http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html
Subhash Lakhotia
Tax and Investment Consultant,
Tax Guru: CNBC Awaaz
Sometimes, when a tax payer sells his agricultural land, a question
generally that arises in the minds of the tax authorities is to find out
whether the surplus realized on sale of land was in the nature of
Capital Gains or was it a profit received by the tax payer as a trader
in land on account of adventure in the nature of trade.
Similar question also came up recently before the Honourable High Court
in the case of CIT v. Administrator of the Estate of Late Shri E.F.
Dinshaw (2012) 345 ITR 529 In this case one Late F.E. Dinshaw, who was a
partner in a firm of solicitors and a financial adviser to the Princely
State of Gwalior, purchased large tracts of land admeasuring about 2500
acres at Malad and Borivali in or about 1923.
He died in 1936 and was survived by a son, E.F. Dinshaw, and a daughter
Bachoobai Woronzow, both of whom were non-residents and were citizens of
a foreign country. Upon the death of F.E. Dinshaw, his son and daughter
became joint owners of the lands. No physical division was carried
out.
Under the last will and testament of F.E. Dinshaw, a life interest was
created of his share in the land in favour of his daughter, Bachoobai, a
reversionary interest being created in favour of two U.S. based
charities. By a judgment of the Bombay High Court dated 21.12.1972, W
was appointed as sole administrator of the estate. The other half share
was bequeathed to E.F. Dinshaw.
On 27.12.1973, Bachoobai leased out 72 acres of the lands jointly owned
by her and her brother to a company by the name of Haven Kores Real
Estate Pvt. Ltd. for a period of ninety nine years. On 29.3.1973,
Bachoobai created three charitable trusts :
(i) F.M. Dinshaw Foundation with a corpus consisting of the reversionary
interest of herself and the administrator in the land leased to Haven
Kores Real Estate Pvt. Ltd. ;
(ii) F.E. Dinshaw Charities consisting of the corpus of mostly tenanted
properties jointly owned ;
(iii) F.E. Dinshaw Trust with a corpus consisting of mainly leased and
unencumbered free land of F.E. Domshaw Estate jointly owned by her and
her late brother.
From early times, different portions of the property were leased out to
various persons against the payment of ground rent for the purposes of
constructing house properties. Over time, a large part of the land was
encroached upon. From November, 1968, agreements to sell were executed
in respect of different portions of the land.
Before any sale deed could be entered into, permission was required to
be taken of the Charity Commissioner under section 36 of the Bombay
Public Trusts Act, 1950. Since E.F. Dinshaw and Bachoobai were not
citizens of India, permission was also required under the Foreign
Exchange Regulation Act, 1973.
The provisions of the Urban Land (Ceiling and Regulation) Act, 1971,
rendered some parts of the land as surplus. Permissions were also
required to be taken under Chapter XX-C of the IT Act. After
permissions were taken and the conveyances were finalized upon
registration, there was a surplus which the assessee claimed as a
long-term capital gain.
When the matter came up before the Assessing Officer during the course
of assessment proceedings, the Assessing Officer held that there that
there was a steady, systematic and continuous process of selling
portions of the property for making profits in the real estate.
According to the Assessing Officer, the nature of expenses debited to
the income and expenditure account, the quantum, the activities and the
manner in which the value of the trust properties was reduced, was
suggestive of the fact that the lands were purchased only for the
purpose of earning profit.
The profit arising from the sale of the land was treated as business
income. In appeal, the CIT (Appeals) held that the mere ownership of
the land did not constitute trade. The Commissioner of Income-tax
(Appeals) held in favour of the assessee on the basis of the following
findings : (i) neither of the assessees had purchased the land
themselves.
The land had been purchased by the late F.E. Dinshaw nearly seventy
years earlier when the growth of Mumbai to its present state could not
have been foreseen ; (ii) the land was purchased as a source of earning
income from ground rent ; (iii) encroachment took place after 1947
whereupon it became difficult to protect open land.
