approved bonds, (NABARD Bonds) and were not invested in any business.

For these reasons, we are of the opinion that the CIT(A) erred in holding that the sale proceeds should be assessed as business income after recording certain factual findings in para 4.30 of order (supra)".

5. Since the issue is common for A.Y 2005-06 before us also, respectfully following the decision of the Coordinate Bench, we see no reason to interfere with the order of the CIT (A).

6. In the result, Revenue's appeal is dismissed.

Order pronounced in the Open Court on 24th April, 2015.

Sd/- Sd/- (P.M. Jagtap) (P. Madhavi Devi) Accountant Member Judicial Member

Hyderabad, dated 24th April, 2015.

Vnodan/sps Copy to:

1. The Dy. Commissioner of Income Tax, Circle 15(1), 1st Floor, B Block, IT Towers, AC Guards, Hyderabad

2. Shri B. Venu Madhav, House No.11-119 Ramanthapur Hyderabad

3. The CIT(A)-VI Hyderabad

4. The CIT - V Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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