I sold my agricultural land in small plots over several years, leaving roads and drains. The Assessing Officer has taxed part as business income and part as capital gains and invoked s.45(2). Can he split it like that?
Yes, on facts like these. The Allahabad High Court upheld a finding that land held in an urban area as a capital asset, carved into 43 plots of 60 to 1,815 sq. mtrs. and sold over seven years with roads and drainage provided, had been converted into stock-in-trade, so that s.45(2) applied and the profits on sale were business income. Both substantial questions were decided in favour of the Revenue and the appeals were dismissed.
Decided by the High Court (Sunil Ambwani J and A.N. Mittal J) on 2012-08-24, reported as Income Tax Appeal Nos. 33 of 2002, 457 of 2007 and 458 of 2007, High Court of Judicature at Allahabad; judgment reserved 7 August 2012. It bears on section 45(2), section 2(14), section 2(14)(iii), section 148, section 143(2), section 142(1), section 54F, section 271(1)(c), section 260A of the Income Tax Act 1961, in Capital Gains, Assessment & Scrutiny and Evidence & Burden of Proof matters.
This is the Revenue's half of the adventure-in-trade dispute, and the library needs it beside CIT v. Suresh Chand Goyal (M.P. High Court, 11 January 2007), which reached the opposite result on plotting and roads. What decided this case was not the development work. It was the combination of an urban capital asset, the absence of any agricultural operations, a taxpayer who was a Nagar Palika clerk rather than a cultivator, an inheritance story the Tribunal disbelieved, and 43 sale deeds over seven years. The mechanism matters as much as the outcome. Once the finding is conversion into stock-in-trade, s.45(2) engages and produces a two-part charge: the capital gain, computed on the fair market value on the date of conversion as the full value of consideration, is charged in the year the stock is sold, and the balance is business profit. That is why the assessment here shows both a capital gains figure and a business income figure for each year. The Court also confirmed a practical point: the officer had adopted a notional value as on 1 April 1974 as the cost of acquisition and applied a 10 per cent annual depreciation to arrive at the 1984 value, and the Court held that method fair and reasonable. Finally, note what did NOT save the assessee — an explanation that funds were needed to build a house was rejected as an afterthought because the investment could not be correlated at the first opportunity.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessment years were 1989-90, 1990-91 and 1991-92. The assessee was an employee of the Nagar Palika Parishad, Jalaun at Orai. Between the financial years 1984-85 and 1990-91 he sold land, said to belong to a Hindu undivided family, by carving out plots of 60 to 1,815 sq. mtrs. through 43 sale transactions. The land lay within municipal limits in an area where zamindari had been abolished on 1 July 1961; part had been inherited from his father, who died in 1952, and part acquired under sale deeds of 16 December 1958 and 16 May 1959 from Shri Narain Rao, followed by long litigation ending with a partition decree of 11 July 1980 allotting him 4.44 acres. The Assessing Officer reopened under s.148 and assessed each year under three heads — capital gains, business income and salary — with agricultural income taxed for rate purposes. The Commissioner (Appeals) recorded that the assessee had levelled the land with a tractor and sold the plots leaving roads and a drainage system, and applied s.45(2). The Tribunal dismissed all three appeals by common order dated 31 December 2001, holding that the assessee became entitled to the land in his individual capacity and converted it into stock-in-trade, that the land in an urban area was an asset in his hands, that it was fragmented into small pieces and sold with passage and drainage, and that his intention was to reap business profit; it also rejected a claim to deduct the notional value of the land under the passage and drainage. The assessee appealed under s.260A.
Both questions of law were decided in favour of the Revenue and against the assessee, and all three appeals were dismissed. Since no agricultural operations were carried on, the income-tax authorities rightly concluded that the capital asset had been converted into stock-in-trade and that sales of plots of such land were a business activity to make profits; s.45(2) was rightly applied and the method of valuation adopted was fair and reasonable (paras 25 to 28).
