I.TA. NO. 222(IB) OF 1989-90. VS I.TA. NO. 222(IB) OF 1989-90.
1991 P T D (Trib.) 786
[Income-tax Appellate Tribunal Pakistan]
Before Sayed Amjad Hussain Bukhari, Judicial Member Junejo M. Iqbal,
Accountant Member
I.TA. No. 222(IB) of 1989-90.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 27 &. 2(ii), Second Sched., Part I, item 65---Constitution of Pakistan (1973), Fourth Sched., Part I, item 50---Business---Adventure in the nature of trade-- Sale of immovable property---Criteria for determining the character of transaction---Capital gain ---Assessee, a doctor by profession working as Executive Director of a hospital and deriving income from salary applied for allotment of commercial plot which was allotted to him on 30-9-1981 on the terms that the plot in question was meant for construction of five-storey building for commercial purposes and for clinic and residential apartments ---Assessee, at the time of allotment of plot expected that Industrial Development Bank or some other financial institution would advance loans to help him complete the construction of clinic and in spite of his best efforts when no loan granting agency considered his request favourably and Development Authority pressed for the completion of construction by issuance of show-cause notice to him for the cancellation of plot and fixed the deadline as 30-6-1986, the assessee reached a point of exasperation and disposed of the plot on 14-7-1986---Assessee had not made any improvement in the plot to make it more attractive and readily resaleable and was sold in the same position in which it was allotted to him and that too not in bits and pieces but in one transaction---Assessee had never entered into any business in the past and his salary was the sole source of his income as a doctor and salaried employee and sale of plot in question was a solitary transaction of property so sale of plot did not fall in his line of profession as a doctor and salaried person---Held, assessee was a doctor by profession and continued to work as F4ecutive Director in a hospital, deriving income from salary and purchase and sale of the property were not allied to his usual vocation or profession or any activity incidental thereto---Purchase and sale of the plot was thus not in the nature of trade or business so as to fall within the definition of "business" as contained in S.2(ii) of the Ordinance---Surplus realised on the sale of plot by the assessee could not, therefore, be branded as an adventure in the nature Of trade as sale of the plot by assessee was for special reasons.
P. Kannan (Karn)'s case (1985) 15.1 1 T R 441; Dinshaw Irani v. C.I.T. (1957) 31 I T R 92; Naseer Ahmad Shaikh v. C.I.T. P L D 1977 Lah. 753; Californian Copper Syndicate Ltd. v. Harris (1904) 5 T C 159; Wragg v. Palmer (1919) 2 Ch. D. 59; (1944) 12 I T R 209 (Lah.); Commissioners of Inland Revenue v. Reinhold (1953) 34 T C 389; (1959) 37 I T R 242; (1962) 451 T R 37; (1906) 57 I T R 21; (1966) 62 I T R 578; (1970) 77 I T R 253; (1977) 107 I T R (sic); 1990 P T D 345; (1978) 14 I T R 253; (1981) 129 I T R 115; (1983) 142 I T R 115; 1984 M L D 262; (1985) 152 I T R 7; 1989 P T D (Trib.) 460; (1957) 311 T R '1(92; p L D 1977 Lah. 753; Commissioner of Inland Revenue v. Ligingstion and others 11 T C 538; 14 T C 648; (1961) 42 I T R 197; (1975) 31 Tax 7 (Trib.); 1988 P T D (Trib.) 354; 1989 P T D (Trib.) 460; (1989) P T D (Trib.) 191; 1989 P T D (Trib.) 1233 and 1989 P T D (Trib.) 150 ref.
(b) Income-tax Act (XI of 1922)---
----S. 27---Constitution of Pakistan (1973), Fourth Sched., Part I, item 50-- Capital gain---Sale of immovable property---Capital gain, if any, earned on the sale of immovable property was not taxable by virtue of the Constitution and relevant provisions.
(c) Income-tax---
----Adventure in the nature of trade---Criteria for determination of nature of the transaction stated.
Khalid Hussain and Muhammad Amin Butt for Appellant.
Sultan Mansoor and Muhammad Jehangir Khan, D.R. for Respondent.