In selling the land, the assessees had been motivated more by the desire
of protecting their corpus than of earning profits ; (iv) the assessees
were trusts or the administrator of the estate and could not enter into
the business of selling land.
The Income-tax Department filed appeal to the Income-tax Appellate
Tribunal. When the matter came up before the Income-tax Appellate
Tribunal, The Tribunal had relied upon the following circumstances in
support of its conclusion that the income that was realized upon the
sale of the lands constituted capital gains and not business income :
(i) The late F.E. Dinshaw had no intention to trade in the lands at the
time of purchase. After the purchase of the lands in 1923, there was no
sale thereafter for nearly thirty-five years ;
(ii) The late F.E. Dinshaw was far from any business in real estate
and, therefore, this was not a case where a transaction can be regarded
as being relatable to the business which was normally carried on by the
assessee ;
(iii) In the present case, there was no activity such as in the nature
of improvements on the lands, for instance, by laying drainage lines,
electricity, levelling or construction of roads. The fencing of the
land and the construction of the compound well were only intended to
protect the property and not to carry out improvements ;
(iv) Though the extent of the sales had increased over time, compared to
the vast extent of holding, the sales could not be regarded as
expensive. Morever, while there were sales of some parts of the land,
there was no corresponding activity involved of purchases ;
(v) The repurchase of about a hundred acres of land which had been
declared surplus under the Urban Land Ceiling Act was not a purchase in
the commercial sense since it constituted nothing but a retention of the
property which was earlier vested in the assessees
(vi) The property was purchased nearly seventy years earlier and it
could not be expected that it should remain vested indefinitely.
The sale of the property was explained by the fact that there were
encroachments on the lands leading to heavy litigation and expenditure
on account of which it became necessary to sell parts of the land.
On the evaluation of the record and having regard to the
aforesaid circumstances, the Tribunal affirmed the view of the
Commissioner of Income-tax (Appeals) that the income generated from the
sale of land during the Assessment years in question, should be treated
as capital gains.
Finally, while deciding this important issue the Honourable judges of
the High Court were of the view that a large tract of land of nearly
2500 acres was acquired in or about the year 1923 by the late F,E.
Dinshaw. F.E. Dinshaw was a solicitor. The acquisition of the land
was evidently not motivated by an adventure in the nature of trade.
The statement of case makes it clear that there was no transaction
involving the sale of the land during his life time. Secondly,
neither E.F. Dinshaw nor for that matter Bachoobai purchased the land.
The land had devolved on E.F. Dinshaw and upon Bachoobai by testamentary
succession. Thirdly, upon the death of F.E. Dinshaw in 1936, there was
no transaction involving the sale of the land for a period of nearly
sixty five years since the purchase of the land.
Fourthly, the assessee in the present case, is the administrator of the
estate of the late E.F. Dinshaw. Half the interest of the land
devolved upon E.F.Dinshaw under the will that was executed by his father
F.E. Dinshaw. Fifthly, both the Commissioner of Income-tax (Appeals)
and the Tribunal have rendered concurrent findings of fact.
The finding of fact recorded by the Tribunal is that since independent
encroachments gradually took place over certain areas of the land. The
sale of the land was not motivated by a desire to make a profit, but to
protect the corpus and the resulting expenditure due to litigation.
The finding of the Tribunal is also to the effect that there were no
improvements on the land by way of laying out drainage, levelling or
construction of roads.
Though an area admeasuring about a hundred acres was repurchased, the
Tribunal recorded that this was hardly a purchase in the commercial
sense since it was a repurchase of lands which were declared as surplus
under the Urban Land Ceiling Act.
Finally after discussing many important decided case laws on the subject
the Honourable judges of the High Court came to the conclusion that the
surplus that was realized on sale of the land was in the nature of
capital gain.
The author is tax & investment consultant at New Delhi for last over
40 years. He is also Director of M/s R.N. Lakhotia & Associates
& The Strategy Group.
