INCOME TAX APPEALS NOS. 83(IB) AND 84(IB) OF 1989-90, DECIDED ON 14TH APRIL, 1991. VS INCOME TAX APPEALS NOS. 83(IB) AND 84(IB) OF 1989-90, DECIDED ON 14TH APRIL, 1991., 1991 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 937 (1991)

(a) Income Tax Ordinance (XXXI of 1979)---

----Second Schedule, clause 65 & S. 27(2) (a)(ii)---Constitution of Pakistan (1973), Fourth Schedule, item 50---Assessee, a housewife, was assessed to tax on her property income which had been offered for taxation from year to year-- Property, as held by assessee, had been declared in her wealth statement and shown on the assets side ---Assessee was neither an estate agent nor a property dealer as such ---Assessee who had 90% share in the plot, sold the same, during the relevant year which was purchased back in 1974 and disposed of in 1985, when the Capital Development Authority served her with cancellation notice for completion of the building within 5 months, similarly 50% share in the building sold by her was also on the insistence of three other co-sharers in the building holding the rest of 50% share therein---Rent derived out of said building was offered for tax purposes by assessee and it was sold after being held for 7 long years---Transactions entered into by the assessee with respect to these two properties showed that the intention at the time of purchase of these properties was to create a source of regular income and not to make profit on sale---No income was there from the sale and purchase of properties but any surplus arising out of the disposal of properties was natural concomitant of the passage of time in an inflationary era ---Assessee's other co-sharers in both the properties were being independently assessed to Income-tax in respect of their earnings and transaction of sale of the plot and building had not been treated in their cases as adventures in the nature of trade, nor had the respective sale proceeds accruing to them been assessed business income---Held, character of transactions entered into by the assessee was not that of a trading venture and the department had failed to prove or establish that the intention at the time of purchase of said properties was to make profit---Surplus earned by the assessee could either be called a casual receipt, or a capital gain---If the surplus earned was a casual receipt, it would be exempt under Second Schedule, Cl. 65 and if the same was a capital gain, then too it fell outside the domain of the Federal Legislature to tax such a gain on the immovable property in view of item 50 of the Fourth Schedule to Constitution of Pakistan (1973), read with S. 27(2)(a)(ii) of the Income-tax Ordinance.

Gustad Dinshaw Irani v. C.I.T.(1957) 31 ITR 92, Commissioner of Inland Revenue v. Reinhold (1953) 34 TC 389, G. Ventataswami Na idu & Co. v. C.I.T. (1959) 35 ITR 594, 609(SC), Janki Ram Bahadur Ram v. C.I.T. (1965) 57 ITR 21 (SC), Naseer Ahmad Sheikh v. C.I.T. PLD 1977 Lah. 753 and Bogilal H. Patel v. C.I.T. reported as (1969) 74 ITR 692 ref.

Taskeen Muzaffar, D.R. for Appellant.

Muhammad Amin Butt for Respondent.

Date of hearing: 14th April, 1991.

ORDER

These two departmental appeals, relating to the charge years 1986-87 and 1987-88, contest the separate orders passed by the learned C.I.T.(Appeals), Rawalpindi, on 10-8-1989, in I.T.As. Nos. 2040 and 2042, deleting the additions made to the tune of Rs.22,77,000 and Rs.77,33,740, treated as business income by the Income-tax Officer, during the charge years 1986-87 and 1987-88, respectively.

