PAKISTAN STEEL MILLS CORPORATION (PVT.) LTD., KARACHI VS COMMISSIONER INLAND REVENUE (LEGAL DIVISION), KARACHI, 2012 PTD-KARACHI-HIGH-COURT-SINDH 723 (2012)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss. 122(5A), 133 & 221---Amendment of assessment---Sale of extra land by Pakistan Steel Mills in shape of small plots after establishing Housing Scheme thereon---Order of Taxation Officer treating amount received from such transactions as income of assessee from business of developing Housing Scheme upheld by Appellate Tribunal---Plea that amount received from sale of subject land was capital gain and not income of assessee---Validity---No hard and fast rule could be adopted in cases of adventure in nature of trade, rather each transaction would be examined on basis of its own facts---Nothing on record to establish that subject land was part of area, which constituted such Mills or same could be treated as capital assets of assessee---Nothing on record to show that finding of facts recorded by Tribunal were based on mis-reading or non-reading of evidence---Remedy of rectification could be availed in case of error in finding of facts by Tribunal, but not reference to High Court---Assessee instead of responding to queries raisedbyTaxationOfficerhadtakenanevasivepleawhichwasnotsupportedbyanyevidence---High Courtcouldnotexamineor disturb finding of facts by Tribunal, unless proved to be perverse---Reference application High Court dismissed in circumstances.

Commissioner of Income Tax, Madras v. P.K.N. Co. Ltd., AIR 1966 SC 1256; Janki Ram Bahadur Ram v. Commissioner of Income Tax AIR 1965 SC 1898; Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd., 100 ITR/AIR 1975 SC 2106; CIT v. Mehmood Ali (Sindh High Court) 2008 PTD 82; Maj. General (Retd) Jalauddin v. ACIT (Sindh High Court) 2011 PTD 1377; International Traders Ltd. v. CIT (1967) 16 Tax 46; Soraj Kumar v. CIT West Bengal AIR 1959 SC 1252; Industrial Management v. CIT (Sindh High Court) PLD 1978 Kar. 673; Hyderi Construction Co. Ltd., Karachi v. Commissioner of Income Tax, Central Karachi 1967 PTD 242; Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad 1994 PTD 675; and Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad 1994 PTD 675ref.

InternationalTradersLtd.,Karachiv.CommissionerofIncome Tax (1967) 16 Tax 46; Lungla (Sylhet) Tea Co. v. CIT 1970 SCMR 872; S.M. Ilyas and Sons v. Ilyas and Sons v. CIT PLD 1982 SC 259; Japan Storage v. CIT 2003 PTD 2849 and CIT v. NIT 2003 PTD 589 rel.

(b) Income Tax Ordinance (XLIX of 2001)---

----S.133----Reference to High Court---Scope---High Court could not examineordisturbfindingoffacts,unlessprovedtobe perverse.

International Traders Ltd., Karachi v. Commissioner of Income Tax (1967) 16 Tax 46; Lungla (Sylhet) Tea Co. v. CIT 1970 SCMR 872; S.M. Ilyas and Sons v. Ilyas and Sons v. CIT PLD 1982 SC 259; Japan Storage v. CIT 2003 PTD 2849 and CIT v. NIT 2003 PTD 589 rel.

(c) Income Tax Ordinance (XLIX of 2001)---

----Ss.133 & 221---Reference to High Court---Scope---Finding of facts by Appellate Tribunal, error in, remedy against---Scope---Aggrieved party could seek rectification of such error by approaching Tribunal, but not High Court.

Aga Zafar Ahmed for Applicant.

Jawaid Farooqui for Respondent.

Date of hearing: 21st November, 2011.

JUDGMENT

AQEEL AHMED ABBASI, J.---Through instant reference application, the applicant has proposed the following questions of law, which are said to have been arisenfromtheimpugnedorderdated21-1-2010 passed by the Tribunal in I.T.A. No.438/KB of 2009:--

(1)Whether on the facts and circumstances of the case, the Learned Tribunal was right to hold that earlier decisions of the Tribunal mentioned in impugned order are distinguishable and not relevant to the case of the applicant, when the said judgments deal with the issue in fact viz. issue of exempted income from selling of extra land to downstream industries?