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
Subhash Lakhotia
Tax and Investment Consultant,
Tax Guru: CNBC Awaaz
Sometimes, when a tax payer sells his agricultural land, a question
generally that arises in the minds of the tax authorities is to find out
whether the surplus realized on sale of land was in the nature of
Capital Gains or was it a profit received by the tax payer as a trader
in land on account of adventure in the nature of trade.
Similar question also came up recently before the Honourable High Court
in the case of CIT v. Administrator of the Estate of Late Shri E.F.
Dinshaw (2012) 345 ITR 529 In this case one Late F.E. Dinshaw, who was a
partner in a firm of solicitors and a financial adviser to the Princely
State of Gwalior, purchased large tracts of land admeasuring about 2500
acres at Malad and Borivali in or about 1923.
He died in 1936 and was survived by a son, E.F. Dinshaw, and a daughter
Bachoobai Woronzow, both of whom were non-residents and were citizens of
a foreign country. Upon the death of F.E. Dinshaw, his son and daughter
became joint owners of the lands. No physical division was carried
out.
Under the last will and testament of F.E. Dinshaw, a life interest was
created of his share in the land in favour of his daughter, Bachoobai, a
reversionary interest being created in favour of two U.S. based
charities. By a judgment of the Bombay High Court dated 21.12.1972, W
was appointed as sole administrator of the estate. The other half share
was bequeathed to E.F. Dinshaw.
On 27.12.1973, Bachoobai leased out 72 acres of the lands jointly owned
by her and her brother to a company by the name of Haven Kores Real
Estate Pvt. Ltd. for a period of ninety nine years. On 29.3.1973,
Bachoobai created three charitable trusts :
(i) F.M. Dinshaw Foundation with a corpus consisting of the reversionary
interest of herself and the administrator in the land leased to Haven
Kores Real Estate Pvt. Ltd. ;
(ii) F.E. Dinshaw Charities consisting of the corpus of mostly tenanted
properties jointly owned ;
(iii) F.E. Dinshaw Trust with a corpus consisting of mainly leased and
unencumbered free land of F.E. Domshaw Estate jointly owned by her and
her late brother.
From early times, different portions of the property were leased out to
various persons against the payment of ground rent for the purposes of
constructing house properties. Over time, a large part of the land was
encroached upon. From November, 1968, agreements to sell were executed
in respect of different portions of the land.
Before any sale deed could be entered into, permission was required to
be taken of the Charity Commissioner under section 36 of the Bombay
Public Trusts Act, 1950. Since E.F. Dinshaw and Bachoobai were not
citizens of India, permission was also required under the Foreign
Exchange Regulation Act, 1973.
The provisions of the Urban Land (Ceiling and Regulation) Act, 1971,
rendered some parts of the land as surplus. Permissions were also
required to be taken under Chapter XX-C of the IT Act. After
permissions were taken and the conveyances were finalized upon
registration, there was a surplus which the assessee claimed as a
long-term capital gain.
When the matter came up before the Assessing Officer during the course
of assessment proceedings, the Assessing Officer held that there that
there was a steady, systematic and continuous process of selling
portions of the property for making profits in the real estate.
According to the Assessing Officer, the nature of expenses debited to
the income and expenditure account, the quantum, the activities and the
manner in which the value of the trust properties was reduced, was
suggestive of the fact that the lands were purchased only for the
purpose of earning profit.
The profit arising from the sale of the land was treated as business
income. In appeal, the CIT (Appeals) held that the mere ownership of
the land did not constitute trade. The Commissioner of Income-tax
(Appeals) held in favour of the assessee on the basis of the following
findings : (i) neither of the assessees had purchased the land
themselves.
The land had been purchased by the late F.E. Dinshaw nearly seventy
years earlier when the growth of Mumbai to its present state could not
have been foreseen ; (ii) the land was purchased as a source of earning
income from ground rent ; (iii) encroachment took place after 1947
whereupon it became difficult to protect open land.
