Smt. Supriya Kanwar vs. ITO (ITAT Jodhpur – Third Member)

Law laid down on when an isolated transaction can be regarded as an “adventure in the nature of trade” and the taxability of agricultural land situate beyond municipal limits

In view of difference of opinion between the Judicial Member and the Accountant Member, the Third Member had to consider two questions: (i) whether transactions of purchase and sale of five pieces of agricultural land with standing crop, by way of separate conveyance deeds, amounts to transactions on capital account or adventure in the nature of trade? & (ii) whether the surplus arising on sale of the agricultural land was “agricultural income” within the meaning of s. 2(1A) read with Explanation (1)/Section 2(14)(iii)(a) and (b) & consequently exempt u/s 10(1)? HELD by the Third Member:

(i) As regards Q. 1, the tests to distinguish between a transaction on the capital account and an adventure in the nature of trade have been set out in Venkataswami Naidu & Co. 35 ITR 594 (SC). On facts, the assessee purchased the land with standing crops thereon and it was shown in the records as land cultivated throughout the period of holding by the assessee. No efforts have been taken by the assessee to change the nature of land. Income from standing crops was offered for rate purpose as agricultural income. The transaction of purchase and sale of agricultural land is not part of a regular business activity of the assessee. It was an isolated transaction of purchase of agricultural land and sale thereof within a period of 13 months. Though the land is situated in the National Capital Region and there was a plan to develop the area of Alwer district as a global city, the fact remains that the master plan was finalised in the year 2010 and as per the master plan the area will be developed by the year 2013. If the assessee’s intention was to carry on an adventure in the nature of trade she has to wait at least till the master plan is finalised as otherwise she cannot expect substantial profit. On the contrary, the land was sold within a short span, seizing the opportunity of offer of better price which shows that the assessee intended to purchase the land as an investment only. Merely because a property was sold for a profit it cannot be assumed that it is an adventure in the nature of trade. Also, whether the land was sold out of free will or compulsion will not alter the character of the transaction. Every assessee would like to make profit on a transaction, given an opportunity. Taking a holistic view of the matter, the transaction was not an adventure in the nature of trade;

(ii) As regards Q. 2 (which would apply even if the transaction was an adventure in the nature of trade), the land cannot be treated as capital asset since it is situated beyond eight kilometers from the municipal limits and it was purchased as agricultural land and sold accordingly without making any changes such as conversion in the land records, plotting of land, etc. The assessee earned agricultural income in the immediately preceding year on sale of standing crop and the same was offered as agricultural income and accepted by the AO for rate purposes. It is thus clear that it is a case of sale of agricultural land and the land being situated beyond eight kilometres from the municipal limit, it cannot be subjected to tax under the Income Tax Act either as business income or capital gains. Though the Kerala High Court in T.K. Sarala Devi 167 ITR 136 and the of P&H High Court in Tula Ram 199 ITR 450 dissented from the decision of the Bombay High Court in Manubhai A. Sheth 128 ITR 87, in the light of the latest decision of the Apex Court in Singhai Rakesh Kumar vs. Union of India 247 ITR 150, the only interpretation permissible is that the land situated outside the municipal limits stands excluded from the expression ‘capital asset’ from the inception and the sale proceeds have to be treated as revenue received from agricultural land. At any rate, the view taken by the Bombay High Court can be said to be an appropriate view, on an analysis of provisions of s. 2(1A)/2(14)(iii) (a) &(b)/10(1). When two views are possible a view which is in favour of the assessee has to be taken in the light of the decision of the Apex Court in Vegetable Products Ltd. 88 ITR 192. Consequently, the surplus arising on sale of the impugned agricultural land gives rise to agricultural income and not assessable to tax.