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Section 2 in The Revenue Recovery Act, 1890
The Revenue Recovery Act, 1890
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Income Tax Appellate Tribunal - Hyderabad
Goutham Constructions Company, ... vs Assessee on 26 August, 2013

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH 'A', HYDERABAD

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

ITA No. 307/Hyd/2011

Assessment year 2007-08

M/s. Goutham Constructions vs. The Income Tax Officer Company, Hyderabad Ward-4(2) PAN: AADFG2330C Hyderabad Appellant Respondent

Appellant by: Sri S. Rama Rao

Respondent by: Sri R. Laxman

Date of hearing: 26.08.2013

Date of pronouncement: 27.09.2013

ORDER

PER CHANDRA POOJARI, AM:

This appeal by the assessee is directed against the order of the CIT(A)-V, Hyderabad dated 10.12.2010 for assessment year 2007-08.

2. The grievance of the assessee in this appeal is with regard to making addition of Rs. 1,23,48,500 by treating the purchase and sale of agricultural land as a business transaction and taxing the same as income from business.

3. Brief facts of the case are that the assessee is carrying on the business of purchase and sale of land. In addition to this, it was also developing real estate and selling the same. During the financial year 2003-04, the assessee had purchased land to the extent of 12.23 acres at Ashapur village, Ghatkesar Mandal for a consideration of Rs. 8,84,000. During the previous year relevant to the current assessment year, the assessee sold this 2 ITA No. 307/Hyd/2011

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land for a consideration of Rs. 1,32,32,500. The assessee claimed this transaction is to be the purchase and sale of agricultural land and also stated that from the beginning it had treated the land as a capital asset in its balance sheet. Its intent was to exploit this asset as a capital asset. Accordingly, some agricultural operations were being carried out. The Assessing Officer, on the other hand, disagreed with this contention and held that the assessee had not disclosed any agricultural activity and agricultural income in its return of income. The Assessing Officer was also of the opinion that motive of the assessee behind this transaction was doing business in the real estate, and held that the transaction of purchase and sale of land was a business transaction. Accordingly, by reducing the cost of acquisition from sale consideration, the AO made an addition of Rs. 1,23,48,500 treating the same as agricultural income.

4. On appeal, the CIT(A) confirmed the order of the AO by placing reliance on the judgement of Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (35 ITR 594) and Deepak Jyoti & Arati Trust vs. CIT (284 ITR 453) (Bom). He observed that from the above ratios of those judgements, it emerges that various facts including the nature of the business of the assessee, the nature of activity carried out pertaining to the asset, the line of business of assessee provide an indication to the intent of an assessee pertaining to the capital asset. It is this intent coupled with the nature of activity carried by an assessee which will determine whether the transaction can be classified as business or will rest within the four walls of transfer of capital asset. He observed as follows:

(a) There is no doubt that the assessee has given papers from the revenue authorities which indicate that some 3 ITA No. 307/Hyd/2011 M/s. Goutham Constructions Company

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agricultural activity was carried out. However, an examination of the papers reveals that the amount of crop produced in the land pertaining to the assessee is nowhere mentioned. The nature of crop and the extent of agricultural operations are conspicuously absent from these papers. On the other hand, when questioned during the course of appeal proceedings, the assessee could only state that some agricultural operations were being carried on one portion of the land only. It is clear therefore, that only a portion of the land had some agricultural operations in it and while rest of the land was not used by the assessee for any agricultural operations.

(b) The assessee could not provide any reply or any information as to how much labour was working on these lands, what was the nature of the operations being carried out, how many tube wells were there and what was the detailed nature of the agricultural activity being carried out by it. On the contrary, it was stated in the written submissions that "no systematic agricultural operations were carried out". It was stated that it was put to use sowing jowar seeds, etc. and growing/green grass for feed cattle. In this regard, it is pertinent to note that there is no description of any cattle in the books of the assessee. No income or loss from any crops it shown. These are all explanations given without any evidence or proof whatsoever.

