Ori. T v. Venugopal

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 14 DAY OF JUNE 2016 PRESENT THR HON’BLE MR.JUSTICE JAYANT PATEL AND THR HON’BLE MR.JUSTICE B.SRBEBENIVASK GOWD ITA NO.325/2015C/WITA Nos.326, 3277/201 IN ITA 325/2015 BETWEEN 1.)PRINCIPLE COMMISSIONER ©OF INCOME TAX,OF INCOME TAX, C. R. BUILDING, BANGALORE.» iaDEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1), BANGALORE. _. APPBELLANTS (By SRI. JEEVAN J. NEE RALGI, ADV. FOR SRI. E. I. SANMATHI, ADV.) AND: ORI. T. V. VENUGOPAL,NO.3911, 14 CROS5s,' MAIN CORNER, 2 K. R. ROAD, BSK II STAGE,BANGALORE —- 560 070. PAN NO: AAPPV4/20M. ... RESPONDENT THIS TTA IS FILED UNDER SEC.2Z60-A OF INCOMETAX|ACT1961,|ARISINGOUT.OF|ORDERDATHD.2//02/2015 PASSED IN ITA NO.19523/BANG/2013, FORTHE ASSESSMENT YBKAR JOO9S-2ZJO10 PRAYING TO DECTHE FOREGOING QUESTION OF LAW AND/OR SUCH|OTHER OUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON’BLE COURT AS DEEMED RIT. IN ITA 326/2015 BETWEEN 1.)PRINCIPLE COMMISSIONER OFINCOME TAX,CR BUILDING ,.INCOME TAX,CR BUILDING ,. BANGALORE. iaDEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1), BANGALORE. —. APPELLANTS (By SRI. JEEVAN J. NEERALGI, ADV. FOR|SRI. E. I. SANMATHI, ADV.)SRI. E. I. SANMATHI, ADV.) AND: ORI. T. V. VENUGOPAL,NO.3911, 14 CROSS,' MAIN CORNER, |K R ROAD, BSK II STAGE,BANGALORE -560 O70.PAN NO : . —. RBSPONDBENT THIS [TA IS FILED UNDER SEKC.260-A OF [INCOMTAX|ACT1961,|ARISINGOUT.OF|ORDERDATBD.2//02/2015 PASSED IN ITA NO.1924/BNG/2013, FOR THE|ASSESSMENT YRBAR 2O10-11 PRAYING TO DECIDE THEFOREGOING QUESTION OF LAW AND/OR SUCH OTHER|QUESTIONS OF LAW As MAY BE FORMULATED BY THE|HON’BLEBE COURT AS DBEMED RIT IN ITA 3327/201 BETWEEN: Ll.PRINCIPLE COMMISSIONER OF INCOME TAX,C R BUILDING, |BANGALORE.C R BUILDING, |BANGALORE. iaDEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1),BANGALORE.CENTRAL CIRCLE -2(1),BANGALORE. —. APPELLANTS (By SRI. JEEVAN J. NEERALAGI, ADV. FORORI. E. I. SANMATHI, ADV.)ORI. E. I. SANMATHI, ADV.) AND: ORI. T. V. VENUGOPAL,NO.3911, 14 CROS5s,' MAIN CORNER,K. R. ROAD, BSK II STAGE,BANGALORE -560 070,PAN NO : AAPPV4/20M. —. RESPONDENT THIS [TA IS FILED UNDER SEC.260-A OF INCOME|TAX|ACT1961,ARISINGOUT.OF|ORDERDATHD.2//02/2015 PASSED IN ITA NO. 1525/BNG/2013, FORTHE ASSESSMENT YEREAR 2011-2012 PRAYING TO DBCID A THE FOREGOING QUESTION OF LAW AND/OR SUCH|OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY|THE HON’BLE COURT AS DEEMED RIT. THRSEK APPBALS COMING ON FOR ADMISSION THISDAY,JAYANT PATEL J.,PASSEDTHR FOLLOWING: ORDER All appeals are preferred by the Revenue byraising the following substantial question of law:- “Whether, on the facts and in thecircumstances of the case, that the Tribunalts |right in law in directing to treat the sale|proceeds from sale offlats under the head ofcapital gain against the factual matrix of the|case establishing the adventure in the nature|of trade|and|ignoringthe principle of|preponderance of probabilities when theevidence clearly points to set off organized|activitiesTo CarynprofitOUT|of|business/adventure in the nature of trade|which fulfills the ingredients for treating the|income of the assessee as business income?™ 5 2 |We have heard Sri. Jeevan J. Neeralgi and Sri.EK...sanmatnhi,learnedcounselfor.the appellants /revenue. 3.|As such it appears that when the matter wasconsidered by the Tribunal, it was observed by theTribunal at para 8 to 12 which reads as under:- “Whether, on the facts and in thecircumstances of the case, that the Tribunalts |right in law in directing to treat the sale|proceeds from sale offlats under the head ofcapital gain against the factual matrix of the|case establishing the adventure in the nature|of trade|and|ignoringthe principle of|preponderance of probabilities when theevidence clearly points to set off organized|activitiesTo CarynprofitOUT|of|business/adventure in the nature of trade|which fulfills the ingredients for treating the|income of the assessee as business income?™ 5 2 |We have heard Sri. Jeevan J. Neeralgi and Sri.EK...sanmatnhi,learnedcounselfor.the appellants /revenue. 3.