Shri G. Manjunatha, Accountant Member:-
This appeal filed by the revenue is directed against order of the CIT(A), Vijayawada dated 9.11.2012 and it pertains to the assessment year 2007-08.
2. The brief facts of the case are that the assessee carrying on business of transport contractors with ITC Limited, filed his return of income for the assessment year 2007-08 on 31.10.2007 admitting a total income of ' 1,07,45,900/- and agricultural income of ' 30,000/-. The total income comprising of ' 31,21,937/- income from business, ' 75,26,277/- income from capital gains and ' 97,688/- income from other sources. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act') on 13.3.2009. The case was selected for scrutiny as per clause 9 of CBDT guidelines and notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the books of accounts and information/documents as called for.
3. During the course of assessment proceedings, the A.O. noticed that the assessee has incurred freight charges of ' 4,43,45,100/-. To ascertain the correctness of expenditure incurred in the assessee and also to examine the applicability of provisions of section 194C of the Act for deduction of tax at source, the A.O. issued a show cause notice and asked to furnish necessary details of expenditure along with TDS particulars. In response to show cause notice, the assessee vide letter dated 19.11.2009 submitted that he is involved in the business of transport contract entered into an agreement with ITC Limited for transport of goods from its manufacturing facilities to various places of customers. The assessee further submitted that to execute contract, he has hired lorries from various parties to be deployed to M/s. ITC Limited for transportation of goods. The assessee further submitted that the trucks will be hired directly from owners/drivers as and when it is required. There is no written or oral contract with the suppliers and the lorries were hired based on the requirement from various places and the payment is directly made to the drivers or the owners of the vehicles, therefore, the provisions of section 194C of the Act has no application and hence, the TDS is not deducted on such payments.
4. The A.O. further observed that during the financial year relevant to assessment year 2007-08, the assessee has computed long term capital gain from sale of lands. Therefore, issued a show cause notice and asked to furnish necessary details of computation of capital gain along with evidences. In response to show cause notice, the assessee submitted that he had purchased an agricultural land admeasuring 2 acres 95 cents situated in survey no.215/1, Ayyappa Nagar in the year 1980. The assessee further submitted that the said land has been converted into stock-in-trade as on 31.3.2006 for the purpose of formation of lay out. The assessee further submitted that he had converted its capital asset into stock-in-trade, formed layout and sold and accordingly computed profit arising out of sale of land under the provisions of section 45(2) of the Act.
5. The A.O. after considering explanations of the assessee and also analysis of the provisions of section 194C of the Act, observed that the assessee has paid freight charges without deduction of tax at source u/s 194C of the Act, even though the payments exceeds the threshold limit fixed for deduction of tax at source. The A.O. further observed that the assessee has entered into contract with lorry owners for the purpose of transportation of goods which is evident from the fact that the lorry receipts issued by the assessee stipulates a condition that the risk associated with goods is on the drivers till the goods are delivered at the specified places. The A.O. further observed that the assessee is also liable for constructive or actual damages, goods being lost in transit or goods being damaged or deteriorated. The terms and conditions as appeared in the L/R specifies that the driver or owner of the truck or his agents will be totally responsible and liable for the safety of goods and for any loss, damage, theft, highway robbery, fire and damage arising out of the negligence of the truck crew till such time the goods are delivered. Further, it is also incorporated that in the event of any loss or damage caused to the consignment, the driver/owner of the truck will be responsible to make good the loss to the assessee as valued by him. The signature of owner/driver on the L/R authenticate the acceptance of the liabilities of the assessee by the lorry owner/driver. The A.O. further observed that the L/R is the basis for payment of freight, hence, the payment cannot be a hire payment as claimed by the assessee. Therefore, opined that the freight charges paid by the assessee need to be treated as payment to sub contractors as defined u/s 194C(2) of the Act. Since, the assessee failed to deduct tax at source u/s 194C of the Act, the total expenditure incurred towards freight charges cannot be allowed as deduction u/s 40(a)(ia) of the Act.