ORDER
SAYED AMJAD HUSSAIN BUKHARI (JUDICIAL MEMBER).-- This appeal relating to the charge year 1987-88 is directed against the order dated 31-3-1990 whereby the learned Commissioner of Income-tax (Appeals), Rawalpindi rejected the appeal filed against the assessment order, dated 18-6-1989. A brief account of the facts of the case is that the assessee-appellant is an individual. He filed a return for the assessment year under consideration to declare loss of Rs.26,730 as follows:--
Income declared
| (i) Income from salary | Rs. 48,909 |
| (ii) Profit from sale of Plot No. 54 Blue Area, Islamabad | Rs. 59,09,0000 |
| (iii) Interest from P & L account | Rs. 75,069 |
| | Rs. 60,32,978 |
Exemption claimed
| (i) Profit on sale of plot No. 54 Blue Area, Islamabad | Rs. 59,09,000 |
| (ii) Profit on P & L Account | Rs. 15,000 |
| (iii) Zakat | Rs. 1,35,708 |
| | Rs. 60,59,708 |
| Loss: | Rs.26.730 |
2. The Assessing Officer processed the case under section 62 of the Income-tax Ordinance, 1979 (hereinafter called the Ordinance) and finally determined a gain of Rs.59,09,000 accruing from the sale of commercial Plot No.54 (hereinafter to be referred to as the plot), Blue Area. Islamabad. On appeal, the learned C.I.T.(A), Rawalpindi set aside the assessment order for fresh determination, vide his order, dated 20-1-1989. Thereafter, a fresh notice under section 62 alongwith a notice under section 61 of the Ordinance was issued to the appellant by the Income-tax Officer. The learned Authorised Representative of the appellant, Mr. Noor Ali Ismaili, I.T.P. appeared on 21-8-1988 before him and tiled a reply to the notice issued under section 62 of the Ordinance, explaining the position regarding the gain of Rs.59,09,000 as under:--
(1) The gain of Rs.59,09,000 which arose on sale of plot is of casual nature, there is no element of adventure in the nature of trade and the same is exempt under clause (65) of the Second Schedule to the Income-tax Ordinance, 1979.
(2) Initial investment of Rs.6,70,000 was made by taking loan from:
(a) Justice (Retd.) Muhammad Daud Khan, Resident of Tattar, Tehsil Mansehra, District Abbottabad. Rs.2,80,000
(b) Ltd.-Col. (Retd.) Malik Aman, (PA) No. 4663) Deputy Finance Adviser, Defence Production Division Pak. Secretariat No. 2, Rawalpindi, 02-30-0494448.
Rs.2,40,000
(c) Lt.-Col. Muhammad Younis, Housing Directorate, GHQ, Rawalpindi, 02-11-0309261
Rs.50,000
(d) Muhammad Amin Khan s/o Abaidullah Khan Garri Habib Ullah Tehsil and District Mansehra Rs.50,000
(e) Mst. Yasmin Ayaz w/o Muhammad Ayaz Lt.-Col. P.A. No. 7115,
Garri Habib Ullah, Tehsil and District Mansehra.Rs. 50,000
_______________________
Total: Rs.6.70.000
The I.T.O. accepted the source of investment explanation after examining the creditors named by the appellant.
3. On examining the case, the ITO noted that the appellant had purchased the plot for a sum of Rs.11,94,666.67, on 30-9-1981. An advance amount of Rs.6,70,000 was paid by the appellant to the C.D.A. at the time of allotment of the plot. The balance price of Rs.5,24,666 was deposited by the appellant with the C.D.A. out of the full price received by him from Ch. Mushtaq Hussain to whom the plot had been sold for a consideration of Rs.74,00,000. A specific notice under section 62 of the Ordinance, was therefore, sent to the appellant in order to confront him with the situation, in the following manner:--
"You sold plot No. 54 Blue Area Islamabad between (F.6 & G-6) measuring 48" x 224 i.e. 1194-6/9, sq. yards for Rs.74,00,000 on 14-7-1986 and claimed Rs.59,09,000 profit arising from its sale as exempt from Income-tax.
The profits arising from the sale proceeds of abovementioned plot are taxable as adventure in the nature of trade and not exempt under clause (65) of tire Second Schedule to the Income-tax Ordinance, 1979 for the following reasons:--
(i) You had applied for allotment of a `Commercial Plot' which was allotted to you on 30-9-1981 and confirmed vide CDA's allotment letter No. CDA/EM-27/ (1077)/75/85, dated 3-1-1982. Para. II of C.D.A's. allotment letter already states that the plot was meant for the construction of five-storey building for commercial purposes (ground floor) and upper floor for clinic and residential apartments. The very fact that the plot was commercial one signifies that you wanted to earn profit from the sale of shops and apartments and the plot was not allotted exclusively for making a clinic.
(ii) You did not have the means to pay for the plot, as such funds were raised by borrowing from relatives and payments were made to the CDA accordingly, including the balance payment which was paid out of advance received from the purchase of plot.
