Commissioner of Income Tax vs A. Mohammed Mohideen

S. Ratnavel Pandian, Offg. C.J.

At the instance of the Revenue, the following question of law has been referred to this court u/s 256(1) of the Income Tax Act, 1961, for the

opinion of this court :

Whether, on the facts and in the circumstances of the case, the transaction of the assessee of purchasing the property in question under the sale

deed dated April 20, 1963, and selling the same after converting it into small housing plots did not amount to an adventure in the nature of trade

and the surplus arising from the sale of plots could be brought to tax only as capital gains ?

The brief facts of the case are as under :

The assessee, during the relevant period, was a resident of Saigon and assessed in India in the status of a non-resident. During the year 1963, the

assessee purchased a property at Madras which consisted of 22 grounds and 222 sq. ft. with a dilapidated building. In the assessment proceedings

for the assessment year 1970-71, the question arose whether the excess realisation from the sale of the property would be assessable as revenue

profits from an adventure in the nature of trade or merely as capital accretion assessable as capital gains. In the course of the assessment

proceedings for the earlier assessment year, the assessee took up the stand that the profits realised were from an adventure in the nature of trade,

but the correct profits could be ascertained only after all the plots were sold and the entire amount was realised. However, in the next year, the

assessee changed his stand and contended that the entire realisation from the sale of plots represented capital receipt assessable to capital gains in

the respective assessment years. The Income Tax Officer, while examining the claim of the assessee, found that the assessee had advertised for the

sale of the property in the year 1964, though the advertisement also offered the property for lease. Before the Income Tax Officer, the assessee

contended that the property was purchased as an investment either to be used by his family members who were in India or, in the alternative, to

derive income by leasing out the property. The assessee sought to explain before the officer that as he was not able to get any tenant and also as it

could not be used by his family, he decided to sell the property. As there were no bidders for the property, it became necessary to plot it out and

sell it in small house plots so that the assessee could realise the best price from the sale of the property. According to the assessee, there was no

intention on his part to indulge in any business activity in India and the mode of disposal adopted by him was only to realise the best price from the

sale of the property. The Income Tax Officer, not accepting the stand taken by the assessee, took the view that even at the time of purchase of the

property, the assessee could not have intended to make it as an investment as the condition of the building was not habitable and the assessee also

could not have realised any rent from letting out the building. The Income Tax Officer further noticed that the assessee did not take any step to

renovate the building to make it suitable for living by the members of his own family or to rent it out to third parties. On the basis of the materials

before him, the Income Tax Officer concluded that the assessee''s conduct of demolishing the building, converting the entire area into house sites

leaving space for roads and subsequently selling it in small house plots only proved that the assessee earned the profits from an adventure in the

nature of trade. The Income Tax Officer worked out the profits from the sale of plots at Rs. 34,450 and brought them to tax as revenue profits.

The assessee contested the order of assessment before the Appellate Assistant Commissioner. In the appeal, the assessee reiterated his stand

taken before the Income Tax Officer that the purchase of the immovable property in India was only by way of investment and subsequently when it

turned out to be not a wise investment, steps were taken to sell the property and realise the best price possible. It was pointed out on behalf of the

assessee that if the assessee''s intention was only to make a profit, he would not have waited till 1968 to effect the sale of the property. The

assessee placed reliance on the decision of this court in Commissioner of Income Tax, Madras Vs. Kasturi Estates (P.) Ltd., , in support of the

contention that mere realisation of high profits could not be the criterion for holding that the assessee indulged in any business activity. The

Appellate Assistant Commissioner rejected the contentions raised on behalf of the assessee and held that the assessee was engaged in an

adventure in the nature of trade giving rise to revenue profits. The Appellate Assistant Commissioner also distinguished the decision of this court in

Commissioner of Income Tax, Madras Vs. Kasturi Estates (P.) Ltd., , while upholding the assessment made by the Income Tax Officer.

Being aggrieved by the order of the Appellate Assistant Commissioner, he assessee preferred a second appeal to the Income Tax Appellate

Tribunal wherein also the assessee raised similar contentions that the purchase of the property was made with a view to derive income from it and

when it was found that no satisfactory arrangement could be made for letting out the property, it was decided to sell it in small plots and since the

sale of the property in small plots was only with a view to realise the best price, there was no intention on the part of the assessee to venture in any

trading activity. It was further pointed out that neither in the past, nor subsequently, the assessee indulged in any such activity in India which clearly

showed that the sale of plots after conversion into house sites could not be termed a trading activity. It was, accordingly, submitted that the excess

realisation from the sale of the property was assessable only as capital gains, and since the sale of plots had taken place over a period of two

years, the capital gains should be computed separately for the two years. For the Department, it was urged that the assessee, even at the time of

the purchase of the property, was fully aware of the condition of the property, and the subsequent conduct of the assessee in converting it into