6. In so far as computation of capital gain, the A.O. observed that the assessee has purchased agricultural land in the year 1980 for the purpose of carrying out agricultural operations, which is evident from the fact that he had declared agricultural income from said land for all the assessment years. The A.O. further observed that though assessee claims to have converted capital asset into stock-in-trade as on 31.3.2006, on perusal of the financial statement filed by the assessee for the financial year 2005-06, it is observed that the assessee has not incorporated conversion of capital asset into stock-in-trade by passing necessary entries in the books of accounts. The A.O. further observed that the tax audit report issued by the auditor u/s 44AB of the Act, clearly specified that during the financial year relevant to assessment year there is no conversion of any capital asset into stock-in-trade. Therefore, opined that the assessee has failed to file necessary evidences to prove, he had converted his capital asset into stock-intrade. The A.O. further observed that the assessee has no intention at the time of purchase of agricultural land to resale, and he has not placed any material evidence to show that the agricultural land was converted into stock-in-trade. Further, the assessee failed to place any evidence to brand the activity as business. On the contrary, the material evidence available on record show that the assessee received amount on realization of investment only. Hence, the purchase of agricultural land and holding it as capital asset till 31.3.2006 and sale of the same by marking into plots and receipt of sale consideration should be treated as income from capital gains. With these observations, and also by following certain judicial precedents, the A.O. held that the sale proceeds from sale of land should be assessed under the head income from capital gains but not under the head income from business. In so far as consideration for computation of capital gain, the A.O. has adopted sale consideration as per provisions of section 50C of the Act, for the reason that the sale of land is assessable under the head ‘capital gains’, as the assessee failed to prove the conversion of capital asset into stock-in-trade, accordingly, computed long term capital gain by adopting full value of consideration received as per the provisions of section 50C of the Act.
7. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions. As regards disallowance of freight charges for failure to deduct TDS u/s 194C of the Act, the assessee submitted that there is no written or oral contract with the lorry owners and hence, the question of deduction of tax at source u/s 194C of the Act does not arise. The assessee further contended that he had hired lorries in the open market as and when required for the purpose of transportation of goods. It was further submitted that he had entered into a transport contract agreement with M/s. ITC Limited for transportation of goods from its manufacturing facilities to various places. In the process, he had hired lorries from the owners without there being any written or oral contract and the lorries are hired on various places depending upon the requirement and hence, it cannot be considered as contract or sub contract as defined u/s 194C(2) of the Act. The assessee further submitted that the provisions of section 194C of the Act would apply, only when there is a contract between the parties for execution of work including transportation of goods. He had neither entered into any contract nor taken vehicles on regular basis, therefore, the payments made to lorry owners cannot be considered as payment made towards execution of works contract as defined u/s 194C of the Act. The assessee further submitted that the payments were directly made to the drivers or who so ever was incharge of vehicles and the drivers has not undertaken any responsibility of goods except what is stated in the L/R receipts, which is only an assignment of responsibility to the lorry owners for safe movement of goods, which cannot be considered as transfer of risk involved in the goods to the lorry owners. The A.O. merely relied upon the L/Rs to hold that the payments are coming within the ambit of the provisions of section 194C of the Act. But, the fact is that the assessee himself has undertaken the responsibility of the goods. The lorry owners does not take any responsibility, therefore, the question of application of the provisions of section194C of the Act is unwarranted.
8. In so far as computation of long term capital gain on sale of land, the assessee submitted that he had converted his capital asset into stock-in-trade and formed plots and computed resultant profit under the provisions of section 45(2) of the Act. The A.O. ignored the provisions of section 45(2) of the Act, and re-computed profit arised from the sale of land under the head ‘income from capital gains’ merely on the ground that the assessee has failed to prove conversion of capital asset into stock-in-trade. But, the fact remains that he had converted capital asset into stock-in-trade as on 31.3.2006, which is evident from the fact that he had computed income arised from sale of land under the provisions of section 45(2) of the Act. The A.R. further submitted that he had developed the land into plots, and the plots were sold immediately after development and all these factors clearly indicate the intention is to convert the land into stock-in-trade to commercially exploit. The A.O. failed to consider the intention of the assessee to commercially exploit the land on the sole reason that the assessee has not carried out any business activity in the past. But, the fact remains that even a single transaction may constitute adventure in the nature of trade or commerce and series of transactions are not necessary to prove that the assessee is into the business.
