PRINCIPLE COMMISSIONER OF INCOME TAX vs SRI T V VENUGOPAL

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 14TH DAY OF JUNE 2016

PRESENT

THE HON’BLE MR.JUSTICE JAYANT PATEL AND THE HON’BLE MR.JUSTICE B.SREENIVASE GOWDA ITA NO.325/2015 C/W ITA Nos.326, 327/2015

IN ITA 325/2015

BETWEEN:

PRINCIPLE COMMISSIONER OF INCOME TAX, C. R. BUILDING, BANGALORE.

DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1), BANGALORE . ... APPELLANTS

(By SRI. JEEVAN J. NEERALGI, ADV. FOR SRI. E. I. SANMATHI, ADV.)

AND:

SRI. T. V. VENUGOPAL, NO.3911, 14TH CROSS, 9TH MAIN CORNER,

2 K. R. ROAD, BSK II STAGE, BANGALORE – 560 070. PAN NO : AAPPV4720M. ... RESPONDENT

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27/02/2015 PASSED IN ITA NO.1523/BANG/2013, FOR THE ASSESSMENT YEAR 2009-2010 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT.

IN ITA 326/2015

BETWEEN

PRINCIPLE COMMISSIONER OF INCOME TAX, C R BUILDING , BANGALORE.

DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1), BANGALORE. ... APPELLANTS (By SRI. JEEVAN J. NEERALGI, ADV. FOR SRI. E. I. SANMATHI, ADV.)

AND:

SRI. T. V. VENUGOPAL, NO.3911, 14TH CROSS, 9TH MAIN CORNER, K R ROAD, BSK II STAGE, BANGALORE -560 070. PAN NO : AAPPV4720M. ... RESPONDENT

3 THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27/02/2015 PASSED IN ITA NO.1524/BNG/2013, FOR THE ASSESSMENT YEAR 2010-11 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT.

IN ITA 327/2015

BETWEEN:

PRINCIPLE COMMISSIONER OF INCOME TAX, C R BUILDING, BANGALORE.

DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(1), BANGALORE. ... APPELLANTS (By SRI. JEEVAN J. NEERALAGI, ADV. FOR SRI. E. I. SANMATHI, ADV.)

AND:

SRI. T. V. VENUGOPAL, NO.3911, 14TH CROSS, 9TH MAIN CORNER, K. R. ROAD, BSK II STAGE, BANGALORE -560 070, PAN NO : AAPPV4720M. ... RESPONDENT

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27/02/2015 PASSED IN ITA NO. 1525/BNG/2013, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING TO DECIDE

4 THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT.

THESE APPEALS COMING ON FOR ADMISSION THIS DAY, JAYANT PATEL J., PASSED THE FOLLOWING:

O R D E R

All appeals are preferred by the Revenue by raising the following substantial question of law:-

“Whether, on the facts and in the circumstances of the case, that the Tribunal is right in law in directing to treat the sale proceeds from sale of flats under the head of capital gain against the factual matrix of the case establishing the adventure in the nature of trade and ignoring the principle of preponderance of probabilities when the evidence clearly points to set off organized activities to earn profit out of business/adventure in the nature of trade which fulfills the ingredients for treating the income of the assessee as business income?”

We have heard Sri. Jeevan J. Neeralgi and Sri. E.I. Sanmathi, learned counsel for the appellants/revenue.

As such it appears that when the matter was considered by the Tribunal, it was observed by the Tribunal at para 8 to 12 which reads as under:- “8. We have duly considered the rival contention and gone through the record carefully. The question, whether assessee made investment in long-term return or it was an adventure in the nature of trade has always posed a difficult situation 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 adventure or concern in the nature of trade or commerce or manufacture”. Thus business is an activity performed by an assessee in an organized manner with an intention to earn profit. It includes any trade, commerce, manufacture or

6 both, i.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 several judicial decisions; and in dealing with it, all the adjudicators had unanimously agreed that no principle can be evolved which would govern all the cases in which the character of impugned transactions falls to be considered. According to the 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 trade or business. It is akin to transactions which would constitute trade or business, but may not be 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 in the waters of trade may partake the character in the nature of adventure in the nature of trade. But there cannot be a single decisive factor. Finding

7 recorded by the Hon’ble Court in para 13 of the judgment explaining the meaning and scope of adventure in the nature of trade is worth to note. It reads as under:

13.

As we have already observed it is impossible 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 inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is 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, 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 date for determining the

8 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 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

9 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.

The other decisions relied upon by the learned counsel for the assessee are also to this effect. ITAT, Lucknow had an occasion to recite and recapitulate all these decisions in the case of Saranath Infrastructure P.Ltd., v. ACIT (120 TTJ 216). The Tribunal has culled out the following broader tests for judging 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

10 shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment.

Whether shown in opening/closing stock or shown separately as investment or non-trading asset.

(2) Whether assessee has borrowed money 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 for retaining.

(3) What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

(4) Whether purchase and sale is for realizing profit or purchases are made for retention 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 the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

(6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa.

(7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, 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 is not real.

(8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase alone will not be sufficient to

12 say that assessee was holding the shares (or the items in question) for investment.

(9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made?

(10) It is permissible as per CBDT’s Circular No.4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.

(11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.

10.

In the light of above tests, as well as the proposition propounded in the various authoritative 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

13 Officer as a house property income meaning thereby part of the investment has been accepted by the Assessing Officer as an investment. The assessee had retained the asset i.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 is that assessee had not the means to complete the project on his own funds. Utilisation of borrowed funds is one corroborative factor for considering a transaction in the nature of business, but again for earning house property income also one can borrow the funds and use it for 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 during the pre construction period towards the cost of asset. 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 but since he has the intention to earn house property income, therefore, he has to capitalize the interest expenditure. The assessee has not converted his plot of land purchased on 04.09.1998 into stock-in-trade. There is nothing with the Assessing Officer which can create a dent in the explanation of the assessee and can doubt about his intention. The first appellate authority also has observed simplicitor that organized way of entering into such a project is clearly with the business intent. But the Revenue authorities below have failed to demonstrate how the activity has been carried out in such an organized way akin to any business activity.

11.

Considering the facts and circumstances, we are of the view that Revenue authorities have erred 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 been treated as a business income. We restore this issue to the file of Assessing Officer for examination. In case assessee fulfills the conditions enumerated in Sections 54 and 54F of the Act, then the Assessing Officer shall grant the exemption.”

The aforesaid shows that the Tribunal after considering the respective case of the assessee has found that the income derived by the assessee from the flat was treated as income from house property. Further the land of the property was retained for the last 15 years. The property was retained, developed by construction of flat and the interest for the loan taken has also been capitalized and not debited as the revenue expenditure. The Tribunal on facts has found that the

16 intention was to earn income from house property and the expenses so incurred for construction, interest of the loan etc., are capitalized and the property at the land, at no point of time was treated as stock-in-trade. Under these circumstances, the Tribunal found that it was not the business income nor it can be said that the assessee had undertaken an organized activity for construction and it can be termed as the capital gain and not the business income.

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 and not the business income. We do not find that any substantial question of law would arise for consideration as sought to be canvassed. The reference were also be made to decision of this Court in ITA No.567/2015 decided on 31.05.2016 wherein similar

17 view on similar facts has been taken into consideration by this Court.

All the appeals are therefore dismissed.

SD/- JUDGE

PMR/-

PRINCIPLE COMMISSIONER OF INCOME TAX vs. SRI T V VENUGOPAL