RAJAB ALI HAMANI, KARACHI VS COMMISSIONER INCOME TAX. KARACHI, 2011 PTD-KARACHI-HIGH-COURT-SINDH 925 (2011)

(a) Income Tax Act (XI of 1922)---

----S. 34---Order of quashment of re-opening of original assessment---Effect---Original assessment order in such case would stand restored automatically.

(b) Income Tax Act (XI of 1922)---

----S. 34---Construction of building as an investment for earning income from its rent--Sale of constructed building by assessee---Profit earned on such sale assessed as capital gain in the earlier year again assessed in subsequent year as an adventure in the nature of trade --Validity--- Income assessed in one year in a particular manner could not be assessed in subsequent year in another manner without cancelling or rectifying earlier assessment after removing such income from its ambit---Same income could not be subjected to assessment in two different years---Impugned order was set aside in circumstances.

Saroj Kumar Masumdar v. Commissioner of Income Tax, West Bengal 1959 (37) ITR (SC) 242 and Yousuf Hakimuddin v. Commissioner of Income Tax 1981 PTD 3 ref.

(c) Income tax---

----Income tax proceedings---Res judicata and estoppel, rules of---Applicability---Such rules would not apply to such proceedings as Assessing Officer on knowing facts subsequently could take a decision different from that taken earlier by him or his predecessor---Income treated in a particular manner in one year, if accrued during another year, might be treated in a different manner in such other year---Principles.

Ms. Farzeen Bhudha Advocate for Applicant.

Mr. Jawaid Farooqui Advocate for Respondent.

Date of hearing: 2nd December, 2010.

JUDGMENT

MUHAMMAD ATHAR SAEED, J.---By its order dated 7-4-1987 in R.A. No.151/KB/1985-86 the Tribunal has referred for the opinion of this Court the following questions said to be arising from its common order dated 23-7-1985 in I.T.A. Nos.922/KB of 1979-80 for the assessment year 1976-77 and I.T.A. No.1125/KB of 1981-82 for assessment years 1978-79:

Assessment year 1976-77

(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that surplus on sale of Hemani Centre, the sale agreement whereof was executed on 2nd June, 1975 was income from an adventure in the nature of trade and not capital gain?

(2) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that surplus on sale of Hemani Centre could be legally assessed in the assessment year 1976-77?

Assessment year 1978-79

Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal was justified in holding that the business transaction in the shape of sale of flat during the assessment year 1978-79, was not an adventure in the nature of trade and the said transaction of sale of flats made in the assessment year 1976-77, which was upheld as taxable income, and that there was absence of intention to make profit?

2. For the assessment year 1976-77 the applicant is the taxpayer and for the assessment year 1978-79 the applicant is the Income Tax Department. Since both these references have been sent by the same order by the Tribunal thus the office of this Court has also constituted only one file that is I.T.A. No.177 of 1997 and therefore both these matters were heard by us on the same date as we intend to dispose of the case by our common order.

3. So far as the questions raised by the applicant and referred by the "Tribunal for the assessment year 1976-77 are concerned we had after hearing the learned counsel on 2-12-2010 reserved the order on the said questions whereas so far as the question referred on behalf of the department for the assessment, year 1978-79 is concerned we had after hearing the learned counsel, for reasons to be recorded answered the said question in affirmative in favour of the respondent and against the applicant whereby the reference application of the applicant was dismissed.

4. By this common order we not only intend to give our decision on the questions raised by the applicant for the assessment year 1976-77 but also highlight the reasons in support of our short order by which the reference of the department fir the assessment year 1978-79 referred on behalf of the department' was dismissed. We will first take up the reserved matter for the assessment year 1976-77.

5. Brief facts of the case are that the applicant an individual earning income for the assessment year under consideration from dividend, interest and property had purchased the plot with old structure on 17-9-1971 and after demolishing the structure constructed a commercial building thereon which was completed somewhere in February, 1975. The commercial building consisted of fifty-seven shops and during the construction of this building the applicant rented out forty-eight of the shops but then he executed an agreement to sell the property on 2nd June, 1975 for a consideration of Rs.700,000 and apparently some advance against the above consideration was received by him. The Sale-Deed however was executed in July, 1975. The applicant had claimed the profits earned on the 'sale of the buildings as capital gains and had claimed exemption in his return for assessment year 1975-76 which was accepted by the department. The case was later reopened under section 34 but the order under section 34 was finalized on the same income. However, the Income Tax Officer did not accept the above plea while finalizing the assessment for the assessment year 1976-77 on the ground that it was an adventure in the nature of trade and the applicant had from very beginning intended to sell away the property. The Income Tax Officer also did not accept the sale price stated in the Sale-Deed and estimated the sale price of the property at Rs.1500,000.00. The applicant's appeal did not succeed and was dismissed by the Tribunal against which the reference application was filed and the Tribunal has referred the above two questions for the opinion of this Court.

