Income Tax Appeal v. Mohan Khan

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR (1) INCOME TAX APPEAL No. 58 of 2006 C I T BIKANER SOHAN KHAN (2) INCOME TAX APPEAL No. 69 of 2005 C I T BIKANER V/S MOHAN KHAN Mr. K K BISSA, for the appellant / petitioner Mr. SURESH OJHA, for the respondent Date of Order : 24.4.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI KISHAN SWAROOP CHAUDHARI,J. REPORTABLE JUDGMENT -------- BY THE COURT : (PER HON'BLE GUPTA,J.) These two appeals arise in identicalcircumstances, and have been admitted vide differentorders dated 21.4.2006 and 10.5.2006, by framing thesame substantial question of law, and are beingclosely interconnected, consequently, they are beingdecided by this common order. The substantial question of law, as framedreads as under:- “Whether taking into consideration thevarious factors discussed by the learned Assessing Officer and other appellateauthorities, the true nature of NagnechiScheme and Vallabhgarden land is anadventure in the nature of trade or it ismerely a transaction of transfer ofcapital asset?” The facts of the case, as appear from theAssessing Officer's order are, that the assesseesubmitted returns declaring particular income ascapital gain. The cases were taken up for scrutiny,and ultimately, it was found that certain number ofplots were sold, and the assessee had shown the incometherefrom, as long term capital gain. It is found thatthe assessees purchased the big chunk of landmeasuring few lacks square feets, somewhere in 1970,under a valid document, and the land was lying fellow,during all this time. It also appears that the landwas under the cloud of ceiling laws, and after it gotcleared therefrom, the assessees picked up the idea ofdisposing it of by making the best profit, i.e. byensuring that it fetches the best price, andaccordingly, the site plan was prepared, showing theland to be divided into different plots, and the plotswere accordingly sold. The different assessees solddifferent plots during different period of time,inasmuch as, Sohan Khan had sold certain plots duringthe relevant year for the assessment year 1993-94,1994-95 and 1995-96 and some plots still continued toremain, while the assessee Mohan Khan had also soldcertain plots during the relevant year for theassessment year 1994-95. These appeals relate to theassessment year 1994-95. The Assessing Officer found the sale to benot taxable as capital gain, but it was found to be abusiness income, and for that, the Assessing Officerfound, that the original land is surrounded by manylands of his near relatives and family members, and ifthe plots would have been carved out from his landalone, they could not have been sold for want ofnetwork of roads being available upto the adjoininglands only, and that, at some distance there isgovernment road measuring 200 ft. Then the othercircumstance is, that all the land owners had plannedthe sale of plots, in Nagnechi Scheme, and VallabhGarden, together, and no land could be sold forresidential purposes. Then the next ground consideredis, that the purchasers were impressed by the factthat all the land belong to same family, and is beingplanned, and sold together, at no stage the hugeproperty of the assessee or his family members wasused for personal purposes, and the intention was togain profit only. Interalia with this, it wasconcluded, that the transaction was in the nature oftrade. In appeals, the learned Commissioner found,that the learned Assessing Officer was not justifiedin taxing the profit earned by sale of the plots underthe head “profits and gains by business”, and theywere liable to be taxed only under the head “capitalgains”, as the appellants were not found to be regulardealer, in purchase and sale of land. It was alsofound, that nothing contrary has been brought on record to establish, that the appellant had anyintention to deal in the property, and with thatintention, any development or improvement had beenmade before affecting the sale. In case of Sohan Khanvarious judgments of different High Courts were alsorelied upon. It may also be observed, that the questionabout the amount of profit, i.e. depending on theprice of the land, was also gone into, which aspect isnot a subject matter of appeal before us, therefore,we need not go into that. Aggrieved of the order of the learned Commissioner, the Revenue also filed an appeal beforethe learned Tribunal, and the learned Tribunal found,that the sale proceeds is to be considered as “capitalgain” only. In this regard, in case of Sohan Khan, theTribunal relied upon the fact, that in the earlierassessment year 1993-94 of this assessee himself, ithad been taxed as “capital gain” only, and we areinformed, that no appeal had been filed against thatorder. However, in case of Mohan Khan, it has beenfound, that the CIT had rightly come to theconclusion, that the sale consideration is to be taxedunder the head of “capital gain” instead of “businessincome”. For arriving at this conclusion, it was alsofound, in case of Mohan Khan, that the assessee hadpurchased the land in 1970, and thereafter no land ispurchased, and no land was sold. It was found, that itseems, that assessee never had any intention to carry on any business in purchase and sale of land, but heinvested the money in the land, with a motive ofinvestment in capital asset, as there was no proof ofdevelopment on this piece of land, coupled with thefact, that the assessee is not a dealer in purchaseand sale of land, thus the conclusions inferred by theAssessing Officers are not valid. Arguing the appeal, the learned counsel forthe Revenue placed strong reliance on the judgment ofHon'ble the Supreme Court, in G. Venkataswami Naidu &Co. Vs. Commissioner of Income-Tax, reported in 35 ITR594, and submitted, that in that case also theisolated transaction