The Court set out s.2(14), including clause (iii) as it then stood with the municipal-limits and 8-kilometre exclusions (para 16), and then reviewed the authorities on adventure in the nature of trade: G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594, that a person who invests in land intending to hold it, enjoys its income and then sells at a profit is a clear case of capital accretion, and that realisation of investments is outside the domain of adventures in the nature of trade (para 17); Janab Abubucker Sait v. CIT (1962) 45 ITR 37, that an essential element is an intention to trade present at the time of purchase (para 18); P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735, that the answer depends on the total impression and effect of all the relevant facts, with the summarised indicia of a commodity divided, altered, treated or repaired and sold, the magnitude of the transaction, the nature of the commodity, subsequent dealings, the organisation employed and the manner of disposal (para 23); and its own decision in Deep Chandra & Co. v. CIT, where parcelling out and selling land designed to enhance its value was held not to make the owner a trader (paras 21 and 24). The Court accepted that the question depends on the facts of each case (para 20). Applying those tests, it held the authorities had applied the correct principles: the HUF case was rightly disbelieved on the litigation history; the assessee was a Nagar Palika employee who held urban land as a capital asset and began selling it in 43 deeds of small plots; and since no agricultural operations were carried on, the conclusion that the capital asset had been converted into stock-in-trade and the sales were a business activity was right (para 25). The Court then upheld the application of s.45(2), reproducing the sub-section, which charges the profits on conversion of a capital asset into stock-in-trade in the previous year in which the stock is sold, taking the fair market value on the date of conversion as the full value of the consideration (para 26), and approved the officer's adoption of a notional value as on 1 April 1974 depreciated at 10 per cent a year to reach the 1984 value as fair and reasonable (para 27).
Since no agricultural operations were carried on, the income tax authorities rightly concluded that the capital asset was converted into stock-in-trade, and that sales of plots in the case of such land would be treated to be business activity to make profits.
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Handle my notice → Ask a CA on WhatsAppYes, on facts like these. The Allahabad High Court upheld a finding that land held in an urban area as a capital asset, carved into 43 plots of 60 to 1,815 sq. mtrs. and sold over seven years with roads and drainage provided, had been converted into stock-in-trade, so that s.45(2) applied and the profits on sale were business income. Both substantial questions were decided in favour of the Revenue and the appeals were dismissed. This was decided by the High Court (Sunil Ambwani J and A.N. Mittal J) and bears on section 45(2), section 2(14), section 2(14)(iii), section 148, section 143(2), section 142(1), section 54F, section 271(1)(c), section 260A of the Income Tax Act 1961. It is reported as Income Tax Appeal Nos. 33 of 2002, 457 of 2007 and 458 of 2007, High Court of Judicature at Allahabad; judgment reserved 7 August 2012. This is the Revenue's half of the adventure-in-trade dispute, and the library needs it beside CIT v. Suresh Chand Goyal (M.P. High Court, 11 January 2007), which reached the opposite result on plotting and roads. What decided this case was not the development work. It was the combination of an urban capital asset, the absence of any agricultural operations, a taxpayer who was a Nagar Palika clerk rather than a cultivator, an inheritance story the Tribunal disbelieved, and 43 sale deeds over seven years. The mechanism matters as much as the outcome. Once the finding is conversion into stock-in-trade, s.45(2) engages and produces a two-part charge: the capital gain, computed on the fair market value on the date of conversion as the full value of consideration, is charged in the year the stock is sold, and the balance is business profit. That is why the assessment here shows both a capital gains figure and a business income figure for each year. The Court also confirmed a practical point: the officer had adopted a notional value as on 1 April 1974 as the cost of acquisition and applied a 10 per cent annual depreciation to arrive at the 1984 value, and the Court held that method fair and reasonable. Finally, note what did NOT save the assessee — an explanation that funds were needed to build a house was rejected as an afterthought because the investment could not be correlated at the first opportunity. If it applies to you, the first step is this: Establish continuous agricultural operations up to the sales, with documents. Their absence was the single fact that carried this case: the Court's reasoning opens with 'Since no agricultural operations were carried on'.
