COMMISSIONER OF INCOME TAX VS MAHMOOD ALI, 2008 PTD-KARACHI-HIGH-COURT-SINDH 82 (2007)

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

---Ss. 2(11), 22 & 27(2)---Sale of commercial plot by assessee purchased for investment purposes---Gain from sale of plot considered by Revenue to be adventure in nature of trade as business income assessable under S.22 of Income Tax Ordinance, 1979---Validity---Revenue had not brought on record any material to show that at the time of purchase of plot, intention of assessee was to achieve revenue gains---Such intention must be deduced from facts and circumstances of each case---Mere change of investment would not amount to adventure in nature of trade---In determining nature of transaction, regard had to be made to nature of property, length of its ownership and holding, actual conduct of assessee in respect thereof and other factors including absence of evidence of any trading activity of speculative nature---If disputed transaction was considered to be revenue gain, then provisions of S.2(11) of Income Tax Ordinance, 1979 read with S.22 thereof would be attracted---Gain on sale of immovable property, if considered to be in nature of capital gain, same would be outside purview of S.27 of Income Tax Ordinance, 1979, as for purposes of capital gain, immovable property was excluded from definition of "capital gain" under S.27(2) thereof---Disputed transaction was not in nature of adventure in trade.

(1966) 62 ITR 578; AIR 1959 SC 1252; Commissioner of Income Tax v. Habib Bank Limited (1985 SCMR 284; British Tax Encyclopaedia, Volume 5, (pages 1013-1014) and Californian Copper Syndicate v. Harris (1903-1911) 5 T.C. 159 rel.

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

----S. 74---Liability of legal representatives of deceased assessee---Scope---Such representatives, if brought on record within reasonable time frame, would be liable to pay tax imposed on deceased assessee---Recourse to S.74 of Income Tax Ordinance, 1979 in such case would be condition precedent.

Aqeel Ahmed Abbasi for Applicant.

Nemo for Respondent.

Date of hearing: 19th September, 2007.

JUDGMENT

ARSHAD SIRAJ, J.---This application has been filed under section133(1) of the Income Tax Ordinance, 1979, hereinafter referred to as "the Ordinance", in which the, Commissioner of Income Tax, the applicant, has referred the followings question allegedly arising out the Order of the Tribunal:--

"Whether on the fact and the circumstances of the case, the learned ITAT was justified to hold that the amount of Rs.10,20,000 does not fall under the purview of adventure in the nature of trade as business income assessable under section 22 of the repealed Income Tax Ordinance, 1979 particularly when the taxpayer admitted purchase of commercial plot for investment purposes?"

2. The matter was taken up at the Katcha Peshi stage when, at the very outset, the learned counsel for Applicant informed then the taxpayer/respondent, 'Mahmood Ali, has expired and despite its best efforts to trace and to bring the legal heirs of the deceased taxpayer/ respondent on record, the Department has not been able to do so anal submits that this Court may pass any order. He further submitted that since the Departmental officers have not complied with the provisions of section 74 of the Ordinance, which provides the machinery to pass on the liability of deceased taxpayer to his/her LRs, on this account also this Court may pass appropriate orders.

3. Before coming to the merits of the case, it may be pointed out that since government revenue is involved, this Court cannot pass order which might be used by the taxpayers in similar situations to their advantage. The Department should have either moved appropriate application duly supported by an affidavit for withdrawal of the present Income Tax Reference Application or should have taken effective measures to have such a record through which if a tax liability is outstanding against a taxpayer and he dies during the pendency of case, the relevant provisions of law as referred by Mr. Aqeel Ahmed Abbasi, i.e., section 74 of the Ordinance, could be invoked. Since in the present case nothing has been done, it would be difficult for this Court to pass an order accordingly.

4. In view of our above observations, we intend to decide this Income Tax Reference Application on its own merits.

5. The brief facts of the case are that the taxpayer/respondent's assessment for the assessment year 1996-97 was framed ex parte under section 63 of the Ordinance and al addition of Rs.10,20,000 was made in the income of the assessee by holding that a plot of land was sold by him on alleged ground that it was sold to earn profit. The Taxation Officer issued a letter to the taxpayer/respondent to file explanation in this behalf as to why the gains from the sale of the plot be not considered as adventure in nature of trade within .the meaning of clause (ii) of section 2 of the Ordinance. The record shows that no compliance was made of the aforesaid letter as no explanation was filed by the taxpayer/ respondent nor any Adjournment was sought by him. As such the aforesaid addition made in the income of the taxpayer/respondent. The taxpayer/respondent referred an appeal against the said treatment under section 129 of the Ordinance praying therein that he was not afforded adequate opportunity of being heard. The Commissioner of Income Tax (Appeals), vide order, dated 18-9-1999, set aside the assessment for de novo proceedings.

