Income Tax Ordinance (XXXI of 1979)---

----S.22---Sale of shops---Single transaction---Transaction whether in the nature of trade ---Assessee purchasing a residential plot and subsequently getting it converted into commercial plot ---Assessee constructing fourteen shops on the ground floor after demolishing the residential quarters and completing first floor after one year on the sale proceeds of some of the shops---Assessing Officer treating the transaction of sale of shops as trading by-selling and deducted the cost price of the shops from the sale price and assessed the balance to tax as profit from trade---Commissioner of Income-tax on appeal found that transactions of sales of shops were not in the nature of trade---Such finding was challenged in appeal before Appellate Tribunal-- Held, whether or not there was an adventure in the nature of trade depended upon the facts and circumstances of each case ---Assessee sold a portion of his property to generate funds to make further investment---Receiving sale proceeds of some of the shops demonstrated that assessee was constructing shops for purposes of sale and thus transaction would be a trade although object of the assessee was that he would make permanent investment out of the profits he would get from the sale---Facts of the case clearly indicated that the land was put in as trading stock and the ultimate sale of six shops was nothing but a trading activity.

1988 PTD (Trib.) 354; 1989 PTD (Trib.) 460; 1991 PTD (Trib.) 786; PLD 1977 Lah. 753; 1990 PTD (Trib.) 671; (1980) 1 WLR 1196 and (1965) 1 WLR 663 ref.

Mrs. Zareen Saleem Ansari, DR for Appellant.

Khalid Waheed for Respondent.

Date of hearing: 3rd October, 1992.

ORDER

The assessee purchased a residential quarter measuring 13.5 Marlas in Satellite Town, Rawalpindi, for a sum of Rs.74,500 in March, 1982. It is contended by the assessee that acquisition was made for residential purpose. Subsequently (exact date not known) the assessee obtained the permission from local housing authority for the commercial use of the land under the quarter on the payment of further fee of Rs.67,500. The residential quarter was demolished and in the year 1986, 14 shops were constructed on the ground floor. The first floor was completed in 1987. The cost of construction of the building was met from the sale proceeds of six shops on the ground floor out of which two were sold for Rs.68,000 during the period relevant to the assessment year 1986-87 and four were sold for Rs.4,60,000 during the period relevant to the assessment year 1987-88. The prices of some shops were received in advance. The assessing officer was of the view that the assessee traded by selling the shops and as such the profit earned by the assessee from the said sales was taxable under the Income Tax Ordinance, 1979. The assessing officer deducting the cost price of the shops from the sale price assessed the balance to tax as profit from trade which was computed for the assessment year 1986-87 at Rs.37,400 and for the assessment year 1987-88 at Rs.3,80,600. On appeal by the assessee, the CIT(A) has held that the profit was not taxable under the Ordinance as it did not arise from trade. Relying on two decisions of the Tribunal reported as 1988 PTD (Trib.) 354 and 1989 PTD (Trib.) 460, the CIT(A) has held that the transactions of sales of shops were not in the nature of trade.

The Department has, through these appeals filed under section 134 of the Income Tax Ordinance, 1979, objected to the order of the CIT(A). The Department contends that the sales of shops made by the assessee were clearly and plainly in the nature of trade and the profit that arose to the assessee from the sales was taxable under the provision of the Income Tax Ordinance, 1979, and contrary holdings by the CIT(A) are unjustified on facts and in law.

We have heard Mrs. Zareen Saleem Ansari, DR for the Department and Mr. Khalid Waheed, Advocate for the assessee.