(iii) Earlier you had taken the plea that you applied for loan to IDPB and UBL for setting up of clinic, which were refused on legal grounds. The plot was allotted to you in September, 1981 whereas you applied to IDBP on 10-2-1984 which indicates that you were certainly not serious in setting up of a clinic.
(iv) Para. II of CDA's letter mentioned above is reproduced:--
`The plot is meant for the construction of five-storey building for commercial purposes (Ground floor) and upper floors for clinic and residential apartments.'
It is clear from above that completion of such a huge project required substantial amount of investment and you did not have money even at the initial stage to pay for plot, therefore, you had been waiting for an appropriate time to sell the plot and earn profit from the same since this was your only intention right from the beginning as you never wanted to go for construction on this plot. Following case-law is also referred:--
"Where land was purchased for building a Theatre or Hotel but it was converted into house sites and sold and the assessee had no money to build a Theater and had even borrowed money for purchase of land.
Held, that the transaction was an adventure in trade and the profit therefrom was taxable as business income."
P. Kannan (Karu) (1985) 154 I T R 441;
In the light of above your action of selling Plot No. 54, Blue Area, Islamabad for consideration of Rs.74,00,000 on 14-7-1986 is not accepted as exempt income under clause (65) of the Second Schedule of the Income-tax Ordinance, 1979 and earning profit of Rs.59,09,000 is treated as adventure in the nature of trade and is taxable under the Income Tax Ordinance, 1979.
The following cases are also referred:--
Isolated transaction:
"As insolated transaction and sale of land can be treated as an adventure provided there is intention to re-sale."
Dinshaw Irani v. C.I.T. (1957) 311 T R 92.
"Single and isolated business may constitute an adventure in the nature of trade
Naseer Ahmad v. C.I.T. P L D 1977 Lah. 753.
Since I intend to bring to tax net profit on Rs.59,09,000 earned by you through sale of Plot No. 54, Blue Area, Islamabad, therefore, your reply if any should be submitted on or before 30-4-1989 positively."
4. In response to the notice the learned A.R. of the appellant attended the office of the Assessing Officer and filed a reply which was not found to be satisfactory for the following reasons:--
(i) The assessee was allotted a commercial plot and the contents of the allotment letter clearly specify that the plot is meant for the construction of 5-storey building for commercial purposes (ground floor) and upper floor for clinic and residential appartment. This fact is confirmed vide C.D.A.'s Letter No. CDA/EM-27 (1077)/75/85, dated 3-1-1982. It is very clear that the assessee was waiting for the prices to escalate and the sell the plot at appropriate time when he was sure of considerable gain from the adventure of selling his plot.
(ii) The assessee did not have means to pay for the plot as such funds were raised by borrowing from relatives and payments were made to the C.D.A. including the balance payment which was received from the purchaser of plot.
(iii) The assessee was allotted plot in September, 1981 whereas he applied to I.D.B.P. on 10-12-1984 for setting up clinic, which indicates that he was not serious in setting up a clinic at all.
(iv) It is understood that completion of such a huge project requires substantial amount of investment and the assessee did not have money even to make payment for plot, therefore, he had been waiting for a proper time to sell the plot and assessee earned profit from the sale since this was his only intention right from the beginning, as he could have never been able to start the construction due to lack. of financial resources. Following case-law is referred:--
(1) "Where land was purchased for building a Theatre or Hotel but it was converted into house sites and sold and the assessee had no money to build a Theatre and had even borrowed money for purchase of land. Held that the transaction was an adventure in trade and the profit therefrom was taxable as business income."
P. Kannan (Karn) (1985) 154 I.T.R. 441.
(2) An isolated transaction and sale of land can be treated as an adventure provided there is intention to re-sale.
(3) Single and isolated business may constitute an adventure in the nature of trade.
Naseer Ahmed Sheikh v. C.I.T. P L D 1977 Lah. 753.
5. Based on the position highlighted by him with reference to the respondent's reply to the notice issued under section 62 ibid, the I.T.O. observed that profit of Rs.59,09,000 arising out of the sale of the plot by the appellant could not be treated as exempt income, as envisaged by clause (65) of the Second Schedule to the Ordinance, because the transaction was an adventure in the nature of trade. He, therefore, rejected the declared version of the appellant and computed the income, as below:--
| (1) Income from business or profession. | | Rs. 59,09,000 |
| (2) Income under the head salary. | | Rs. 48,909 |
| (3) Income from other sources (P&L profit) | | Rs. 75,069 |
| | Total: | Rs.60,32,978 |
| (1) Exempt P&L profit. | Rs. 15,000 | |
| (2) Zakat deducted. | : Rs. 1.50,708 | Rs.1,5.708 |
| | Net Income | Rs.58,82.270 |
| | | |
6. Feeling dissatisfied with the above dispensation, the appellant preferred an appeal before the learned C.I.T.(A), Rawalpindi; but without any success. Hence the present appeal before us.
