Sale of plots held as investment for six years yields capital gains, not business income.

By | May 25, 2026
0 Comment

Sale of plots held as investment for six years yields capital gains, not business income.

Issue

Whether the sale of 25 plots of land by an assessee engaged in the bar and restaurant business constitutes an “adventure in nature of trade” taxable as business income, or if it should be treated as a long-term capital gain.

Facts

  • The assessee runs a bar and restaurant business and is not a real estate developer or dealer.

  • The assessee purchased 25 plots of land in a single transaction and held them for six years before selling them.

  • The assessee incurred expenditure only for basic levelling of the land. No intensive development activities—such as laying roads, providing water or electricity connections, advertising, or subdividing the land into smaller units—were undertaken.

  • The transaction was funded without using operational business funds, no dealers were engaged for the sale, and no advertisements were made to market the plots.

  • In the books of accounts, the land was consistently treated as an investment rather than stock-in-trade.

  • The Assessing Officer treated the sale as an adventure in nature of trade due to the multiplicity of the plots and the development expenses, classifying the profit as business income.

Decision

  • Held, in favour of the assessee: The transaction does not constitute an adventure in nature of trade, and the profits must be taxed under capital gains, not business income.

  • Rudimentary Development vs. Intensive Trade: The mere levelling of land is a basic act of maintenance and falls short of the intensive development required to characterize a transaction as a business venture.

  • Multiplicity is Not Determinative: A high number of plots sold is not a sufficient legal foundation on its own for the Revenue to reclassify an investment as a trade activity.

  • Investment Intent Demonstrated: Because the assets were held for a significant period (six years), recorded as investments, and sold without commercial marketing or business funds, the dominant intent was investment rather than profit-seeking trade.

Key Takeaways

  • Dominant Intent Matters: The classification of income from property sales depends on the primary intention at the time of purchase and the subsequent conduct of the assessee, rather than the scale of the transaction alone.

  • Book Treatment Holds Weight: Consistently maintaining property as an “investment” rather than “stock-in-trade” in financial records serves as strong evidence of non-business intent.

  • Definition of Development: Basic improvements like land levelling do not convert an investment into a commercial venture; a business classification requires active, systematic commercial development (e.g., building infrastructure or marketing layouts).

