Shri K.Vijaya KUmar vs. JCIT, Special Range 4

ITTA/461/2010HC TelanganaHBHC01019060201023 August 2010Bench: V.V.S.RAO,RAMESH RANGANATHAN4 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the character of a transaction as an adventure in the nature of trade is ultimately a question of fact, but it can become a mixed question of law and fact if statutory guidance is ignored or legal principles are misapplied by the lower authorities. Citing the Supreme Court in G. Venkataswami Naidu & Co., the Court noted that without considering relevant legal principles, it is impossible to decide whether a transaction is in the nature of trade, and any error in applying these principles constitutes an error of law. However, the Court found that the assessee purchased the property in 1993-1994 and sold it after three years for a higher amount, which would typically constitute a capital gain. The claim of further expenditure by way of interest and the return of a loss for assessment year 1997-1998 were not sufficient to bring the transaction within the parameters of an adventure in the nature of trade. The Court agreed with the Assessing Officer and the appellate Commissioner that the transaction was not an adventure in the nature of trade, and therefore, the assessee could not claim it as a business transaction or set off the loss against other income. The appeal was dismissed.

What were the facts?

The assessee, Shri K. Vijaya Kumar, a salaried employee, purchased a property of M/s. Neelam Steels Limited for Rs. 27,50,000/- in a public auction during the financial year 1993-1994. He incurred Rs. 14,31,500/- towards interest on this property until October 1996. He subsequently sold the asset for Rs. 25,71,594/-, claiming the difference of Rs. 16,09,906/- as a business loss and sought to set it off against his salary income for assessment year 1997-1998. The Assessing Officer, by order dated 29.10.1997 under Section 143(1), disallowed the business loss and determined the income at Rs. 5,44,020/-. The assessee's appeal to the Commissioner of Income Tax (Appeals) was dismissed. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal, which was also dismissed. The assessee then filed an appeal to the High Court under Section 260A of the Income Tax Act, 1961.

What were the issues?

1. Whether the transaction of purchasing and selling the property by the assessee, a salaried employee, constitutes an adventure in the nature of trade, entitling him to claim the resultant loss as a business loss, which is a mixed question of law and fact under Section 260A of the Income Tax Act, 1961? Assessee's contentions: The assessee argued that the purchase of the property was a business transaction, or at least an adventure in the nature of trade, and therefore, the loss incurred should be treated as a business loss. He further contended that the transaction could not be treated as an investment for the purpose of capital gains during the relevant assessment year. The assessee relied on the decisions in G. Venkataswami Naidu & Co. v. Commissioner of Income Tax and Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income Tax. Revenue's contentions: The judgment does not record specific contentions from the revenue.

Which sections of the Income-tax Act were involved?

Section 260A,Section 143(1)

AI-generated summary — verify with the full judgment below

THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

ITTA No.461 of 2010

Dated:23.08.2010

Between:

Shri K.Vijaya Kumar.

…Appellant

and

JCIT, Special Range-4, Hyderabad.

…Respondent

THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

ITTA No.461 of 2010

JUDGMENT: (per Hon’ble Sri Justice V.V.S.Rao)

Being aggrieved by the order of the learned Income Tax Appellate Tribunal, Hyderabad Bench ‘B’, in ITA No.1136/Hyd/2004, dated 16.10.2009, the assessee is in appeal under Section 260A of the Income Tax Act, 1961 (the Act). He, inter alia, contends that the assessing Officer, the appellate Commissioner and learned Tribunal failed to properly appreciate the mixed question of fact and law regarding “the business transaction as an adventure in the nature of trade”.