2. Briefly stated, the facts of the case are that the assessee-respondent, a house-wife and an individual deriving income from house property, was being assessed to tax from this source from year to year. However, the I.T.O. concluded during the two charge years under appeal that, besides the rental income, the respondent had also realised a profit which could be termed as an adventure in the nature of trade, and subjected it to tax as business income because the respondent had shown a profit arising out of 90% share from the sale of commercial plot bearing No.16-D, Blue Area, Islamabad at Rs.22,77,000, which was reflected in the wealth statement, as on 30-6-1986, relevant to the assessment year 1986-87. The respondent had also disclosed a surplus of Rs.77,33,740 arising out of the sale of 50% share from a building at Bara Market, Rawalpindi, which was sold for a sum of Rs.1,60,00,000. The assessing officer was of the view that the respondent was regularly conducting business of purchase, construction and sale of property. After issuing show-cause notices under section 62 of the Income. Tax Ordinance, 1979 (hereinafter called the Ordinance), dated 23-6-1987, for the charge year 1986-87 and, dated 12-7-1988, in respect of the charge year 1987-88, and discarding the respondent's replies, dated 15-7-1987 and 20-7-1987, for the assessment year 1986-87, and replies., dated 19-7-1988 and 20-7-1988, for the assessment year. 1987-88, the amounts, as aforesaid, were added to the property income of the -respondent for both the years as business income and charged to tax. This was contested in appeal before the learned C.I.T.(Appeals), Rawalpindi, who examined the case in depth and arrived at the conclusion that it was a case of rotation of investment in property by a housewife in order to safeguard and improve her investment in property, wherefrom she was deriving rental income. Rotation of investment could not be called an adventure in the nature of trade, and, therefore, the additions made for both the years by the I.T.O. were not justified and were ordered to be deleted. It is against this treatment meted out by the first appellate authority that the department has taken exception to and has agitated the issue in further appeal before the Tribunal.

3. Mr. Taskeen Muzaffar, the learned D.R., argued vehemently that the learned C.I.T.(Appeals) was not justified in deleting the additions simply on the ground that the transaction for the year 1986-87, related to 90% share in a plot, which was sold after holding it for 11 years, could not be called an adventure in the nature of trade, and that the 50% portion of the building sold after 7 years was also not an adventure in the nature of trade. The learned D.R. relied upon two decisions reported as Gustad Dinshaw Irani v. C.I.T. (1957) 31 ITR 92 and Naseer Ahmed Sheikh v. C.I.T. PLD 1977 Lah. 753, wherein it has been held that even a single transaction can fall within the ambit of an adventure in the nature of trade. The I.T.O. had rightly concluded that the profit earned for the two years under appeal was out of business income and he had rightly subjected it to tax. The learned D.R. has urged that the order of the first appellate authority may be vacated and that of the I.T.O.restored for both the years under appeal.

4. Mr. Muhammad Amin Butt, Advocate, appearing on behalf of the respondent has submitted that `income' has been defined under section 2(24) of the Ordinance to include any profits or gains, from whatever source derived, chargeable under any provision thereof under any head specified in section 15, that the different heads of income given in section 15 of the Ordinance are salary, interest on securities, income from business or profession, capital gains, and income from other sources, that "business" has been defined under section 2(11) of the Ordinance to include "any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture", that according to the assessing Officer, the respondent had indulged in the business of purchase and sale of immovable property, but the former has failed to prove that any property disposed of by the latter was her stock-in-trade, that plot No.16-D, Blue Area, Islamabad, was got allotted/purchased in the year 1974 and was sold during the assessment year 1986-87, that this plot Was retained and shown as a capital asset in the wealth statement from year to year, that it was not the intention of the respondent to sell it, that it was after receiving a show-cause notice from the C.DA. in 1985 that construction be completed within five months failing which the plot would be cancelled, that the respondent, finding her financial position very tight decided to dispose of the plot just to avoid its cancellation and save her investment, and that this was a single transaction after a period of 11 years of holding that property. Continuing, the learned counsel contended that just for the sake of arguments one could say that even if the property had been held for 11 years for the intention of making profit, the surplus realised on the sale of that property could not be called an adventure in the nature of trade, business or commerce, that the respondent, being the owner of property, had every right to safeguard her interest and if, in the process, she was obliged to dispose of the property and the sale thereof after 11 years resulted in some surplus, then, irrespective of the quantum of receipts, it could not be called an adventure at all, that similarly, the building wherein the respondent held 50% share was sold on the insistence of other co-sharers, that no further improvement or investment was made by the respondent after purchasing this building alongwith co-sharers and she had every intention to earn rental income from it, that, being a joint owner, she had to bow down before the decision of three co -sharers and agree to the disposal of the property under the dictates of circumstances and not by choice, that the department had been accepting the plea of the respondent upto the charge year 1985-86 that it was a capital gain, but suddenly in 1986-87, when the pot was sold after holding i it for 11 years, the surplus was subjected to tax by treating it as business income and not as an adventure in the nature of trade, and that similar was the position even in the year 1987-88 when the asset was held for seven years and disposed of on being forced by co-sharers. Dilating further on the matter, the learned counsel has maintained that there is plethora of case-law on the subject pointing to one basic factor i.e. the intention at the time of purchase of property to make profit and that intention has to be gathered after considering the total effect of all the relevant facts and circumstances in each case, that in dealing with the question whether the transaction is in the nature of capital or an adventure, three possible categories of cases can arise (i) where a person purchases property for his own enjoyment and use only, with no intention of trading in it or making a profit out of it; (ii) where he intends to use the property for his own use and enjoyment, but is obtained at some future date; and (iii) where the property is bought showing no intention to use or enjoy it at all, but only in order to earn profit.