|As such it appears that when the matter wasconsidered by the Tribunal, it was observed by theTribunal at para 8 to 12 which reads as under:- eSWe|havedulyconsideredthe|rivalcontention and gone through the record carefully.The question, whether assessee made investmentin long-term return or it was an adventure in the|nature of trade has always posed a difficultsituation before the adjudicator. The expression|“business” has been defined in Sec. 2(13) of the)Act. It contemplates “business includes any|trade, commerce or manufacture or any adventureor concern in the nature of trade or commerce or manufacture”. Thus business is an activity|performed by an assessee in an _ organizemanner with an intention to earn profit. Itincludes any trade, commerce, manufacture or| 6 both, t.e., trade and manufacture. The Hon’ble|Supreme Court in the case of G. Venkataswamy|Naidu v. CIT (supra), has observed that this)question has been the subject matter of severaljudicial decisions; and in dealing with it, all the)adjudicators had unanimously agreed that no|principle can be evolved which would govern allthe cases in which the character of impugnedtransactions falls to be considered. According tothe Hon’ble Supreme Court, when the expression“adventure in the nature of trade” should be|considered, then it would clearly suggest that|transaction cannot broadly be regarded as tradeor business. I[t is akin to transactions which§would constitute trade or business, but may notbe trade or business by itself. Certain essential|features would make a transaction as a trade or|business. So even an isolated transaction can'|satisfy the description of an adventure in the|nature of trade. Sometime even a single plunge inthe waters of trade may partake the character inthe nature of adventure in the nature of trade. Butthere cannot be a single decisive factor. Finding 7 recorded by the Hon’ble Court in para 13 of thejudgment explaining the meaning and scope ofadventure in the nature of trade is worth to note. —It reads as under: 13.As we have already observed it tsimpossible to evolve any formula which can|be applied in determining the character of|isolated transactions which come before the|Courts in tax proceedings. It would besides|be imexpedient to make any attempt to|evolve such a rule or formula. Generally|speaking, it would not be difficult to decidewhetherFTgiventransaction|1S.anadventure in the nature of trade or not. It 1s|the cases on the border line that cause|difficulty. If a person invests money in land|intending to hold it, enjoys its income for|some time, and then sells it at a profit, itwould be a clear case of capital accretion|and not profit derived from an adventure in|the nature of trade. Cases of realisation ofinvestments consisting of purchase and|resale,thoughprofitable,areclearlyoutside the domain of adventures in the|nature of trade. In deciding the character|of such transactions several factors are|treated as relevant. Was the purchaser, a|trader and were the purchase of the|commodity and its resale allied to his usual|trade or business or incidental to tit?Affirmative answers to these questions mayfurnish relevant date for determining the character of the transaction. What is the|nature of the commodity purchased and|resold and in what quantity was_ itpurchased and resold? If the commoditypurchased is generally the subject-matter oftrade, and if it is purchased in very large|quantities, it would tend to eliminate thepossibility of investment for personal use,|possessionOLrenjoyment.Didthe|purchaser by any act subsequent to thepurchaseimprovethequalityof|thecommodity purchased and thereby made it|more readily resaleable? What were the|incidents associated with the purchase and|resale? Were they similar to the operations|usually associated with trade or business?|Are the transactions of purchase and salerepeated? In regard to the purchase of the|commodity and its subsequent possession|by the purchaser, does the element ofpride|of possession come into the pictureP A|person may purchase a piece of art, hold itfor some time and tf a profitable offer isreceived may sell it. During the time that|the purchaser had its possession he may|be able to claim pride of possession and|aesthetic satisfaction; and if such a claim1s |upheld that would be a factor against the|contention that the transaction is in the|natureof|trade.Theseand.otherconsiderations are set out and discussed in|judicial decisions which deal with thecharacter of transactions alleged to be in|the nature of trade. In considering these| O decisions,It|wouldbe.necessarytoremember that they do not purport to lay|down any general or universal test. The|presence of all the relevant circumstancesmentioned in any of them may help the|Court to draw a similar inference; but it 1s|not a matter of merely