In selling the land, the assessees had been motivated more by the desire
of protecting their corpus than of earning profits ; (iv) the assessees
were trusts or the administrator of the estate and could not enter into
the business of selling land.
The Income-tax Department filed appeal to the Income-tax Appellate
Tribunal. When the matter came up before the Income-tax Appellate
Tribunal, The Tribunal had relied upon the following circumstances in
support of its conclusion that the income that was realized upon the
sale of the lands constituted capital gains and not business income :
(i) The late F.E. Dinshaw had no intention to trade in the lands at the
time of purchase. After the purchase of the lands in 1923, there was no
sale thereafter for nearly thirty-five years ;
(ii) The late F.E. Dinshaw was far from any business in real estate
and, therefore, this was not a case where a transaction can be regarded
as being relatable to the business which was normally carried on by the
assessee ;
(iii) In the present case, there was no activity such as in the nature
of improvements on the lands, for instance, by laying drainage lines,
electricity, levelling or construction of roads. The fencing of the
land and the construction of the compound well were only intended to
protect the property and not to carry out improvements ;
(iv) Though the extent of the sales had increased over time, compared to
the vast extent of holding, the sales could not be regarded as
expensive. Morever, while there were sales of some parts of the land,
there was no corresponding activity involved of purchases ;
(v) The repurchase of about a hundred acres of land which had been
declared surplus under the Urban Land Ceiling Act was not a purchase in
the commercial sense since it constituted nothing but a retention of the
property which was earlier vested in the assessees
(vi) The property was purchased nearly seventy years earlier and it
could not be expected that it should remain vested indefinitely.
The sale of the property was explained by the fact that there were
encroachments on the lands leading to heavy litigation and expenditure
on account of which it became necessary to sell parts of the land.
On the evaluation of the record and having regard to the
aforesaid circumstances, the Tribunal affirmed the view of the
Commissioner of Income-tax (Appeals) that the income generated from the
sale of land during the Assessment years in question, should be treated
as capital gains.
Finally, while deciding this important issue the Honourable judges of
the High Court were of the view that a large tract of land of nearly
2500 acres was acquired in or about the year 1923 by the late F,E.
Dinshaw. F.E. Dinshaw was a solicitor. The acquisition of the land
was evidently not motivated by an adventure in the nature of trade.
The statement of case makes it clear that there was no transaction
involving the sale of the land during his life time. Secondly,
neither E.F. Dinshaw nor for that matter Bachoobai purchased the land.
The land had devolved on E.F. Dinshaw and upon Bachoobai by testamentary
succession. Thirdly, upon the death of F.E. Dinshaw in 1936, there was
no transaction involving the sale of the land for a period of nearly
sixty five years since the purchase of the land.
Fourthly, the assessee in the present case, is the administrator of the
estate of the late E.F. Dinshaw. Half the interest of the land
devolved upon E.F.Dinshaw under the will that was executed by his father
F.E. Dinshaw. Fifthly, both the Commissioner of Income-tax (Appeals)
and the Tribunal have rendered concurrent findings of fact.
The finding of fact recorded by the Tribunal is that since independent
encroachments gradually took place over certain areas of the land. The
sale of the land was not motivated by a desire to make a profit, but to
protect the corpus and the resulting expenditure due to litigation.
The finding of the Tribunal is also to the effect that there were no
improvements on the land by way of laying out drainage, levelling or
construction of roads.
Though an area admeasuring about a hundred acres was repurchased, the
Tribunal recorded that this was hardly a purchase in the commercial
sense since it was a repurchase of lands which were declared as surplus
under the Urban Land Ceiling Act.
Finally after discussing many important decided case laws on the subject
the Honourable judges of the High Court came to the conclusion that the
surplus that was realized on sale of the land was in the nature of
capital gain.
The author is tax & investment consultant at New Delhi for last over
40 years. He is also Director of M/s R.N. Lakhotia & Associates
& The Strategy Group.
