High Court Of Allahabad
CIT vs. Mohakampur Ice & Cold Storage
Sections 2(13), 2(14), 45
Asst. Year 1986-87
R.K. Agrawal & Rajes Kumar, JJ.
IT Ref. No. 14 of 1996
24th May, 2005
Counsel Appeared
R.K. Upadhyaya, for the Revenue : R.R. Agarwal with Amitabh Agarwal, for the Assessee
JUDGMENT
Rajes Kumar, J. :
The Tribunal, Allahabad, has referred the following question under s. 256(1) of the IT Act (hereinafter referred to as “Act”) relating to the asst. yr. 1986-87 for opinion to this Court : “Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal was legally justified in confirming the view of the learned CIT(A) who held that the profit arising from the sale of land was not an adventure in the nature of trade and further in directing the AO to treat the receipt of Rs. 21,30,173 during the year and balance being receipts in the subsequent year as capital gains ?”
2. The brief facts of the case are that the assessee-applicant (hereinafter referred to as ‘assessee’) is a registered firm and was carrying on the business of cold storage and for the accounting period ending December, 1985 filed return on 31st July, 1987 declaring a net loss of Rs. 85,380. The assessee opted a mercantile method of accounting. The assessment was completed under s. 143 (3) of the Act computing the total income of Rs. 19,65,860 and during the relevant previous year, the assessee sold some land for a total consideration of Rs. 21,30,173. The sale consideration was shown under the head ‘Capital gains’ and according to it in all no capital gains tax was attracted as the assessee purchased the capital gain units from UTI and all conditions of the provisions of s. 54E of the Act were fulfilled. Thus, the entire sale proceeds from the sale of land declared under the head ‘Capital gains’ were claimed as exempt under the aforesaid section on account of investment in the capital units of the UTI. It may be mentioned here that the land which was sold by the assessee earlier belonged to Shri Vishwanath and Brij Mohan who were the partners in the capacities of Kartas of HUFs in the assessee-firm which was transferred to the firm for a total consideration of Rs. 1,96,360 by crediting the account of Shri Vishwanath and Brij Mohan at Rs. 90,650 and Rs. 1,05,510, respectively. However, the aforesaid two partners on behalf of the firm entered into an agreement to sell the major portion of the land to Shri Kamlesh Kumar and Dr. Laxmi Narain and others. During the course of assessment proceedings, the assessing authority required the assessee to explain as to why the profits arising from the sale of the land should not be treated as adventure in the nature of trade as the assessee has given detailed explanation which was not found acceptable to the assessing authority and the profit arising from the sale of the land was treated as adventure in the nature of trade. Aggrieved by the assessment order, assessee filed appeal before the CIT(A) which was allowed. The CIT(A) held that it was not the case of purchase of land with the intention to resell at a profit but only realisation of investment and thereby earning profit. The CIT(A) was of the view that the assessee-firm created the asset as the fixed asset and used for business purpose and the land (was) sold as a whole and not in plots for a fixed consideration to M/s Agarwal Enterprises. He was further of the view that carving of the plot and the development activities as well as expenditure on the land were done by M/s Agarwal Enterprises and not by the assesseefirm and merely the assessee-firm signed some applications and obligation of the agreement dt. 11th March, 1985 and the sale deeds were executed in favour of the buyers of the plots as nominee of M/s Agrawal Enterprises and the receipt of consideration by drafts or cheques was only to protect the interest of the assessee-firm. He, thus, concluded that it was a case of realisation of investment and could not be termed as adventure in the nature of trade. Detailed finding has been recorded by CIT(A) vide paras 6 and 6.3, the part of which will be dealt hereinafter. Consequently, the AO was directed to treat the receipt of Rs. 21,30,173 during the year, the balance being received in subsequent year as capital gains. However, the AO was directed to verify the claim of exemption under s. 54E of the Act to the effect that the entire sale proceeds have been invested in the capital units within a period of six months thereby there is no taxable amount of the capital gains. Aggrieved by the order of the CIT(A) Revenue filed appeal before the Tribunal which was dismissed. The Tribunal confirmed the view of the CIT(A). We have heard Sri R.K. Upadhyaya, learned standing counsel for the Revenue, and Sri Rakesh Ranjan Agarwal, assisted by Sri Amitabh Agarwal, learned counsel for the assessee.