house sites and selling them as plots clearly established that he was indulging in an adventure in the nature of trade and, as such, the excess

realisation was rightly assessed as revenue profits. The Tribunal rejected the stand of the Department and held that the Department had not brought

in any material to prove that the assessee, even at the time of purchase of the property, intended to venture in a trading activity and in he absence

of any material to prove that the assessee''s sale transaction was an adventure in the nature of trade, it should be accepted that the mode adopted

by the assessee was only with a view to realise the best price from the sale of the immovable property. The Tribunal also relied on the

circumstances that, neither in the past, nor subsequently, the assessee had ventured in such transactions and, as such, the single and sporadic

instance of sale of plots could not give any inference that the assessee''s activity could be classified as an adventure in the nature of trade. In

support of its conclusion, the Tribunal also placed reliance on the decision of this court in Commissioner of Income Tax, Madras Vs. Kasturi

Estates (P.) Ltd., . In the result, the Tribunal allowed the appeal holding that the excess realisation was assessable only as capital gains and

directed the Income Tax Officer the compute the gains for two years as the sale of plots had taken place over a period of two years.

Against the order of the Tribunal, the Revenue sought for the obtained a stated case to this court on the question of law extracted already.

Before this court, learned counsel for the Revenue contended that the Tribunal was in error in holding that the Department has failed to prove

that the assessee intended to enter into a business venture when he converted the total area of the property into housing sites and sold the plots

giving rise to profits. It was pointed out that even at the time when the assessee purchased the property, he was fully aware of the condition of the

property which consisted of 22 grounds with a dilapidated building and which could not have yielded any income. Great stress was laid by learned

counsel for the Revenue on the fact that the assessee is a non-resident and hence could not have invested so much of money on a property which is

not likely to yield any income immediately. Learned counsel also pointed out that the assessee, except for putting some advertisements in papers,

did not take any step to repair the building to make it habitable. It was further contended that the assessee, immediately after purchase of the

property, advertised it for sale and at no point of time, the assessee made any attempt to let off the property for rent and after four years, the

assessee converted the area into house sites and sold the plots over a period of years. According to learned counsel, all the materials on record

clearly indicate that the assessee, even from the inception, wanted to indulge in an activity which is in the nature of an adventure in trade and, as

such, the excess realisation was assessable only as revenue profits.

The assessee is not represented by any counsel and hence we proceed to consider the objections raised before the Tribunal as the objection

raised before this court. Learned counsel for the Revenue relied on the decision of the Supreme Court in G. Venkataswami Naidu and Co. Vs.

The Commissioner of Income Tax, , wherein the Supreme Court has pointed out that the issue whether a particular activity would give rise to an

adventure in the nature of trade or not would give rise to a mixed question of law and fact and as such, it is open to the High Court to examine the

correctness of the conclusion of the Tribunal. In dealing with the question on the characteristics of an adventure in the nature of trade, the Supreme

Court observed thus (at page 607) :

When section 2, sub-section (4), refers to an adventure in the nature of trade, it clearly suggests that the transaction cannot properly be regarded

as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some

of the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an

adventure in the nature of trade. 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. On the

other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer

represents trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in

the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business, but are

essentially of such a similar character that they are treated as in the nature of trade.

The Supreme Court, after considering a number of decisions of English Courts, held that the nature of the issue is such that no decision even on

similar facts could be taken as a binding precedent. The Supreme Court explained the position thus (at page 609) :

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 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 in 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 make 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 hat 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 the 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 Supreme Court, while dealing with the question as to the relevancy of the intention to resell at the time of purchase, explained the legal

position thus (at page 610) :

In this connection, it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the

purchase made with the intention to resell it at a profit ? It is often said that a transaction of purchase followed by resale can either be an investment

or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judicial

decisions apply the test of initial intention to resell in distinguishing adventures in the nature of trade form transactions of investment. Even in the

application of this test, distinction 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. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and

circumstances in the case, the court may, despite he said initial intention, be inclined to hold that the transaction was not an adventure in the nature

of trade. We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based

solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.

This decision of the Supreme Court is almost considered as a landmark on the subject and all the subsequent decisions applied the ratio of this

decision to the facts of the cases which were before them. However, it is seen that on the basis of the aforesaid decision, the Supreme Court itself,

in later cases, has come to an opposite conclusion from that arrived at in that case.

Learned counsel for the Revenue brought to our notice two later decisions of the Supreme Court in Saroj Kumar Mazumdar Vs. The

Commissioner of Income Tax, West Bengal, Calcutta, and Janki Ram Bahadur Ram Vs. Commissioner of Income Tax, Calcutta, , which support

the stand taken by the assessee in this case. The decision of this court in Commissioner of Income Tax, Madras Vs. Kasturi Estates (P.) Ltd., ,

also supports the stand of the assessee in this case.