IN THE ITAT BANGALORE BENCH ‘A’
Keshavareddy Krishnareddy
v.
Assistant Commissioner of Income-tax*
Prashant Maharishi, Vice President
and SOUNDARARAJAN K., Judicial Member
IT Appeal No. 1422 (Bang) of 2025
[Assessment year 2012-13]
MAY  18, 2026
P.K. Prasad, Adv. for the Appellant. Balusamy N., JCIT for the Respondent.
ORDER
Prashant Maharishi, Vice President.- ITA No. 1422/Bang/2025 is filed for Assessment Year 2012-13 by Shri Keshavareddy Krishnareddy (the Assessee/Appellant) against the Appellate Order passed by the National Faceless Appeal Centre (the NFAC), Delhi (the Ld. CIT(A)) on 07.04.2025 wherein the Appeal filed by the Assessee against the Assessment Order passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) on 27.02.2025 by the Assistant Commissioner of Income Tax, Circle – 2(2)(1), Bangalore (the Ld. Assessing Officer) was dismissed.
2. The Assessee is aggrieved with the same and has raised 6 grounds of appeal as under:-
1. The Learned Commissioner of Income Tax (Appeals) erred in law and on facts by confirming the recharacterization of the Long-Term Capital Gains of the surplus from sale of 25 plots as income from business or trade without giving credence to the nature and intent of the Appellant including the long-term holding and accounting treatment and by not accepting the valid Balance Sheets as sufficient proof and holding them as a self-serving document. As such, the addition has been made by ignoring the facts, evidence and cogent reasons and with a preconceived notion resting solely on the reasons that the Appellant invested money in the upkeep and maintenance of the plots and made a subsequent profit on the sale.This addition to income made on this account for income from business or trade may kindly be deleted and cancelled.
2. The Learned Commissioner of Income Tax (Appeals) erred in law and on facts by upholding the disallowance of the exemption under section 2(14)(iii) of the Income Tax Act on sale of agricultural lands at Survey Nos.- 145 and 146, Iggalur village and upholding the addition under income from business or trade in a sweeping and generalised manner and without independently verifying the rural and agricultural character of the lands. Thus, the addition being without due application of mind and without due consideration of the facts and evidence of the case, is in contravention of the provisions of the law. The disallowance of the exemption and the subsequent addition is illegal and may kindly be deleted and the exemption be allowed.
3. The Learned Commissioner of Income Tax (Appeals) erred in law and on facts by upholding the disallowance of the exemption on the KIADB compensation for the compulsory acquisition of agricultural land at Survey Nos.- 130 and 132, Mysore and upholding the addition under income from business or trade in a sweeping and generalised manner ignoring that the lands were rural and agricultural and were compulsorily acquired, and the transaction was involuntary, qualifying under sections 2(14)(b) and 10(37) of the Income Tax Act. Thus, the Addition being without due application of mind along with a preconceived and prejudiced notion and without due consideration of the facts and circumstances, documents and evidence produced, is in contravention to the provisions of the law. The disallowance of the exemption and the subsequent addition is illegal and may kindly be deleted and the exemption be allowed.
4. The Learned Commissioner of Income Tax (Appeals) erred because of misapplication of case laws and CBDT No. 4/2007 dated 15.06.2007 in the context of all the additions made to the returned income, without understanding and analysing the facts and arguments discussed in the case laws. Thus, the Additions made in the impugned Order are generalised and sweeping in nature and bad in law and should be declared null and void.
5. The Learned Commissioner of Income Tax (Appeals) erred in confirming the charging of interest under sections 234B and 234C of the Income Tax Act.
6. The Assessing Officer erred by initiating penalty proceedings under section 271(1)(c) of the Income Tax Act and the Learned Commissioner of Income Tax (Appeals) erred in confirming the same.
2.1 The brief fact of the case shows that the Assessee is an individual engaged in the business of running a bar and restaurant under the name and style of M/s. RK Gardens Bar & Restaurant filed his return of income on 28.09.2012 at a total income of Rs. 97,46,740/-.
3. The return of income was picked up for scrutiny, and it was found that Assessee has shown a capital gain on sale of 25 plots of land situated at 30/4B, Iggalur, Bengaluru. The ld. AO asked why the sale of 25 plots should not be considered as adventure in the nature of trade u/s. 2(13) of the Income Tax Act and that the capital gain offered by the Assessee should not be brought to tax as business income.
4. The Assessee submitted that the transactions are not in the nature of business or adventure in the nature of trade as the Assessee is not a developer and not dealing in real estate activities. The Assessee intended to keep these investments as long term investment only. The Assessee has neither applied for any conversion of the said land. The Assessee purchased these plots in bulk for the lower price and to kept them for long term. It was further stated that Assessee has held this property for more than 3 years and therefore Assessee has treated them as a capital asset and offered the same as long term capital gain.
