Land sold by plotting held business income not capital gain. Sale was completed within a short period of few months and space was left for streets

Land sold by plotting held to be business income not capital gain as the sale was completed within a short period of few months and space was left for streets. In a recent judgment, this was upheld by ITAT Amritsar.

Case Law Details:
I.T.A No.478(Asr)/2014 Assessment Year: 2010-11
Sakun Aggarwal vs. Dy. CIT
Date of Judgment: 27/05/2016

Brief Facts of the Case:
The assessee had purchased 246.50 Marlas of land vide an agreement to purchase land and paid Rs. 25 lakh as advance payment. For the relevant assessment year, the assessee had declared Short Term Capital Gain on account of profit from sale of land which was sold in the form of plots but the assessee did not get the land registered or transferred in his name. The assessee was asked to explain as to why the profit from sale of land be not treated as business income instead of capital gain. The assessee contended that since he was not having means to make balance payments for the land purchsed by him therefore, he had entered into a verbal agreement with sellers of land whereby the sellers were free to sell the land to other buyers in lieu of which he received only some part of profits earned. However, the Assessing Officer was not satisfied with the submissions of the assessee and he held the transactions as business transactions observing among other things:
(a) The assessee sold the land in parts, in form of 12 plots
(d) he assessee did not get the purchased land registered or transferred in his name and the modus operandi was that the assessee got direct registries of sale made between the original owners and the final customers.
(e) The assessee sold all the plots in a very short period of time, approximately within a year.
(f)  The assessee made sale by plotting the whole area of 246.50 Marlas of the land.
(g) The plotting of land was also evidenced by the map found during the survey.
(h) Considerable development of land was undertaken by the assessee leaving out streets for proper colonization.
(i) The fact that land was not transferred in assessee’s name established that the land was not investment but just stock-in-trade purchased on credit with initial investment of Rs. 25 Lakh only.

Aggrieved by the AO order, the assessee contested the order before CIT(A) who agreed with the view that the sale of land should be assessed as adventure in the nature of trade covered under business income.  

Contentions of the Assessee:

The assessee contended that the deal of purchase could not materialize because one of the partners of assessee backed out from his part of investment and the assessee was not in a position to pay the entire balance amount and, therefore, he requested the sellers of land to sell the land to other persons and in lieu of his right of specific performance he was promised to get his advance amount of Rs.25,00,000/- back along with some portion out of profits earned from sale of such land. That the assessee had relinquished his right of specific performance which itself was a capital asset and therefore, relinquishing of this right resulted into sale of capital asset and therefore, assessee had rightly declared the income under the head capital gains.

Held by ITAT:

The ITAT held that the nature of transactions entered into by assessee was in the nature of adventure in trade because of the following facts:

(i) The copy of map showing of land intended to be purchased by assessee along with copy of agreement was found at the premises of assessee. The plotting of land done by sellers of land or by assessee himself suggests that the assessee had invested the amount with the purposes of selling in the form of plots within the earliest available period.

(ii) The sale of such land was completed by the sellers of land in a short period of a few months. The map of land reproduced in the assessment order suggests that the sufficient space was left for streets on the entire land.

(iii) The assessee was not able to demonstrate with evidence in the form of some agreement with the sellers of land whereby he had relinquished his right for specific performance of not getting the sale deed registered in his name.

(iv) The assessee could not demonstrate as to the amount for which such right was relinquished, as he continued to receive payments from owners linked with the sales.

(v) The assessee could not demonstrate as to why the payment of compensation was calculated in the form of profits and rather the receipt of profit from the sellers of land in two years itself suggests that assessee were sharing the profits with the sellers.

(vi) Had it been a payment received for relinquishment of his right then there would have been a clear cut agreement for specific amount.

(vii) The assessee had received the amount for the proportionate land sold in the year under consideration which itself proves that assessee was indeed entitled to profits form such land as and when it gets sold off.

(viii) The argument of learned AR that in earlier years or in subsequent years the assessee did not carry any business therefore can not be said to have business transaction in this year does not hold any force as any person, can venture into a business in any one year and then may not continue it. 

Land sold by plotting held business income not capital gain

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