of purchase and sale of land, washeld to be taxable as profit of business, inasmuch as,in that case one chunk of land was purchased inpiecemeal, and thereafter sold to the adjoining mill,and that was found to be taxable as profit ofbusiness, and therefore, the findings recorded by thelearned Tribunal, as well as the learned Commissioner,are required to be set aside, and it is required to betreated, that the true nature of transaction was of“adventure in the nature of trade” and was not merelya transaction of transfer of capital asset, so as tobe taxable as capital gain. Learned counsel for the assessee on the otherhand, supported the impugned orders, by also invitingour attention to the fact, that the big chunk of landbelonged to some 15 persons, and in case of otherpersons, being co-owners also, the income derived by sale has been taxed as capital gain. Likewise, in thecase of Sohan Khan himself also, for earlier year, ithas been taxed as capital gain, as such, it cannot besaid, that for the assessment year 1994-95, it isrequired to be, or permissible to be, taxed as profitfrom business, with respect to two assessees. We have considered the submissions, and havegone through the judgment in G.Venkataswami Naidu'scase, in detail. Learned counsel for the assessee on the otherhand, supported the impugned orders, by also invitingour attention to the fact, that the big chunk of landbelonged to some 15 persons, and in case of otherpersons, being co-owners also, the income derived by sale has been taxed as capital gain. Likewise, in thecase of Sohan Khan himself also, for earlier year, ithas been taxed as capital gain, as such, it cannot besaid, that for the assessment year 1994-95, it isrequired to be, or permissible to be, taxed as profitfrom business, with respect to two assessees. We have considered the submissions, and havegone through the judgment in G.Venkataswami Naidu'scase, in detail. Coming to the G.Venkataswami Naidu's case,the facts of that case were telling, inasmuch as, theassessee was the managing agent of the company, themill, to whom the land was sold, and the land wassituated adjoining the mill, a total land measured 5acres 26 cents, and was purchased by four sale deedsdated 25.10.41, 15.11.41, 29.6.42 and 19.11.42, andafter about 5 years it was sold in two lots to themill, on 1.9.1947 and 10.11.1947. By this transaction,the assessee earned the profit of Rs.43,887/- and odd.On these facts the Tribunal and High Court had foundthe transaction in question being an “adventure in thenature of trade”, correctness of which view waschallenged before the Hon'ble Supreme Court. Theexpression “adventure in the nature of trade” isdefined in Section 2(4) of the Act, and Hon'ble theSupreme Court considered various judgments of House ofLords and other decisions of the Court of Appeal etc.,and then, at page 609 it was held as under:- “.....it is impossible to evolve anyformula which can be applied indetermining the character of isolatedtransactions which come before thecourts in tax proceedings. It wouldbesides be inexpedient to make anyattempt to evolve such a rule orformula. Generally speaking, it wouldnot be difficult to decide whether agiven transaction is an adventure in thenature of trade or not. It is the caseson the border line that causedifficulty. If a person invests money inland intending to hold it, enjoys itsincome for some time, and then sells itat a profit, it would be a clear case ofcapital accretion and not profit derivedfrom an adventure in the nature oftrade.Casesofrealisationofinvestments consisting of purchase andresale, though profitable, are clearlyoutside the domain of adventures in thenature of trade. In deciding thecharacter of such transactions severalfactors are treated as relevant. Was thepurchaser a trader and were the purchaseof the commodity and its resale alliedto his usual trade or business orincidental to it? Affirmative answers tothese questions may furnish relevantdata for determining the character ofthe transaction. What is the nature ofthe commodity purchased and resold andin what quantity was it purchased andresold? If the commodity purchased isgenerally the subject-matter of trade,and if it is purchased in very largequantities, it would tend to eliminatethe possibility of investment forpersonal use, possession or enjoyment.Did the purchaser by any act subsequentto the purchase improve the quality ofthe commodity purchased and thereby madeit more readily resaleable? What werethe incidents associated with thepurchase and resale? Were they similarto the operations usually associatedwith trade or business? Are thetransactions of purchase and salerepeated? In regard to the purchase ofthe commodity and its subsequentpossession by the purchaser, does theelement of pride of possession come intothe picture? A person may purchase apiece of art, hold it for some time andif a profitable offer is received maysell it. During the time that thepurchaser had its possession he may beable to claim pride of possession andaesthetic satisfaction; and if such aclaim is upheld that would be a factoragainst the contention that the transaction is in the nature of trade.These and other considerations are setout and discussed in judicial decisionswhich deal with the character oftransactions alleged to be in the natureoftrade.Inconsideringthesedecisions it would be necessary toremember that they do not purport to laydown any general or universal test. Thepresenceofalltherelevantcircumstances mentioned in any of themmay help the court to draw a similarinference; but it is not a matter ofmerely counting the number of facts andcircumstances pro and con; what isimportanttoconsideristheirdistinctive character. In each case, itis the total effect of all relevantfactorsandcircumstancesthatdetermines the character of thetransaction; and