Learned standing counsel submitted that the land was sold with the intent to earn profit in plots, therefore, the profit earned out of the sale of the land would amount to profit arising from the adventure in the nature of trade. In support of his contention he relied upon the decision of this Court in the case of Baijnath Hari Shanker vs. CIT (1973) 91 ITR 208 (All). Learned counsel for the assessee submitted that on the facts found by the CIT(A) which have been confirmed by the Tribunal the sale was for the realisation of the investment and cannot be termed as adventure in the nature of trade. In support of his contention, he relied upon the several decisions namely, CIT vs. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad), Janki Ram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC), Deep Chandra & Co. vs. CIT 1975 CTR (All) 28 : (1977) 107 ITR 716 (All), Kaur Singh vs. CIT (1982) 31 CTR (P&H) 95 : (1983) 144 ITR 756 (P&H), CIT vs. A. Mohammed Mohideen (1988) 74 CTR (Mad) 129, CIT vs. Principal Officer, Laxmi Surgical (P) Ltd. (1994) 116 CTR (Bom) 238 : (1993) 202 ITR 601 (Bom), ITO vs. Rani Ratnesh Kumari (1980) 123 ITR 343 (All), CIT vs. Sushila Devi Jain (2004) 191 CTR (P&H) 175 : (2003) 259 ITR 671 (P&H), CIT vs. Smt. Bilkishbai (1997) 225 ITR 570 (MP) and CIT vs. Shashi Kumar Agrawal (1992) 195 ITR 767 (All).
6. The CIT(A) held that all along the firm treated the land in question as fixed asset on the asset side of the balance sheet and has never been treated as stock-in-trade. It has been observed that the title deed with the land in question was sold to the alleged firm and the title deeds were in the name of the partners till the transfer/sale to the ultimate buyers of the plot and the land was brought as an asset of the firm by way of capital contribution by the two partners. The land was exploited for the purposes of brick field business and the income from M/s Mohakampur Brick Field was subjected to assessment for the asst. yrs. 1977-78, 1978-79 and 1981-82 upto which the business of manufacturing of the brick was carried on. On these facts, it has been held that the land in question was used as a fixed asset of the firm and exploited for the business of the firm and has not been treated as stock- in-trade. It has been concluded that the land has been brought in the book of the firm not with an intention to resell for profit. The CIT(A) also found that M/s Agarwal Enterprises was carrying on the colonization business and the land was sold as a whole by the assessee-firm to M/s Agarwal Enterprises and not to ultimate buyers of the plots. It was claimed that only to safeguard the interest regarding receipt of the sale consideration, the cheques/drafts were received in the name of the assessee and was sold for a fixed consideration irrespective of the ultimate amount received by M/s Agarwal Enterprises from the purchaser of the plot. The sale deeds of the plots to the buyers of the plots as nominee of M/s Agarwal Enterprises. The CIT(A) has considered the agreement dt. 1st June, 1975 between the partners of the assessee and Dr. Laxmi Narain and others and held that from the perusal of the above agreement, it is clear that the partners of the appellant-firm agreed to sell the land as a whole to Dr. Laxmi Narain or their nominee subject to execution of the sale deed within a period of nine years and as such another agreement was executed on 11th March, 1985 viz., the assessee as first party, Dr. Laxmi Narain as second party and M/s Agarwal Enterprises as third party. On a consideration of the said agreement, CIT(A) concluded that from the perusal of the above agreement, it is clear that the appellant-firm sold the land in question as a whole for a fixed consideration of Rs. 33,000. The sale deeds with the ultimate buyers of the plots were entered as a nominee of the third party i.e., M/s Agarwal Enterprises. In the sale deeds the appellant-firm Dr. Laxmi Narain and others and M/s Agarwal Enterprises all have been made party. Earlier agreements dt. 1st June, 1975 as well as 11th March, 1985 have been referred to show specific mention regarding the purchaser as a nominee of M/s Agarwal Enterprises as well as development of the colony being carried by M/s Agarwal Enterprises. Thus, the sale agreements with ultimate buyers of the plots were executed by the appellant-firm to the purchaser as a nominee of M/s Agarwal Enterprises. In fact, M/s Agarwal Enterprises instead of getting the land first transferred in its own name opted for a direct transfer in the names of the purchasers of the plots as their nominee. To sum up, the land was sold by the appellant as a whole to M/s Agarwal Enterprises as a nominee of Dr. Laxmi Narain and others for a total fixed consideration of Rs. 33,000. It was not sold by the appellant-firm directly to the plot-holders. However, the sale deeds were executed by the appellant-firm as per terms and conditions of agreement dt. 11th March, 1985 to the nominee of M/s Agarwal Enterprises. The CIT(A) on the basis of the material on record has also concluded that the development work was being carried on by M/s Agarwal Enterprises and the expenditure in this regard was incurred by it. The CIT(A), accordingly, sum up as follows :
To sum up, firstly, it was not a case of purchase of land with the intention to resale at a profit but only a realisation of investment and thereby earning profit. The firm treated the asset as a fixed asset and used for purpose of business. The land was sold as a whole and not into plots for a fixed consideration to M/s Agarwal Enterprises. The carving out of the plots and of the development activities and expenditure on the land was incurred by M/s Agarwal Enterprises and not by the appellant-firm. The appellant-firm merely signed some applications under an obligation of an agreement dt. 11th March, 1985. The sale deeds were entered with the buyers of the plots as nominee of Agarwal Enterprises and the receipt of consideration by drafts/cheques was only to protect the interest of the appellant-firm. Thus, it is clearly a case of realisation of investment and cannot be termed as adventure in the nature of trade.” The aforesaid finding of the CIT(A) has been confirmed by the Tribunal and has not been challenged by the Revenue. The question that on the aforesaid facts whether in law the view taken by the CIT(A) and the Tribunal is correct.