The assessment years were 1989-90, 1990-91 and 1991-92. The assessee was an employee of the Nagar Palika Parishad, Jalaun at Orai. Between the financial years 1984-85 and 1990-91 he sold land, said to belong to a Hindu undivided family, by carving out plots of 60 to 1,815 sq. mtrs. through 43 sale transactions. The land lay within municipal limits in an area where zamindari had been abolished on 1 July 1961; part had been inherited from his father, who died in 1952, and part acquired under sale deeds of 16 December 1958 and 16 May 1959 from Shri Narain Rao, followed by long litigation ending with a partition decree of 11 July 1980 allotting him 4.44 acres. The Assessing Officer reopened under s.148 and assessed each year under three heads — capital gains, business income and salary — with agricultural income taxed for rate purposes. The Commissioner (Appeals) recorded that the assessee had levelled the land with a tractor and sold the plots leaving roads and a drainage system, and applied s.45(2). The Tribunal dismissed all three appeals by common order dated 31 December 2001, holding that the assessee became entitled to the land in his individual capacity and converted it into stock-in-trade, that the land in an urban area was an asset in his hands, that it was fragmented into small pieces and sold with passage and drainage, and that his intention was to reap business profit; it also rejected a claim to deduct the notional value of the land under the passage and drainage. The assessee appealed under s.260A. The matter was decided on 2012-08-24 by the High Court (Sunil Ambwani J and A.N. Mittal J). On those facts the High Court held as follows. Both questions of law were decided in favour of the Revenue and against the assessee, and all three appeals were dismissed. Since no agricultural operations were carried on, the income-tax authorities rightly concluded that the capital asset had been converted into stock-in-trade and that sales of plots of such land were a business activity to make profits; s.45(2) was rightly applied and the method of valuation adopted was fair and reasonable (paras 25 to 28).
The Court set out s.2(14), including clause (iii) as it then stood with the municipal-limits and 8-kilometre exclusions (para 16), and then reviewed the authorities on adventure in the nature of trade: G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594, that a person who invests in land intending to hold it, enjoys its income and then sells at a profit is a clear case of capital accretion, and that realisation of investments is outside the domain of adventures in the nature of trade (para 17); Janab Abubucker Sait v. CIT (1962) 45 ITR 37, that an essential element is an intention to trade present at the time of purchase (para 18); P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735, that the answer depends on the total impression and effect of all the relevant facts, with the summarised indicia of a commodity divided, altered, treated or repaired and sold, the magnitude of the transaction, the nature of the commodity, subsequent dealings, the organisation employed and the manner of disposal (para 23); and its own decision in Deep Chandra & Co. v. CIT, where parcelling out and selling land designed to enhance its value was held not to make the owner a trader (paras 21 and 24). The Court accepted that the question depends on the facts of each case (para 20). Applying those tests, it held the authorities had applied the correct principles: the HUF case was rightly disbelieved on the litigation history; the assessee was a Nagar Palika employee who held urban land as a capital asset and began selling it in 43 deeds of small plots; and since no agricultural operations were carried on, the conclusion that the capital asset had been converted into stock-in-trade and the sales were a business activity was right (para 25). The Court then upheld the application of s.45(2), reproducing the sub-section, which charges the profits on conversion of a capital asset into stock-in-trade in the previous year in which the stock is sold, taking the fair market value on the date of conversion as the full value of the consideration (para 26), and approved the officer's adoption of a notional value as on 1 April 1974 depreciated at 10 per cent a year to reach the 1984 value as fair and reasonable (para 27). In the words reproduced by the source cited on this page: "Since no agricultural operations were carried on, the income tax authorities rightly concluded that the capital asset was converted into stock-in-trade, and that sales of plots in the case of such land would be treated to be business activity to make profits." The decision followed or applied G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC) — applied; P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735 (SC) — applied; Janab Abubucker Sait v. CIT (1962) 45 ITR 37 (Mad.) — applied; Deep Chandra & Co. v. CIT, Kanpur (All.) — considered and distinguished on facts.
