The main legal point established in the judgment is that the tax treatment of surplus realized from the sale of land depends on factors such as the intention at the time of purchase, improvements on the land, and the motivation behind the sale.

(Dr. D.Y. Chandrachud, J.)

By this Reference, under Section 256(1) of the Income Tax Act, 1961, the Tribunal has at the behest of the Revenue, referred the following question:

"Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that surplus realised on sale of land was in the nature of capital gain and that the assessee was not a trader in land."

2. The Reference arises from an order of the Income Tax Appellate Tribunal for Assessment Years 1987-88, 1988-89 and 1989-90. The facts, as set out in the statement of case, are that 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 in half 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 this Court dated 21 December 1972, Mr.Nusli Wadia was appointed as sole administrator of the estate. The other half share was bequeathed to E.F. Dinshaw.

3. On 27 December 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 28 December 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. Dinshaw 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 Trust 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 Income Tax Act, 1961. 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.

4. The Assessing Officer in the course of the assessment held that there was a steady, systematic and continuous process of selling portions of the property for making profits in 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 is reduced, was suggestive of the fact that the lands were purchased only for the purposes of earning profit. The profit arising from the sale of the land was treated as business income. In appeal, the CIT (A) held that the mere ownership of the land does not constitute trade. The CIT(A) held in favour of the assessee on the basis of the following findings : (i) Neither of the assessees had purchased the land themselves.