5. The Ld. Assessing Officer rejected the explanation of the Assessee for the reason that the dominant intention of the Assessee is to make the plots more attractive by incurring development expenses and sell them to prospective buyers placing reliance on the decision of the Hon’ble Delhi High Court in case of R. Dalmia v. CIT [1981] (Delhi)/[1982] 137 ITR 665 (Delhi). He was also of the view that Assessee has sold 2 moreproperties during the year and therefore Assessee is into the business of buying the property and selling the same. He further relied upon the decision of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) of the Hon’ble Supreme Court stating that the magnitude of the transaction of 25 plots eliminates the possibility of investment. Assessee has also incurred development expenses of Rs. 11,24,870/- and the manner of disposal of 25 plots to various purchasers shows that Assessee is into the business of buying the property and selling the same. Thus, the Ld. Assessing Officer noted that in the present case, the Assessee has bought 25 sites in bulk at one go from the seller and later necessary developments were made to make it suitable for selling and sold these 25 plots to various parties. Therefore, he considered it as adventure in the nature of trade. Accordingly, he computed the sale consideration of Rs. 1,21,53,100/-, granted deduction of the cost of acquisition of Rs. 10,10,000/- and development expenses of Rs. 11,24,870/- and determined the business income of Rs. 1,00,18,230/-. For other property, The Ld. Assessing Officer further found that Assessee has claimed exemption from sale of agricultural land, but the Ld. Assessing Officer held that it is adventure in the nature of trade as Assessee is in habit of buying and selling the property. Accordingly, the profit on sale of two agricultural land of Rs. 22,13,650/- and Rs. 16,36,160/- was considered as business income. The Assessee also received compensation during the year on acquisition of agricultural land amounting to Rs. 52,17,187/- having the cost of acquisition of Rs. 6,60,335/-was also considered as business income. Accordingly, the Assessment Order u/s. 143(3) of the Act was passed on 27.02.2015 determining total income ofthe Assessee at Rs. 1,89,63,722/-.
6. Aggrieved with the Assessment Order, Assessee preferred an Appeal before the Ld. CIT(A). The Assessee contended that in terms of circular no. 4/2007 dated 15.06.2017, there is a difference between capital asset and trading asset wherein the guiding principles have been laid down. The Assessee also relied upon several judicial precedents. In the substance, Assessee submitted that Assessee is holding all these immovable properties as capital assets and never treated the same as business assets. Assessee further stated that even the agricultural land as well as the compensation received on acquisition of agricultural land was also considered as taxable income by the Ld. Assessing Officer which is not in accordance with the law. The Assessee relied upon several judicial precedents.
7. The Ld. CIT(A) was also shown the annual accounts of the Assessee wherein the purchase of plots were shown as investment. The Ld. CIT(A) disregarded the same relying upon the decision of the Hon’ble Supreme Court in case of G. Venkataswami Naidu and Company v. CIT [1959] 35 ITR 594 (SC). He thereafter relied upon the decision of the Coordinate Bench in Dilip Battu Karanjule v. ITO 161 ITD 172 (Pune – Trib.), noted that the Assessee has incurred development expenses of Rs. 11,24,870/- confirmed the action of the Ld. Assessing Officer that the income from sale of plot as well as agricultural land was correctly treated by the Ld. Assessing Officer as business income being adventure in the nature of trade. Thus, the Appeal of the Assessee was dismissed.
8. The Ld. Authorized Representative has filed 5 volumes of paper books to support the case of the Assessee. Volume 3 is the written submission containing page no. 66-201. The paper book volume 4 containing page no. 202750 was with respect to the various submissions made before the Ld. Assessing Officer. Paper book no. 5 was the various decisions referred to by the Ld. Assessing Officer as well as the Ld. CIT(A) containing page no. 7511149.