6. In pursuance of the order of the Commissioner of Income Tax (Appeals the Taxation Officer initiated set aside proceedings. Initially, there was no compliance by the taxpayer/respondent, however, subsequently, he was represented by an authorized representative and reply was filed which was supported by case-law.

7. The taxpayer/respondent's contention, as recorded in the set ,aside proceedings, was that it is an isolated transaction, therefore, the same was not in the nature of adventure in trade.

8. On the other hand, the Assessing Officer has stated in the order that it is an admitted fact that the plot purchased by the assessee was a commercial plot and intention of making money was there. In view of the above matter, the above order was repeated and the additional amount was added in the income of the taxpayer/respondent.

9. The taxpayer/respondent once again preferred an appeal under section 129 of the, Ordinance in which the order of the assessment officer passed under sections 63/132 was confirmed by the Commissioner of Income Tax (Appeals). However, nothing has been spelt out in the said order of the Commissioner of Income Tax (Appeals) nor any reason has been assigned for confirming the order of assessment except that the taxpayer failed to comply the notices issued by Assessing Officer. The explanation of the taxpayer was not considered.

10. Being dissatisfied by the order of the Commissioner of Income Tax(Appeals), the taxpayer/respondent filed an appeal before the Income Tax Appellate Tribunal under section 134 of the Ordinance. It was contended before the learned Tribunal that the orders of the lower authorities have been passed without giving adequate opportunity of being heard and that the reply submitted in the second round of litigation was not properly considered while finalizing the assessment.

11. On factual plain, it was contended by the authorized representative of the taxpayer/respondent that the assessee acquired the commercial plot of land many years ago and the purchase of the plot was made with the sole intention of making investment. It was stated that after his retirement from service the taxpayer/respondent disposed of the plot and gain resulted from such sale. It was, therefore, submitted that since the assessee was not dealing in the business of sale and purchase of plots as he was admittedly a salaried employee. It was further contended by the authorized representative of the taxpayer/respondent that the capital derived by the taxpayer/respondent on the sale of the plot was not his business income but capital gain on transfer of immovable property which has been excluded from the purview of section 27 of the Ordinance which deals with taxation of capital gains derived by assessee from the sale/transfer/exchange of asset.

12. On the other hand the departmental representative supported the order orders of the officers below.

13. The matter was considered by the learned Tribunal after examining the facts of the case and came to the conclusion that the gain derived by the taxpayer/respondent was clearly a capital gain and not an income resulting from a adventure in the nature of trade. The learned Tribunal also held that the Assessing Officer has not brought on record any evidence to show that the appellant had undertaken similar transactions in respect of sale and purchase of plots in the preceding years. It has been held by the Tribunal on factual plain that the taxpayer/respondent was salaried employee and his contention that the plot was acquired for the purpose of investment appears to be correct.

14. In view of the above matter, the appeal was allowed and it was held by the learned Tribunal that the transaction was of capital in nature and not an adventure in the nature of trade.

15. Mr. Ageel Ahmed Abbasi, learned counsel for the applicant, submitted that the point taken by the assessee in respect of sale transaction is not the criteria for ascertaining whether a transaction falls within the mischief of the expression "adventure in nature of trade or otherwise. He had stated that he would be filing copies of the case-law in this regard, however; till the writing of this judgment, nothing has been placed on record by him.

16. We have carefully considered the contentions of the learned counsel for the applicant and find that the case has been decided after considering the factual aspect of the matter, as such, no question of law arises out of the order of the learned Tribunal requiring determination by this Court.

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) b2 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 Encyclopaedia, 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."

20. In the light of the above observations, the well-settled legal position reflected from the cases quoted supra and examination of the facts on record, it is evident that the transaction in dispute was not in the nature of adventure in trade. Even otherwise, the findings of the learned Tribunal were based on appreciation of the facts. of the case and no determination of legal question is involved.

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.

21. The upshot of the above discussion is that this Income Tax Reference Application is without any force and is, therefore, dismissed.

22. Before parting with the case, we would emphasize that in cases where government revenues are involved, the Department should be very careful and, as rightly pointed out by the learned counsel for the applicant, the recourse to section 74 of the Ordinance was condition precedent. We hope that the case where an assessee dies, his legal representatives are brought on record within reasonable timeframe, as in our considered view the legal representatives would be liable to pay the tax which is imposed on such deceased assessee in accordance with the provisions of section 74 of the Ordinance.

S.A.K./C-18/KReference dismissed.