IN THE HIGH COURT OF SINDH AT KARACHI
ITR No.231 Of 2005
Mr. Justice Muhammad Ather Saeed, and
Mr. Justice Irfan Saadat Khan.
For the Applicant: Ms. Lubna Pervez, Advocate.
For the Respondent: Mr. Jawaid Farooqui, Advocate
Date of hearing: 21.04.2011.
J U D G M E N T
IRFAN SAADAT KHAN, J: This Income Tax Reference (ITR) has been referred by the Income Tax Appellate Tribunal (ITAT) vide its order dated 15.06.2001 in R.A. No.239/KB of 2000-01 pertaining to assessment year 1992-93 arising from the order of the ITAT in ITA No.173/KB of 1994-95 dated 15.01.2011. The following question of law has been referred by the ITAT under Section 136 of the Income Tax Ordinance, 1979 (the repealed Ordinance) for the advisory jurisdiction of this Court:
“Whether on the facts and circumstances of the case, the Tribunal was justified to tax the allegedly casual income as being from an adventure in the nature of trade.”
2. Briefly stated the facts of the case are that the assessee is an individual who retired from the army. The assessment for the year 1992-93 was finalized at an income of Rs.512,617/- under the provisions of Section 62 of the repealed Ordinance wherein an amount of Rs.454,500/- was added to the income of the assessee as income from the sale of a plot as adventure in the nature of trade. An appeal thereafter was filed before the Commissioner of Income Tax (Appeals) who vide his order dated 06.06.1994 allowed the appeal and deleted the addition made to the income of the assessee. An appeal thereafter was filed by the department before the ITAT which appeal was allowed in favour of the department vide order dated 15.01.2001. Against the said order a Reference Application (R.A) was filed by the assessee which R.A was allowed by the ITAT and the matter was referred to this Court for giving its opinion on the above referred question.
3. Ms. Lubna Pervez, the learned counsel appeared on behalf of the assessee and submitted that the assessee purchased the plot bearing Survey No.58, Sector 6-D, measuring 1000 sq. yds. in North Karachi through a power of attorney from Mrs. Naseema Khatoon wd/o. Late Hasnain Sadiq Naqvi on 5.5.1989. The said plot was sold at a sum of Rs.5,17,000/- vide the sale agreement in respect of the said plot dated 24.5.1992 and a profit of Rs.4,54,500/- was declared as capital gain and exempt from the ambit of tax. As per the learned counsel the department was not justified in treating the sale of the said plot as adventure in the nature of trade on the ground that the assessee was holding a number of other plots also. The learned counsel submitted that holding a number of plots would not make the assessee a dealer of the plots but the main point which has totally been ignored by the department was whether the assessee was a dealer of the plots or whether the assessee had sold the plot which was not required by him, in view of the facts and circumstances developed in the case. The learned counsel further submitted that the department has failed to prove that apart from selling this plot the assessee had indulged in the purchase and sale of plots and hence when admittedly the assessee was not a dealer in estate or property the gain arising from the sale of the plot could not be considered as adventure in the nature of trade and taxable in the hands of the assessee. She submitted that the sale of plot was nothing but a conversion of less beneficial asset into a more beneficial asset and this transfer of the asset by no stretch of imagination could be considered as adventure in the nature of trade. In support of her contentions the learned counsel placed reliance on certain documents to prove that as the plot was encroached upon by some miscreants hence the assessee deemed it appropriate to dispose it off. She also placed reliance on the following decisions:
i. G. Venkataswami Naidu & Co. Vs. Commissioner of Income-Tax [(1959) 35 ITR 594] given by the Hon’ble Supreme Court of India.
ii. Edulji Dinshaw Limited Vs. Income-Tax Officer (PLD 1990 Supreme Court 399) given by the Hon’ble Supreme Court of Pakistan.
iii. Commissioner of Income Tax Vs. Mahmood Ali (2008 PTD 82) given by a Division Bench of this Court.
4. Mr. Jawaid Farooqui, the learned counsel appeared on behalf of the department and submitted that it is evident from the wealth statement of the assessee that he made huge investment in the purchase of the plots and from there it could easily be deduced that the purpose of purchasing the plot was to make money out of their sale hence the assessee for all practical purposes could be considered to be dealer of the plots and hence the gain arisen out of the said plot was rightly added to the income of the assessee. He, therefore, supported the order of the Assessing Officer as well as the ITAT and submitted that the present ITR may be dismissed by answering the question of law raised in affirmative i.e. in favour of the department and against the assessee.