7. The appellant is represented by his learned counsel, Mr. Muhammad Amin Butt, assisted by Mr. Khalid Hussain, Advocate. The learned Legal Adviser, Mr. Sultan Mansoor, is present on behalf of the respondent. He is assisted by the learned Departmental Representative, Mr. Muhammad Jehangir Khan. Arguments on behalf of the parties have been addressed by Mr. Muhammad Amin Butt and Mr. Sultan Mansoor. The record of the case has been examined in detail.
8. The learned counsel for the appellant has contended that the authorities below have not been able to comprehend and thrash out the matter properly and have proceeded on a misconceived notion that the sale of the plot amounted to an adventure in the nature: of trade, that the appellant had not purchased any property in the past and his only source of income is the salary received from C.D.A., as Executive Director. Capital Hospital, Islamabad, that the case in hand is not one of purchase of property but involves allotment of a plot made in the name of the appellant as an employee of the C.DA. for the construction of a hospital, that application for the allotment of the plot had been submitted by the appellant in 1978 and the allotment was made in 1981, but the formal allotment letter was received by him in 1982, that in 1983, the appellant went to the United States of America for higher studies and returned in 1984, that appellant applied for a loan to build the hospital as he had been served with notices by the C.D.A. for the cancellation of allotment due to his failure to complete the construction within the specified period, that since the appellant had been pressed hard to pay back the loan obtained for the payment of price to the C.D.A., he (appellant) was obliged to dispose of the plot to get money for this purpose, and that the deadline indicated by the C.D.A. for the cancellation of the allotment of the plot was 30-6-1986; whereas the plot was sold by the appellant, on 14-7-1987, because he had all along been trying to tap other financial sources for the repayment of loan. Advancing this arguments further the learned counsel for the appellant has pleaded that the plot was not a trading asset or a stock-in-trade to be disposed of eventually for the purpose of making a gain out of the transaction, that the purchase of the plot in dispute by the appellant was a mere investment and the same was being held as a capital asset, in terms of section 2(12) of the Ordinance, that the onus to prove that the plot was a stock-in-trade in the hands of the appellant lay on the department and the same has not been discharged by it, and that any isolated instance of sale of property by a person in some peculiar circumstances does not constitute an adventure in the nature of trade and in order to establish the contrary, it falls heavily on the shoulders of the departmental authorities to prove by a strong and cogent evidence that the property had been purchased with the sole intention of starting an adventure in the nature of trade.
9. The learned counsel for the appellant has added that the I.T.O. had commenced re-assessment proceedings with pre-occupied mind that the acquisition of the plot by the appellant was an investment in commercial property, although no such inference had been drawn in the original assessment, that the I.T.O. was wrong in assuming so and assessing the appellant for having indulged in an adventure in the nature of trade. In this context, the learned counsel for the appellant has referred to item 11 of section 2 of the Ordinance wherein "business" has been defined to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Dilating further on the issue, he has given out that the gain accruing to the appellant out of the solitary transaction of sale is simply a casual and non-recurring receipt, not covered by item 11 of section 2 ibid and not liable to tax in view of the exemption provided under clause (65) of Part 1 of the Second Schedule to the Ordinance, that the special provision to tax "capital gains", contained in section 27 excludes the general provision enacted in the form of item 11 of section 2 of the Ordinance oil the principle that the special excludes the general that immovable property does not fall within the definition of "capital assets" appearing in section.. 27 2)(a)(ii) of the Ordinance and for this reason the difference of Rs.59,09,000 III tile allotment value and sale price of the plot, although a capital gain on immovable property is not taxable as such, that capital gain on immovable property stands excluded from the purview of subsection (1) of section 27 providing for the levy of tax on the capital gains inter alia for the reason that the Federal Legislature has no power to tax the capital gains on immovable property, as envisaged by item 50 of the Federal Legislature list in the Fourth Schedule to the 1973 Constitution of the Islamic Republic of Pakistan, tax on the sale transfer of immovable property can be levied only by the provincial Legislature and in fact it was so levied for several years, but was later on withdrawn, and the assessment is liable to be annulled in so far as it relates to tile questioned addition of Rs.59,09,000 treated as profit from the business of sale of immovable property.
