1989 PLP 460 (PTD)

MIAN ABDUL KHALIQ (JUDICIAL MEMBER).--1n this further appeal relating to charge year 1981-82 the assessee, an individual, derived income from interest and share from a registered firm: The assessee's declared income of Rs. 55,874 comprised of share from registered firm styled as M/s. Pak Punjab Octroi Company at Rs.2,405 and interest at Rs.53,

469. The I.T.O. accepted the assessee's declared interest income but adopted share income from the firm at Rs.5,000 subject to completion of assessment to the firm's case.

2. The assessee in her wealth reconciliation statement declared profit on sale of 196 kanal land at Jhang at Rs.20,84,

500. This profit was arrived at as under Sale value Rs.21,00,000 Less purchase value Rs. 15,500 Gain on sale of land Rs.20,84,500

3. The solitary issue involved in this appeal is taxability or non-taxability of the declared gain on sale of land. The relevant facts for decision of this issue are that in 1965 the assessee had purchased agricultural land measuring 196 Kanals from the Rehabilitation Department for a consideration of Rs.15,

500. As per Khasra Girdawari produced before the assessing officer, the land throughout remained in cultivation. The assessee declared agricultural income from this land alongwith her other ancestral agricultural land measuring 1435 acres situated in Mianwali. Throughout her life the assessee had sold only aforesaid 196 Kanals of land. On 11-5-1980 the assessee entered into an agreement for sale of 196 kanals of agricultural land situated at Jhang with one Sh. Siraj Din s/o Sh. Nizam Din for total consideration of Rs.21,00,

000. An advance of Rs.1,00,000 was obtained at the time of execution of sale agreement and the balance amount was to be paid by Mr. Siraj Din at the time of registration of sale-deeds. During the year under review the entire land was sold in the form of 132 plots. The sales were through registered sale-deeds.

4. During the course of assessment proceedings, the I.T.O. felt that the assessee had purchased this land in 1965 and its sale made in 1980 amounted to an adventure in the nature of trade and hence income accrued therefrom was taxable. In response to the I.T.O's query, the assessee on 30-4-1984 filed written explanation stating that she was basically an agriculturist and the- land in dispute was purchased for agricultural purposes and it remained under cultivation throughout. Copy of Khasra Girdawari was produced in support of this assertion. It was also stated by the assessee that neither in the year 1965 the land was purchased for sale on profit nor sale:/purchase of land was her profession: The assessee in her letter mentioned the following two reasons which tempted her for sale: (i) that the land having been surrounded by Abadi had become unprofitable for agricultural purposes. (ii) that there was imminent threat of acquisition of the said land by Jhang Development Authority for construction of some colony. The I.T.O. was not satisfied from the assessee's explanation and on 26-5-1984 he issued notice under section 62 of the income Tax Ordinance, 1979 (hereinafter called the Ordinance) seeking the assessee's explanation on the issue involved. Relevant portion of the I.T.O.'s notice runs as under:- "Perusal of your wealth reconciliation shows that you have declared profit on sale of land amounting to Rs.20,84,

500. At the time of hearing, it was stated that you sold your property situated at 196-11, Jhang City after sub-dividing your land and selling them as plots. Such transactions amount to adventure in the nature of trade. You have not offered income of Rs.20,84,500 for tax and claimed it exempt. I am of the view that since the transactions made by you amount to adventure in the nature of trade, the said income is taxable On 26-5-1984 the assessee submitted the following reply:- "As per agreement to sell already on record it is clear that the assessee sold the agriculture land to one person. The reason of sale was already explained vide our letter dated 30-4-1984. The assessee is not engaged in land (sale/purchase) business and this is the first transaction in the life of the assessee for which she was forced as the land was no longer profitable for agriculture:" The I.T.O. discarded the assessee's explanation holding that copy of agreement of sale furnished by the assessee could not be deemed to be legal piece of evidence for purchase/sale of land. The I.T.O. was of the view that the agreement to sell was simply binding on the signatories and it did not affect the transfer of `property. It was concluded that the document furnished by the assessee did not establish that the sale was actually effected. The assessee's explanation regarding the land to be in cultivation till the date of sale agreement was discarded by holding that it was an extraneous submission. The I.T.O. was of the view that the assessee had purchased the land in the vicinity of the city and later on when it came within the limits of Municipal Committee she sold the same at a higher price resulting in substantial margin of profit. The I.T.O. laid a good deal of emphasis on the intention of the assessee for earning of profits as the land was not sold for agricultural purposes rather the sale was for residential and construction purposes. In the assessment order the I.T.O. relied on a decision in the case of Mohammad Uthman v. C.I.T: 1957-1480 (Citation of this case is not clear). Following portion from that case was reproduced in the assessment order:- "Capital gain arising from agricultural land is exempt from tax as capital gain but to order to qualify for such exemption, it is not enough that the land was once agricultural, it must be agricultural land at the time of sale." On these basis, the I.T.O: concluded that the assessee had sold her land when it had lost its character as agricultural land. Gain of Rs.20,84,500 accrued to the assessee from sale of land was held to be an adventure in the nature of trade and as such taxable at the assessee's hands. Making addition of that amount to the interest and share income, the assessee's total income for this year was determined at Rs.21,42,969.