6. We have heard Ms. Farzeen Bhudha the learned counsel for the applicant and Mr. Jawaid Farooqui the learned counsel for the respondent.

7. Ms Farzeen Bhudha the learned counsel for the applicant has reiterated the arguments she made before the Tribunal. Her first argument was that initially the respondent had treated the difference as capital gain for the assessment year 1975-76 and for the assessment year in question has again taxed the income from the same transaction as an adventure in the nature of trade and assessed the difference to income tax. She therefore submitted that since the matter has already been assessed for the year 1975-76 the income tax department was estopped from assessing the same income for the assessment year 1976-77 as an adventure in the nature of trade. The Income Tax Officer however did not accept her plea and not only treated the above income as an adventure in the nature of trade but also treated the deposits received from the tenants by the applicant as part of the sale consideration and estimated the sale consideration at Rs. 1500,000.00. The assessee's appeal before the Appellate Assistant Commissioner and the Tribunal failed hence this reference application.

8. She argued that the transaction had been finalized in February, 1975 corresponding to the assessment year 1975-76 and therefore again if any could only have been assessed for the year 1975-76. She further submitted that the transaction did not constitute an adventure in the nature of trade as the building had been constructed as an investment for the purposes of earning money by way of rent by letting out the constructed shops to tenants and the applicant being misguided by the rumors that the government intended to nationalize the commercial buildings, to avoid such eventuality had sold the property. She submitted that since the building was sold not to earn profit but on genuine apprehension that the building may be snatched away from him by way of nationalization and with a view to avoid substantial loss the building was sold therefore the profit from such transaction cannot be treated as an adventure in the nature of trade but disposal of assets for an unforeseen situation and therefore has to be treated as a casual and nonrecurring transaction. She further submitted that the total consideration she received on the sale of the building was Rs.700,000.00 and the deposit received by her earlier were not part of the consideration and therefore there was no justification for estimation of the sale price of the building at Rs. 1500,000.00. In support of her contention the learned counsel relied on the following judgments:-

(1) Saroj Kumar Masumdar v. Commissioner of Income Tax, West Bengal (1959 (37) ITR (SC) 242).

(2) Yousuf Hakimuddin v. Commissioner of Income Tax 1981 PTD 3.

9. Mr. Jawaid Farooqui the learned counsel for the respondent opposed the arguments of the learned counsel for the applicant and supported the order of the Tribunal. He submitted that the Tribunal had thoroughly discussed the facts of the case and the law on the subject and after exhaustive exercise had come to the conclusion that the intention all along from purchase of the plot to the construction of the commercial building was to sell the building and earn profit and the investment was not made for the purpose of investment only and earning income by letting out of the shops. He submitted that although the applicant had argued that he had believed the rumors that the government intended to nationalize the building and to avoid possible substantial loss had sold the building despite the fact that his intention was not to sell the building but to keep it as an investment and earn income from rent, but he had not produced any press release/pamphlets or any other evidence in support of his contention that there was a very strong news that the government intended to nationalize the commercial buildings and without any such evidence it is difficult to believe that the government intended to nationalize the commercial buildings as its earlier action of nationalizing the industry and schools had failed miserably. He therefore prayed that the reference may be dismissed and the order of the Tribunal upheld.

10. We have examined the case in the light of the arguments of the learned counsel and have carefully perused the records of the case including the impugned order of the Tribunal, the order by which the questions were referred to this Court and the order of the Appellate Assistant Commissioner and the assessment order.

11. We consider it appropriate to examine and give our opinion on the second question first because of the fact that our answer to that question will resolve whether the assessment order for the assessment year 1976-77 on the basis of which the first question has been framed is justifiable or not.