(c) There is no evidence to show any organized agricultural activity by the assessee. The assessee is in the business of real estate and has good infrastructure for keeping a record of all transactions and maintaining detailed books of account. However, in the case of the land in question no such infrastructure was allocated to this land. The 4 ITA No. 307/Hyd/2011

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only explanation is that some agricultural operations were carried out, some produce was there and the sale price of the produce equalled the cost of price of the inputs. Therefore, no agricultural income was shown. It is clear from this explanation that far from standing on any legs of evidence, it does not even provide any details whatsoever. What was the produce, where it was sold, for how much, what was the nature of the inputs, at what cost, etc., all these are unanswered questions. Moreover, the important thing to note is that the inputs of labour, seed, land levelling, water, manure, etc. enter into the operations before the produce is there and sold. It is not clear as what was the source for payment regarding all these inputs. There are no debits in the bank accounts or in the books of account of the assessee pertaining to these expenses. From all these facts, it is clear that the assessee did not make any effort and did not indulge in organized activity or for that matter any activity whatsoever to build the land purchased into a proper agricultural asset which would provide the assessee with an income stream over the years. There is not a hint of any activity being carried by the assessee. The papers submitted do not provide any details of agricultural operations or of the extent of the crops. The land was not also given on any contract. It is entirely possible and probable given the surrounding circumstances that the villagers living in the area had grown small amount of crop on the land for their captive consumption, They may still be doing so. It is also important to note that there is no record of any agricultural implement or tool owned by the assessee. The assessee does not possess any electricity connection pertaining to this agricultural land.

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(d) It is also an important fact that the assessee is in the business of real estate and that this particular transaction is allied to the same business.

5. The CIT(A) further observed that from the above facts and circumstances, it is clear that from the very day the land was purchased by the assessee, its intent was always that of trading with the same. The facts discussed above unequivocally lead to this very inference. Not only was the intention of the assessee is to trade in the asset, but also there was a clear intention of not paying taxes on it. Therefore, the land was shown as capital asset of the assessee. The assessee was and is in the business of real estate. Therefore, it is clear that it had full knowledge of this market. The assessee fully knows that the land in question would increase in price substantially in years to come. Therefore, it was purchased for trading later on. As already discussed, not a rupee was spent on the land to build it as a capital asset. No activity or operation, whatsoever, was carried out by the assessee to ensure that the land becomes fit to sustain agricultural operations which could give it income stream in years to come. The only activity which would have been required in trading this land was to ensure that it remains free from illegal occupation and encumbrances. This was done by the assessee as is evident from the sale deed. When there was boom in the real estate sector, the assessee sold this land to realize a hefty profit. If at all, the assessee had carrying out proper agricultural operations, the implements of agricultural would either have been reported in the books of assessee or in the transfer deed of the land, in case they were sold with the land. This was not so.

6. The CIT(A) further held that the transaction was definitely in the nature of business or trade and has been rightly 6 ITA No. 307/Hyd/2011

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classified by the AO. The CIT(A) relied on the ratio laid down by the Apex court in the case of Saroj Kumar Mazumdar vs. CIT (37 ITR 242) (SC), wherein it has been held that if the transaction is in the assessee's line of business, even a single transaction of dealing in land estates is, an adventure in the nature of trade. Accordingly, he sustained the addition made by the Assessing Officer. Against this, the assessee is in appeal before us.

7. The learned AR submitted that the order of the CIT(A) is erroneous in law as well as on facts of the case. The CIT(A) ought to have accepted the contention of the assessee that the land purchased was agriculture land as the same was purchased in acres and not in square yards. The CIT(A) ought to have taken into consideration the fact that the assessee sold the land in two transactions as two bits. The land was held by assessee as an asset from the date of purchase till the date of sale and not as stock in trade. The conclusion of the CIT(A) that the intention of the assessee in acquiring the property was for trading is erroneous in the absence of any supporting evidence. The land was sold in two bits and if the assessee had any intention to carryon real estate business in respect of that land he would have obtained permission from the concerned authorities for making the same into plots. The claim of the assessee that the land was agriculture in nature was supported by patta pass books issued by State Revenue Authorities. The agricultural land was purchased as a capital asset and the same was supported by the entry in balance sheet submitted by the assessee for earlier years. There was unexpected increase in the prices of lands in and around twin cities and therefore the assessee sold away the agricultural land for a good price and that itself should not be a ground for the assessing officer to arrive at the conclusion that the assessee made an adventure in 7 ITA No. 307/Hyd/2011

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trade. All the relevant facts lead to a conclusion that the assessee did not involve in adventure in trade as there was no supporting evidence.