9. The Ld. Authorized Representative amongst all these pages referred to page no. 276 of the paper book which is the details of sales made by the Assessee of 25 sites having a total sale consideration of Rs. 1,21,53,100/-. The Assessee referred to copies of the sale deed placed on page no. 666-668 of the paper book. He submitted that all these 25 plots admeasuring 33,593 sq.ft. were forming part of sy. no. 30/4B, in Iggalur village which was purchased by the Assessee through registered sale deed on 01.02.1996 for a total consideration of Rs. 10,10,000/- from Shri N. Muniswamy Reddy. It was further stated that all these 25 plots were sold in Financial Year 2011-12 relevant to Assessment Year 2012-13. He further submitted that all these plots were held by the Assessee as Capital Asset. He further referred to page no. 687-689 of the paper book to show that Assessee has incurred ground levelling expenditure and no other expenditure is incurred. The Assessee also submits that as the 25 plots purchased by the Assessee were required to be levelled; only that expenditure has been incurred. It is not the case that Assessee has tried to improve the land purchased by Assessee. It was further stated that in the written submission filed by the Assessee all the decisions relied upon have been dealt with. He therefore submitted that when the Assessee is not a dealer in land or real estate, the decision relied upon by the lower authorities rejecting the claim of the Assessee is not correct.
10. With respect to the sale of agricultural land, he submits that these are classified as agricultural land in land records, are situated beyond the specified distance, not disputed by the Ld. Assessing officer but are treated as profit thereon as adventure in the nature of trade. He submits that sales of agricultural land as such exempt u/s. 10 of the Act and cannot be held to be business income. Similarly, he stated that acquisition of the agricultural land also does not fall under the provisions of section 2(14).
11. The Ld. Departmental Representative vehemently supported the order of the Ld. Lower Authorities. It was submitted that the level of quantum of agricultural land sold by the Assessee being 25 plots itself suggests that Assessee is earning profit being adventure in the nature of trade. When the agricultural land is also part of that trading activity, the Ld. Assessing Officer has correctly treated the same as business income. He referred to the fact that Assessee has also developed those plots of lands before selling and therefore those assets cannot be stated to be capital asset but are stock in trade.
12. We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities. The facts clearly show that the Assessee is engaged in the business of running a bar and restaurant. During the year, Assessee has sold 25 plots for a sale consideration of Rs. 1,21,53,100/- and offered long term capital gain of Rs. 92,07,913/-. The Assessee has claimed exemption u/s. 10(37) of the Act being transfer of agricultural land located at sy. no. 145 and 146, Iggalur and further compensation received of Rs. 52,17,187/- also agricultural land was not offered to tax. The Ld. Assessing Officer has treated the sale of 25 plots as adventure in the nature of trade for the reason that Assessee has incurred development expenses of Rs. 11,24,870/- and consequently also held that agricultural land sold and acquired is also liable to be taxed as business income. It is an undisputed fact that these 25 plots were not at all agricultural land. However, the other two plots sold by the Assessee and one plot in the acquisition proceedings are agricultural land.
13. The fact also shows that these 25 plots were purchased from one seller on 09.02.2005 and sold in Financial Year 2011-12. The plots were held for more than 6 years. Undisputedly, the volume of transactions entered into by the Assessee is in quantity 25 plots. However, purchases are through one deed, and sale is through 25 deeds. The frequency of the transaction was purchased in 2005 (single transaction) and sold in Financial Year 2011-12 being 25 transactions as sale is to 25 different persons. The facts also show that there is no finding that the sources of the funds are sourced from outside. The Assessee has used his own funds for purchasing these plots. The development expenditure incurred by the Assessee was stated to be only levelling charges and no further evidence is brought on record by either party that these expenditures are other than levelling of those plots only. The expenditure was also incurred in 2006. This fact also shows that Assessee has incurred this expenditure only for the purpose of making the plot sellable. It is also not brought on record that subsequent to the above transaction or prior to the same, the Assessee was engaged in the sale and purchase of plot of land. Thus, the fact in simple word shows that Assessee has purchased 25 plots from one seller, levelled them by incurring the expenditure, held them for 6 years and subsequently sold them to 25 buyers using his own source of funds and subsequently did not deal into purchase and sale of plots. The issue is whether in these circumstances the Assessee, who is a restaurant owner, can be said to be a developer in the nature of trade so as to bring the resultant gain within the ambit of business income u/s. 28 of the Act as against capital gain u/s. 45 of the Act.
14. Provisions of section 2(13) clearly defines that —adventure in the nature of trade” is embedded in the statutory definition of business, and if a transaction falls into that category, the consequence of such characterizationwould be that the profits and gains from such transaction would fall into the realm of —Profits and Gains of Business or Profession” rather than —Capital Gains.” It will have a material consequence as the Assessee would not be eligible for cost indexation benefit,concessional rate of tax on long term capital gain vis-a-vis applicability of provisions of section 50C.