9. The CIT(A) after considering relevant submissions of the assessee and also analysis of the provisions of section 194C of the Act, observed that the assessee has taken lorries on hire without there being any written or oral agreement. The CIT(A) further observed that as seen from the agreement entered into by the assessee with ITC Limited there are number of responsibilities for the assessee and all the risk involved in transport of goods are rest with the assessee. The A.O. treated the freight payments as payment made to sub contractors merely on the ground that the lorry receipts clearly indicates that the driver/lorry owners have undertaken the risk associated with the goods. The CIT (A) further observed that it is seen that the lorries are placed at the disposal of the ITC Limited for transport of the goods. The goods are loaded and transported at the responsibility of the assessee. The assessee makes advance payment to the lorry driver at the time of loading goods and after delivery the lorry driver goes back and takes the balance amount. Thus, in the impugned activity elements of contract are absent and as such the action of the A.O. in applying the provisions of section 194C of the Act is not approved. Since, it is held that the provisions of section 194C of the Act have no application and accordingly, the provisions of section 40(a)(ia) of the Act have also no application, accordingly, directed the A.O. to delete additions made towards disallowance of freight charges.
10. In so far as computation of capital gain, the CIT(A) observed that it transpires from the record that the assessee has converted his capital asset into stock-in-trade, formed plots and thereafter sold. The assessee has computed both income from capital gain and income from business on conversion of capital asset into stock-in-trade as per the provisions of section 45(2) of the Act. But, the assessing officer is of the view that there is no business activity carried on by the assessee particularly in view of the fact that the stock converted on 31.3.2006 was not shown in the balance sheet. But, the assessee has filed necessary evidences to prove that he had converted his capital asset into stock-in-trade. Once conversion cannot be doubted, the provisions of section 45(2) of the Act come into play and the income is to be determined in accordance with the said section. With these observations and also by following the decision of ITAT, Mumbai bench in ACIT Vs. Jahangir reported in 20 SOT 512, held that the A.O. is incorrect to doubt the genuineness of such conversion and also compute the income under the head income from capital gains. In so far as application of the provisions of section 50C of the Act, the CIT(A) observed that when income is computed under the head ‘income from business’ the provisions of section 50C of the Act has no application. Accordingly, directed the A.O. to determine the income based on the actual consideration received from sale of land. Aggrieved by the CIT(A) order, the revenue is in appeal before us.
11. The first issue that came up for our consideration is disallowance of freight charges u/s 40(a)(ia) of the Act, for failure to deduct tax at source u/s 194C of the Act. The assessee has incurred freight charges without deduction of tax at source u/s 194C of the Act. The A.O. disallowed freight charges on the ground that the assessee ought to have deducted TDS, however failed to deduct TDS as per the provisions of section 194C of the Act. The A.O. further was of the opinion that the lorry receipts issued by the assessee clearly indicates that there exist a contract between the assessee and the lorry owners. The A.O. further observed that there is no need for written agreement, even an oral agreement is sufficient to attract the provisions of section 194C of the Act. According to the A.O., the transactions between the assessee and the lorry owners are comes within the ambit of the provisions of section 194C of the Act and accordingly, the payment made to lorry owners are nothing but a payment made to sub contractors. It is the contention of the assessee that the expenditure incurred under the head ‘freight charges’ is a payment made for mere hiring of vehicles without any written or oral contract with the lorry owners. The assessee further contented that the risk of transportation of goods is rest with him. The lorry owners/drivers does not take any responsibility of risk. Any damages to the goods while in the transportation is fully on the assessee. Therefore, the payments made to the lorry owners cannot be considered as payment made to sub contractors as defined u/s 194C(2) of the Act.
12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed freight charges for failure to deduct tax at source u/s 194C of the Act. According to the A.O., the expenditure incurred under the head ‘freight charges’ is nothing but payment made to sub contractors which attracts TDS provisions u/s 194C(2) of the Act. The provisions of section 194C of the Act require any person who is responsible for paying any sum to any sub contractor in pursuance of a contract with such sub contractor for carrying out any work undertaken by the contractor. As per the explanation (iii), the work shall include carriage of goods and passengers by any mode of transport other than by railways. A reading of section 194C(iii) of the Act, would clearly indicate that there should be a contract between the parties for carrying out any work. If there is no contract and the amounts were paid directly for engaging the vehicles temporarily for delivering the goods, it would not fall within the provisions of section 194C of the Act.