It was decided by the High Court on 2012-08-24 and is reported as Income Tax Appeal Nos. 33 of 2002, 457 of 2007 and 458 of 2007, High Court of Judicature at Allahabad; judgment reserved 7 August 2012. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 45(2), section 2(14), section 2(14)(iii), section 148, section 143(2), section 142(1), section 54F, section 271(1)(c), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. Both questions of law were decided in favour of the Revenue and against the assessee, and all three appeals were dismissed. Since no agricultural operations were carried on, the income-tax authorities rightly concluded that the capital asset had been converted into stock-in-trade and that sales of plots of such land were a business activity to make profits; s.45(2) was rightly applied and the method of valuation adopted was fair and reasonable (paras 25 to 28). It arises in Capital Gains, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 45(2), section 2(14), section 2(14)(iii), section 148, section 143(2), section 142(1), section 54F, section 271(1)(c), section 260A of the Income Tax Act 1961, and was decided by Sunil Ambwani J and A.N. Mittal J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If a conversion into stock-in-trade is alleged, fix the date of conversion and insist on the s.45(2) computation being done properly — fair market value on that date as full value of consideration for the capital gains half, the balance as business profit in the year of sale. Do not offer a use-of-funds explanation late. The claim that sale proceeds went into a house was rejected as an afterthought for want of correlation at the first opportunity. Where the number and spread of transactions is the Revenue's case, meet it directly: 43 deeds over seven years by a single seller was treated as a regular activity, and a handful of deeds within a short period is a materially different case. If you claim to have held the land as HUF property, prove the devolution. The Tribunal disbelieved the HUF case on the litigation history and that finding was upheld. Contest the valuation method separately if you must; the Court approved a notional 1 April 1974 value depreciated at 10 per cent a year only as fair and reasonable on the material, not as a rule.
Still good law. A citedby search returns only 3 later decisions and all three distinguish it; a second probe by name and subject matter turned up the application. In Mahaveer Yadav v ITO (ITAT Jaipur, 27 February 2018) the Bench took it up itself at para 23 - 'reference can also be drawn to the decision of the Hon'ble Allahabad High Court in case of Rajendra Kumar Dwivedi [2012] 26 Taxmann.com 84 (All) wherein the facts of the case are similar to that of the case' - adopted the holding that on conversion of the capital asset into stock in trade the sale of plots is a business activity, and remanded for computation of capital gains under s.45(2) and business income separately (the companion order in Pradeep Vatrana v DCIT, same date, is to the same effect). The distinctions mark the boundary and are worth knowing. In Dr Sanjyot Deshpande v ITO (ITAT Pune, 8 March 2019) the Bench held the judgment inapplicable because although sub-division was sanctioned 'the assessee did not sell the individual smaller plots of land but sold the total landholding of family members as a whole'; and in Ramesh Raj Bhra v DCIT and Pushap Raj Bohra v DCIT (ITAT Jodhpur, both 20 March 2020) the Bench found 'substantial factual difference in the case of Rajendra Kumar Dwivedi vs. CIT'. What drives the judgment is the actual carving up and selling of plots with development, not the mere holding of urban land. Nothing overruling or doubting it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read in full from the indiankanoon print view. Two oddities in the report. First, the questions of law at para 3 are numbered '(i)' and '(iv)' with nothing between them, so the framed questions as reproduced are incomplete. Second, the dates of the first sale are inconsistent: para 14 says the first sale was in July 1984 and the last in March 1991, para 9 says the deeds were executed between 1984 and 1991, and para 25 says between January 1984 and March 1991. Nothing in the reasoning turns on the month. The Court's reasoning in paras 9 to 11 restates the Tribunal's findings in the Court's own voice before the Court's own conclusion at paras 25 to 27; the entry treats paras 25 to 28 as the Court's holding. The report also mis-cites Bhogilal H. Patel as '1969 Vol.14 ITR 692' and Deep Chandra & Co. as '1977 ITR 716' without volume numbers. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both questions of law were decided in favour of the Revenue and against the assessee, and all three appeals were dismissed. Since no agricultural operations were carried on, the income-tax authorities rightly concluded that the capital asset had been converted into stock-in-trade and that sales of plots of such land were a business activity to make profits; s.45(2) was rightly applied and the method of valuation adopted was fair and reasonable (paras 25 to 28).
TaxSphere, “Rajendra Kumar Dwivedi v CIT, Kanpur”, https://taxnotice.vittsphere.com/caselaw/case/rajendra-kumar-dwivedi-v-cit-plots-sold-as-business-and-section-45-2/ (validity last checked 2026-09-08)
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