counting the number|of facts and circumstances pro and con;|what is important to consider is_ thelidistinctive character. In each case, it is thetotal effect of all relevant factors and|circumstancesthatdeterminesthecharacter of the transaction; and so, though|we may attempt to derive some assistance|from decisions bearing on this point, we.cannot seek to deduce any rule from them|and mechanically apply it to the facts|before us. 9. The other decisions relied upon by thelearned counsel for the assessee are also to this:effect. ITAT, Lucknow had an occasion to recite|and recapitulate all these decisions in the case ofsaranath Infrastructure P.Ltd., v. ACIT (120 TTJ|216). The Tnbunal has culled out the followingbroader tests forJudging any transaction, whether|falls within the ambit of trade or it is a simplicator|investment. They read as under: (1) What is the intention of the|assessee at the time of purchase of the Shares (or any other item). This can befound out from the treatment it gives to|such purchase in its books of account. |Whether it is treated as stock-in-trade orinvestment.WhethershownIn|opening/ closing stock or shown separatelyas investment or non-trading asset. (2) Whether assessee has borrowedmoney to purchase and paid interest)thereon? Normally money is borrowed to)purchase goods for the purpose of trade|and not for investing in an asset forretaining. (3) What is the frequency of such|purchases and disposal in that particularitemP Ifpurchase and sale are frequent, orthere are substantial transactions in that'item, it would indicate trade. Habitualdealing in that particular item is indicativeof intention of trade. similarly, ratio)between the purchases and sales and theholdings may show whether the assesseeis trading or investing (high transactions:and low holdings indicate trade whereaslowtransactionsandhighholdingsindicate investment). (4) Whether purchase and sale is forrealizing profit or purchases are made forretention and appreciation in its value?—Former will indicate intention of trade and|latter, an investment. In the case of shares|whether intention was to enjoy dividend|and not merely earn profit on sale and 11 purchase of shares. A commercial motive|is an essential ingredient of trade. (4) Whether purchase and sale is forrealizing profit or purchases are made forretention and appreciation in its value?—Former will indicate intention of trade and|latter, an investment. In the case of shares|whether intention was to enjoy dividend|and not merely earn profit on sale and 11 purchase of shares. A commercial motive|is an essential ingredient of trade. (5) How the value of the items has.been taken in the balance sheet? If theitems in question are valued at cost, itwould indicate that they are investments|or where they are valued at cost or marketvalue or net realizable value (whichever 1sless), it will indicate that items in question|are treated as stock-in-trade. (6) How the company (assessee) is.authorizedin|memorandumofassociation/ articlesof|association?|Whether for trade or for investment? _ Ifauthorized only for trade, then whetherthere are separate resolutions of the board|of directors to carry out investments in thatcommodity? And vice versa. |(7) It ts for the assessee to adduce|evidence to show that his holding is forinvestmentor for|tradingandwhatdistinction he has kept in the records orotherwise, between two types of holdings. |If the assessee is able to discharge the|primary onus and could prima facie show|that particular item is held as investment)(or say, Stock-in-trade) then onus would)shift to Revenue to prove that apparent isnot real. — (S) The mere fact of credit of saleproceeds of shares (or for that matter any|other item in question) in a particularaccount or not so much frequency of saleand purchase alone will not be sufficient to 17 say that assessee was holding the shares(or the items in question) for investment. (9) One has to find out what are thelegal requisites for dealing as a trader in)the items in question and whether the)assessee is complying with them. Whetherit is the argument of the assessee that it is.violating those legal requirements, if it is.claimed that it is dealing as a trader inthat item? Whether it had such ansintention (to carry on illegal business inthatitem) since.beginningOLrwhenpurchases were madeP (10) It ts permissible as per CBDT's|Circular No.4 of 2007 of 15[th]June, 2007that an assessee can have