13. In this case, on perusal of the facts available on record, we find that the assessee is entered into a transport contract with M/s. ITC Limited for transportation of goods from its manufacturing facilities to various places. In the process, the assessee has hired vehicles and deployed the vehicles to M/s. ITC Limited for transportation of goods. As per the agreement entered into with ITC Limited, the total responsibility of transportation of goods is rest with the assessee. In the event of any damage caused to the goods, it is the responsibility of the assessee to bear the cost of goods. The lorry owners/drivers does not undertake any responsibility. They merely deploy the vehicle at the disposal of the assessee and the assessee has to hire the vehicles and make payment directly to the drivers or the lorry owner. We further observed that the A.O. has treated the said payments as payment made to sub contractors, merely on the ground that the L/Rs issued by the assessee clearly establishes that the assessee is entered into a sub contract with the lorry owners for transportation of goods. The A.O. further referring to the L/Rs observed that the driver or the owner of the truck or his agents will be totally responsible and liable for the safety of goods and for any loss, damage and also any damages arising out of the negligence of the truck, till such time the goods are delivered, the drivers or lorry owners has to undertake to bear the cost of goods. We do not agree with the findings of the A.O. for the reason that on perusal of paper book filed by the assessee, we find that the assessee has furnished sample copies of L/Rs. The terms and conditions mentioned in the L/Rs indicates that the lorry owners or drivers will undertake responsibility of safe movement of goods. The L/Rs further indicate that in the event of any damages to the goods, on account of negligence of the truck/lorry owners or drivers, then the lorry owners are liable to bear the cost of goods. The A.O. without appreciating the proper facts, simply came to the conclusion that the L/Rs issued by the assessee indicates that there exist a contract between the assessee and the lorry owners. But, the fact remains that the total responsibility of risk involved in the goods is rest with the assessee. The assessee merely hired the vehicles and deployed the vehicles at the disposal of the ITC Limited. Therefore, we are of the considered view that the payments made to lorry owners are not coming within the ambit of the provisions of section 194C of the Act.
14. The assessee has relied upon the decision of ITAT, Visakhapatnam in the case of Kranti Road Transport Private Limited Vs. ACIT, (2012) 50 SOT 15. The coordinate bench of this Tribunal, under similar circumstances, observed that whenever the lorries and trucks are hired by the assessee to be used in his business under its own supervision and control, then TDS is not required to be deducted on payment made to the lorries/truck owners. The relevant portion of the order is extracted below:
“In the provisions of section 194C, the word 'work' has been used and the said word 'work' has been defined under Explanation 3 according to which the expression 'work' includes advertising, broadcasting, telecasting, carriage of goods and passengers by any mode of transport other than by railways and catering. For the purpose of impugned controversy, the carriage of goods and passengers by any mode of transport other than by railways is considered to be the work which can be assigned to the contractor or subcontractor for its carrying out. [Para 11]
In the instant case, the assessee is a transporter and books the consignment of different parties for its transportation. Sometimes, the assessee hires the trucks and lorries of others for the transportation of the consignment booked by it. The assessee has made out a case that he has simply hired the lorries and trucks to transport its consignment under its own control and supervision. The movement of trucks and lorries are governed by the assessee itself and not the truck owners. Truck owners simply hire out their trucks for its use by the assessee against certain hire charges. The revenue has not made out a case that the assessee has engaged or hired the trucks for transportation of the consignment booked by it under the control and supervision of truck owners. Therefore, the assessee has not assigned any work to the lorry/truck owners as per pro visions of section 194C. The question involved in this case whether the assessee is required to deduct the TDS on payment of hire charges made to lorry owners was also examined in the case of M. Sitaramaiah v. ACIT [I T Appeal No. 355 of2008], in the light of finding in the case of Mythri Transport Corporation v. Asstt. CIT [2010] 24 lTD 40 (Visakhapatnam) and in that case it was concluded that the payments made to tanker owner would not fall in the category of sub-contractor for carrying out the whole or part of contract liable for deduction of tax at source under section 194C [Para 12]