15. The locus classicus in this subject is the decision of the Hon’ble Supreme Court in case of G. Venkataswami Naidu and Company (supra) whichlaid down that the question whether the transaction is an adventure in the nature of trade must be decided on consideration of all the relevant facts and circumstances and no single factor is conclusive. Such indicative criteria are as under: –
(i) Whether the purchaser was a trader and whether the purchase of the commodity and its resale was allied to his usual trade or business or incidental to it;
(ii) The nature and quantity of the commodities purchased and resold;
(iii) Whether the purchase was made solely with the intention of resale at a profit, or was made for personal use, enjoyment, or investment;
(iv) Whether any operations were carried out on the commodity to render it more readily saleable (e.g., development, subdivision, conversion);
(v) The frequency and continuity of similar transactions;
(vi) The length of period of holding and whether there were any abortive attempts at resale.
The Court was emphatic that the “intention to resell at a profit,” coupled with positive steps to develop or render the property more saleable, is an important — though not conclusive — circumstance.
16. The Hon’ble Supreme Court was empathic that intention to resell at a profit with positive steps to develop the property more sellable is important but not a conclusive circumstance. Further, the Hon’ble Supreme Court in Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) has also categorically held that a single transaction on purchase and sale at a profit will not constitute an adventure in the nature of trade. Further the onus lies on the revenue to bring on record material to show that the transaction was in the character of trade. Further in Janki Ram Bahadur Ram (supra) the Hon’ble Supreme Court further reiterated that mere fact that the property is put to commercial use does not transform an investment into an adventure in the nature of trade. It further held that intention at the time of purchase is paramount. The Hon’ble Supreme Court had further had an occasion in Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 (SC) to consider the issue where the Assessee entered into an activity of plotting and development by making the land marketable in smaller parcels and sold them in parcel was held to be adventure in the nature of trade. Thus, there has to be a concerted activity of plotting and development of the plots. Thus, it is true that no single test is decisive and the cumulative effect of all transactions must be assessed.
17. In the present case, the Assessee is engaged in running a bar and restaurant and dealing in real estate is wholly unaccounted to and not allied with his usual trade. Further the plots were purchased in 2005 and sold in 2011 holding it approximately for 6 years and such a long holding period inconsistent with the trading motive does not show rapid turnover. The Assessee has entered into only one transaction of purchase of all these 25 plots and sold 25 plots to 25 different persons in one financial year and does not show rapid turnover of buying and selling. Though the number of plots sold by the Assessee is 25 but by itself is not decisive. As held by the Hon’ble Supreme Court in case of Saroj Kumar Mazumdar, the quantum number of items is one circumstance among many, but it is a cumulative effect that needs to be examined. Indeed, the Assessee has acquired 25 plots in a single transaction from a single seller which are contiguous plots of land. Regarding the expenditure incurred by the Assessee in 2006 are only stated to be levelling which is rudimentary act and falls short of any kind of intensive development such as laying of roads, providing water and electricity connections, advertisement, subdividing into smaller marketable units etc., Mere levelling is equivalent to preparing the land for use and facilitating its eventual sale. No doubt, the operations rendered would be decided on the skill and character of the work undertaken. In the present case revenue did not dispute that the expenditure incurred by the Assessee is merely levelling of land. However, there is nothing on the facts to suggest that Assessee is engaged in similar transactions before or after. Thus, a solitary instance even involving 25 plots is not sufficient to constitute the trade. Further it is important to look at the intention of the Assessee at the time of purchase, and it is for revenue to demonstrate on the basis of contemporaneous material that those plots were acquired with the intention of resale at a profit. Indeed, those plots are sold at a profit, but it cannot be said that the intentions of the Assessee before these Assessment Years, at the time of purchase of these plots was to deal in these plots. The burden lies on the revenue to bring on record evidence of trading intent. Even otherwise, Assessee did not use operated funds, did not make any advertisement for sale, did not engage any one as a dealer and also the treatment in its books of accounts as investment but not as stock in trade clearly shows that the impugned transactions cannot be said to be adventure in the nature of trade.