10. In order to reinforce his contentions, the learned counsel for the appellant has quoted copious case-law. The relevant extracts, of the precedents are set out hereinbelow:
Californian Copper Syndicate Ltd. v. Harris (1904) 5 Tax Cases 159:
Held, that it is quite a well-settled principle in dealing with questions of assessment of Income-tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit from an adventure in the nature of trade and hence not assessable to Income-tax.
Wragg v. Palmer (1919) a Chancery Division 59:
Held, that the word to "invest" when used in an investment clause may safely be said to include as one of its meanings "to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income which it will yield, whilst the noun "investment" when used in such a clause may safely be said to include as one of its meanings the property in the purchase of which the money has been so applied"
(1944 12 I T R 209 (Lahore H.C.):
Held, that the essential test to determine whether a transaction is an adventure in the nature of trade is the intention with which the property is purchased and that if the purchase is with the intention to invest one's capital with the sole object of selling the property in future to make a profit, the purchase and the subsequent sale are an adventure in the nature of trade.
Commissioners of Inland Revenue v. Reinhold (1953) 34 Tax Cases 389:
Held, that the fact that the property was purchased with a view to resale did not of itself establish that the transaction was an adventure in the nature of trade, and that the Commissioners were justified in treating the profit in question as not assessable to Income-tax, that in order to establish that a transaction was an adventure in the nature of trade, it is not enough for the Revenue to show that the property was purchased with the intention of reselling it some day at a profit, because it is the expectation of most, if not all, people who make investments.
(1959) 371 T R 252 (SC of India):
Held, where a transaction is not in the line of business of the assessee but is an isolated or single instance of a transaction, the onus is on the Department to prove that it is an adventure in the nature of trade; and a visual profit made on an isolated purchase and sale. unless merged with similar transactions in the carrying on of a trade, is not liable to tax.
(1962) 451 T R 37 (Madras H.C.):
Held, that one of the important matters to be considered in deciding whether a transaction of purchase and re-sale amounts to an adventure in the nature of trade is the intention to trade, which must be present at the time of purchase, that the mere circumstance that a property is purchased in the hope that when sold later it would leave a margin of profit could not be sufficient to show an intention to trade at the inception that in determining the intention to re-sell, the nature of the article purchased has to be taken into account, namely, whether it is of such kind and in such quantity as to be capable of commercial disposal only, and not of intention as an investment, or for use by the purchaser personally, that the onus is on the Department to prove that a particular transaction amounts to an adventure, in the, nature of. trade, that the purchase of property in the shape of agricultural lands is ordinarily an investment and the purchaser does not always judge the wisdom of the transaction by the returns he would get and that other considerations also prevail in the matter of such purchase, like the pride of possession of agricultural lands, security which is inherent in the investment etc.
(1966) 571 T R 21 (S.C. of India):
Held, that it is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and that the nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the Income Tax authorities.
(1966) 62 I T R 578; (Madras H.C.):
Held, that the decision of the question whether profits made by the sale of land by an assessee carrying on business are profits from his that very business or merely capital gains will depend on the cumulative effect of all the facts and circumstances, that developing land into building sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment and amounts to conversion of one form of the asset into another, that the surplus in such a case will not be trading or business profit because the transaction is one of realisation of assets in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade.
(1970) 77 I T R 253 (S.C. of India):
Held, that if the transaction is in the ordinary line of the assessee's business, there would hardly be any difficulty in concluding that it is a trading transaction; but where it is not, the facts must be property assessed to discover whether it is in the nature of trade, that surplus realised on the sale of shares, would be capital if the assessee is an ordinary investor realising his holding, but it would be revenue if he deals with them as an adventure in the nature of trade and that the fact that originally purchase of property was made with the intention to resell if an enhanced price could be obtained is by itself not enough, but in connection with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction.
(1977) 107 I T R (sic) (Allahabad H.C.):
Held, that land alone is also not a trade in itself, that normally, the purchase of land represents investment of money in land, that transaction of purchase of land cannot be assumed without more, to be a venture in the nature of trade, that investment in purchasing a property is also made with a view to earning return on the sum invested and that the mere fact that a person invested money in property for the purpose of reselling it whenever a suitable opportunity arises, does not give a sufficient ground to hold that the transaction is in the nature of trade.