5. We have heard both the learned counsel at some length and have perused the decisions relied upon by them.
6. Before adverting to the issue in hand, it would be pertinent if the law regarding adventure in the nature of trade be first examined. It is a trite proposition of law that facts of one case are to be examined on the basis of the surrounding circumstances of that case only. There may be occasions where the facts of one case may be akin to the facts of the other case but as no two sun rises are same so are the cases of tax laws. The prime consideration is the cases wherein the question of adventure in the nature of trade is involved is to examine and gather information from which it can be deduced as to what the intention of the purchaser was at the time of the purchase of the plot. If from the facts gathered it becomes imperative that the said plot was purchased with the intention of resale then the case squarely falls under the ambit of adventure in the nature of trade but if due to subsequent facts and circumstances the assessee had to sale a plot for some reasons to convert an un un-remunerative asset into a remunerative assets and obtains a gain, specially in the case of sale of plot, the gain arising there-from is a capital gain on which no tax is applicable subject to the condition that the assessee is neither a dealer nor a habitual purchaser and seller of the plots, though this gain is not considered to be a yardstick so far as the sale of plots are concerned. It has been held in some decisions that under the given circumstances an isolated transaction of sale of the plot was held to be an adventure in the nature of trade and under different circumstances a series of sale of plots can be held not to be so. Therefore, no yardstick or parameter, as far this aspect is concerned, could be laid down and each case is to be judged on the basis of the facts pertaining to that case only. It is also a trite proposition of law that the onus of proving adventure in the nature of trade lies squarely on the department.
7. Now coming to the facts of this case, it is seen from the record that the assessee is a retired army official who purchased the plot on a power of attorney from Mrs. Naseema Khaton on 5.5.1989 and disposed off the same on 24.5.1992 to one Syed Majid Ali for 517,000/- and as a result of the said sale earned a gain of Rs.454,500/-. This plot was claimed to be no a stock-in-trade of the assessee. The assessee filed his return by showing income from various sources and in exempt column declared the surplus arising from the sale of the plot to be casual income and capital gain not liable for tax. The plot was purchased on power of attorney from Mrs. Naseema Khatoon W/o. Hasnain Sadiq Naqvi on 05.05.1983 and was disposed off on 24.05.1992 to one Syed Majid Ali for Rs.5,17,000/- and as a result thereof declared gain of Rs.4,54,500/-. The learned counsel for the applicant produced before us a letter dated 04.06.1984 written by M. Jalaluddin Attorney to Director General KDA mentioning therein to allow him another plot as the said plot was neither having the facility of water nor electricity. It was also mentioned in the said letter that the whole Sector 6-D was practically riddled with encroachers and it would be extremely difficult to have the same vacated and it was requested in the said letter that he may be allotted another plot of similar size in a suitable area. Another letter was produced dated 16.07.1984 written in response to the above letter by the KDA, as it then was, informing the attorney that his request cannot be acceded to and has been rejected. As per the learned counsel the assessee was apprehending that as his plot could be encroached upon so he considered it expedient to dispose off the same. The learned counsel also stated before us that apart from selling this plot the assessee had not indulged in selling of the plots though he had purchased several plots but this alone could not be considered that he was a dealer in plots. A question was asked by the Bench from Mr. Jawaid Farooqui, learned counsel for the department, that whether the assessee is involved in the sale and purchase of the plots to which he candidly replied in negative.
8. At this juncture we would like to reproduce an extract from the decision of the Hon’ble Supreme Court of India, cited above, wherein the Hon’ble Supreme Court observed as under:-
“If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventure in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily re-saleable; any act prior to the purchase showing a design or purpose; the incidents associated with the purchase and resale; the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold it for some time and if a profitable offer is received sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction”.
We are further fortified from an observation made by the Hon’ble Supreme Court of Pakistan in the above referred judgment wherein the Hon’ble Apex Court observed as under:-
“On the facts and circumstances proved on record, the sale proceeds of the properties and the compensation amounts received from the Government in respect of the compulsory acquisition of the properties were indeed capital gains, and was not income from business, for, the company was not a dealer or engaged in the business of buying and selling of the properties. All the transactions or sales of the properties and the compulsory acquisition of land by the Government were fully disclosed by the company and after conscious consideration, the Income‑tax Officer had finalised the assessment orders. It has not been shown that assessee had purchased any property from any outsider and sold or disposed of during the assessment years in question. Since the case of the assessee throughout is that the sale proceeds of the properties and the compensation amounts received in respect of the compulsory acquisition of the properties by the Government were capital gains and not income”.
The learned Division Bench of this Court in the above referred decision observed as under:-
“17. The taxpayer/respondent in the instant case has admittedly sold the plot after his retirement from employment/service and the department has not brought any material on record to show that at the time of purchase of the said plot the intention of the taxpayer/respondent was to achieve revenue gains. The intention must be deduced from the facts and circumstances of each case and whether a man makes a business of speculation the same must be deduced from the facts of each case. The mere change of investment would not amount to adventure in nature of trade. It will be beneficial to quote the law laid down in the case of (1966) 62 ITR 578. In that case the company was a family company which was formed for the purpose of dealing in properties transferred to it and it had power to purchase and sell properties. The company made profits on the sale of land but it was held that the transaction of sale of plots was one that prudent owner of land would engage in and which was, therefore, no more than realization of a capital investment or conversion of land into money and not a venture in the nature of trade.