TDS as per section 194C is required to be deducted when the payments are made to the contractor for carrying out the work i.e. carriage of goods and passengers by any mode of transport other than by railways subject to other conditions prescribed under section 194C but whenever the lorries and trucks are hired by the assessee for its own use in any manner under its own control and supervision, the TDS is not required to be deducted on payment made by the contractor to the lorry/truck owners. In the instant case, the assessee has hired the trucks/lorries for transporting of the consignment booked by it under its own supervision and control with all responsibility and liabilities. Therefore, the hiring of truck and lorries cannot be called to be the work as per definition given in Explanation 3 of section 194C and consequent thereto, the assessee is not liable for deduction of TDS on payment to lorry/truck owners as per section 194C Therefore, there was no merit in the order of Commissioner (Appeals) and it was to be set aside. [Para 13]”
15. The assessee relied upon the decision of Hon’ble High Court of Punjab & Haryana, in the case of CIT(TDS) Vs. United Rice Land Limited (2010) 322 ITR 594. The Hon’ble High Court, has observed that in the absence of any oral or written agreement between the assessee and the transporters for carriage of goods, freight charges paid to the lorry owners are not coming within the ambit of provisions of section 194C of the Act. The relevant portion of the order is extracted below:
“The Assessing Officer had held the assessee liable for deduction of tax only on the assumption that it was having agreement with the parties through whom trucks were arranged for transportation of goods. However, the Commissioner (Appeals) had recorded a finding of fact that there was neither any oral or written agreement between the assessee and the transporters for carriage of goods, nor had it been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for a specific period, quantity or price. That finding of fact was recorded by the Commissioner (Appeals) after considering the certificates furnished by the transporters. The Tribunal had also recorded a finding of fact that the department had not controverted the said finding of the Commissioner (Appeals) even before it. While recording the finding of fact, the Tribunal bad clearly stated that nothing had been brought on record by the Assessing Officer to prove that there was any written or oral agreement between the alleged parties for carriage of the goods. In view of that, no interference was called for with the finding of fact recorded by the Tribunal. The appeal, being without merit, was to be dismissed.”
16. In this view of the matter and also considering the ratios of the case laws discussed above, we are of the view that the expenditure incurred by the assessee under the head ‘freight charges’ is not coming within the ambit of provisions of section 194C of the Act, as the assessee neither entered into any oral or written agreement with the assessee nor taken vehicles on regular contract basis. The assessee has taken vehicles on mere hire basis to be deployed in the places where he has undertaken transport contract with M/s. ITC Limited. The risk associated with the goods till transportation to the destination is rest with the assessee. The lorry owners/drivers had not undertaken any responsibility of risk in the goods. Therefore, we are of the view that the payments made to lorry owners are not liable for TDS as per the provisions of section 194C of the Act, consequently, the expenditure incurred under the head ‘freight charges’ are not liable for disallowance u/s 40(a)(ia) of the Act. The CIT(A) after considering relevant submissions of the assessee has rightly deleted additions made by the A.O. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the CIT(A) order and dismiss the ground raised by the revenue.
17. The next issue that came up for our consideration is computation of capital gain on sale of land. The factual matrix of the case which leads to the impugned additions are that during the financial year relevant to assessment year 2007-08, the assessee has sold land admeasuring 2.98 acres and computed resultant profit under the head ‘income from business and income from capital gains’ as per the provisions of section 45(2) of the Act. The A.O. observed that the assessee has failed to prove conversion of capital asset into stock-intrade with necessary evidences. The A.O. further observed that the fact clearly indicates that the assessee has sold his capital asset. According to the A.O., the assessee failed to prove conversion of capital asset therefore, the resultant profit from sale of land would be assessable under the head ‘income from capital gains’. The A.O. has given various reasons to come to the conclusion that the impugned land is sold as a capital asset, but not as stock-in-trade. The A.O. further observed that though assessee claims to have converted capital asset into stock-intrade, as on 31.3.2006, the financial statements indicates that the assessee has not passed necessary entries to incorporate conversion of capital asset into stock-in-trade. The A.O. further observed that the tax audit report issued by the tax auditor clearly indicates that during the financial year relevant to assessment year, there is no conversion of capital assets in to stock-in-trade or vice-versa. According to the A.O., the assessee never had involved in any business activity of real estate development. The A.O. further was of the opinion that the activity undertaken by the assessee is not in the nature of adventure in the nature of trade or commerce.