5. Advancing his arguments the learned counsel for the respondent has added that if the facts are subjected to a close scrutiny, the departmental contention that it was business income of the respondent utterly fails for the simple reason that the property in question for both the years was purchased, and the building was rented out and the rental income therefrom offered for taxation for almost seven years, that, obviously, an open plot could not be let out as such but was retained for 11 long years, that viewed from any angle, the case of the respondent would fall either in the first category or under the second category, but certainly not under the third category which appears to be the contention of the department. Quoting from the decision of the English Court of Appeals in Commissioner of Inland Revenue v. Reinhold reported as (1953) 34 T.C 389, the learned counsel has stated that.

"A disclosed intention not to hold what was being bought might, as Lord Dunedin said, provide an item of evidence that the buyer intended to trade, and if the commodity purchased in the single transaction was not of a kind normally used for investment but for trading, and if the commodity could not produce an annual return by retention in the hands of the purchaser, then the conclusion may easily be reached that the venture was a trading one. If, however, the subject of the transaction is normally used for investment like land, house, stocks and shares, the inference is not so readily to be drawn from an admitted intention in regard to a single transaction to sell on the arrival of a suitable pre- selected time or circumstance and does not warrant the same definite conclusion as regards trading or even that transaction is in the nature of trade. When the Lord Advocate distinguished between a man who bought any commodity in the hope of being able to sell on a rise and one who determined when buying to sell, and said the first was an investor and the other one who engaged in a trading adventure, he did not shrink from applying his principle to a person who buys company shares If the buyer merely hoped that one day the shares would turn out profitable to sell he was an investor, but a buyer of the same shares who bought at 60 and instructed, there and then his broker to sell out if the shares reached 80, was engaged in a venture of the nature of trade".

7. Arguing further, the learned counsel has cited from a decision of the Supreme Court of India in the case of G. Ventataswami Naidu & Co. v. C.I.T. reported as (1959) 35 ITR 594, 609(SC), and submitted that:

"Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the borderline that cause difficulty. 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 realisation of investment consisting of purchase and re-sale, though profitable, are clearly outside the domain of adventures in the nature of trade.

In our opinion, case clearly falls within the principle laid down in the said case.

The other point upon which, in our opinion, the Tribunal was in error in law was that, in judging the question as to what was the intention of the assessee, it failed to note that the important consideration is what was the intention at the commencement of the transaction, that is to say, at the date of the purchase, and that though the intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. This was pointed out in Janab Abubuker Siat's case which we have already referred to at page 46, the Madras High Court pointed out that :-

One of the essential elements in an adventure in the nature of trade, is the intention to trade; that intention must be present at the time of purchase. The mere circumstance that a property is purchased in the hope that when sold later on, it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception."