12. Brief facts of the case as narrated by the Assessing Offer are that initially for the assessment year 1976-77 the present applicant had filed a return of income in which he had also included the profit which had accrued to him on the sale of Hemani Centre the agreement of sale of which was entered on 2nd June, 1975, and had treated the same as exempt by treating it as capital gain. This return was accepted by the Income Tax Officer and he has also treated the gain on property as capital gain. However, later on the case was reopened under section 34 allegedly for the reason that income had escaped assessment and in reply to notice under section 34 the present respondent had taken the plea that cases cannot be reopened on the same facts which were before the Income Tax Officer at the time of original assessment merely on the change of opinion. Although the assessment order under section 34 is not on record and has neither been produced by any of the learned counsel but according to the factual position narrated in the impugned orders, the Income Tax Officer has finalized the assessment under section 34 on the same income on which the original assessment was finalized. When the income tax officer took the plea while assessment proceedings for the assessment year 1976-77 were in progress, that the sale of Hemani Centre was finally concluded on 7th July, 1975 and therefore the income from the sale of Hemani Centre accrued in the assessment year 1976-77 and therefore had to be assessed in this year, the present applicant not only submitted that since he was maintaining accounts on mercantile basis therefore the income was to be assessed for the assessment year 1975-76 which was the year in which the agreement for sale was signed but also submitted that since the Income Tax Officer had already assessed the income from the sale of the building in the assessment year 1975-76 therefore it was a past and closed transaction and the same income could not be reassessed in the assessment year 1976-77. This plea of the respondent was rejected by the various lower forums in the following manner.

INCOME TAX OFFICER ORDER

Reopening of the case under section 34 for the charge year, 1975-76

The assessee's plea that the Department could not reopen an assessment on an issue which has been settled merely because of change of opinion does not help him. In the instant case the said sale did not pertain to the charge year 1975-76 and therefore has been taken out of the scope of assessment for the charge year 1975-76 when reassessment of the assessee for the said charge year was completed. Since original assessment for the charge year 1975-76 no longer holds good after having been reopened under section 34 and the reassessment order for the charge year 1975-76 does not make any mention of this issue, any controversy with regard to taxability of profit in the assessment year 1976-77 is redundant.

ORDER OF APPELLATE ASSISTANT COMMISSIONER

Thus it is evident that he had reopened the case with the intention of taxing the income earned by the appellant from interest through private parties but ultimately found that the information in his possession was without any proof or evidence. He, therefore, ignored the same. At this stage he should have dropped the proceedings under section 34 but in spite of the fact that there was no escapement or under assessment he went on to finalize the assessment and determined the total income with the following remarks:--

"income of the assessee is now determined as under."

From facts stated above really it is strange to note that what was the fun in re-determining the total income under section 34 which was already determined originally. In view of such circumstances the impugned order is without any legal footing. It is accordingly annulled.

In this connection I may point out that the fact that the property was actually transferred in 1976-77 has been established beyond doubt, therefore, whatever income arose to the appellant out of this transfer it was in 1976-77 and not in 1975-76. Thus it is evident that in 1975-76 the Income Tax Officer has discussed about an income which did not accrue to him in that year. Here I may say that the Income Tax Officer has acted beyond his jurisdiction in 1975-76 so far as the discussion about this transaction relate. His observations in connection with Hemani Centre are superfluous and are based neither on facts nor on law. If the Income Tax Officer has discussed everything without lawful authority, the real situation or the legal aspect of the income will not alter. The irrelevant and superfluous remarks will in no way change the real, factual and legal position. In view of these observation I hold that legally the Income Tax Officer was perfectly justified in considering the income out of this transaction in 1976-77 irrespective of irrelevant and superfluous observations made by the Income Tax Officer in 1975-76.

TRIBUNAL'S ORDER

(2) One of the preliminary grounds taken by the appellant is that on the one hand the department has treated the difference as capital gains in the assessment year 1975-76 and on the other hand has treated the transaction as an adventure in the nature of trade and assessed the difference to Income Tax. It is settled law that the strict rules of res judicata and estoppel do not apply to Income Tax proceedings as it has been laid down in a number of ruling of courts. If the facts and circumstances which come to the notice of the Income Tax Officer subsequently justify taking a decision different from that taken earlier by him or his predecessor, he could do so provided it was legally justifiable. When the case cane up before the learned Appellate Assistant Commissioner he confirmed the finding of the Income Tax Officer and came to the conclusion that the transaction of sale of the building was adventure in the nature of trade and the difference in the construction cost and the sale price could, therefore, be assessed to Income Tax. The learned Appellate Assistant Commissioner further agreed with the Income Tax Officer and that the estimate of the sale property made at Rs.15,00,000 was justified. This estimate of the sale price of building was made by the Income Tax Officer in view of the fact that besides Rs.7,00,000 the assessee had also received the security deposit amounting to Rs.7,55,000 which was not returned to the buyer of the building or to the tenants, and was treated as part of the sale price.