18. It is the contention of the assessee that he had converted his capital asset into stock-in-trade as on 31.3.2006, developed said lands into plots before it was sold and computed resultant profit by applying the provisions of section 45(2) of the Act. The assessee further contended that he never carried out any business activity during the previous year ended 31.3.2006, except conversion of land into stock-intrade, therefore, no profit and loss account was drawn in so far as the business activity of real estate is concerned. It is also submitted that the entries in the books of accounts are not relevant for determining the nature of transactions. The tax auditor has issued audit report in respect of its transport business, therefore, he did not mention the conversion of capital asset into stock-in-trade in clause 12 of the tax audit report. Merely, the auditor did not mention the conversion of capital asset into stock-in-trade, it cannot be considered that conversion has not been taken place. In support of his arguments, relied upon the decision of Hon’ble A.P. High Court, in the case of CIT Vs. M. Krishna Rao reported in 120 ITR 101 and also the decision of the Rajasthan High Court in the case of CIT Vs. Govind Gruha Nirman Sahakar Samiti Limited reported in 258 ITR 208.
19. We have heard both the parties and perused the materials available on record. The A.O. computed long term capital gain from sale of land on the ground that the activity carried out by the assessee is not in the nature of adventure in the nature of trade or commerce. The A.O. further observed that the assessee has sold agricultural land. Mere conversion of agricultural land into various parts cannot constitute adventure in the nature of trade or commerce. According to the A.O., the assessee never involved in the business of trading in lands. The A.O. further observed that the assessee failed to prove conversion of capital asset into stock-in-trade with necessary evidences. According to the A.O., the documents furnished by the assessee and his financial statements for the financial year 2005-06 and tax audit report issued by the auditor clearly indicates that there is no conversion of capital asset into stock-in-trade during the relevant financial year.
20. The only question that needs to be examined is on the facts and in the circumstances of the case the profit from sale of land is assessable under the head ‘income from business’ or under the head ‘ income from capital gains’. The term ‘buisness’ includes any adventure in the nature of trade, commerce or manufacture. In order to find whether a transaction of purchase and subsequent sale amounts to an adventure in the nature of trade, the initial intention is an important factor, but not a conclusive one. The subsequent events and the assessee’s conduct are also important factors and the facts to be considered are firstly whether the transaction was in the line of the assessee’s business and secondly whether it was a isolated transaction or there was a series of similar transactions. It is not necessary that in order to constitute trade, there should be a series of transactions, both of purchase and of sale. Even a single and isolated transaction can be held to be capable of falling within the definition of business. Whether a transaction is in the nature of trade and commerce must be decided on the facts and circumstances of each case. The activity alleged/claimed to be an adventure in the nature of trade need not be allied to be the already existing activity of the assessee. The activity or the transaction said to be an adventure in the nature of trade must be with the object of earning profit. Therefore, to decide whether a particular transaction is in the nature of trade or commerce or it is in the nature of realization of investment by sale of capital asset has to be decided based on the facts and circumstances of each case.
21. In this case, on perusal of the facts available on record, we find that the assessee has purchased an agricultural land in the year 1980. The assessee has sold the impugned land in the financial year relevant to assessment years 2007-08. The assessee claims to have converted his investment into stock-in-trade as on 31.3.2006, developed the said land into various plots before it was sold. From this, it is very clear that the intention of the assessee was to purchase the land, divide them into plots and sell the plots within the period established, therefore, it is clearly indicates that the intention of the assessee was to carry out adventure in the nature of trade to commercially exploit the said land. The A.O. recomputed profit from sale of the said land on the simple reason that the assessee has failed to prove the conversion of capital asset into stock-in-trade. The assessee claims to have converted its capital asset into stock-in-trade as on 31.3.2006. Since, the said land was shown as investment in the balance sheet before it was converted, the assessee has not prepared financial statement for the real estate business separately. In the profit & loss account prepared for its other business, the assessee has not disclosed the said conversion of capital asset into stock-in-trade. The assessee further claims that merely because the books of accounts not disclosed the conversion of capital asset into stock-in-trade, the characteristics of the transaction would not change.
