Ita/113/2016 Of The Principal Commissioner Of Income Tax v. Shri. John Poomkudy

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 29TH DAY OF OCTOBER 2018 / 7TH KARTHIKA, 1940 I.T.A.No.113 of 2016 AGAINST THE ORDER IN MISCELLANEOUS PETITION NO.17/COCH/2015DATED 09.05.2016 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. -------------------- APPELLANT/APPELLANT: THE PRINCIPAL COMMISSIONER OF INCOME TAX,KOCHI - I, KOCHI, INCOME TAX OFFICES, CENTRAL REVENUE BUILDING, I.S.PRESS ROAD, KOCHI - 682 018. BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, STANDING COUNSEL FOR GOI (TAXES) RESPONDENT/RESPONDENT: SHRI.JOHN POOMKUDY,F-11, LINK HEIGHTS, PANAMPILLY NAGAR, KOCHI - 682 036.BY ADVS.SRI.NAVIN R NATHSMT.GEETHA JOB(OZHUKAYIL)SRI.TOM JOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29.10.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Vinod Chandran,J. JUDGMENT The appeal by the Revenue, is against the orderof the Tribunal, alleging that the Tribunal has misconstruedthe facts and the law, in confirming the order of thefirst appellate authority, which found that there is no'adventure in the nature of trade' involved in thetransactions entered into by the respondent-assessee. It issubmitted that the Tribunal had failed to look into thefacts and had merely extracted the order of the Commissioner(Appeals), in which was noticed the mere submission madeby the assessee without any supporting material. Thelearned Senior Counsel for Government of India (Taxes) alsopoints out that an agreement of sale and a further salemade to the assignee of the intended purchaser has beenconstrued as two separate sales by the Tribunal, whichindicates that the Tribunal has not applied its mindproperly in considering the essential facts with respectto the transaction. Reliance is also placed on the decisionof the Hon'ble Supreme Court in G.Venkataswami Naidu & Co.v.-Commissioner of IncomeTax[(1959) XXXV ITR 594]. 2. The question of law framed is re-framed as follows: Whether on the facts and circumstances of thecase the Tribunal erred in finding no adventure in thenature of trade when there were purchases made ofproperties steadily over a period and a transaction ofsale carried out in the subject assessment yearleading to a clear presumption of 'adventure in thenature of trade' as contemplated under Section 2(13)of the Income Tax Act, 1961 [for brevity “IT Act”]? 3. On facts, it has to be noticed that the AssessingOfficer [for brevity “AO”] initiated the proceedings underSection 143(3) of the Act on the basis of the return filed bythe assessee showing the amount received on sale of certainproperties and claiming exemption from capital gains allegingit to be sale of agricultural land. The AO found that theproperties were acquired between 1992-93 to 1997-98 as also asolitary purchase in 2006-07, which were together sold in thesubject assessment year to a group of builders. The AO foundthat the purchases were made with an intention of indulgingin sale of such land and there was a sale effected in theprevious year to the subject assessment year ie: 2008-09after holding the lands for about 12-15 years. It is also thesubmission that the purchases made were for a totalconsideration of Rs.48 lakhs which on sale generated a huge profit; the total sale consideration being Rs.24 crores inthe year 2008-09. Essentially the purchases were made onaccount of the real estate business engaged in by theassessee and it is an adventure in the nature of tradeinsofar as the assessee having sold the entire propertieseven though in one solitary sale transaction. profit; the total sale consideration being Rs.24 crores inthe year 2008-09. Essentially the purchases were made onaccount of the real estate business engaged in by theassessee and it is an adventure in the nature of tradeinsofar as the assessee having sold the entire propertieseven though in one solitary sale transaction. 4. The Commissioner of Appeals, however, found thatthere is absolutely no evidence brought on record by the AOto establish that the respondent-assessee was engaged incontinuous real estate trade. It was also found that therespondent-assessee had been holding the properties and hadentered into an agreement for sale with one individual, whoseassignee was a builder to whom the sale was eventually made.The first appellate authority found that there is noadventure in the nature of trade in the transaction of theassessee and, hence, there could be no assessment made onthat count treating the transaction as a regular business ofthe assessee. 