18. We may further observe that in determining the nature of the transaction regard has to be made to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along and other factors including absence of evidence of any trading activity of the speculative venture. In another case the Indian Supreme Court in the case reported as AIR 1959 SC 1252, while striking down the finding of the department, pointed out that mere fact that the assessee had realized that the property was valuable and would increase in price was no reason to hold that it should be treated as income and reliance was placed on a decision of the House of Lords in which it was held that: "An accretion of capital does not become income merely because original capital was invested in the hope and expectation that it would rise in value. If it so rises its realization does not make it income."
19. At this juncture it would be beneficial to give the distinction between the "revenue income" and "capital" under the income tax law as duly approved by the Hon'ble Supreme Court of Pakistan in the case of Commissioner of Income Tax v. Habib Bank Limited (1985 SCMR 284). In this connection, the distinction between "revenue income" and "capital" under the Income Tax Law was examined and reference was made to the following passage from British Tax Encyclopedia, Volume 5, (pages 1013-1014):--
"Underlying many of the decisions as to what is, and what is not, taxable income from property or profits is the broad concept that capital corresponds to the tree and income to the fruit. An accretion to capital is not income, although income does not escape tax merely because it is used to increase or recoup capital; nor is it any the less `income' because its production involves wastage of capital. Possibly the best definition of income from property comes from the Supreme Court of the United States. Here we have the essential matter; not a gain accruing the capital, not a growth or increment of value in the investment; but a gain, a profit something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being derived, that is, received or drawn by the recipient (the tax-payer) for his separate use, benefit, and disposal; that is income derived from property. Nothing else answers the description,"
The same subject is more specifically explained as under:--
"A trader who has money in hand and temporarily invests it in shares is not regarded as performing a trading operator; if he later wants the money and realizes his investment at a profit, such profit is not taxable. But if he carries on a trade in which investing money is a normal part of that trade, then any profits or losses he makes on investments will be brought into his tax computation. Thus; an insurance company and a bank have been held taxable on profits made on realizing investments as the buying of investments is part of insurance or banking business; conversely any loss may be deducted. Interest received by a trading company from its bankers on its daily bank balance has been held to be part of its trading profits."
In Californian Copper Syndicate v. Harris (1903-1911) 5 T.C. 159 the law on the subject was laid down in the following words:--
"It is quite well-settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses as to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule of the Income Tax Act, 1842 assessable to Income Tax. But it is equally well-established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they make is liable to be assessed for Income Tax”.
9. In the light of the above narrated facts and in the light of the legal proposition as discussed above, we have come to the conclusion that in view of the prevailing facts of the case the sale of the plot by the assessee could not be considered to be an adventure in the nature of trade but the same squarely falls under the ambit of casual income or capital gain being exempt from tax. The mere fact that the owner of an immoveable property had sold the same on an accretion is not enough to state that the said transaction was an adventure in the nature of trade until and unless the facts so warrant. The whole emphasis of the lawmakers in respect of the law settled so far was to determine the intention of the person at the time of purchase of any property. If it is proved from the facts that the intention was to resale the same and to make profit out of the same, the same squarely falls under the ambit of adventure in the nature of trade but where it is proved that the intention at the time of acquiring the asset was not to resale it but due to attending circumstances the said property was sold and the profit made out the said gain thus could not be considered to be adventure in the nature of trade or a business transaction.
10. The definition of the term business as given in section 2(11) read with section 22 of the repealed Ordinance clearly stipulates that if a receipt arises from the business it would be chargeable to tax though it may be casual or non-recurring in nature or adventure. In order to determine whether the transaction is in the nature of business first of all the facts of each case had to be ascertained under which the said purchase and sale was made. In the above referred decision the learned Division Bench of this Court has also observed as under:-
“It may be further observed that if in a given case a transaction is held to be of Revenue Gain, the provisions of clause (11) of section 2 of the Ordinance read with section 22 thereof, would be attracted. However, if it is held that gain on sale of immovable property is in nature of Capital Gain, it would be clearly outside the purview of section 27 of the Ordinance, as for the purposes of Capital Gain the immovable property has been excluded from the definition of "capital asset" under subsection (2) of section 27 of the Ordinance”.
11. We, therefore, in the light of the above observations are of the considered view that the learned ITAT was not justified in considering sale of the plot to be adventure in the nature of trade. Hence, we answer the question raised in the present ITR to be in negative i.e. in favour of the assessee and against the department.
12. A copy of this order under the signature of the Registrar and seal of this Court be remitted to the Income Tax Appellate Tribunal for passing the order in conformity with this order.
Karachi, dated:___________ 2011