8.The learned counsel then went on to rely upon another decision of the Supreme Court of India in the case of Janki Ram Bahadur Ram v. C.I.T. reported as (1965) 57 ITR 21 (SC), wherein their Lordships have held that the purchase and sale of the property was not an adventure in the nature of trade within the meanings of section 2(4) 'and the profit realized therefrom was not taxable under section 10 of the Indian Income-tax Act, 1922 (which corresponds to section 22 of the Income-tax Ordinance, 1979). The facts that the appellant made a profitable bargain when it purchased the property and that it had a desire to sell the property if a favourable offer was forthcoming could not, without other circumstances, justify an inference that the appellant intended by purchasing the property to start a venture in the nature of trade. It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances, which are brought on record of the Income-tax authorities. The profit motive in entering a transaction is not decisive for an accretion to capital does not become taxable income merely because an asset was acquired in the expectation that it may be sold at a profit. He has added that when viewed against the backdrop of these decisions of the Supreme Court, it would be very clear that a single transaction of sale of 90% share of a plot after retaining it for 11 years or sale of 50% of share in building during the subsequent year after enjoying its income for 7 years could not be termed an adventure in the nature of trade, leave alone the business income as held by the assessing officer, and that the first appellate authority had very rightly observed that this was a case or merely of rotation of investment rather than earning of any profits, and the surplus arising was nothing but a capital gain, which was not taxable under the Ordinance at all.

9. After hearing the submissions made at the Bar and listening to the passages of judgments of various Courts on the issue, we feel that the department has failed to discharge the onus that lay squarely on it to prove that the transaction in each year under appeal was in the nature of trade. No useful purpose would be served by giving the detailed account of the analysis and review of the observations in the light of the relevant facts. Any single fact does not have a decisive significance and the question whether the present case is an adventure in the nature of trade must depend upon the collective material brought on record.

10. The cases relied upon by the I.T.O. are distinguishable inasmuch as in the case of Gustad Dinshaw Irani v. C.I.T. reported as (1957) 31 ITR 92, the assessee was earning income from business. He was a partner in several firms and his income was not from the source like that of the respondent whose exclusive income is from property rent. In the reported case of Gustad Dinshaw Irani, there was some reasonable basis for concluding that the assessee was entering into a big business adventure. It would be pertinent to note that the High Court in that case had agreed with the learned counsel for the assessee in the following words:-

"We agree with him that the mere fact that the person buying property wishes to resell and realise profit on resale is not conclusive on the question as to whether the adventure is in the nature of trade."

11. As regards the second case relied upon by the I.T.O., that is, Naseer Ahmad Sheikh v. C.I.T. reported as PLD 1977 Lah. 753, this was clearly a case of business transaction as the assessee was a businessman and was share-holder and Director of several companies. He manipulated the purchase and sale of shares in his companies in such a manner that considerable profit was earned by him. There was not any ostensible reason for doing so except of earning profit from the sale of shares. It was more or less a case of lifting a veil of corporation from the family business. There was, thus, every justification in taxing the profit earned by the assessee. It does not have any similarity with the facts of the case of the respondent.

12. Chief Justice Kotval speaking for the Bombay High Court in the case of Bogilal H. Patel v. C.I.T. reported as (1969) 74 ITR 692, has observed that in order that it may be held that a person is undertaking a trade or business or entering into an adventure in the nature of trade, it is essential that the particular transaction under scrutiny should have been entered into with the intention of earning profit. Though that is not a conclusive test, it is certainly an essential test before such a conclusion could be drawn. But such a case is quite different from the case of a person purchasing property with the dominant intention of using it himself or enjoying it himself, but at the same time excepting that at some future date, if it goes up in value, he may take advantage of the rise in the price. 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 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 outside the domain of adventure in the nature of trade. Though the intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade and that intention must be present at the time of purchase. The mere circumstance that a property is purchased in the hope that, when sold later on, it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. It was, therefore, held that the purchase of two plots by the assessee was only a capital and the profit earned on the resale was an accretion to the capital and not a profit from business or an adventure in the nature of trade.