13. From a perusal of the above extract it is seen that all the forums have relied on different versions to justify the taxability of the income in the assessment year 1976-77 after it had admittedly been assessed in 1975-76 earlier. The Income Tax Officer has submitted that although for the assessment year 1975-76 the income was assessed as capital gains but the assessment for the assessment year 1975-76 was reopened under section 34 of the Income Tax Act, 1922 and an order was passed under section 34 in which no mention was made of the income from the sale of Hemani Centre and since after passing of the order under section 34, the original order ceased to exist therefore the same income could have been taxed in 1976-77. We regret we cannot subscribe to this view as it is an admitted fact that in the order under section 34 the income assessed was the same as the one originally assessed and this included the income treated as exempt from the sale transaction of Hemani Centre therefore this plea of the Income Tax Officer does not hold ground. We have also seen that the present applicant had filed appeal against the order under section 34 before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner vide his same order by which he had upheld the action of taxing the income from the sale of Hemani Centre for the assessment year 1976-77 cancelled the order under section 34 in the assessment year 1975-76. This cancellation completely demolishes the contention of the Income Tax Officer as even if his contention that in view of order under section 34 the original order had failed to hold ground is accepted the quashment of order under section 34 automatically leads to the restoration of the original assessment order for the assessment year 1975-76 in which admittedly the income front the sale of Hemani Centre was considered and assessed as exempt income. The Appellate Assistant Commissioner while upholding the order of the Income Tax Officer has observed that the Income Tax Officer has acted beyond his jurisdiction in 1975-76 so far as the discussion about this transaction relate. His observations in connection with Hemani Centre are superfluous and are based neither on facts nor on law. If the Income Tax Officer has discussed everything without lawful authority, the real situation or the legal aspect of the income will not alter; the irrelevant and superfluous remarks will in no way change the real, factual and legal position. We regret that we cannot bring ourselves to agree with this contention of the learned Appellate Assistant Commissioner because of the fact that income can be assessed in one year only and same income cannot be assessed in two years and therefore unless the assessment for the assessment year 1975-76 was cancelled or rectified to remove such income from the ambit of the assessment order for that year the same income, in our humble opinion, could not have been assessed for the assessment year 1976-77.

14. The Tribunal while upholding the orders of the lower forums has referred to the settled law that strict rules of res judicata and estoppel do not apply to the income tax proceedings and the Income Tax Officer under the facts and circumstances of the case which come to his notice subsequently can take a decision different from that taken earlier by him or his predecessor provided it is legally justifiable. There can be no cavil to the above proposition which has been relied on by the learned Tribunal but the above proposition is applicable only when in one year an income is treated in a particular manner then in the other year identical income which has accrued during that year may be treated in a different manner. We have not come across any judgment in which it has been held that if one income has already been assessed in an assessment year in a particular manner then the same income can be assessed in the subsequent year in another manner and in this case there is only one income that is the profit on the sale of Hemani Centre which has been assessed as exempt income in the assessment year 1975-76 and as an adventure in the nature of trade and liable to be taxed in the assessment year 1976-77 and we are of the considered opinion that the same income cannot be subjected to assessment in two different years, and therefore orders of lower forums cannot be sustained. We will therefore answer question No.2 in negative in favour of the applicant and against the respondent. We may at this stage point out that if the Income-Tax Officer had proceeded legally he would either have reopened the assessment under section 34 again and assessed this income as an adventure in the nature of trade in that year or he could have rectified assessment order for the year 1975-76 by removing this exempt income from the ambit of the assessment for the assessment year 1975-76 and then perhaps taxed it for the assessment year 1976-77. Since we have already held that income from sale of Hemani Centre cannot be legally taxed in 1976-77, therefore, we need not answer question No.1 as to whether the surplus on sale of Hemani Centre was income from an adventure in the nature of trade and not capital gain.

