[Opinion] Tax Impact of Treating Income as Adventure in the Nature of Trade

V K Subramani – [2026] 187 taxmann.com 813 (Article)

Income-tax Act, 2025 and the repealed Income-tax Act, 1961 do not exhibit structural changes in taxation but have a few changes which may require a further thought process on the part of the lawmakers to recheck whether the changes are really intended or inadvertent. For example, cash withdrawal was subjected to tax deduction at source in respect of the amount exceeding the threshold limit and whereas the new dispensation provides for tax deduction for the threshold limit as well (refer section 393 (3)) and this is somewhat preplexing.
In this refresher, we shall analyse the decision in the case of Keshavareddy Krishnareddy v. Asstt. CIT [2026] 186 taxmann.com 773 (Bangalore – Trib.).

1.1 Factual matrix of Keshavareddy and Krishnareddy’s case
The assessee was engaged in the business of running a bar and restaurant, which filed its ITR for the assessment year 2012-13, declaring a total income of ₹ 97.47 lakhs. The ITR was selected for scrutiny, and it was found that the assessee had shown capital gain on the sale of 25 plots of land. The Assessing Officer treated the sale of plots as ‘adventure in the nature of trade’ and taxed the same as income from business when the assessee had admitted the same under the head ‘Capital gain’. It was found that the assessee in the same year had sold two agricultural lands with profit of ₹ 22.14 lakh and ₹ 16.36 lakhs respectively. Also, the assessee received compensation on the acquisition of agricultural land of ₹ 52.17 lakhs. If treated as an adventure in the nature of trade, the whole of the profit on the sale of agricultural land and compensation received in respect of compulsory acquisition would also be taxable as income from business. That was huge damage that could be inflicted on the assessee.
The assessee claimed that the sale of 25 plots of land was a capital gain and it is not in the nature of business, whereas the Revenue treated the same as business. Thus, the dispute was as regards the character of holding 25 plots of land and sale subsequently and the consequential impact of other sale transactions made during the year.

1.2 Legal decisions
In Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) the assessee was engaged in various business activities such as shareholder/director in several companies and was also partner in a firm. He entered into an agreement for acquiring a plot of land for the purpose of constructing a residential building, besides a workshop for his business activities. He paid an advance also in pursuance of the agreement. Later, it was found that the area proposed to be bought was requisitioned for purposes connected with the prosecution of the Second World War and was in the occupation of the government. One of the terms of the agreement was that the transaction of purchase would be completed within 6 months of it being released from the government occupation. Subsequently, the assessee found a buyer to whom he assigned his rights and received a consideration resulting in a surplus. The question before the court was whether the agreement entered into for acquisition of plot of land can be termed as “adventure in the nature of trade”. The tribunal had held that it is an adventure in the nature of trade and therefore chargeable to tax. The apex court held that the transaction could not be decided by laying down any rigid legal principle. It is a mixed question of fact and law. It was not a transaction in the line of business engaged by the assessee but an isolated transaction. The Revenue had to prove that the transaction was an adventure in the nature of trade. Further, there must be evidence to support the inference that the land was acquired with the sole motive of selling at a later date. At the time of entering into agreement, the assessee was doing business and had shown large amounts as income liable to tax. It was not unnatural for him to continue the business he was doing and raise sufficient funds for construction of residential house and a workshop for engineering business. The probability of appreciation in value of the plot of land would not lead to the inference that it was an adventure in the nature of trade. It may be noted that the facts of the case relate to assessment year 1948-49.

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