1990 P T D 345:
Held, that the property involved in the case, being land, was not ordinarily a commercial commodity and that its resale took place a little over six years after the purchase, which would militate against any inference being drawn that the purchase itself had been made with the intention of embarking on a venture in the nature of trade.
(1978) 1141 T R 253 (Madras H.C.):
Held, that where a receipt is sought to be taxed as income, the burden lies on the Department, to prove that it is within the taxing provision and only where the character of the receipt is established as income, the burden of proof that it is not taxable lies on the assessee.
(1981) 129 I T R 115 (Madras H.C.):
Held, that the purchase of a plot of land by an assessee maintaining horses for races and also making money from betting and racing, and its resale after building roads, drains, etc. in the form of three small units under different sale-deeds was not an adventure in the nature of trade as the assessee had entered into the solitary transaction for the acquisition and sale of land and had not purchased any such immovable property at any time before or after.
(1983) 142 I T R 115 (Madras H.C.):
Held, that a mere application for permission for a layout of the surplus land or the subsequent sale of the land would not lead to the inference that there was a conversion of the capital asset into a stock-in-trade, that the intention of the assessee to sell the laid out plots was only to discharge the debts and not for carrying on any adventure in the nature of trade and that the sale of the laid out plots instead of selling the entire land was only for the purpose of obtaining the best possible price and not for engaging himself in the real estate trade.
(1984) M L D 262 (Kar. H.C.):
Held, that in so far as the capital gains arising from sale, exchange or transfer of immovable properties, the same are not chargeable to income-tax but were chargeable to tax under the provincial law relating to the capital gains tax.
(1985) 152 I T R 7 (Punjab and Haryana H.C,)
Held, that the assessee purchased the land with the intention of putting it to agricultural use, the question of this purchase with any other intention does not arise for consideration and that the subsequent sale of land in the form of plots did not amount to an adventure in the nature of trade because the initial intention with which the land was purchased by the assessee was alone relevant.
1989 P T D (Trib.) 460;
Held, that the revenue receipts accruing from the sale in 1980 of the agricultural land purchased by an assessee in 1965, in the form of plots after it came within the municipal limits were not liable to tax as the transaction was not an adventure in the nature of trade.
10. The learned Legal Adviser, while replying to the arguments advanced by the learned counsel for the appellant, has submitted that the appellant had no money to build a hospital; nor did he have any means to purchase a plot, that right from the beginning, his intention was to make profit out of the deal, and that if he were sincere in his intention to build a hospital the appellant should have applied for a loan way back in 1981, without waiting for 1984. The additional plea set up by him is that it is vividly clear from the facts and circumstances of the case that the appellant had no intention of building a hospital, but his sole objective throughout was to make money out of the sale of the plot, and that the disposal of the plot for a huge price, by all means, is an adventure in the nature of trade as is evident from the reported cases relied upon by the assessing officer, viz. (1957) 31 I T R 92 (Bombay High Court) and P L D 1977 Lah. 753.
12. Adverting to the cases mentioned by the I.T.O. in the assessment order, it is pointed out that the ratio decidendi therein is not at variance with the general rule hereinabove enunciated, namely, that without the proof of initial intention in this regard, the profits earned by a person from a solitary transaction of purchase and sale of property cannot be taxed on the ground of having been realised from an adventure in the nature of trade. These cases do not, therefore, detract from the spirit of the rulings quoted on behalf of the appellant. In (1957) 31 I T R 92, the Bombay High Court has stated in express terms that the mere fact that a person buying property wishes to sell and realise profit by the resale is not conclusive on the question as to whether the transaction is in the nature of trade or in the nature of capital investment and that in the case before the Income-tax Appellate Tribunal, there were other circumstances besides that one circumstance, to justify its conclusion that the questioned transaction was in the nature of trade. The assessee in that case was a partner in several firms doing restaurant business in Bombay. He obtained a piece of land in a Municipal Scheme in 1946 on the terms that he would erect a building thereon costing no less than Rs.75,000, that an annual rent of Rs.3,338 would be paid and that on the completion of construction he would be granted a lease for 99 years. In 1950 the assessee assigned his rights for a sum of Rs.32,011. No material was brought on the record to prove that he had any intention to raise a building, or was possessed of sufficient means to do so. Basing it finding on these peculiar fact, the Tribunal held that the transaction was an adventure in the nature of business. In this context it observed that when the assessee applied to the Bombay Municipality for a plot of land, he must have known that building materials were not easily available and, therefore, it was never his intention to construct a building with the ultimate object of obtaining a lease for 99 years and that he did not even have the means to undertake the construction involving an expenditure of not less than Rs.75,000. On a reference filed before it, the High Court endorsed the observation of the Tribunal and confirmed the view taken by it regarding the nature of the transaction. This was in consonance with the special facts and circumstances of that case.