15. A copy of this order under the signature of Registrar and seal of this Court be remitted to the Income Tax Appellate Tribunal for passing an order in conformity with this order.

Assessment year 1978-79

16. During this assessment year the respondent in this reference purchased another plot measuring 960 square yards approximately during the year 1975 and constructed tour residential apartments which were completed in the accounting year corresponding to the assessment year 1978-79. Out of the four apartments he retained one for his own use and the other three apartments were sold on 25-2-1978. The profit earned on the sale of these three apartments was also declared by the present respondent as capital gains which contention was not accepted by the Income Tax Officer who treated the transaction as an adventure in the nature of the trade and taxed the gain on disposal of these apartments.

17. Being aggrieved by the order passed by the Income Tax Officer the present respondent tiled appeal before the Appellate Assistant Commissioner of Income Tax who allowed the appeal and held that the gain on disposal of the three apartments was not profit from adventure in the nature of the trade. Being aggrieved by the order of the Appellate Assistant Commissioner the present applicant filed appeal before the Tribunal which was dismissed by the Tribunal, hence this reference application.

18. We have heard Mr. Jawaid Farooqui the learned counsel for the applicant and Ms. Farzeen Bhudha the learned counsel for the respondent.

19. Mr. Jawaid Farooqui submitted that the applicant's family was a joint family and one apartment was enough for all of them to live in and therefore the three apartments were sold and the assessee's intention all along had been to construct one apartment for his own residence and three apartments for earning profit by their disposal. He submitted that it has been held in a number of cases that when a transaction is carried out with the sole intention of earning profit then such transaction even if it is a solitary transaction in nature will constitute an adventure in the nature of trade and the profit on such transaction shall be treated as business profit and will be taxed accordingly. He therefore prayed that since the intention of the present respondent is apparent therefore the reference application may be allowed and the order of the Tribunal may be set aside.

20. Ms. Farzeen Bhudha the learned counsel for the respondent opposed the arguments of the learned counsel for the applicant and supported the order of the Tribunal. She submitted that the applicant had three sons and being a memon individual he had constructed four identical apartments for his residence and residence of his three sons as Memon families prefer to live separately and independently but in close vicinity, but by the time the apartments were ready for occupation two of his sons had left Pakistan and proceeded to U.K. and the third son also refused to live in the vicinity of his father as the applicant had remarried and the son preferred to live with his in-laws rather to live with his stepmother. The present respondent was disappointed at this turn of affairs and after failing to persuade his sons in coining to live in these apartments, out of sheer frustration sold them only retaining one apartment for his residence. The learned counsel contended that initially neither the plot was acquired nor the flats were constructed with intention to sell them but the only intention was to use them for his residence and the residence of his sons and therefore the transaction could not be treated as an adventure in the nature of trade and gains could not be treated as profit front the source of business.

21. We have examined the case in the light of the arguments of the learned counsel and have carefully perused the facts of the case.

22. A perusal of facts reveals that the respondent had three sons and in such circumstances it is natural that four independent apartments may be constructed by the father in the same vicinity for the purpose of being occupied by him and the families of his sons being so close and yet so far. There appears no weight in the contention of the Income Tax Officer that if the sons of the respondent were unable to occupy the apartments due to reasons explained above the respondent instead of selling they could have let them on rent. We are of the view that it was applicant's decision whether to sell them or give them on rent and reaching at any of the above two decisions does not necessarily reveal the mala fide intention of the applicant to evade tax. The applicant may have thought it better to finalize the transaction then and there instead of letting the said apartments on rent and facing various problems with the tenants for years to come. We therefore tend to agree with the Appellate Assistant Commissioner and the Appellate Tribunal that in the facts and circumstances of the case it seems improbable that the apartments were constructed with the intention of being sold to earn profits and the respondent's statement that they were constructed for his residence and the residence of his sons seems more probable. We are therefore inclined to confirm the order of the Tribunal of allowing the appeal against the order of the Income Tax Officer and holding that the gains on the disposal of the three apartments do not constitute business profit as an adventure in the nature of trade.

23. The above are the reasons for the short order delivered by us in Court after hearing the learned counsel on 2-12-2010 vide which we had answered the referred question for the assessment year 1978-79 in affirmative in favour of the respondent and against the appellant.

24. Both these matters are disposed of in the above manner.

S.A.K./R-3/KOrder accordingly.