8. The AR submitted that the conclusion of the CIT(A) that the land involved in the transaction was not agriculture land was erroneous and, therefore, the same may be quashed. The AR submitted that the sale of agriculture land cannot be considered as adventure in trade. He submitted that the resultant profit cannot be considered as business profit assessable under the head profits and gains of business. The AR submitted that the CIT(A) ought to have considered the sale transaction as sale of capital asset liable for tax u/s. 45 instead of treating the same as business transaction liable for taxation u/s. 28. The CIT(A) ought not to have sustained levy of interest u/s. 234B of the IT Act as the case does not warrant levy of interest. The CIT(A) ought not to have sustained initiation of penalty u/s. 271(1)(b) of the IT Act on the facts and circumstances of the case. The CIT(A) ought not to have confirmed initiation of penalty u/s. 271(1)(c) of the IT Act on the facts and circumstances of the case.

9. The AR further submitted that the assessee has declared agricultural income. The property has been treated as fixed asset in its Balance Sheet for A.Ys. 2004-05, 2005-06 and 2006- 07 and the land was put to agricultural operations. It was purchased on 22.8.2003 and sold on 22.12.2006. Till then it was treated as a fixed asset and the AR drew our attention to the copies of financial statement for A.Ys. 2004-05, 2005-06 and 2006-07. Further, he relied on the order of the Tribunal in the case of M/s. SSPDL Ltd. vs. DCIT, in ITA No. 976/Hyd/2012 dated 5.4.2013 specifically on para 32 which is as under: 8 ITA No. 307/Hyd/2011

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"32. We have to see the intention of the assessee at the time of acquiring the asset. The intention of he assessee herein is to construct a building for setting up of its corporate office and it was always a fixed asset and not a stock-in-trade. Even if the assessee is in the business of real estate, the property acquired by the assessee for the purpose of setting up of a corporate office cannot be construed as a trading asset. The profit realised by sale of current assets in the line of trading is income from business. On the other hand, if the assessee sells a capital asset as an investor it is income from capital gain. The dominant or even the sole intention to resell is a relevant factor and raises a strong presumption but by itself is not conclusive proof of trading. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. Profit made by sale of capital asset always income from capital gain. One has to see whether the asset held by the assessee as an investment or as a trading asset. Realisation of capital asset is always income from capital gain."

10. Further he relied on the order of the Tribunal in the case of T. Veerender vs. Addl. CIT & Anr in ITA Nos. 550 & 551/Hyd/2012 dated 4.7.2013.

11. On the other hand, the learned DR relied on the orders of the lower authorities.

12. We have heard both the parties and perused the material on record. It is an admitted fact that the land was held by the assessee as a capital asset from the date of purchase till the date of sale. This is evidenced by the entries reflected in the Balance Sheet of the assessee company. The assessee's contention is that it is intended to retain the agricultural land acquired as a capital asset. The assessee never treated the land as stock in trade. The assessee reflected the same in the Balance Sheet as a fixed asset. The assessee carried on agricultural operations. This agricultural land is situated 9 ITA No. 307/Hyd/2011

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beyond 28 km from the municipal limits. The Assessee has not taken any permission from the Government for making plots, as the assessee company never had any intention to make the land into plots and carry on real estate business in respect of the land. Thus, the assessee never created an asset as stock in trade but treated it as capital asset (agricultural land). The same is reflected under the head fixed assets in the Balance Sheet up to 31.3.2006. Copies of pahanis of the above said land is brought on record by the assessee to prove the fact that the land held/sold by the assessee is agricultural land.