both portfolios,|one for trading and other for investmentprovided it is maintaining separate account|for each type, there are distinctive features|for both and there is no intermingling ofholdings in the two portfolios. (11) Not one or two factors out of abovealone will be sufficient to come to a definiteconclusion but the cumulative effect ofseveral factors has to be seen. 10. In the light of above tests, as well as thepropositionpropoundedin|theVATIOUSauthoritative pronouncements, let us examine the|facts of the present case. The assessee has been)Showing rental income from the unsold flats. That|income has been assessed by the Assessing| Officer as a house property income meaningthereby part of the investment has been acceptedby the Assessing Officer as an investment. The|assessee had retained the asset 1.e., plot of land|for more than 15 years. It indicate that he has the|intention to keep the asset for earning long term|capital gain or dividend in any other form. One of|the objection raised by the Assessing Officer isthat assessee had not the means to complete theproject on his own funds. Utilisation of borrowed|funds is one corroborative factor for considering a)transaction in the nature of business, but againfor earning house property income also one can)borrow the funds and use itfor construction. That|is why Section 24 of the Act allow deduction of|interest expenditure etc., The next objection of the|Assessing Officer is that assessee has capitalized|the interest charges on the borrowed funds duringthe pre construction period towards the cost ofasset. If assessee had the intention to earn|business income, he could have booked the flats|for sale, recognize the revenue from such advance|booking and can set off the interest expenditure,| 14 14 but since he has the intention to earn house|property income, therefore, he has to capitalize the|interest expenditure. The assessee has notconvertedhisplotof|landpurchasedOrl04.09.1998 into stock-in-trade. There is nothingwith the Assessing Officer which can create adent in the explanation of the assessee and can|doubt about his intention. The first appellate|authority also has observed simplicitor thatorganized way of entering into such a project ts|clearly with the business intent. But the Revenue|authorities below have failed to demonstrate how|the activity has been carried out in such anorganized way akin to any business activity. 11. Considering the facts and circumstances,we are of the view that Revenue authorities haveerred in treating the capital gain earned by the|assessee as business income. We allow this|ground of appeal in A.Y. 2009-10, 2010-11 and)2011-12 and direct the Assessing Officer to)consider the sale proceeds received by the| 15 assessee as capital gain and determine the|taxable income accordingly. | 12. The assessee had claimed deduction§u/s.54 and 54F of the Act. This claim has been|denied on the ground that income has_ beentreated as a business income. We restore this|1SSUEtothe|fileof|AssessingOfficer forexamination. In case assessee fulfills the|conditions enumerated in Sections 54 and 54F of|the Act, then the Assessing Officer shall grant theexemption.” a |The aforesaid shows that the Tribunal after|considering the respective case of the assessee hasfound that the income derived by the assessee from theflat was treated as income from house _ property.Further the land of the property was retained for thelast 15 years. The property was retained, developed byconstruction of flat and the interest for the loan taken|has also been capitalized and not debited as the revenueexpenditure. The Tribunal on facts has found that the intention was to earn income from house property andthe expenses so incurred for construction, interest ofthe loan etc., are capitalized and the property at theland, at no point of time was treated as stock-in-trade. —Under these circumstances, the Tribunal found that itwas not the business income nor it can be said that theassessee had undertaken an organized activity forconstruction and it can be termed as the capital gainand not the business income. 5 |In our view, as such on appreciation of the|evidence and material on record, the Tribunal has)arrived at a finding on fact that it was a capital gain andnot the business income. We do not find that anysubstantialquestionOT lawwould|arise {Orconsideration as sought to be canvassed. 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