The issue whether any transaction of sale of immovable property is an adventure in the nature of trade or not has been subject of judicial scrutiny in a very long chain of judicial precedents out of which more than a dozen cases have been noted in this Tribunal's decision reported as 1991 PTD (Trib.) 786. From the precedents what is clear is that the question whether or not there has been an adventure in the nature of trade depends on all the facts and circumstances of each case and depends on the interaction between various factors that are present in any given case. One thing that is discernible from the reading of the precedents is that there are certain features and badges which may point to one conclusion rather than another. In relation to one-off transaction by a person, not being a dealer in land, the ordinary view is that it was not an adventure in the nature of trade. Although one-off transaction is in law capable of being an adventure in the nature of trade (see PLD 1977 Lahore 753 and 1990 PTD (Trib.) 671). At the very outset it may be pointed out that the precedents relied upon by the CIT(A) for his holding that the sales of shops by the assessee did not amount to transaction in the nature of trade dealt with only a one-off transaction and the interacting factors in the said precedents were quite different from those in the case of the assessee. For an answer the question whether a transaction is an adventure in the nature of trade or otherwise one may refer to a passage from the judgment of House of Lords in Simmons v. Inland Revenue Commissioners (1980) 1 Weekly Law Reports 1196, in which Lord Wilberforce said:

"Trading requires an intention to trade: normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment? Often it is necessary to ask further questions: a permanent investment may be sold in order to acquire another investment thought to be more satisfactory; that does not involve an operation of Trade, whether the first investment is sold at a profit or at a loss. Intentions maybe changed what was first an investment may be put into the trading stock and. I suppose vice versa."

Coming to the circumstances under which the assessee came to own the shops that were sold it will be convenient to refer to what the assessee him self had stated in his written note submitted to the CIT(A) (reproduced in CIT's order). The assessee stated that he purchased a residential quarter of an area of 13.5 Marlas in 1982 for residential purpose and used it as a residence till 1985. In order to secure a permanent and regular rental income he started construction of shops on the land after demolishing the quarter. The assessee expected that some advance rent and security will be forthcoming which will be utilized for the construction of the shops. But, contrary to his expectations, the expected amount could not be fetched and the amount in hand fell short of the required investment. In order to meet the cost of construction, there was no other alternative with the assessee but to sell some shops under the compelling circumstances. The shops were sold during the period when the construction of the building was underway. The prices of some of the shops were received in advance. The ground floor was completed in the year 1986 and the first floor was completed in the year 1987. The assessee stated that he did not sell any shop after the completion of the building and for the last two years the property has been leased out and the tax is being paid on rent.

As stated earlier the answer to the question whether or not there has been an adventure in the nature of trade depends upon all the facts and circumstances of each case. In this case the relevant question that arises is that if the assessee sells a portion of the property to generate funds to make further investment whether the said sales will be treated as an adventure m the nature of trade or not. The best example to answer the above question, in my view is the decision of the Privy Council in case Iswera v. Inland Revenue Commissioners reported in (1965) 1 Weekly Law Report 663. In the case before the Privy Council the assessee, in order to finance the acquisition of some area for a house of her own, had to buy a larger area and sell off some parts of the area. The assessee was required to pay tax on the profit she earned from the sub-sales. It was contended on behalf of the assessee that after an assessee sells a part of its property to acquire something for his own use or enjoyment, that is sufficient to show that the steps which he takes in order to acquire it cannot be an adventure in the nature of trade. Their Lordships not agreeing with the contention observed that "it was going much too far". "If, in order to get what he wants, the assessee has to embark on an adventure which has all the characteristics of trading, his purpose or object alone cannot prevail over what he in fact does." In the case before us the assessee himself states that the sale proceeds of some of the shops was received in advance. This clearly demonstrates that the assessee was constructing the shops for the purposes of the sale. And where an assessee puts an asset in stock for the purpose of sale any transaction would be nothing but a trade although the object of the assessee is that he would make permanent investment out of the profit he gets from the sale.

As observed earlier an asst acquired with the intention of investment can be put in the trading stock. Whether the assessee acquired the residential quarter for investment or for his own use the manner, getting it commercialised and receiving advance payment for the sale of the shops to be constructed ultimately, in which the building was constructed, are the factors clearly pointing towards the conclusion that the land was put in as trading stock, and the ultimate sale of six shops was nothing but a trading activity.

In view of the facts and circumstances of the case, the CIT(A), in our opinion, was not justified to hold that the sales of six shops were not adventure in the nature of trade. The appeals are accepted. The order of the CIT(A) is set aside and that of the assessing officer is restored.

M.BA./1744/TAppeal accepted.