(2)Whether on the facts and circumstances of the case, earlier decisions of the divisional bench of Learned Tribunal on similar facts and grounds can be ignored by two member bench of the Learned Tribunal, which were binding on the respondents?

(3)Whetherthenoticeissuedandtheorderpassedundersection 122(5A) of the Income Tax Ordinance was illegal, without legal authority and void ab initio?

(4)Whether on the facts and circumstances of the case, the Learned Tribunal was right to vacate the order of the learned Commis-sioner Inland Revenue (Appeal) and restore the impugned amended assessment order made under section 122(5A) of the Income Tax Ordinance, 2001?

(5)Whether the Learned Tribunal erred in law to presume the amount of Rs.569,754,000 as the income of the applicant when no evidence was produced by the respondents in support of the claim that Rs.569,754,000 represents income from Gulshan-e-Hadeed Society?

2.Brief facts for the disposal of the instant reference application are that the applicant is a State owned Private Limited Company (Corporation) and derives income from manufacturing and sale of Steel. For the year under consideration the applicant has claimed a sum of Rs.569,754,000 as exempt from sale of extra land to down stream industries. The learned Additional Commissioner treated the same amount as income from business of land development known as Gulshan-e-Hadeed Scheme, therefore, finding the order erroneous as well as prejudicial to the interest of revenue the Additional Commissioner of Income Tax issued show cause notice and amended the order under section 122(5A) of the Income Tax Ordinance, 2001 by adding the amount of Rs.569,754,000 to the income of the taxpayer treating the same as business income and the profits on development of housing scheme, Gulshan-e-Hadeed.

2A.Learned counsel for the applicant has contented that Appellate Tribunal Inland Revenue (Pakistan) at Karachi has wrongly treated the said amount as development of land and the housing scheme i.e. Gulshan-e-Hadeed. Per learned counsel, the advances received from allottees of Gulshan-e-Hadeed were shown in the financial statement as "advances" and not charged to profit and loss account. It has been submitted by the learned counsel that there is mis-reading of evidence by the Appellate Tribunal, whereas the amount received from sale of subject land is capital gain and not the income of the applicant. Per learned counsel, in previous years the issue viz. 'whether the amount received on allocation of plot of land to downstream industry, is an income as an adventure in the nature of trade?' came before the Hon'ble Appellate Tribunal Inland Revenue, Karachi in earlier years (1995-1996, 1996-1997 and 1997-1998). The learned Tribunal was pleased to hold that the amount received on allocation of plot to downstream industries by the applicant cannot be treated an income and is not an adventure in the nature of trade. In support of his contention, learned counsel has placed reliance on the following judgments:--

(1)Commissioner of Income Tax, Madras v. P.K.N.Co. Ltd., AIR 1966 SC 1256

(2)Janki Ram Bahadur Ram v. Commissioner of Income Tax AIR 1965 SC 1898

(3)Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd., 100 ITR/AIR 1975 SC 2106

(4)CIT v. Mehmood Ali (Sindh High Court) 2008 PTD 82

(5)Maj. General (Retd) Jalauddin v. ACIT (Sindh High Court) 2011 PTD 1377

(6)International Traders Ltd v. CIT 1967 Tax 46

(7)Soraj Kumar v. CIT West Bengal AIR 1959 SC 1252

(8)Industrial Management v. CIT (Sindh High Court) PLD 1978 Karachi 673.

3.Conversely, learned counsel for the respondent has contended that the Taxation Officer has specifically mentioned that the taxpayer is engaged in the business of development of land. It has been further held that sale of land and plots to the various allottees and the amount received as profits thereon is the income of the applicant from its business. Such income and the profits on the sale of land is in "adventure in the nature of trade" and cannot be termed as capital gain, as alleged by the taxpayer. Per learned counsel the details of land sold out as well as expenses incurred on levelling of land were sought from the applicant by the Taxation Officer vide letter dated 16-8-2008, but the reply thereto was deliberately not furnished which shows the intention of the applicant to withhold correct information and to avoid the taxability of its business income. It is further submitted that the transaction being adventure in the nature of trade has correctly been added by the Taxation Officer into the income of the applicant as the intention and the purpose to earn profit out of such sale of land is manifest on the face of the transaction. Per learned counsel, the Commissioner of Income Tax (Appeals) has erred in law and facts as the entire facts were not properly appreciated while deleting the addition. In support of his contention, he has placed reliance on the following judgments:--