There is hardly any need to examine all the decisions of courts when, ultimately, it is said that the question has to be decided on the first

impression of the court on the materials available on record on the facts of that particular case. There is also no need to match he colour of this

case with that of any other case decided earlier by courts. In this connection, we would like to refer to certain observations of the Supreme Court

in K.T.M.T.M. Abdul Kayoom and Another Vs. Commissioner of Income Tax, . The Supreme court observed as follows (at page 703) :

Further, none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and

another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation

to decide cases (as said by Cordozo *) by matching the colour of one case against the colour of another. To decide, therefore, on which side of

the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the

expenditure. The nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general

principles, which are followed in such cases.

Reference may also be made to the observations of Lord Denning in Griffiths (Inspector of Taxes) v. J. P. Harrison (Watford) Ltd. [1965] 58

ITR 328 .

Bearing in mind the principles laid down by the Supreme Court, it is necessary to examine the facts of the present case. Already we have

noticed the contentions urged for the Revenue. The first contention is that the Tribunal is in error in holding that the Department has not established

by evidence that the intention of the assessee in purchasing the property was not by way of investment, but to trade in house sites. It is pointed out

by learned counsel for the Revenue that the Tribunal has not considered all the aspects before holding that it was not established that the assessee

intended to trade in house sites. We are of the view that this does not vitiate the conclusion reached by the Tribunal. In this content. It is worthwhile

to notice the principle laid down by the Supreme Court that the Revenue should establish by positive evidence that the purchase and sale of the

property by the assessee was with the view to earn profits through trading transaction. The circumstances relied on by learned counsel for the

Revenue only throw suspicion on the assessee''s act of purchasing a property which did not immediately yield any income. But there are no

materials to further prove that the assessee intended to indulge in a trading activity. Similarly, fro the fact that the assessee converted the property

into small house sites and after leaving space for roads sold the rest of the plots, the Revenue wanted to draw an inference that the assessee, even

at the time of purchase of the property, had this idea of indulging in an adventure in the nature of trade to make maximum profits. Suppose an

owner of a property finds that the sale of the entire property in one lot is not beneficial and instead enters into an agreement with a civil engineer

and plans to put up flats and after retaining a portion for his own requirement, sells the excess floors to third parties, can it be said that he has

plunged into the waters of trade to make huge profits ? It may be that for realising the maximum price, he undertakes certain acts which any other

owner would undertake; but that by itself would not establish that in such cases, the person concerned would be indulging in a trading activity. In

the above illustration, if the person, instead of putting up the multi-storeyed building in his own plot, purchases a plot and with borrowed funds puts

up the flats and sells them, then it can be said that he is indulging in a trading activity. As pointed out by the Supreme Court in Saroj Kumar

Mazumdar Vs. The Commissioner of Income Tax, West Bengal, Calcutta, , the dividing line between the two types of cases is very thin. The

decision of this court in Commissioner of Income Tax, Madras Vs. Kasturi Estates (P.) Ltd., , has only reiterated the position that in order to hold

that an activity is in the nature of an adventure, there must be positive materials to prove that the assessee intended to trade in such an activity and,

in the absence of evidence, the sale of immovable property consisting of land could give rise only to capital accretions.

As pointed out by courts, the normal inference to be drawn in cases of purchase of land is that it is intended to be an investment, whether it

yields income or not. Numerous authorities were brought to our notice. But it is not necessary to examine all the decisions of the various courts, as

the central theme in all these cases is one and the same. We will, however, mention he cases that are brought to our notice by learned counsel for

the Revenue. Raja J. Rameshwar Rao Vs. Commissioner of Income Tax, Hyderabad, ; P.M. Mohammed Meerakhan Vs. Commissioner of

Income Tax, Kerala, ; Commissioner of Income Tax, Nagpur Vs. Sutlej Cotton Mills Supply Agency Ltd., ; Commissioner of Income Tax Vs.

Mlm. Mahalingam Chettiar (Deceased by LR.), ; CIT v. R. Ramaiah [1984] 146 ITR 507 and Commissioner of Income Tax Vs. V.A. Trivedi, .

This court in Commissioner of Income Tax, Madras Vs. Kasturi Estates (P.) Ltd., explained the test to be applied to such cases thus (at page

600) :

A sale of immovable property may possibly be a trading or commercial transaction, but need not necessarily be so. ... If a land-owner developed

his land, expended money on it, laid roads, converted the land into house sites and with a view to get a better price for the land, eventually sold the

plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realisation of a capital investment or

conversion of one form of asset into another. Obviously, the surplus in such a case will not be trading or business profits because the transaction is

one of realisation of assets in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade.

We are of the view that even in this case, the same position holds good as there is no material to indicate that the assessee ever intended to

indulge in any trading activity.

In the result, we answer the question of law referred to this court in the affirmative and against the Department. Since the assessee is not

represented before this court, we are not awarding any costs in the reference.