13. In the case reported as P L D1977 Lah. 753, the High Court has ruled that what actually constitutes a venture in the nature of trade is difficult to define and will depend on the circumstances of each case. It has further held that a person, who having a collection of pictures for personal use, sells one of them, is not taxable on the profits of sale but a picture dealer would be assessable to tax on the profits of sale of pictures, that in determining whether a case is one of trade, all the relevant facts must be considered, that the nature of assets bought and sold, the circumstances of the sale and purchase, the duration for which the assets were held by the assessee and his vocation are some of the relevant considerations to be borne in mind, and that sometimes even a single and isolated transaction may constitute an adventure in the nature of trade.
14. We have given a very careful consideration to the averments of the learned representatives of the parties in the context of legal provisions and the case-law, cited at the Bar. We feel that it would be pertinent to refer to some of the decisions in English cases as well, which throw sufficient light on the issue in point. .
In Commissioner of Inland Revenue v. Ligingstion and others (11 Tax cases 538). Lord President (Clyde) observed: If the venture was one consisting of simply an isolated purchase of some articles against an expected rise in price and subsequent sale, it might be impossible to say that the venture was in the nature of which would be the trade of a dealer in such articles and a single transaction falls as far short of constituting a dealer's trade as the appearance of a single swallow does of making a summer. The trade of a dealer necessarily consists of a course of dealing, either actually engaged in or at any rate contemplated and intended to continue.
In 14 Tax Cases 648, it was concluded---
A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property if that is all that is involved in the plunge may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade but they are not necessarily distinctive of it. Much depends on the circumstances.
15. There are numberous decisions of this Tribunal as well as superior Courts of Pakistan on this subject, some of which can be referred to with advantage bringing out the same exposition of law that without the proof of initial intention at the time of acquisition of immovable property, the profit earned from its purchase and sale cannot be taxed. Moreso, where it is a solitary transaction. The decisions are---
(i) (1961) 42 I T R 197,
(ii) (1975) 31 Tax (Trib.) 7,
(iii) 1988 P T D (Trib.) 354,
(iv) 1989 P T D (Trib.) 460,
(v) (1989) P T D (Trib.) 191,
(vi) (1989) P T D (Trib.) 1233, and
(vii)1989 P T D (Trib.) 150.
16. It would also be worthwhile to discuss in some details the decision relied upon by the learned counsel for the appellant and reported as CIT v. Anand Lal Bechar Lal and Company 1990 P T D 345: In this case, the Court laid down the following criteria for determining the character of a transaction with regard to immovable property;
(i) Whether the purchaser was trader and whether the purchase of the commodity and its subsequent sale were allied to his usual trade or business?
(ii) Whether the purchaser had brought about any improvement subsequent to the purchase of the property in order to make it attractive and fetch more value?
(iii) The nature and quantity of the commodity purchased and resold?
(iv) The incidents associated with the purchase and re-sale?
(v) Whether they were similar to the operations generally associated with trade or business?
(vi) Whether the transactions of sale and purchase were repeated?
17. If the case of the appellant is judged against the above yardstick, the first criterion -obviously, favours him inasmuch as he is a doctor by profession and continues to work as Executive Director Capital Hospital, Islamabad, deriving income from salary. The purchase and sale of tins property were not allied to his usal vocation or profession or any activity incidental thereto. Such being the case, it cannot be said that the purchase and sale of the property was in the nature of trade or business so as to fall within the definition of business as contained in section 2(ii) of the ordinance.
18. The second test also supports him as the nature of the property is the land allotted to him as distinct from any property purchased and the quantity consists of only one plot allotted to him. Therefore, the second test also does not stand in his way. Besides, the plot could not be sold by him without the permission of the C.D.A., which at the time of acquisition, he could not anticipate would be accorded.
19. The third point also goes in his favour because the appellant did not make any improvement in the plot to make it more attractive and readily resaleable. It was sold in the same position in which it was allotted to him and that, too not in bits and pieces, but in one transaction.
