C I TEXEMPTIONS JAIPUR vs. J D A JAIPUR

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/2015 DATED 09.05.2016 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. [ASSESSMENT YEAR 2008-09] -------------------- 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 NATH SMT.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:

I.T.A.No.113 of 2016 - 2 - JUDGMENT Vinod Chandran,J. The appeal by the Revenue, is against the order of the Tribunal, alleging that the Tribunal has misconstrued the facts and the law, in confirming the order of the first appellate authority, which found that there is no 'adventure in the nature of trade' involved in the transactions entered into by the respondent-assessee. It is submitted that the Tribunal had failed to look into the facts and had merely extracted the order of the Commissioner (Appeals), in which was noticed the mere submission made by the assessee without any supporting material. The learned Senior Counsel for Government of India (Taxes) also points out that an agreement of sale and a further sale made to the assignee of the intended purchaser has been construed as two separate sales by the Tribunal, which indicates that the Tribunal has not applied its mind properly in considering the essential facts with respect to the transaction. Reliance is also placed on the decision of the Hon'ble Supreme Court in G.Venkataswami Naidu & Co. v. Commissioner of Income

- Tax [(1959) XXXV ITR 594].

I.T.A.No.113 of 2016 - 3 - 2. The question of law framed is re-framed as follows: Whether on the facts and circumstances of the case the Tribunal erred in finding no adventure in the nature of trade when there were purchases made of properties steadily over a period and a transaction of sale carried out in the subject assessment year leading to a clear presumption of 'adventure in the nature 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 Assessing Officer [for brevity “AO”] initiated the proceedings under Section 143(3) of the Act on the basis of the return filed by the assessee showing the amount received on sale of certain properties and claiming exemption from capital gains alleging it to be sale of agricultural land. The AO found that the properties were acquired between 1992-93 to 1997-98 as also a solitary purchase in 2006-07, which were together sold in the subject assessment year to a group of builders. The AO found that the purchases were made with an intention of indulging in sale of such land and there was a sale effected in the previous year to the subject assessment year ie: 2008-09 after holding the lands for about 12-15 years. It is also the submission that the purchases made were for a total consideration of Rs.48 lakhs which on sale generated a huge

I.T.A.No.113 of 2016 - 4 - profit; the total sale consideration being Rs.24 crores in the year 2008-09. Essentially the purchases were made on account of the real estate business engaged in by the assessee and it is an adventure in the nature of trade insofar as the assessee having sold the entire properties even though in one solitary sale transaction. 4. The Commissioner of Appeals, however, found that there is absolutely no evidence brought on record by the AO to establish that the respondent-assessee was engaged in continuous real estate trade. It was also found that the respondent-assessee had been holding the properties and had entered into an agreement for sale with one individual, whose assignee was a builder to whom the sale was eventually made. The first appellate authority found that there is no adventure in the nature of trade in the transaction of the assessee and, hence, there could be no assessment made on that count treating the transaction as a regular business of the assessee. 5. The Tribunal extracted the findings of the first appellate authority and accepted it. We find that the Tribunal had committed a mistake in observing that the properties purchased prior to 15 years was sold to an individual who, later, transferred the property to the builder. However, the mistake so committed would not be so

I.T.A.No.113 of 2016 - 5 - grave as to make a remand especially considering the decision of the Hon'ble Supreme Court relied on by the Revenue in G.Venkataswami Naidu & Co.(supra). 6. G.Venkataswami Naidu & Co. (supra) was a partnership firm, acting as managing agents of one Janardana Mills Ltd., Coimbatore. They purchased four contiguous plots of land ad-measuring 5 acres and 26 cents under four sale deeds executed in October and November, 1941 and June and November, 1942 for a total consideration of little more than Rs.8,700/-. After four years, the said properties were sold to Janardana Mills Ltd. in two lots, wherein the appellant received a sum, far in excess of the purchase price. The Income Tax Officer [ITO] found that there was no evidence to show that the properties were purchased as agricultural land or that he had acquired it as an investment. We immediately notice the finding of the AO that the assessee therein had not purchased the properties as an investment and had purchased it keeping in mind the possibility of immediate sale on profit to the seller who eventually acquired the property. This is also one of the considerations which weighed with the Hon'ble Supreme Court in dismissing the appeal and finding on facts that there is an adventure in the nature of trade in the transactions as dealt with in G.Venkataswami Naidu & Co.(supra).