22. We find force in the arguments of the assessee, for the reason that the assessee has proved its intention to carry out adventure in the nature of trade on the said land. The assessee has converted the land into stock-in-trade, formed sites before it was sold. Therefore, from the above facts, it is very clear that the assessee has involved in the business of real estate which is evident from the fact that the assessee has computed resultant profit from sale of impugned land by applying the provisions of section 45(2) of the Act. Once the assessee has proved the conversion of capital asset into stock-in-trade, the provisions of section 45(2) of the Act come into play and the income is to be determined in accordance with the said section. In this case, the assessee has applied the provisions of section 45(2) of the Act and computed capital gain as well as business income after conversion of capital asset into stock-in-trade. Therefore, we are of the view that the documents furnished by the assessee clearly indicates that the assessee has converted his capital asset into stock-in-trade and hence, rightly computed resultant profit by applying the provisions of section 45(2) of the Act.
23. In so far as application of the provisions of section 50C of the Act for the purpose of determination of computation of capital gains, we find that the A.O. has adopted full value of consideration received as per the provisions of section 50C of the Act to determine the capital gain on the ground that the activity carried out by the assessee is not in the nature of adventure in the nature of trade or commerce and it is the realization of sale of capital asset. Since, we hold that the activity carried out by the assessee is in the nature of adventure in the nature of trade or commerce and the resultant profit is assessable under the head ‘income from business’ the provisions of section 50C of the Act has no application, when the income is computed under the head ‘income from business or profession’.
24. Now it is pertinent to discuss case laws relied upon by the assessee. The assessee has relied upon the decision of Hon’ble High Court of Andhra Pradesh, in the case of CIT Vs. M. Krishna Rao reported in 120 ITR 101. The Hon’ble High Court, under similar circumstances, held that when the assessee purchased the land, divide them into plots and sold the plots within the period established, then the intention of the assessee was to carry on the adventure in the nature of trade. The relevant portion of the order is extracted below:
“The assessee had not sold the property as he bought it, but had parceled it. He could not have realized the said amounts if there was no layout and he had not plotted out the land for building sites. Even a single venture might be regarded as in the nature of trade and business. From the facts, it was manifest that the intention of the assessee in purchasing the land in two transactions was to do business in real property and it was a business venture. The profits derived by the assessee on the sale of plots was assessable to tax as income from adventure in the nature of trade, for the two assessment years in question.”
25. The assessee also relied upon the decision of Hon’ble Rajasthan High Court, in the case of CIT Vs. Govind Gruha Nirman Sahakar Samiti Limited reported in 258 ITR 208. The Hon’ble High Court in the said case observed that the land which has been developed and divided into small plots has to be treated as stock-in-trade. The relevant portion of the order is extracted below:
“The facts found by the Tribunal were that the land had been developed and the expenses were incurred in developing the land. That land had been treated and found by the Tribunal as stock-in-trade. In view of the finding of the Tribunal, no interference was called for in the order of the Tribunal.”
26. In this view of the matter and also considering the ratio of the case laws discussed above, we are of the view that the income from sale of land is assessable under the head ‘income from business’, but not under the head ‘income from capital gains’. We further observed that the assessee has filed necessary evidences to prove, he had converted his capital asset into stock-in-trade, developed the said land before it was sold. The assessee has computed resultant profit from sale of the land by applying the provisions of section 45(2) of the Act. When the income is computed under the head ‘income from business’, the provisions of section 50C of the Act has no application for determination of full value of consideration for the purpose of computation of capital gain. The CIT(A) after considering the relevant provisions of the Act and also submissions of the assessee rightly directed the A.O. to delete additions made towards computation of capital gains. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the CIT(A) order and dismiss ground raised by the revenue.
27. In the result, the appeal filed by the revenue is dismissed.