13. Similar views were expressed by their Lordships of the Supreme Court of India in the case of Janki Ram and Bahadur Ram v. C.I.T. reported as (1965) 57 ITR 21, relied upon by the learned counsel for the respondent. Therein, it has been held that the facts that the appellant made a profitable bargain when it purchased the property and that it had a desire to sell the property if a favourable offer was forthcoming could not, without other circumstances, justify an inference that the appellant intended, by purchasing the property, to start a venture in the nature of trade. It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. 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. The profit motive in entering into a transaction is not decisive for an accretion to the capital does not become taxable income merely because an asset was acquired in the expectation that it might be sold at a profit.

14. Adverting to the facts of the present case, the respondent is a housewife assessed to tax on her property income, which has been offered for taxation from year to year. The property, as held by her, has been declared in her wealth statement and shown on the assets side. She is neither an estate agent nor a property dealer as such. She has not sub-divided, altered or converted her share in the plot or her share in the building which has been disposed of during the 8 years under appeals in different portions and then sold them. In fact, the plot sold during the assessment year 1986-87 was purchased way back in 1974 and was disposed of in 1985, when the C.DA. served her with cancellation notices for completion of the building within 5 months. Similarly, 50% share in the building, sold during the year 1987-88, was also on the insistence of three other co-sharers, who held the balance 50% share in the property. The rent derived out of this " building was offered for tax purposes, and it was sold after being held for 7 long years. As rightly pointed out by the learned C.I.T.(Appeals) that the transactions entered into by the respondent with respect to these properties show that the intention at the time of purchase of these properties was to create a source of regular income and not to make profit on sale. There was no income from the sale and purchase of properties, but any surplus arising out of the disposal of properties was a natural concomitant of the passage of time in an inflationary era.

15. Considering all the facts and circumstances, it appears to us that the character of the transactions entered into by the respondent was not that of a trading venture and the revenue has failed to prove or establish that the intention at the time of purchase of these. properties was to make profit. Therefore, the surplus earned by the respondent can either be called a casual receipt, as claimed by her, or a capital gain. If it is a casual receipt, it would be exempt under clause (65) of the Second Schedule to the Ordinance, but if the same is a capital gain, then, too, it falls outside the domain of the Federal Legislature to tax such a gain on the immovable property in view of item 50 of the Fourth Schedule to the 1973 Constitution read with section 27(2)(a)(ii) of the Ordinance. It is, therefore, obvious that the surplus on the sale of 90% share in the plot in Blue Area, E Islamabad, and 50% share in the building at Rawalpindi, owned by the respondent, cannot be stated to be adventures in the nature of trade because of the facts and circumstances discussed hereinabove as also the legal position explained in the preceding paragraphs.

16. It would be pertinent to mention here that till 1985-86, the Department had not drawn any inference adverse to the respondent on account of the sale of the disputed properties. She was not the sole owner of the plot and the building sold by her. She held 90% share in the plot and 50% share in the building. Her co-sharer in the plot to the extent of the remaining 10% share was Naheed Randhawa and the joint owners of the building with her were Parveen Akhtar and Sheikh Salahuddin enjoying 35% and 15% shares, respectively. The other owners of the disputed plot and building are being independently assessed to Income-tax in respect of their earnings. The transactions of sale of the plot and building have not been treated in their cases as adventures in the nature of trade, nor have the respective sale proceeds accruing to them been assessed as business income. The respondent cannot, therefore, be discriminated against and singled out for an exceedingly harsh and oppressive treatment while determining her tax liability for the period under consideration.

17. For the reasons stated above, we uphold the findings of the learned C.I.T.(Appeals), and dismiss the departmental appeals accordingly.

M.BA./1199/TAppeals dismissed.