I.T.A.No.113 of 2016 - 6 - 7. The findings of the Tribunal was also elaborately detailed by the Hon'ble Supreme Court. The Tribunal had found that the first purchase made was in the name of the son-in- law of the Managing Partner of the assessee firm, who was also an Assistant Manager in Janardana Mills Ltd. The subsequent acquisitions were made in the name of the firm itself, which was the managing agent of Janardana Mills Ltd. The properties were also contiguously lying around the premises of Janardana Mills Ltd. The appellant did not derive any income from the lands nor made any improvements in the land. The claim that the purchases were made as an investment was specifically declined by the Tribunal also. The Tribunal also found that 'since the appellant was the managing agent of the mills it was in a position to influence the decision of the mills to purchase the properties from it and that was the 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 or manufacture or any adventure or concern in the nature of trade, commerce or manufacture' is in pari materia in the present IT Act also. It was held:

I.T.A.No.113 of 2016 - 7 - “It is patent that the clause “in the nature of trade” postulates the existence of certain elements in the adventure which in law would invest it with the character of a trade or business; and that would make the question and its decision one of mixed law and fact”. Examining the question whether the consideration would be on facts alone or on the law, the Hon'ble Supreme Court found that the question would be a mixed question of fact and law and framed the question as under: “Whether, on the facts and circumstances proved in the case, the inference that the transaction in question is an adventure in the nature of trade is in law justified?” This is the question we too have to answer in the instant case, 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 which the character of the impugned transaction falls to be considered,the Hon'ble Supreme Court laid down certain specific aspects of a transaction being taken as an adventure in the nature of trade. They were - (1) that the transaction cannot properly be regarded as trade or business, (2) it is s allied to transactions that constitute trade or business, but may not be trade or business itself, (3) it is characterised

I.T.A.No.113 of 2016 - 8 - by some of the essential features that make up trade or business but not by all of them, and (4) even an isolated transaction can satisfy the description of an adventure in the nature of trade. 10. The learned Senior Counsel for Government of India (Taxes) would specifically stress on the finding of the Hon'ble Supreme Court that even an isolated incident could result in, it being characterised as an adventure in the nature of trade. We cannot and do not at all dispute the said proposition. However, it has to be noticed that the Hon'ble Supreme Court had further elucidated the matter in the following manner: “Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction”. Hence, the mere fact that there was an isolated transaction of sale which generated a huge profit to the assessee would not by itself result in the transaction being treated as an adventure in the nature of trade.

I.T.A.No.113 of 2016 - 9 - 11. Distinguishing an investment from an adventure in the nature of trade, it was held so: “If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside 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 it? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject- matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity 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

I.T.A.No.113 of 2016 - 10 - the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received 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 claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the court to draw a similar inference; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character 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".

I.T.A.No.113 of 2016 - 11 - 12. We have to notice that none of these tests have been employed by the AO in finding out an adventure in the nature of trade in the transactions in land entered into by the respondent-assessee. The AO has merely recorded the purchases made about 15 years back and a solitary purchase made in the year 2006-07 as also the sale of properties for the previous year to the assessment year. The AO has also examined other purchases made in different parts of the State and outside the State, again of landed properties by the assessee. It is on this premise alone that the assessee was found to have indulged in adventure in the nature of trade. The AO has not examined whether the properties purchased were lying contiguously or there was any connection between the intended purchaser in the agreement, the respondent-assessee and the ultimate purchaser of the lands which would result in the assessee having specifically anticipated the sale transaction. 13. In considering the specific character of the transaction, we have to again extract from the judgment of the Hon'ble Supreme Court cited by the Revenue, wherein the distinction between an adventure in the nature of trade and an investment simplicitor, was emphasised, by the Hon'ble Supreme Court. We extract the same: “Even in the application of this test distinction