7. In the case of CIT vs. Kasturi Estates (P) Ltd. (supra), Madras High Court held as follows : “… If a land-owner developed his land, expended money on it, laid roads, converted the land into house sites and with a view to get a better price for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realisation of a capital investment or conversion of one form of asset into another. Obviously, the surplus in such a case will not be trading or business profit because the transaction is one of realisation of asset in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade. ……The transaction involved no risk or speculation; nor can it be truly said that it is a ‘plunge in the waters of trade’. It is a transaction which any prudent owner of land will engage in and which is, therefore, no more than realization of capital investment, conversion of land into money, not a venture in the nature of trade. Having regard to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along and all other facts including absence of evidence of any trading activity or speculative venture, we are of the view, therefore, that the Tribunal was right in its conclusion that the surplus from sale of the land did not result from any trade or business in land carried on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade.”
8. In the case of Janki Ram Bahadur Ram vs. CIT (supra), the Supreme Court held that it is for the Revenue to establish that the profit earned in a transaction is within the taxing provisions and the transaction must be determined on a consideration of all the facts and circumstances. The apex Court observed as follows : “…..No useful purpose would be served by entering upon a detailed analysis and review of the observations made in the light of the relevant facts, for no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. If, for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture : for instance, a man who purchases a large quantity of aeroplane linen and sells it in different lots, and, for the purpose of selling starts an advertising campaign, rents offices, engages an advertising manager, a linen expert and a staff of clerks, maintains account books normally used by a trader, and passes receipts and payments in connection with the linen through a separate banking account : Martin vs. Lowry (1926) 11 Tax Cases 297 : a person who carries on a money-lending business purchases very cheaply a vast quantity of toilet paper and within a short time thereafter sells the whole consignment at a considerable profit : Rutledge vs. IRC (1929) 14 Tax Cases 490 and a person, even though he has no special knowledge of the trade in wines and spirits, purchases a large quantity of whiskey and sells it without taking delivery of it at a considerable profit : IRC vs. Fraser (1942) 24 Tax Cases 498, may be presumed, having regard to the nature of the commodity and extent of the transaction coupled with the other circumstances to be carrying on an adventure in the nature of trade. These are cases of commercial commodities. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. A director of a company carrying on the business of warehouseman purchasing a number of houses with a view to resale, and selling them at a profit some years after the purchase…. a person carrying on business in various lines, including an engineering works, purchasing land which was under requisition by the Government, negotiating sale thereof before the land was derequisitioned, and selling it after the land was released : Saroj Kumar Majumdar vs. CIT (1959) 37 ITR 242 (SC) and a syndicate formed to acquire an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit : Leeming vs. Jones (1930) 15 Tax Cases 333, may not be regarded as commencing a venture in the nature of trade. These are cases in which the commodity purchased and sold is not ordinarily commercial and the manner of dealing with the commodity does not stamp the transaction as a trading venture. It may be emphasized from an analysis of these cases that a profit motive in entering into a transaction is not decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit.”
9. In the case of Kaur Singh vs. CIT (supra), the Punjab & Haryana High Court held as follows : “Keeping in view the principles enunciated by the Supreme Court, we shall now independently examine whether on the facts found by the Tribunal, the sale was an adventure in the nature of trade. A bare analysis of the facts found by the Tribunal would show that for arriving at this conclusion that it was an adventure in the nature of trade, the Tribunal was mainly influenced by the fact that out of the land attached to the Krishan Bagh Kothi, 42 plots of 2,000 sq. yds. each have been earmarked for sale; that in the year in question 7 plots were sold for Rs. 18,500 and that advances were received in respect of other plots. In our view, on the basis of these facts alone, no such inference could legally be drawn that the transaction in dispute has the character of a trade in nature. The assessee admittedly had purchased the property in the year 1967. The Revenue has not at all brought any circumstance or evidence on the record to show that at the time of the purchase of the property in the year 1967, the assessee had an intention to sell the property. Merely carving out plots in a portion of the land, without proof of anything more, cannot give rise to the conclusion that the transaction is an adventure in the nature of trade. Our attention was pointedly drawn by the learned counsel for the Revenue to a Division Bench judgment of this Court in Harbans Singh vs. CIT (1981) 23 CTR (P&H) 335 : (1981) 132 ITR 77 (P&H). But that decision is of no assistance to the Revenue as the facts of that case are entirely different and on the facts found in that case, the view was rightly taken that it was an adventure in the nature of trade. There can be no gainsaying that even a single venture may be regarded as a trade or business, but there have to be circumstances which may give rise to such a conclusion. As earlier observed, in this case the Tribunal has fallen in error in holding the venture as a trade or business merely on the ground that 42 plots were carved out, out of which 7 were disposed of in the year in question. In this view of the matter, in the circumstances of the case and on the facts found, the Tribunal was not right in law in holding that the income derived by the assessee from the sale of plots was from an adventure in the nature of trade. Consequently, the answer to this question is returned in favour of the assessee and against the Revenue.”