13. The AR submitted that the sale transaction effected by the assessee in respect of the above agriculture land constituted only sale of agriculture land, and by no stretch of imagination it can be treated as adventure in trade and so as to treat the same as 'business transaction' for the following reasons:

i) Purchase and holding of land for a period and subsequent sale thereof itself cannot be an indicator to hold that the intention of the assessee was to carry on business with those assets. The intention cannot be presumed unless supported by evidence. In this case the treatment given by the assessee for this asset in the account books clearly indicate that the intention of the assessee is to hold the same as capital asset to have good returns from the same.

ii) The assessee held land for considerable time. The asset acquired was agriculture land as per the evidence brought on record. It was sold on 22.12.2006 which was acquired on 22.8.2003. Thus, the assessee held the agriculture land for about 4 years. According to the AR, during that period the assessee carried on regular agricultural operations in the land. In the light of favourable market conditions the assessee thought it good to sell the asset to 10 ITA No. 307/Hyd/2011

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realize a good amount. Realization of better price in a booming market cannot be considered as an adventure in trade

iii) The expression adventure in the nature of trade occurs in the definition of business under section 2(13) but the expression adventure in the nature of trade has not been defined in the Act. It may be pertinent to mention here that a specific transaction partake the character of business or an adventure in the nature of trade or realization of capital asset or a mere conversion of asset has to be decided depending upon facts of each case.

iv) In deciding as to whether a particular transaction is an adventure in the nature of trade, the Assessing Officer must consider all the relevant and proved facts and circumstances. Realization of investments consisting of purchase of agricultural land and resale, though profitable are clearly outside the domain of adventure in the nature of trade.

v) The assessee treated the assets as investment in agricultural land. Therefore disposal of the same would not convert, what was a capital accretion, to an adventure in the nature of trade. To make it more clear, sale of agricultural land by the assessee and realisation of good price would not alter the basic nature and characteristic of the transaction. In the case of the assessee, land was acquired by the assessee and reflected in the balance- sheets of the concern as fixed-assets. The assessee never treated the land as stock-in-trade and reflected in profit and loss account (closing stock). There was no element of trade attached to the activity of the assessee in purchase 11 ITA No. 307/Hyd/2011 M/s. Goutham Constructions Company

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and sale of the land. A continuous business requires more activity and greater organization. This is absent in the transaction of sale of land by the assessee. Therefore, although there is profit in the transaction the transaction cannot be characterized as an adventure in the nature of trade.

vi) Whether a transaction in respect of an asset is capital or business income being adventure in the nature of trade depends on the facts and circumstances of the case. There are many factors like frequency of transactions, period of holding, intention for resale etc, which determine whether the gain arising of a transaction is in the process of realisation of investment or in the course of business. The mere fact that the person has purchased a land and subsequently sold it, giving rise to a substantial profit cannot change the character of the transaction. It is the general human tendency to earn profit out of capital asset. No one invests to incur a loss. If the market condition suddenly goes up or down, it is always the tendency of a person to take a quick decision so that the realization on the investment is maximum or the loss is minimum.

vii) The assessee filed adangal/pahani and other documents from Revenue authorities suggesting the agricultural nature of the property and agricultural activities have been carried on in a portion of the land.

14. From the above, it is clear that:

a) The assessee purchased agriculture land now under consideration situated beyond 8 km from the municipal limits.

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b) The assessee treated the same as fixed asset in their books along with other agriculture land which was already acquired by them in the earlier years.

c) The land was identified as agriculture land in the revenue records.

d) The assessee carried on routine agriculture operations in the said land.

e) The assessee did not carry on any commercial activity with reference to that land such as getting of approval for converting into sites, plotting of the same into sites etc. Thus, the character of the land i.e., agriculture nature was continuing till the same was sold by the assessee company.

f) Because of favourable market conditions the assessee sold the land and the same fetched them a good price.

15. Therefore, in the present case there is no dispute that the assessees acquired agricultural land. There is also no dispute that there was agricultural operation in this land before sale of this land by growing paddy and grass which does not require investment. The amount fetched to the assessee used to be enough for meeting the expenditure for agriculture.

16. The Assessing Officer was of the opinion that the amount received on sale of this agricultural property is nothing but on account of adventure in the nature of trade and the same was brought into income from business. In this case, the assessee held the land always as investment and not at all converted into stock-in-trade. The character of the land in the hands of the assessees has not changed. There is no material on record to show that the assessee carried on activities of buying and selling of land in a systematic manner so as to justify the action 13 ITA No. 307/Hyd/2011

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of the AO in treating the activities of the assessee as adventure in the nature of trade. The land was sold by the assessees in acreage and not by making plots.