(1)Hyderi Construction Co. Ltd., Karachi v. Commissioner of Income Tax, Central Karachi 1967 PTD 242

(2)International Trades Ltd., Karachi v. Commissioner of Income Tax (1967) 16 Tax 46

(3)Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad 1994 PTD 675

4.We have heard both the learned counsel and perused the record. From perusal of the order passed by the learned Additional Commissioner under section 122(5A), it is noted that before treating the amount of Rs.569,754,000 by the applicant as exempt income, being taxable income. A show cause notice was issued, which reads as follows:--

"Return of income for the tax year 2007 filed under section 114 of the Income Tax Ordinance, 2001 electronically besides business income also declared exempt income of Rs.569,754,000. Audited accounts along with computation of income reveals that you have claimed the said exempt income as profit on disposal of land. The perusal of record reveals that you have started business of land development and construction known as Gulshan-e-Hadeed, Phase-III, Phase-I and Phase-II schemes since the year 2002. The allotment of developed land for the above Housing Scheme against advances from the allottees constituted the business income, therefore, the said return considered as erroneous in so far as prejudicial to the interest of revenue as you have not offered the said income from development and allotment of land of Gulshan-e-Hadeed scheme for tax purposes.

The trail from the year 2002 and onward is given as under:--

Note No.21.3 to the accounts has also been perused which also suggest that you have received the above payment from the allottees of Gulshan-e-Hadeed, Karachi against the allotment of developed land. For the sake of facility the said note is reproduced hereunder:-

"Represents advances received from the allottees of Gulshan-e-Hadeed against allotment of land. Includes an mount of Rs.895.327 million collected from employees of the Corporation against the scheme of Gulshan-e-Hadeed Phase-III introduced last year andExtension Phase I and II introduced during the year. Allotment of land against such scheme was pending as at year end."

Since you are also engaged in the business of developer and constructor of immovable property and also involved in the allotment of developed land under the Housing Scheme to the allottees, therefore, the said income earned from the development and construction business is chargeable to tax.

In view of the above facts, since the return under section114 treated as assessment order issued under section 120 by the Commissioner without offering the said income from sale of developed scheme known as Gulshan-e-Hadeed is erroneous in so far as prejudicial to the interest of revenue, therefore, for the retrieval of loss of revenue the action under section 122(5A) is exigible.

You are hereby allowed an opportunity to be heard undersection 122(9)toexplainastowhynottheorderundersection 120 may be revised for the reasons as discussed above.

Statutorynoticeisenclosedherewithforcomplianceby30-7-2008."

5.In response to such notice, the applicant filed the reply in the following manner:--

"(1)That you have misdirected yourself by assuming that the income claimed as exempt was derived by developing of housing scheme against advances from the allottees which constituted as business income.

(2)That the income claimed as exempt as pointed out by you, was actually for disposal of extra land for setting up down stream industries around the steel mill areas.

That issue of exempted income from selling of extra land is a well settled issue and have already been decided by the Honorable I.T.A.T. in the earlier years in our case. Copies of ITAT Order Nos.745 KB of 1998-99 assessment year 1995-96 and I.T.A. No.1108 KB of 1998-99 assessment year 1996-97 as well as by (ADRC (Alternate Dispute Resolution Committee) vide Order No.Feb-14-2006 (copies of all the orders are enclosed)."

6.Since the reply submitted by the applicant was evasive and not satisfactory, the Taxation Officer again confronted the applicant vide letter dated 16-8-2008, whereby certain information was sought from the applicant in respect of documents and details of Gulshan-e-Hadeed Scheme Phase-I, Phase-II and Phase-III and Extension of Phase-I and Extension of Phase-II. Site Plan and Map of area scheme was also requisition. Detail of expenditure incurred by applicant in respect of levelling of land and its conversion into small plots, development of roads, development of water supply line, sewerage line and expenditure on installation of electrical poles and electrical lines was also sought. In response some information was provided by the applicant. Whereafter, considering all the details available on record and by distinguishing the finding of the learned Tribunal as well as ADRC in the case of the assessee for the earlier years and after placing reliance on the judgments of superior Courts, the learned Taxation Officer examined the criteria for determination as to under what circumstances, sale transaction of some immovable property can be treated as "adventure in the nature of trade" in the following manner:--

"(I)That no hard and fast rule can be adopted in such cases and, therefore, each transaction will have to be judged on the basis of its own facts.