20. Having regard to the fourth test the appellant had applied for the allotment of a plot for construction of a clinic. At that time he was expecting that the I.D.B.P. and some other institutions would advance loans to help him complete the construction of clinic, In spite of his best efforts, when the financial institutions did not consider his request favourably and the C.D.A. pressed for the completion of construction by issuance of show-cause notice to him for the cancellation of the plot, the deadline, as 30-6-1986, the appellant reached a point of exasperation and disposed of the plot, on 14-7-1986. The plot was not saleable without the permission of the CDA. These factors clearly show that the appellant's intention at the time of acquisition of the plot was not to sell it. In fact he applied for the plot way back in 1978 as an employee of the C.D.A. and was intimated about the allotment of the plot in September 1981. The actual allotment was made, vide CDA's Letter No. CDA/EM/(1077)/75/85, dated 3-1-1982.
21. As regards the fifth test, the appellant it appears, never entered into any business as proved by his income-tax record in the past and his salary was the sole source as a doctor. In fact, his income falls under section 16 of the Ordinance, whereas the income from business falls under section 22 of the Ordinance.
22. The sixth and last point also shows that the transaction of allotment and sale of property did not fall in his line of profession as a doctor and salaried employee. As this was a solitary transaction of property, this test also does not disfavour him.
23. When viewed against the backdrop of the above tests laid down by the High Court it clearly exonerates the appellant of all tile adverse inferences drawn by the assessing officer for entangling him in the tax net. The contention of the assessing officer that the appellant had no intention of building a hospital, but waited for a proper time to dispose of the plot in order to gain maximum profit is frivolous in view of the fact that he applied for a plot in 7975. The plot was finally allotted to him in June, 1982. He could not apply for a loan for the construction of clinic because he was sent to the USA for higher studies and on return, he immediately applied for loan in February, 1984, to build a clinic and after failure to get a favourable response from the loan advancing institutions combined with pressure from the CDA for cancellation of the plot, the appellant was left with no other alternative but to put it to sale. The totality of the facts and circumstances shows that the intention at the time of acquisition of the plot was not to sell it subsequently to make profit but to build a clinic. The intention at this time of realisation of this asset, again appears to be compelling necessity to retrieve the blocked funds. The admitted position is that this was sole purchase and sale of land by the appellant, who has never before, or after indulged in real estate business. Therefore, in order to bring it to the extended definition of "business" by way of adventure in the nature of trade the presence of two ~, dominant intentions at the time of acquisition and at the time of its disposal is a necessary element. Since this crucial element is absent here, the gain that the appellant had made would either be a casual gain or a capital gain and nothing else. The I.T.O. wrongly taxed the casual gain that fell within the exception available under clause (65) of the Second Schedule to the Ordinance and if the same is treated as a capital gain then, too it falls outside the powers of the Federal Legislature to tax such a gain on the immovable property, in view of item 50 of the Fourth Schedule to 1973 Constitution, which reads as follows:--
"Taxes on the capital value of the assets, not including taxes on capital ' gains on immovable property."
24. This clearly shows that the capital gains on immovable property have been specifically excluded from the legislative power of the Federation. Any law to the contrary would be ultra vires of the provisions of the Constitution. The result is that tax on capital gains on immovable property can be levied by the Provincial Legislature. In fact, such a tax was levied for the first time by the West Pakistan Legislature and even by the Provincial Legislature of the four provisions but was subsequently withdrawn. Had that not been withdrawn and had its application been extended to the Federal Capital Territory, then the appellant would have been liable to tax on capital gains under the Provincial law. Besides the Income Tax Ordinance itself treats the capital gains as a distinct class of income under section 27 and in subsection (2)(e) thereof excludes from taxation the capital gains on immovable properties. This brings the Ordinance in line with the Constitutional provisions. It would, therefore, be seen that the capital gain, if any, earned on the sale of immovable property is not taxable by virtue of the i,,, Constitutional and relevant legal provisions.
25. It is crystal clear that the surplus realised on the sale of plot by the appellant cannot be branded as an adventure in the nature of trade because the facts and circumstances discussed hereinbefore in detail and the legal position elaborated in the preceding paragraphs do not warrant such a conclusion. The sale of the plot by the appellant for special reasons has, therefore, been wrongly treated as a transaction in the nature of trade and the surplus therefore has been erroneously assessed to tax as income from business or profession because, being a receipt of casual and non-recurring nature, it was exempt from the levy of tax, in terms of clause (65) of Part 1 of the Second Schedule to the Ordinance.
26. For the reasons hereinabove stated, we delete the amount of Rs.59,09,000 assessed as income from business or profession, classified under section 22 of the Ordinance, and direct that the assessment of the appellant for the charge year 1987-88 be modified accordingly.
The appeal succeeds.
M.B.A./1191/T Appeal accepted.