17. Now the question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.

18. The expression 'agricultural land' is not defined in the Act, and now, whether it is agricultural land or not has to be determined by using the tests or methods laid down by the Courts from time to time.

19. The Hon'ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim (204 ITR 631) has approved the decision of a Division Bench of the Hon'ble Gujarat High Court in the case of CIT vs. Siddharth J. Desai (1982) 28 CTR (Guj) 148 : (1983) 139 ITR 628 (Guj) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has to be decided or answered. We reproduce the said 13 tests as follows:

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1. Whether the land was classified in the Revenue records as agricultural and whether it was subject to the payment of land revenue?

2. Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

3. Whether such user of the land was for a long period or whether it was of a temporary

character or by any of a stopgap arrangement?

4. Whether the income derived from the

agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?

5. Whether, the permission under s. 65 of the Bombay Land Revenue Code was obtained for

the non-agricultural use of the land? If so, when and by whom (the vendor or the

vendee)? Whether such permission was in

respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date?

6. Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use?

Whether such lesser and/or alternative user was of a permanent or temporary nature?

7. Whether the land, though entered in Revenue records, had never been actually used for

agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?

8. Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the land in the adjoining area were such as would

indicate that the land was agricultural?

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9. Whether the land itself was developed by plotting and providing roads and other

facilities?

10. Whether there were any previous sales of portions of the land for non-agricultural use?

11. Whether permission under s. 63 of the Bombay Tenancy and Agricultural Land Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale or intended sale to such non- agriculturists was for non-agricultural or agricultural user?

12. Whether the land was sold on yardage or on acreage basis?

13. Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the

owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?"

20. A reference could be made to the case of CWT vs. Officer- in-charge (Court of Wards) (105 ITR 138) (SC) wherein the Constitution Bench of the Hon'ble Supreme Court stated that the term 'agriculture' and 'agricultural purpose' was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance. The Hon'ble Supreme Court has observed that the term 'agriculture' is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term 'agriculture' receives a wider interpretation both in regard to its operation as well as the result of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of 16 ITA No. 307/Hyd/2011

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its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon'ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.

21. The Hon'ble Gujarat High Court in the case of Dr. Motibhai D. Patel vs. CIT (1982) 27 CTR (Guj) 238 : (1981) 127 ITR 671 (Guj) referring to the Constitution Bench of the Hon'ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon'ble Gujarat High Court further held that there was nothing on record to show that the presumption rose from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.

22. The Hon'ble Bombay High Court in the case of CWT vs. H. V. Mungale (1983) 32 CTR (Bom) 301 : (1984) 145 ITR 208 (Bom) held that the Hon'ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some 17 ITA No. 307/Hyd/2011

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evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue. The Hon'ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.

23. We may also refer to the case of CIT vs. Manilal Somnath (1977) 106 ITR 917 (Guj), wherein the Division Bench of the Hon'ble Gujarat High Court observed that the potential non- agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.

24. We may also refer to the case of Gopal C. Sharma vs. CIT (1994) 116 CTR (Bom) 377 : (1994) 209 ITR 946 (Bom), in which, the case of Smt. Sarifabibi Mohamed Ibrahim & Ors. vs. CIT (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.

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25. We may refer to a judgment of the Hon'ble Madras High Court in the case of CWT vs. E. Udayakumar (2006) 284 ITR 511 (Mad) where the Hon'ble Madras High Court has referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Smt. Savita Rani (2004) 186 CTR (P&H) 240 : (2004) 270 ITR 40 (P&H) and has observed and held as under :

"8. It is well settled in the case of CIT vs. Smt. Savita Rani (2004) 186 CTR (P&H) 240 : (2004) 270 ITR 40 (P&H), wherein it is held that the land being located in a commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non- agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

9. In the abovesaid case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years. The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim. Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for nonagricultural 19 ITA No. 307/Hyd/2011

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purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant."

26. Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land as per Revenue records which is kept on record at Paper Book page Nos. 44 to 47. It is also an admitted fact that the AO has not brought on record any evidence to show that the agricultural land was used for non- agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land.