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
Subhash Lakhotia
Tax and Investment Consultant,
Tax Guru: CNBC Awaaz
Sometimes, when a tax payer sells his agricultural land, a question
generally that arises in the minds of the tax authorities is to find out
whether the surplus realized on sale of land was in the nature of
Capital Gains or was it a profit received by the tax payer as a trader
in land on account of adventure in the nature of trade.
Similar question also came up recently before the Honourable High Court
in the case of CIT v. Administrator of the Estate of Late Shri E.F.
Dinshaw (2012) 345 ITR 529 In this case one Late F.E. Dinshaw, who was a
partner in a firm of solicitors and a financial adviser to the Princely
State of Gwalior, purchased large tracts of land admeasuring about 2500
acres at Malad and Borivali in or about 1923.
He died in 1936 and was survived by a son, E.F. Dinshaw, and a daughter
Bachoobai Woronzow, both of whom were non-residents and were citizens of
a foreign country. Upon the death of F.E. Dinshaw, his son and daughter
became joint owners of the lands. No physical division was carried
out.
Under the last will and testament of F.E. Dinshaw, a life interest was
created of his share in the land in favour of his daughter, Bachoobai, a
reversionary interest being created in favour of two U.S. based
charities. By a judgment of the Bombay High Court dated 21.12.1972, W
was appointed as sole administrator of the estate. The other half share
was bequeathed to E.F. Dinshaw.
On 27.12.1973, Bachoobai leased out 72 acres of the lands jointly owned
by her and her brother to a company by the name of Haven Kores Real
Estate Pvt. Ltd. for a period of ninety nine years. On 29.3.1973,
Bachoobai created three charitable trusts :
(i) F.M. Dinshaw Foundation with a corpus consisting of the reversionary
interest of herself and the administrator in the land leased to Haven
Kores Real Estate Pvt. Ltd. ;
(ii) F.E. Dinshaw Charities consisting of the corpus of mostly tenanted
properties jointly owned ;
(iii) F.E. Dinshaw Trust with a corpus consisting of mainly leased and
unencumbered free land of F.E. Domshaw Estate jointly owned by her and
her late brother.
From early times, different portions of the property were leased out to
various persons against the payment of ground rent for the purposes of
constructing house properties. Over time, a large part of the land was
encroached upon. From November, 1968, agreements to sell were executed
in respect of different portions of the land.
Before any sale deed could be entered into, permission was required to
be taken of the Charity Commissioner under section 36 of the Bombay
Public Trusts Act, 1950. Since E.F. Dinshaw and Bachoobai were not
citizens of India, permission was also required under the Foreign
Exchange Regulation Act, 1973.
The provisions of the Urban Land (Ceiling and Regulation) Act, 1971,
rendered some parts of the land as surplus. Permissions were also
required to be taken under Chapter XX-C of the IT Act. After
permissions were taken and the conveyances were finalized upon
registration, there was a surplus which the assessee claimed as a
long-term capital gain.
When the matter came up before the Assessing Officer during the course
of assessment proceedings, the Assessing Officer held that there that
there was a steady, systematic and continuous process of selling
portions of the property for making profits in the real estate.
According to the Assessing Officer, the nature of expenses debited to
the income and expenditure account, the quantum, the activities and the
manner in which the value of the trust properties was reduced, was
suggestive of the fact that the lands were purchased only for the
purpose of earning profit.
The profit arising from the sale of the land was treated as business
income. In appeal, the CIT (Appeals) held that the mere ownership of
the land did not constitute trade. The Commissioner of Income-tax
(Appeals) held in favour of the assessee on the basis of the following
findings : (i) neither of the assessees had purchased the land
themselves.
The land had been purchased by the late F.E. Dinshaw nearly seventy
years earlier when the growth of Mumbai to its present state could not
have been foreseen ; (ii) the land was purchased as a source of earning
income from ground rent ; (iii) encroachment took place after 1947
whereupon it became difficult to protect open land.
In selling the land, the assessees had been motivated more by the desire
of protecting their corpus than of earning profits ; (iv) the assessees
were trusts or the administrator of the estate and could not enter into
the business of selling land.