The brief admitted fact of the matter is short. The appellant returned the loss of Rs.10,65,890/- for the assessment year

1997-1998. The Joint Commissioner, Income Tax, by order dated 29.10.1997 processed under Section 143(1) of the Act and finalized the assessment determining the income of Rs.5,44,020/-. Feeling aggrieved, he preferred appeal before the Commissioner of Income Tax (Appeals), Hyderabad. The same was dismissed, aggrieved by which, he filed the appeal before the learned Tribunal. The petitioner is admittedly a salaried employee. Allegedly, he is also engaged in business. During the financial year 1993-1994 he purchased a property of M/s.Neelam Steels Limited, Rajahmundry, from Andhra Pradesh State Financial Corporation in a public auction for Rs.27,50,000/-. He also incurred Rs.14,31,500/- by way of interest for the period from 31.01.1994 to 31.10.1996. He sold the asset for Rs.25,71,594/- and claimed the difference of Rs.16,09,906/- as business loss. In his return he also claimed set off against salary income. As noticed supra, while processing the return, the business loss was disallowed.

Counsel for the appellant submits that the purchase of the property by the appellant was a business transaction, and in any event, it has to be treated as an adventure in the nature of business, and therefore, the appellant is entitled to claim business loss. He nextly contends that the same cannot be treated as investment for the purpose of capital gain during the concerned assessment year. He placed reliance on G.Venkataswami Naidu & Co. v Commissioner of Income Tax[1] and Khan Bahadur Ahmed Alladin & Sons v Commissioner of Income Tax[2].

We have given our anxious consideration to the submission made by the Counsel. We have also perused the orders of the lower authorities as well as the learned Tribunal. As held by the Supreme Court in G.Venkataswami Naidu & Co., “the question about the character of the transaction is ultimately treated as a question of fact”. But, while considering such question of fact if the jurisdictional Officers and the learned Tribunal ignore statutory guidance, if any, it would certainly be a mixed question of fact and law. In this connection we may usefully quote the following from G.Venkataswami Naidu & Co. …Even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, it cannot be ignored that, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly to address itself to the legal requirements associated with the concept of trade or business. Without taking into account such relevant legal principles it would not be possible to decide whether the transaction in question is or is not in the nature of trade. If that be so, the final conclusion of the Tribunal can be challenged on the ground that the relevant legal principles have been

misapplied by the Tribunal in reaching its decision on the point; and such a challenge would be open under section 66(I) because it is a challenge on a ground of law. The same result is achieved from another point of view and that is to treat the final conclusion as one on a mixed question of law and fact. On this view the conclusion is not treated as one on a pure question of fact, and its validity is allowed to be impeached on the ground that it has been based on a misapplication of the true legal principles. It would thus be seen that whether we call the conclusion in question as one of fact or as one on a question of mixed law and fact, the application of legal principles which is an essential part in the process of reaching the said conclusion is undoubtedly a matter of law and if there has been an error in the application of the said principles it can be challenged as an error of law. The difference then is merely one of form and not substance; and on the whole it is more convenient to describe the question involved as a mixed question of law and fact…

Admittedly, the appellant purchased the property of M/s.Neelam Steels Limited during the financial year 1993-1994. He did not sell it immediately, nor did he divide the area and sell it as small pieces as in the case of Khan Bahadur Ahmed Alladin & Sons. He sold the property after a period of three years for higher amount, which would certainly be a capital gain. But, he claimed further expenditure by way of interest thereon and returned a loss for the assessment year 1997- 1998. This itself would not be sufficient to bring the transaction within the parameters of an adventure in the nature of trade. As observed by the Supreme Court in Khan Bahadur Ahmed Alladin & Sons, “it is not possible to evolve any legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction”.

As found by the Assessing Officer and the appellate Commissioner, the transaction is certainly not an adventure in the nature of trade and, therefore, the appellant cannot claim that it is a business transaction nor can he seek to set off the loss against other income. We do not find any reason to admit the appeal. The appeal is, therefore, dismissed.

__________________ (V.V.S.RAO, J)

______________________________ (RAMESH RANGANATHAN, J)

23.08.2010 vs

[1] (1959) 35 ITR 594 [2] (1968) 68 ITR 573

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