(ii)That mere frequency of a transaction may not by itself amount to venture in the nature trade.

(iii)That in case of a solitary transaction heavy burden lies on the Revenue to establish that the impugned transaction in fact was a business and receipt out of it business receipts.

(iv)That intention to make profit may be an important element to be considered while judging the nature of a transaction but here again presence of such an intention per se will not make a transaction a "business".

(v)That special care will have to be taken while considering sale or purchase of immovable properties where such property is evidently not a stock in trade.

(vi)That it is legal to examine such like transactions in the light of the charters or memorandum of associations in cases of limited companies statutory corporations and other bodies corporate but mere permissibility of a transaction does not by itself mean carrying on the business of that kind. and

(vii)That the distinction between a fixed or capital asset and circulating capital or stock in trade; a "business" and an "investment" should always be in the focus of the Assessing Officer while dissecting a transaction of the kind."

7.Keeping in view the above criteria, the Taxation Officer has treated the impugned transaction for the tax year under consideration as taxable income of the applicant in the following manner:--

"Considering the above discussions it has been established that the transaction of housing scheme was with full intention of profit earning because the taxpayer was fully aware that the development of housing scheme with all modern paraphernalia and facilities constituted business transaction. There is no issue of so called earning of exempt income from "alleged disposal of extra land for setting up down stream industries" as contended by the taxpayer vide their letter dated 13-8-2008 reproduced at page No.3 of this order. The development of housing scheme has nothing to do with the claim as "disposal of extra land for setting up down streamindustries". It is beyond comprehension the housing schemes development constitute down stream industries whereas housing scheme development is fully residential and carry all amenities of modern living. In view of the aforesaid facts quite distinguishable from the taxpayer's appellate history, fully support that the taxpayer was consciously and deliberately engaged in the development of housing schemes with the motive of profit earning".

8.Being aggrieved by such order passed by the Taxation Officer, the applicant preferred an appeal before Commissioner of Income Tax (Appeals-I), Karachi under section 129 of the Income Tax Ordinance, 2001, who, after heavily placing reliance on the decision of the Tribunal and ADRC in the case of the applicant for the earlier years, set aside the order passed by the Taxation Officer vide his order dated 13-4-2009. The order of the Commissioner of Income Tax (Appeals) was assailed by the Commissioner Large Taxpayers Unit, Karachi, before Appellate Tribunal, Inland Revenue (Pakistan) Karachi in I.T.A No.438/KB/2009, who vide impugned order dated 21-1-2010 has vacated the order passed by the Commissioner of Income Tax (Appeals) and restored the order of the Taxation Officer.

9.From perusal of the order passed by the Taxation Officer, it has been observed that the applicant has divided the land, which was meant for the Housing Projects, into small plots. Admittedly, such land was other than the land of 8000 acres, which was meant for establishing Pakistan Steel Mills. The applicant, after dividing the subject land into various plots and after developing the same, sold out such plots to various allottees and earned profits thereon. It has been further observed that selling out the land under dispute to various customers was not on isolated transaction and it was part of the normal business of the applicant relating to the housing scheme known as "Gulshan-e-Hadeed, Karachi". Taxation Officer further held that the applicant is engaged in the business of land development and construction thereon of a housing project known as "Gulshan-e-Hadeed" since the year 2002, therefore, the development of land and allotment of plots out of such land for the above housing scheme against advances from the allottees constituted the business income of the applicant. The applicant has not produced any documentary evidence, which could establish that the subject land was part of the area which was meant for establishing of Pakistan Steel Mills and, therefore, could be treated as part of capital assets of the corporation. On the contrary, it has come on record that the subject land was other than the 8000 acres, which was meant for establishment of Pakistan SteelMills and was part of land of 10,000 acres, which was acquired for the housing projects.

10.In the case of International Traders v. Commissioner of Income Tax (1967) 16 Tax 46, a Division Bench of this Court has held as under:--

"From the facts and circumstances of the case there can be no two opinions about the fact that the dominant intention of the assessee at the time of purchasing the land was to sell a portion of it to Messrs Standard Vacuum Oil Company and earn a profit on it. A solitary transaction, therefore, of the purchase and sale of the land in this case will not deter anybody from reaching a conclusion that the adventure of the assessee in purchasing and selling the land was in the nature of trade. The profit earned by the assessee consequently was rightly charged to tax."