The Income-tax Department filed appeal to the Income-tax Appellate
Tribunal. When the matter came up before the Income-tax Appellate
Tribunal, The Tribunal had relied upon the following circumstances in
support of its conclusion that the income that was realized upon the
sale of the lands constituted capital gains and not business income :
(i) The late F.E. Dinshaw had no intention to trade in the lands at the
time of purchase. After the purchase of the lands in 1923, there was no
sale thereafter for nearly thirty-five years ;
(ii) The late F.E. Dinshaw was far from any business in real estate
and, therefore, this was not a case where a transaction can be regarded
as being relatable to the business which was normally carried on by the
assessee ;
(iii) In the present case, there was no activity such as in the nature
of improvements on the lands, for instance, by laying drainage lines,
electricity, levelling or construction of roads. The fencing of the
land and the construction of the compound well were only intended to
protect the property and not to carry out improvements ;
(iv) Though the extent of the sales had increased over time, compared to
the vast extent of holding, the sales could not be regarded as
expensive. Morever, while there were sales of some parts of the land,
there was no corresponding activity involved of purchases ;
(v) The repurchase of about a hundred acres of land which had been
declared surplus under the Urban Land Ceiling Act was not a purchase in
the commercial sense since it constituted nothing but a retention of the
property which was earlier vested in the assessees
(vi) The property was purchased nearly seventy years earlier and it
could not be expected that it should remain vested indefinitely.
The sale of the property was explained by the fact that there were
encroachments on the lands leading to heavy litigation and expenditure
on account of which it became necessary to sell parts of the land.
On the evaluation of the record and having regard to the
aforesaid circumstances, the Tribunal affirmed the view of the
Commissioner of Income-tax (Appeals) that the income generated from the
sale of land during the Assessment years in question, should be treated
as capital gains.
Finally, while deciding this important issue the Honourable judges of
the High Court were of the view that a large tract of land of nearly
2500 acres was acquired in or about the year 1923 by the late F,E.
Dinshaw. F.E. Dinshaw was a solicitor. The acquisition of the land
was evidently not motivated by an adventure in the nature of trade.
The statement of case makes it clear that there was no transaction
involving the sale of the land during his life time. Secondly,
neither E.F. Dinshaw nor for that matter Bachoobai purchased the land.
The land had devolved on E.F. Dinshaw and upon Bachoobai by testamentary
succession. Thirdly, upon the death of F.E. Dinshaw in 1936, there was
no transaction involving the sale of the land for a period of nearly
sixty five years since the purchase of the land.
Fourthly, the assessee in the present case, is the administrator of the
estate of the late E.F. Dinshaw. Half the interest of the land
devolved upon E.F.Dinshaw under the will that was executed by his father
F.E. Dinshaw. Fifthly, both the Commissioner of Income-tax (Appeals)
and the Tribunal have rendered concurrent findings of fact.
The finding of fact recorded by the Tribunal is that since independent
encroachments gradually took place over certain areas of the land. The
sale of the land was not motivated by a desire to make a profit, but to
protect the corpus and the resulting expenditure due to litigation.
The finding of the Tribunal is also to the effect that there were no
improvements on the land by way of laying out drainage, levelling or
construction of roads.
Though an area admeasuring about a hundred acres was repurchased, the
Tribunal recorded that this was hardly a purchase in the commercial
sense since it was a repurchase of lands which were declared as surplus
under the Urban Land Ceiling Act.
Finally after discussing many important decided case laws on the subject
the Honourable judges of the High Court came to the conclusion that the
surplus that was realized on sale of the land was in the nature of
capital gain.
The author is tax & investment consultant at New Delhi for last over
40 years. He is also Director of M/s R.N. Lakhotia & Associates
& The Strategy Group.
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
Read more at: http://www.moneycontrol.com/news/tax/surplussaleagricultural-land-is-capital-gain-_973575.html?utm_source=ref_article
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