27. The provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. If by a Government Notification, the nature and character of land changes from agriculture into non-agriculture then there is no question of conversion of this land for non- 20 ITA No. 307/Hyd/2011

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agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by any State Government notification and the land owners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by State Government notification.

28. It is also an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also an admitted position that the assessee had not applied for conversion of the land in question into non- agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessees herein to put the same for non-agricultural purposes at time of their ownership that land. No such finding has been given by the Department. No material or evidence in support of the fact that the assessees have put the land in use for non- 21 ITA No. 307/Hyd/2011

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agricultural purposes has been brought on record. At the relevant point of time the land was used for agricultural purposes only and nothing is brought on record to show that the land was put in use for non-agricultural purposes by the assessee. In view of the decision of the Hon'ble High Court in the case of Gopal C. Sharma vs. CIT (209 ITR 946) (Bom), it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non-agricultural purposes. We may also refer to a decision of the Hon'ble Supreme Court in the case of N. Srinivasa Rao vs. Special Court (2006) 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by Developer cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.

29. Recently the Karnataka High Court in the case of CIT vs. Madhukumar N. (HUF) (2012) 78 DTR (Kar) 391 held as follows:

"9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a notification 22 ITA No. 307/Hyd/2011

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under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a "Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion."

30. Further the Kolkata Bench of the Tribunal in the case of DCIT vs. Arijit Mitra (48 SOT 544) (Kol) held as follows: "7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of 'capital asset', if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the 23 ITA No. 307/Hyd/2011

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present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross objection of the assessee is allowed."

31. It was held in the case of CIT vs. Manilal Somnath (106 ITR 917) as follows:

"Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of " capital asset" and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head "capital gains". In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land. If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non-agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.

'The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:

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Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.

32. Further the word "Capital Asset" is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

(iii) agricultural land in India, not being land situate-

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation,

notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central

Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;

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33. It is very clear from the above that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words 'whether known as' clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.

34. We also perused the meaning of the term local authority as referred in section 10(20) of the Act.

(20) the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area].

[Explanation. - For the purposes of this clause, the expression "local authority" means -

(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);

35. It is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended 26 ITA No. 307/Hyd/2011

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so as to include the agricultural land located within the jurisdiction of a municipality in the definition of the expression 'Capital Asset'. The relevant portion of the said memorandum is reproduced hereunder:

"30. ... The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term "capital asset" in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term "capital asset". Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a

population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term "capital asset".

36. Further it is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall 27 ITA No. 307/Hyd/2011

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in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

37. We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions. In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from these notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of 'capital asset'. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situated in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) 28 ITA No. 307/Hyd/2011

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of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (cited supra), Harish V. Milani (supra) and M.S. Srinivas Naicker vs. ITO (292 ITR 481) (Mad). By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (cited supra).

38. From the facts and circumstances of the case, as narrated before us, it is important to note that what was the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would 29 ITA No. 307/Hyd/2011

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not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and even there was no intention to sell the land in future at that point of time. It was due to the boom in real estate market came into picture at a later stage, the assessee has sold the land. Merely because of the fact that the land was sold for profit, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade.

39. Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is 30 ITA No. 307/Hyd/2011

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basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, we are inclined to hold that the sale of agricultural land cannot be considered as advantage in the nature of trade so as to tax the gain on sale of the same. Accordingly, the resultant profit cannot be considered as business profit assessable under the head 'income from business'. This ground of the assessee is allowed.

40. Consequently, there is no question of initiation of penalty proceedings u/s. 271(1)(b) and u/s. 271(1)(c) of the Act.

41. Further, there is also no question of levy of any interest u/s. 234B of the Act.

42. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 27th September, 2013.

Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, dated the 27th September, 2013

Copy forwarded to:

1. M/s. Goutham Constructions Company, c/o. M/s. B. Narsing Rao & Co., Chartered Accountants, Plot No. 554, Road No. 92, Jubilee Hills, Hyderabad-96.

2. The Income Tax Officer, Ward 4(2), Hyderabad.

3. The CIT(A)-V, Hyderabad.

4. The CIT-IV, Hyderabad.

5. The DR - A Bench, ITAT, Hyderabad.

Tprao