Similar view was also taken by Division Bench of this Court in the case of Hydri Construction Co. Ltd., Karachi v. Commissioner of Income Tax, Central Karachi 1967 PTD 242.

11.Similarly in another case of Division Bench of this Court i.e. Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad 1994 PTD 675 while dealing with similar issue, it has been held as follows:--

"But the intention of the applicant was evident from the inception, to make profit through sales at higher price. He was aware about the Government policy. He appears to have intended that develop the land to break into plots and to dispose of the same, or to construct on part of it for business purpose. It clearly shows that the whole idea in purchasing the land was to make profit.

Having considered the totality of the circumstances, we are of the opinion that the purchase of agricultural land and the sale thereof constituted an adventure in the nature of trade and the profit from sales was liable to be taxed as business income."

12.In order to establish that a transaction whereby a plot of land has been sold out for profit constitutes as "adventure in the nature of trade", we have to take cognizance of the entire transaction keeping in view intention of the assessee at the time of purchasing the said land as well as future transaction whereby such land has been sold out by the assessee with a intention to earn profit. No hard and fast rule can be adopted in cases of adventure in the nature of trade and each transaction has to be examined on the basis of its own facts. In the instant case there has been finding of fact to the effect that the subject land after development and by dividing the same into small plots has been sold out to allottees in a housing project, which has been treated as the business of the corporation. Nothing has been brought on record by the applicant to establish that the subject land was part of the area which constituted Pakistan Steel Mills or the same could be treated as capital assets of the applicant. Learned Tribunal has also concurred with such finding of facts, whereas facts of the earlier years have been specifically distinguished in the impugned order passed by the learned Tribunal. It may be observed that finding of facts, unless proven to be perverse, cannot be disturbed by this Court in reference jurisdiction. In the case of International Traders Ltd., Karachi v. Commissioner of Income Tax (1967) 16 Tax 46. Division Bench of this Court while dealing with a reference involving similar finding of facts has held as under:--

"The High Court is not a Court of Appeal and as such it cannot for a moment consider a situation whether the finding on appraisal of evidence on questions of fact given by the Income tax authorities was erroneous or correct. What the High Court has to see is whether the Income-tax authorities could in the circumstances of the case reach the conclusion they had reached on the question of fact. To come to that conclusion the High Court has not to further probe in the matter to see if the conclusions are correct or not."

13.It is pertinent to mention that the applicant has not been able to show any perversity in the finding of facts by the Tribunal nor has produced any document or evidence which may establish that the finding of facts by the Tribunal is based on mis-reading or non-reading of evidence. On the contrary, record reveals that in response to queries raised by the Taxation Officer the applicant instead of furnishing relevant information and documents avoided to respond to such queries and took an evasive plea which is not supported by any evidence. We may observe that in case of any error in the finding of facts by the Tribunal the only course available to the applicant is to seek rectification of such error by moving appropriate application in accordance with law, which has not been done in the instant case. Moreover, question of fact cannot be examined by this Court in its reference jurisdiction. Reference in this regard can be made to the judgments of the Hon'ble Supreme Court in the case of Lungla (Sylhet) Tea Co. v. CIT 1970 SCMR 872 S.M. Ilyas and Sons v. CIT PLD 1982 SC 259, Japan Storage v. CIT 2003 PTD 2849 and CIT v. NIT 2003 PTD 589.

The case-law relied upon by the learned counsel for the applicant is of no assistance to the applicant as the facts of this case are distinguishable from the facts of the cited case-laws.

14.In viewof hereinabove, we are of the opinion that there is no error in the finding of the learned Tribunal which is pre-dominately based on finding of facts, whereas correct law has been applied to such facts. Accordingly, instant reference application having no merits is hereby dismissed. Consequently, the proposed question No.1 is answered in affirmative, whereas question No.2 in view of the answer to question No.1 has become infractuous. Similarly, question No.3 is answered in negative, question No.4 is answered in affirmative and question No.5 is answered in negative, all against the applicant, however, with no orderas to costs.

S.A.K./P-3/KAnswer accordingly.