18. Thus, on the basis of above on cumulative assessment of the test laid down by the Hon’ble Supreme Court, it is clear that Assessee’s business is unconnected with real estate, holding period of 6 years is consistent with investment objective, the levelling activity is not a prima-facie of a character indicative of trade, there is no suggestion of records or systematic dealing and in absence of any material to establish a contemporaneous intent of trade at the time of purchase clearly shows that the plot of land purchased by the Assessee were for the purpose of investment and not for the purpose of business. Thus, as shown to us, the gain arisen from the sales would ordinarily fall under the head capital gain and not under the head profits and gains of business. Mere multiplicity of plots sold is not a sufficient foundation for the revenue to characterize the transaction as adventure in the nature of trade.
19. In G. VENKATASWAMI NAIDU & CO. case [supra] the circumstances showed that the appellant whose ordinary business was not to make investment in lands had purchased the plots of land with the sole intention of selling them to the Mills at a profit and this intention raised a strong presumption that the purchase and the subsequent sale were an adventure in the nature of trade; and, it was held that in the absence of any rebutting evidence, the Income-tax authorities were justified in taxing the amount in question as income from business.Revenue found that, since the lands were adjacent to the Janar- dana Mills, the appellant must have purchased them solely with a view to selling them to the said mills with a profit. That is why, though the transaction was in the nature of a solitary transaction, it was held that it had all the elements of a business transaction and was thus an adventure in the nature of trade. All the plots which were thus purchased by the appellant piecemeal are contiguous and they adjoin the mills. Such are not the facts in case of appeal before us.
20. Our findings are further fortified by the fact that the Ld. Assessing Officer and the Ld. CIT(A) ought to have examined the sources of funds, the contiguous nature of the plots and the nature and expenditure of the levelling. The Ld. Assessing Officer could have further examined any further contemporaneous evidence such as advertisement etc., none of that has been carried out.
21. In the result, the orders of the Ld. revenue authorities have reached conclusion of the transaction in the nature of adventure in the nature of trade solely and substantially on the 25 number of plots sold by the Assessee without a meaningful analysis of cumulative facts enumerated in the decision of the Hon’ble Supreme Court in case of G. Venkataswami Naidu and Company (supra) and the subsequent decisions of the Hon’ble Supreme Court enunciated in Saroj Kumar Mazumdar and Janki Ram Bahadur Ram. In view of the above facts, we hold that the sales of 25 plots made by the Assessee are correctly offered by the Assessee under the head capital gains as Assessee has transferred the capital gains as Assessee has transferred the capital asset held for 6 years. Accordingly, ground no. 1 of the Appeal of the Assessee is allowed.
22. Ground no. 2 and 3 are undisputedly with respect to the sale of agricultural land. The capital gain arising on the sale of agricultural land could not have been charged to tax unless the agricultural land was held to be a business asset. Under the provisions of section 2(14), the definition of capital assets also excludes the agricultural land. Thus, naturally no capital could be charged on the sale or acquisition of the agricultural land provided the same is held to be a capital asset. Here, the Ld. Assessing Officer has held the agricultural land as not a capital asset and has considered its sale and acquisition as business income. We find that the same principles will also apply to the 2 transactions of sale of agricultural land as well as the one transaction of the acquisition which we have enumerated while holding that the 25 plots sold by the Assessee are the sale of capital assets. Further, the same set of facts also applies to the transfer and acquisition of this agricultural land. Thus, we held that these agricultural lands are though capital assets but according to the provisions of section 2(14) of the Act capital gain arising thereon could not be chargeable to tax under the head capital gain also. Thus, ground no. 2 & 3 of the Appeal of the Assessee are allowed.
23. Ground no. 4 is supportive in nature and as in ground no. 1-3, the claim of the Assessee is allowed, no separate adjudication is required on this ground.
24. Ground no. 5 regarding chargeability of interest is consequential in nature and ground no. 6 on initiation of penalty proceedings is premature and hence dismissed.
25. In the result, Appeal filed by the Assessee is partly allowed.