so, though we mayattempt to derive some assistance fromdecisions bearing on this point, wecannot seek to deduce any rule from themand mechanically apply it to the factsbefore us. In this connection it would berelevant to refer to another test whichis some times applied in determining thecharacter of the transaction. Was thepurchase made with the intention toresell it at a profit? It is often saidthat a transaction of purchase followedby resale can either be an investment oran adventure in the nature of trade.There is no middle course and no half-way house. This statement may be broadlytrue; and so some judicial decisionsapply the test of the initial intentionto resell in distinguishing adventuresin the nature of trade from transactionsof investment. Even in the applicationof this test distinction will have to bemade between initial intention to resellat a profit which is present but notdominant or sole; in other words, casesdo often arise where the purchaser maybe willing and may intend to sell theproperty purchased at profit, but hewould also intend and be willing to holdand enjoy it if a really high price isnot offered. The intention to resell mayin such cases be coupled with theintention to hold the property. Casesmay, however, arise where the purchasehas been made solely and exclusivelywith the intention to resell at a profitand the purchaser has no intention ofholding the property for himself orotherwise enjoying or using it. Thepresence of such an intention is no doubt a relevant factor and unless it isoffset by the presence of other factorsit would raise a strong presumption thatthe transaction is an adventure in thenature of trade. Even so, thepresumption is not conclusive; and itis conceivable that, on considering allthe facts and circumstances in the case,the court may, despite the said initialintention, be inclined to hold that thetransaction was not an adventure in thenature of trade. We thus come back tothe same position and that is that thedecision about the character of atransaction in the context cannot bebased solely on the application of anyabstract rule, principle or test andmust in every case depend upon all therelevant facts and circumstances.” Then in final concluding para, afterrecapitulating the relevant facts of the case, it wasfound, that the purchase was the first step taken bythe appellant therein in execution of the wellconsidered plan, to acquire open plots near the mills,and the whole basis for the plan was to sell the saidlands to the mills, at a profit, and then thesubsequent conduct of the purchaser was considered,and after appreciating the totality of attendingcircumstances, it was found to be a series oftransactions, undertaken by the appellant therein, inpursuance of the scheme, and it was after theappellant had consolidated its holding, that at aconvenient time the land was sold. The appellant wasfound to be managing agent of the mill, who was in aposition to influence the mill to purchase itsproperties, which cannot be said to be unreasonable. Thus, in our view, in view of the principlepropounded therein, and the on the facts of that case as considered, it is clear, that in order to arrive ata conclusion, as to whether it is to be taxed ascapital gain or the transaction is to be treated to bean “adventure in the nature of trade”, things cannotbe put in any straight-jacket formula, and it wasdependent upon the facts and circumstances of eachcase, to be decided on the basis of relevantconsiderations. Thus, in our view, in view of the principlepropounded therein, and the on the facts of that case as considered, it is clear, that in order to arrive ata conclusion, as to whether it is to be taxed ascapital gain or the transaction is to be treated to bean “adventure in the nature of trade”, things cannotbe put in any straight-jacket formula, and it wasdependent upon the facts and circumstances of eachcase, to be decided on the basis of relevantconsiderations. In our view, one of the most significantconsiderations would be, the regularity of transactionof purchase and sale. Mere fact that there was aseries of transactions of sale only, by selling thepart of the whole land, purchased in one go, orpurchased once upon a time, in piecemeal, would notrender the activity of sale to be an “adventure in thenature of trade”. In the present case, there isnothing to show, that the land was purchased withintention to sale it at a profit, or with requisiteintention, to bring it within the parameters of “stockin trade”. It is not shown, that the assessee is aregular dealer in real estate. It appears, that theland was purchased in 1970, which was under cloud ofLand Ceiling Laws, and after that cloud was cleared,and other adjoining lands had been developed, andsince the land was not yielding any return, it wasdecided to be sold in piecemeal, by earmarking plots,but then nonetheless it would remain a disposal of thecapital asset only, and not a transaction of any“stock in trade” so as to be described as “adventurein the nature of trade”. Obviously therefore, it is liable to be taxed only, as the capital gain. It is the different story, that the question,as to whether a particular transaction falls withinthe category of “adventure in the nature of trade”, oris merely a transaction of transfer of capital asset,since depends on appreciation of facts, cannot be saidto be giving any rise to the substantial question oflaw, as such, however, since the submissions have beenaddressed, we have gone through these aspects also.However, we are at one with the findings arrived at bythe learned Commissioner, so also the learned Tribunal. The question, as framed, is accordinglyanswered against the Revenue, and in favour of theassessee. The appeals are, therefore, dismissed. ( KISHAN SWAROOP CHAUDHARI ),J. ( N P GUPTA ),J. /tarun/