5. The Tribunal extracted the findings of the firstappellate authority and accepted it. We find that theTribunal had committed a mistake in observing that theproperties purchased prior to 15 years was sold to anindividual who, later, transferred the property to thebuilder. However, the mistake so committed would not be so grave as to make a remand especially considering the decisionof the Hon'ble Supreme Court relied on by the Revenue inG.Venkataswami Naidu & Co.(supra). 6.G.Venkataswami Naidu & Co.(supra)was apartnership firm, acting as managing agents of one JanardanaMills Ltd., Coimbatore. They purchased four contiguous plotsof land ad-measuring 5 acres and 26 cents under four saledeeds executed in October and November, 1941 and June andNovember, 1942 for a total consideration of little more thanRs.8,700/-. After four years, the said properties were soldto Janardana Mills Ltd. in two lots, wherein the appellantreceived a sum, far in excess of the purchase price. TheIncome Tax Officer found that there was no evidence toshow that the properties were purchased as agricultural landor that he had acquired it as an investment. We immediatelynotice the finding of the AO that the assessee therein hadnot purchased the properties as an investment and hadpurchased it keeping in mind the possibility of immediatesale on profit to the seller who eventually acquired theproperty. This is also one of the considerations whichweighed with the Hon'ble Supreme Court in dismissing theappeal and finding on facts that there is an adventure in thenature of trade in the transactions as dealt with inG.Venkataswami Naidu & Co.(supra). 7. The findings of the Tribunal was also elaboratelydetailed by the Hon'ble Supreme Court. The Tribunal had foundthat the first purchase made was in the name of the son-in-law of the Managing Partner of the assessee firm, who wasalso an Assistant Manager in Janardana Mills Ltd. Thesubsequent acquisitions were made in the name of the firmitself, which was the managing agent of Janardana Mills Ltd.The properties were also contiguously lying around thepremises of Janardana Mills Ltd. The appellant did not deriveany income from the lands nor made any improvements in theland. The claim that the purchases were made as an investmentwas specifically declined by the Tribunal also. The Tribunalalso found that 'since the appellant was the managing agentof the mills it was in a position to influence the decisionof the mills to purchase the properties from it and that wasthe sole basis for its initial purchase of the plots' (sic -Page 601).8. The expression “adventure in the nature of trade”as used in the prior Income Tax enactment in Section 2(4)defining “business” as 'including any trade, commerce ormanufacture or any adventure or concern in the nature oftrade, commerce or manufacture' is in pari materia in thepresent IT Act also. It was held: “It is patent that the clause “in the nature of trade”postulates the existence of certain elements in theadventure which in law would invest it with thecharacter of a trade or business; and that would makethe question and its decision one of mixed law andfact”. Examining the question whether the consideration would be on facts alone or on the law, the Hon'ble Supreme Court foundthat the question would be a mixed question of fact and lawand framed the question as under: “Whether, on the facts and circumstances provedin the case, the inference that the transaction inquestion is an adventure in the nature of trade is inlaw justified?” This is the question we too have to answer in the instantcase, but looking at the facts cropping up in this appeal. 9. Finding that there can be no strict principles evolved which would govern the decision of all cases in whichthe character of the impugned transaction falls to beconsidered,the Hon'ble Supreme Court laid down certainspecific aspects of a transaction being taken as an adventurein the nature of trade. They were - (1) that the transactioncannot properly be regarded as trade or business, (2) it is sallied to transactions that constitute trade or business, butmay not be trade or business itself, (3) it is characterised by some of the essential features that make up trade orbusiness but not by all of them, and (4) even an isolatedtransaction can satisfy the description of an adventure inthe nature of trade. 10. The learned Senior Counsel for Government ofIndia (Taxes) would specifically stress on the finding of theHon'ble Supreme Court that even an isolated incident couldresult in, it being characterised as an adventure in thenature of trade. We cannot and do not at all dispute the saidproposition. However, it has to be noticed that the Hon'bleSupreme Court had further elucidated the matter in thefollowing manner: “Sometimes it is said that a single plunge in thewaters of trade may partake of the character of anadventure in the nature of trade. This statement maybe true; but in its application due regard must beshown to the requirement that the single plunge mustbe in the waters of trade. In other words, at leastsome of the essential features of trade must bepresent in the isolated or single transaction”. Hence, the mere fact that there was an isolated transactionof sale which generated a huge profit to the assessee wouldnot by itself result in the transaction being treated as anadventure in the nature of trade. 