I.T.A.No.113 of 2016 - 12 - will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade”. 14. We find here, that the assessee had made investments in the lands long prior to the sale and had held the land for a considerable period of time; almost 12-15 years. It is an admitted fact that the assessee had not derived any income from the lands and also not made any improvements in the land. However, there can be no adventure in the nature of trade found, since the assessee had not identified the seller long prior and had not purchased the land holdings with a definite and sole intention to sell it.

I.T.A.No.113 of 2016 - 13 - That is, the sale for profit being the intention it is distinguished from an adventure in the nature of trade by the fact that the assessee intended to hold the property and there was no specific sale in contemplation at the time of purchases. On sufficient profits being received the assessee eventually sold the property, which results in an accretion of capital; for which if there is liability to tax on capital gains that would have to be satisfied. As noticed by the Hon'ble Supreme Court, though there was an intention to derive profit on sale of such properties purchased as an investment, the assessee, from the circumstances also, was willing to hold it so that the eventual purchase gives him sufficient profit. This alone would take it out of the definition of adventure in the nature of trade and the solitary instance of sale alone cannot characterise the transaction as an adventure in the nature of trade. 15. From the facts and circumstances arising in the aforesaid case, we are of the opinion that the transaction cannot be considered to be an adventure in the nature of trade and the findings so entered by the AO on meagre details of transactions of purchase long prior and sale together after 12-15 years, as found from the assessment order cannot be justified in law. We also have to notice that at the time of the first appeal, there was a remand report called for;

I.T.A.No.113 of 2016 - 14 - based on which the first appellate authority found that there could be no exemption granted from capital gains as there were no agricultural operations carried on and the sale cannot be deemed to be of agricultural lands. We would not interfere with that portion of the first appellate authority's order, which the Tribunal also has not interfered with. However, we reject the instant appeal, affirming the order of the Tribunal and answering the question of law in favour of the assessee and against the Revenue. The direction to assess capital gains has achieved finality and what remains is only computation in accordance with the provisions of the IT Act; which the A.O will carry out with notice to the assessee, if not already done. Ordered accordingly. Parties are left to suffer their respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE

I.T.A.No.113 of 2016 - 15 - APPENDIX APPELLANT'S/S ANNEXURES: ANNEXURE A: COPY OF ASSESSMENT ORDER UNDER SECTION 143(3) DATED 30.12.2010 FOR THE A.Y.2008-09. ANNEXURE B: COPY OF THE APPELLATE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-II, KOCHI IN APPEAL NO.100/R-1/E/CIT(A)-II/2010-11 DATED 29.07.2011 FOR A.Y.2008-09. ANNEXURE C: COPY OF THE COMPOSITE ORDER OF THE ITAT, COCHIN BENCH IN ITA NOS.224, 311, 559, 561/COCH/2011, 336/COCH/2013 & C.O.NO.03 TO 05/COCH/2012 DATED 06.06.2014 - ITA NO.559/COCH/2011 IN THE ASSESSEE'S CASE FOR A.Y.2008-09. ANNEXURE D: COPY OF MISCELLANEOUS PETITION FILED BY THE DEPARTMENT ON 27.02.2015 BEFORE THE ITAT AGAINST THE ORDER IN ITA NO.559/COCH/2011 DATED 06.06.2014. ANNEXURE E: CERTIFIED PLUS COPY OF THE ITAT ORDER IN MISCELLANEOUS PETITION NO.17/COCH/2015 DATED 09.05.2016. RESPONDENT'S ANNEXURES: NIL. Vku/- [true copy]