10. In the case of CIT vs. Principal Officer, Laxmi Surgical (P) Ltd. (supra), the Bombay High Court held as follows : “Applying the tests laid down by the Supreme Court in the various judgments referred to above to the facts of the present case, we are of the clear opinion that the asset, namely, rights in the property ‘Nirmal building’ acquired by the assessee was not its business asset forming part of its stock-in-trade. It was clearly a capital asset. The facts as set out above are clear. The assessee decided to purchase land and sell it to earn some profits. The managing director was allowed to undertake this transaction. He accordingly purchased the property and held it for some time. During this period he gave it on leave and licence basis, earned a licence fee, later transferred the same and thereby earned some profit. This was the sole transaction. This transaction had no connection with the ordinary business activities of the assessee. It is correct, as counsel for the assessee submitted, that the transaction was undertaken with the intention to earn profit because the company had suffered losses in the past but that by itself, as held by the Supreme Court, is not enough to give it the character of stock-in-trade or to bring the transaction within the ambit of an adventure in the nature of trade. Considering the totality of the facts and circumstances of the case, we hold that the Tribunal was not justified in its conclusion that the property acquired by the assessee was its stock-in-trade. Question No. 1 is, therefore, answered in the negative and in favour of the Revenue.”
In this case the assessee received a piece of land by way of gift from the father. Some time thereafter, the assessee proposed to sell the same with a view to get a better profit and got a layout plan prepared. According to this layout plan, land was carved out into several plots and roads. He sold the plots through a broker. The profit earned as a result of the sale was claimed as capital gain. The ITO was of the view that the assessee has undertaken an adventure in the nature of trade and assessed the income from business. The Tribunal, however, accepted the claim of the assessee. In the reference, this Court held as follows : On these facts, the Tribunal concluded that no intention to embark upon an adventure in the nature of trade can be attributed to the assessee. This is essentially a finding of fact. It is true that finding of this nature is held to be a mixed question of fact and law. But, in this case, it appears to be essentially a question of fact. We have seen the order of the ITO as well. Though he says that the assessee developed the land, he has not specified what precise development was undertaken by the assessee except preparing the layout plan. It has not shown that the assessee had laid roads or provided any other amenities before selling the plots. In the circumstances, we are of the opinion that the finding of the Tribunal is a correct one and there are no grounds to interfere with the said findings.”
11. In the case of Raja Bahadur Kamakhya Narain Singh vs. CIT (1970) 77 ITR 253 (SC), the apex Court has considered the expression ‘adventure in the nature of trade’ and held as follows :
“… Since the expression ‘adventure in the nature of trade’ implies the existence of certain elements in the transactions which in law would invest them with the character of trade or business and the question on that account becomes a mixed question of law and fact, the Court can review the Tribunal’s finding if it has misdirected itself in law. It is fairly clear that where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. The distinction whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit-making. If the transaction is in the ordinary line of the assessee’s business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.”
12. From the above cited decisions, it is clear that to treat a transaction within the purview of adventure in the nature of trade, it is to be seen whether the property had been purchased or acquired by the assessee with the intention to sell the property to earn profit by involving in several transactions of sale or to earn profit of its investment. In the present case, CIT(A) and the Tribunal found as a fact that the intent was to sell the property as a whole on a fixed amount. The land in question was used as a fixed asset of the firm and exploited for the business of firm and was not treated as stock-in-trade. Land was brought in the book of the firm not with an intention to resell for profit. The land was agreed to be sold as a whole to M/s Agarwal Enterprises, who was colonizer and after development asked the assessee to transfer the plot of land to its nominee. Development expenses have been borne by M/s Agarwal Enterprises. On these facts, the view of the CIT(A) and the Tribunal cannot be held to be erroneous in concluding that profit earned did not arise from the adventure in the nature of trade, but was in the nature of capital gain.
13. For the reasons stated above, we answer the question referred to us in the affirmative i.e., in favour of the assessee and against the Revenue. However, there shall be no order as to costs.
[Citation : 281 ITR 354]