11. Distinguishing an investment from an adventure in the nature of trade, it was held so: “Sometimes it is said that a single plunge in thewaters of trade may partake of the character of anadventure in the nature of trade. This statement maybe true; but in its application due regard must beshown to the requirement that the single plunge mustbe in the waters of trade. In other words, at leastsome of the essential features of trade must bepresent in the isolated or single transaction”. Hence, the mere fact that there was an isolated transactionof sale which generated a huge profit to the assessee wouldnot by itself result in the transaction being treated as anadventure in the nature of trade. 11. Distinguishing an investment from an adventure in the nature of trade, it was held so: “If a person invests money in land intending tohold it, enjoys its income for some time, andthen sells it at a profit, it would be a clearcase of capital accretion and not profit derivedfrom an adventure in the nature of trade. Casesof realisation of investments consisting ofpurchase and resale, though profitable, areclearly outside the domain of adventures in thenature of trade. In deciding the character ofsuch transactions several factors are treated asrelevant. Was the purchaser a trader and were thepurchase of the commodity and its resale alliedto his usual trade or business or incidental toit? Affirmative answers to these questions mayfurnish relevant data for determining thecharacter of the transaction. What is the natureof the commodity purchased and resold and in whatquantity was it purchased and resold? If thecommodity purchased is generally the subject-matter of trade, and if it is purchased in verylarge quantities, it would tend to eliminate thepossibility of investment for personal use,possession or enjoyment. Did the purchaser by anyact subsequent to the purchase improve thequality of the commodity purchased and therebymade it more readily resaleable? What were theincidents associated with the purchase andresale? Were they similar to the operationsusually associated with trade or business? Are the transactions of purchase and sale repeated?In regard to the purchase of the commodity andits subsequent possession by the purchaser, doesthe element of pride of possession come into thepicture? A person may purchase a piece of art,hold it for some time and if a profitable offeris received may sell it. During the time that thepurchaser had its possession he may be able toclaim pride of possession and aestheticsatisfaction; and if such a claim is upheld thatwould be a factor against the contention that thetransaction is in the nature of trade. These andother considerations are set out and discussed injudicial decisions which deal with the characterof transactions alleged to be in the nature oftrade. In considering these decisions it would benecessary to remember that they do not purport tolay down any general or universal test. Thepresence of all the relevant circumstancesmentioned in any of them may help the court todraw a similar inference; but it is not a matterof merely counting the number of facts andcircumstances pro and con; what is important toconsider is their distinctive character. In eachcase, it is the total effect of all relevantfactors and circumstances that determines thecharacter of the transaction; and so, though wemay attempt to derive some assistance fromdecisions bearing on this point, we cannot seekto deduce any rule from them and mechanicallyapply it to the facts before us". 12. We have to notice that none of these tests havebeen employed by the AO in finding out an adventure in thenature of trade in the transactions in land entered into bythe respondent-assessee. The AO has merely recorded thepurchases made about 15 years back and a solitary purchasemade in the year 2006-07 as also the sale of properties forthe previous year to the assessment year. The AO has alsoexamined other purchases made in different parts of the Stateand outside the State, again of landed properties by theassessee. It is on this premise alone that the assessee wasfound to have indulged in adventure in the nature of trade.The AO has not examined whether the properties purchased werelying contiguously or there was any connection between theintended purchaser in the agreement, the respondent-assesseeand the ultimate purchaser of the lands which would result inthe assessee having specifically anticipated the saletransaction. 