Per Shri S. Rajaratnam, Accountant Member - These two departmental appeals arise out of the orders of the AAC in the case of Shri Botcha Gurunaidu and Shri Botcha Appalanaidu of Vizianagaram for the assessment year 1980-81. Since the facts involved in the case of both these brothers are common, they are dealt with together.
2. Both these assessee, who are HUFs, had acquired lands which they held under a lease from 1969 in the year 1977. The lands belonged to Shri Ashoka Gajapathi Raju of Vizianagaram. Under the clauses of the lease agreement, the assessees were allowed the use said lands only for cultivation. The assessees were cultivating groundnut and green gram and horse gram on these lands. The assessees were returning agricultural income also in the past income-tax assessments. They were regularly assessed to tax as partners in respect of their business income. It is their case that they acquired these lands since they were cultivating lessees with the intention of continuing agricultural operations. The acreage in both the cases was 39 acres each. However, the lands which were adjacent were found suitable for house construction. It is at this stage they wanted to take advantage of this demand and got part of their lands plotted out. Shri Botcha Gurunaidu converted 18 acres of such land for plotting them out while Shri Botcha Appalanaidu converted 13 acres. The approved plots were 203 and 140, respectively, out of which 40 and 10 plots for Rs. 50,000 and Rs. 25,810, respectively, were sold during the year. Both the assessees apparently sold 15 acres each in the accounting year preceding the assessment year under appeal to Andhra Pradesh Non-Gazetted Officers Co-operative House Building Society, Vizianagaram. This was not offered to tax as these were agricultural lands and could not, therefore, be treated as capital asset not having been located in a notified area.
The ITO also did not attempt to bring to tax this amount apparently after getting an explanation in writing from the assessee. For wealth-tax purposes also, these lands were taken always agricultural lands and an amount of Rs. 1.5 lakhs was allowed as a deduction available to agricultural lands. This has happened even for wealth-tax assessment year 1979-80 (the valuation date being 31-3-1979). As noticed earlier, part of the agricultural lands was sold during the year. The ITO was of the view that plotting out the lands made the transaction an adventure in the nature of trade. He worked out the assessees profit in the transaction at Rs. 57,290 in the case of Shri Botcha gurunaidu and Rs. 24,964 in the case of Shri Botcha appalanaidu for the assessment year 1980-81. In both the cases, the profit was said to have been worked out on the basis of the difference between the sale value and the cost including the proportionate cost of laying out plots. The ITOs conclusion was that the assessee having plotted it out could be treated as being engaged in an adventure in the nature of trade. The first appellate authority found that these were agricultural lands and were put to agricultural use. Under the circumstances, mere plotting out of the lands sold would not render them non-agricultural, according to him. The ITO himself treated the surplus as capital gains relating to the agricultural assets and, therefore, exempt. Since the purchase of the lands themselves was not with a view to resell the same, there could not be any adventure in the nature of trade even as held as by the Supreme Court in the case of Janki Ram Bahadur Ram v.CIT  57 ITR 21. The assessee cannot, therefore, succeed even on the basis that there was an adventure in the nature of trade. It is in this view, he allowed the appeals and deleted the surplus arising on sale of plots during the year.
3. In the departmental appeals, the orders of the ITO are sought to be restored on the ground that there has been an adventure in the nature of trade following the decision of Raja J. Rameshwar Rao v. CIT  42 ITR 179 (SC). The learned departmental representative claimed that in view of the short delay between the purchase of the lands in 1977 and sale immediately after a couple of years, an adventure in the nature of trade could be presumed. He also had misgivings about the inference of the first appellate authority that an asset should have been acquired with a view to resell for treating a transaction as an adventure in the nature of trade. Such an argument was raised without prejudice to his contention that the assessee had purchased the lands with a view to resell the same. The fact that the assessee left space for the roads, plotted out, sold them to different persons by yardage rather than by acreage, got a price which was available for an urban building site and also undertook other operations which a dealer would take clearly justified the inference that the lands were acquired for business. Alternatively, a ground was attempted that it could have been taxed even as business profit. He claimed that he could support the orders of the authorities below with reference to such an argument as well. If the profit as from business has to be differently computed, he wanted that the matter should go back to the ITO for ascertaining the correct profits on that basis. He referred to the guidelines given by the Gujarat High Court in the case of CIT v. Manilal Somnath  106 ITR 917 in which it was pointed out that the lands were not agricultural in year in which they were sold on the facts of that case.
A pointed reference was made to a decision of the Bombay High Court in Smt. Bhanumati A. Sanghavi v. CIT  119 ITR 69 where the facts were said to be similar. Here also pointed out that though on the basis of the first few sales, the ITO inferred that the surplus was capital gains, he was not precluded from taking the view that it was business on the basis of repetition of sales and further information which came to light in respect of transactions in later years. The assessees facts it was claimed, are mere identical. He also claimed that the fact that they were put to agricultural use in earlier years would not help the assessee since there was no agricultural income from these lands even from unsold plots. This according to him, led to a strong inference that these lands were not put to agricultural use and has since been converted to non-agricultural use. This again, it was claimed, buttressed departmental case. Reliance was placed upon the decision of the Supreme Court cited in the grounds of appeal in the case of Raja J.Rameshwara Rao (supra).
4. The learned counsel for the assessee, however, took us over the past records both for Income-tax and wealth-tax relating to these two assessees. He strongly relied upon the treatment accorded to the surplus in the immediately preceding and in the wealth-tax assessments.
He also drew our attention to communications filed in respect of these lands. He contended that there had been no conversion at all of any kind except plotting out. The lands were located outside the municipal limits and were very much agricultural lands. Though the registration and purchase were complete in 1977, the assessees were lessees from 1969 and had possession of these lands. Considering that the lands belonged to the erstwhile ruling family of Vizianagaram, acquisition of these lands in assessees name was only a matter of time. These continued to be agricultural lands even after purchase. Only when good offer for their and other surrounding lands came, the assessees with a view to get the best price and plotted out the lands after sale of part of it to Vizianagaram Non-Gazetted Officers Co-operative House Building Society. Plotting out under such circumstances, it was claimed, could not lead to an inference of adventure in the nature of trade when possession over the asset was acquired in 1969 and purchased in 1977 and some agricultural operation were carried on even after 1977. Even on 31-3-1979, these were claimed and accepted as agricultural lands. He contended that it is too well established that acquisition with a view to resell is an essential ingredient of an adventure in the nature of trade. He insisted that the appeal should proceed only on the basis as to whether the transaction is an adventure in the nature of trade or not. At any rate, he vehemently disputed the inference that there was any business in real estate on the part of the assessees merely because they sold the agricultural lands after plotting. He also cited authorities as to what constitutes an adventure in the nature of trade.
He referred to the the decision of the Gujarat High Court in CIT v.Siddharth J. Desai  139 ITR 628 as supporting him apart from the other decisions on this point.
5. We have carefully considered the facts as well as the arguments.
When an asset is acquired with the sole object of selling it at a profit. it could well be a case of an adventure in the nature of trade.