13. In considering the specific character of thetransaction, we have to again extract from the judgment ofthe Hon'ble Supreme Court cited by the Revenue, wherein thedistinction between an adventure in the nature of trade andan investment simplicitor, was emphasised, by the Hon'bleSupreme Court. We extract the same: “Even in the application of this test distinction will have to be made between initial intention toresell at a profit which is present but not dominantor sole; in other words, cases do often arise wherethe purchaser may be willing and may intend to sellthe property purchased at profit, but he would alsointend and be willing to hold and enjoy it if areally high price is not offered. The intention toresell may in such cases be coupled with theintention to hold the property. Cases may, however,arise where the purchase has been made solely andexclusively with the intention to resell at a profitand the purchaser has no intention of holding theproperty for himself or otherwise enjoying or usingit. The presence of such an intention is no doubt arelevant factor and unless it is offset by thepresence of other factors it would raise a strongpresumption that the transaction is an adventure inthe nature of trade”. 14. We find here, that the assessee had madeinvestments in the lands long prior to the sale and had heldthe land for a considerable period of time; almost 12-15years. It is an admitted fact that the assessee had notderived any income from the lands and also not made anyimprovements in the land. However, there can be no adventurein the nature of trade found, since the assessee had notidentified the seller long prior and had not purchased theland holdings with a definite and sole intention to sell it. 14. We find here, that the assessee had madeinvestments in the lands long prior to the sale and had heldthe land for a considerable period of time; almost 12-15years. It is an admitted fact that the assessee had notderived any income from the lands and also not made anyimprovements in the land. However, there can be no adventurein the nature of trade found, since the assessee had notidentified the seller long prior and had not purchased theland holdings with a definite and sole intention to sell it. That is, the sale for profit being the intention it isdistinguished from an adventure in the nature of trade by thefact that the assessee intended to hold the property andthere was no specific sale in contemplation at the time ofpurchases. On sufficient profits being received the assesseeeventually sold the property, which results in an accretionof capital; for which if there is liability to tax on capitalgains that would have to be satisfied. As noticed by theHon'ble Supreme Court, though there was an intention toderive profit on sale of such properties purchased as aninvestment, the assessee, from the circumstances also, waswilling to hold it so that the eventual purchase gives himsufficient profit. This alone would take it out of thedefinition of adventure in the nature of trade and thesolitary instance of sale alone cannot characterise thetransaction as an adventure in the nature of trade. 15. From the facts and circumstances arising in theaforesaid case, we are of the opinion that the transactioncannot be considered to be an adventure in the nature oftrade and the findings so entered by the AO on meagre detailsof transactions of purchase long prior and sale togetherafter 12-15 years, as found from the assessment order cannotbe justified in law. We also have to notice that at the timeof the first appeal, there was a remand report called for; based on which the first appellate authority found that therecould be no exemption granted from capital gains as therewere no agricultural operations carried on and the salecannot be deemed to be of agricultural lands. We would notinterfere with that portion of the first appellateauthority's order, which the Tribunal also has not interferedwith. However, we reject the instant appeal, affirming theorder of the Tribunal and answering the question of law infavour of the assessee and against the Revenue. The directionto assess capital gains has achieved finality and whatremains is only computation in accordance with the provisionsof the IT Act; which the A.O will carry out with notice tothe assessee, if not already done.Ordered accordingly. Parties are left to suffertheir respective costs. Sd/-K.VINOD CHANDRANJUDGE Sd/-ASHOK MENONJUDGE APPENDIX APPELLANT'S/S ANNEXURES: RESPONDENT'S ANNEXURES: NIL. Vku/- [true copy]