If the sole intention was to resell the asset the asset at a profit, it is a relevant factor which would raise a strong presumption that the intention is to trade in an adventure even as laid down by the Supreme Court in G. Venkataswami Naidu Co. v. CIT  35 ITR 594. Even there, the intention may not be conclusive proof of the existence of such an adventure. Agricultural land is not commercial commodity normally dealt as stock-in-trade except perhaps in the hands of the real estate dealers, and where the lands are located in the areas adjacent to major cities where speculative land transactions are rampant. We find it almost impossible to accept the contention of the learned departmental representative that the sale of these lands could be treated as an adventure in the nature of trade even without any proof of circumstances to raise an inference that the asset was acquired with an intention to resell the lands at profit. In the assessees case, the purchase was of lands which were already in their possession as lessees. Sale, no doubt, was in bits. Real estate was not assessees ordinary line of business. If the assessee was clearly holding it as an investment or for purposes of agriculture as a vocation and not as stock-in-trade for re-sale, plotting out does not automatically convert such investment into business. A person need not be a land speculator to do this because even a landed proprietor is justified in attempting to get the best price for his investment. The case law on this point with the decisions of English and other Courts are available in the decision of the Madras High Court in the case of CIT v. Kasturi Estates (P.) Ltd.  62 ITR 578. No doubt, it is possible from subsequent conduct on the part of the assessee to infer his intention at the time of purchase even as pointed out by the Bombay High Court in the case of Smt. Bhanumati A. Sanghavi (supra). We can also agree with the learned departmental representative with reference to this decision that it is open to the ITO to take a new ground even if his action is not consistent with his own finding for earlier years on the basis of the information then available. But, in this case, except for the action of plotting out, there is no other suggestion that the entire transaction would constitute an adventure in the nature of trade. The grounds of appeal would rely on the decision of the Supreme Court in Raja J. Rameshwars case (supra) as supporting the revenues case. In this case, the assessee acquired vast areas of lands from different persons in 1946 to 1947 and constructed on a portion of the land a Gunj and shops. Remaining area was converted into plots and were sold. The ITO, the AAC and the Tribunal in assessees facts found that it was an adventure in the nature of trade. The Supreme Court observed in Raja J. Rameshwar Raos case (supra) as under : "... When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as he bought it but in parcels, he is dealing with land as his stock-in-trade; he is carrying on business and making a profit..." (p.
181) It may be seen that the acquisition itself was taken as having been made with a view to resell. The assessees facts are much different. But the grounds of appeal cannot probably be blamed for relying upon this decision because neither the order of the first appellate authority nor that of the ITO state the facts though they were available on record in connection with the assessment for the assessment year 1979-80 in relation to sale of part of the very lands held by the assessees. The manner of acquisition and the use to which it had been put are all matters of record and cannot be ignored. The attempt of the ITO to treat the transaction as an adventure in the nature of trade should fail even for the simple reason that in an adventure in the nature of trade, the profit has to be ascertained ordinarily on completion of the venture only, a point which is again well settled as in the case of K.H. Mody. In re  8 ITR 179 (Bom.) and in Chinnathambi Rowther & Co. v. CIT  99 ITR 490 (Mad.). We have, therefore, no doubt that the attempt of the ITO to tax the surplus as an adventure in the nature of trade should fail for more than one reason.
6. However, we have to consider the alternative argument that the income should be taxed as from business. Since the ITO himself has not taken this alternative ground, if we have to consider this new case, we have to base our decision on this alternative ground only with reference to the materials on record. In the assessees case, it is a matter of record that the assessees had the lands under lease for a number of years and had become the owners thereof in 1977. The lands were under cultivation even after this date. If at all, it could be stated that at some stage the assessees converted these lands into stock-in-trade if the circumstances warrant such an inference with reference to any particular activity. Here plotting out is not enough justification for the inference though it can well be a good circumstance if there are also other factors for such an inference. The assessees themselves have been consistently claiming that they are holding it is investment and not as stock-in-trade. Even if we were to entertain the revenues new case, we do not have the material for holding that there had been any business. The learned departmental representative would request as to send the matter back to the ITO to enable him to make out such a case, if there is one. We are afraid that we will not be justified in doing so as a ground newly raised before this Tribunal can be entertained only if it could be supported with materials already on record. At any rate, even if the revenue were to succeed on this point, only a part of the profit reckoned and accruing after conversion to stock-in-trade, would be assessable. Since the issue cannot be gone into now, we can only mention that it is open to the authorities to enquire into this matter for subsequent years if there is warrant for such assessment on the basis that these agricultural lands held as investment were converted into stock-in-trade sometime or the other. In that event, the value of the lands as on the date of conversion has to be treated as cost. But we cannot possibly speculate on possible finding with reference to a different line of enquiry which the ITO could have pursued but did not choose to do so. It is under these circumstances that we find that we have no other alternative except to uphold the order of the first appellate authority on the grounds stated by him and dismiss the departmental appeals.