5. On appeal, the first appellate authority mostly repeated the I.T.O's order alongwith query made in the notice issued under section 62 of the Ordinance and the reply filed by the assessee. The first appellate authority also laid a good deal of stress on the fact that the assessee had not furnished copies of the sale agreements made with the purchasers of plots. It was admitted by the first appellate authority that since purchase of land in 1965 it was used for cultivation and the assessee has been regularly declaring agricultural income therefrom. The learned C.I.T. (A) was of the view that use or non-use of land for agriculture: purposes at the time of its sale was immaterial. The reason assigned for this conclusion was that the assessee's land fell within the municipal limits and as such it had lost its agricultural character. The I.T.O's findings were confirmed by the first appellate authority on the following basis:. (a)??????? There is reason to believe that the land situated in the vicinity of Jhang City and purchased by a distant person from the Government Rehabilitation Department was not acquired for agricultural purposes although the same was used for cultivation as per revenue record. (b)??????? The land was got sub-divided and sold as plots after it fell within the Municipal City limits. (c)??????? The land had lost its character as agricultural land when it came within the Municipal limits. (d)??????? The assessee appellant is keeping back vital information in the nature of sale-deeds so that the only inference that can possibly be drawn is that the transaction clouded to mystery represented an adventure in the nature of trade. We have heard the representatives of the parties at considerable length. The admitted facts are that the assessee owned 1435 acres of ancestral land in Mianwali. In addition to that the assessee had purchased 196 Kanals of land in Jhang in 1965 and till its sale in 1980 this land remained under cultivation. It is also an established fact that the assessee had not sold any piece of land in her life and sale/purchase of land has never been the profession of the assessee. The solitary issue requiring determination is whether the transaction of sale made by the assessee through sale agreement dated 11-5-1980 amounted to an adventure in the nature of trade and profits earned therefrom were taxable as revenue receipts. For resolving this issue the real test is the dominant intention and conduct of the concerned party. It has to be seen that at the time of purchase/sale of land what was the intention of the assessee. The tribunal dealt with this issue in 1975 P T D (Trib.)

6. In that case the assessee had purchased land which happened to be in possession of Gowalas. The assessee therein intended to establish a factory of sewing machines/motorcycles and spare parts. Plot of land measuring 10 Kanals 10 Marlas was purchased by the assessee in that case in 1970 for a sum of Rs.1,50,000, The Health Department turned down the assessee's request for grant of NOC vide letter dated 7-7-1970 as installation of factory was likely to result in an unhygienic atmosphere. The assessee failed to take possession of the land who sold the same by making sub-plotting. The Department taxed the surplus as adventure in the nature of trade in the assessee's hands. Before the Tribunal the D.R. contended that the facts and circumstantial evidence on record established that the purchase of plot by the assessee in a residential area was motivated by no consideration other than that of making a profit by subsequent sale thereof. The D.R. had pleaded that the dominant intention as could-be seen from the series of acts in these transactions clearly established that the appellant had at the time of acquisition of plot as well as at the time of its disposal profit-making motives. The Tribunal repelled the submissions of the D.R. holding:- "After considering the facts of the case, we are of the opinion that the Income-tax Officer, as a matter of fact, proceeded on wrong presumption in this case. He first held that the intention to make profit was discernible from the purchase of this land in a residential locality. He then found support for his conclusion from the absence of any attempt on the part of the appellant to establish that the land was acquired genuinely for setting up a factory. These presumptions have been demolished, admittedly before us, as the appellant has produced a letter from the Health Department dated 7th July, 1970 clearly showing that the permission to set up heavy industry on this plot had been refused. The appellant was in business and wanted to set up his sewing machine factory on that plot and it was with this aim, that he invested a substantial amount of Rs.1,50,000 in this venture, otherwise, with a lucrative business that he was carrying on, there was no fun in investing a substantial chunk of his capital in purchasing this plot of land. The very presence of the milkmen and their herd of cattle on this plot clearly shows the agricultural nature of the land and the adverse possession from which it was difficult for the appellant to remove the occupants but he still took this risk in order to advance his business. Therefore, so far as the intention at the time of acquisition is concerned, it is clear that it was not that of making a profit. It was only after the scheme was frustrated by the Health Department, that the appellant decided to retrieve his blocked capital. This could be done but here again the appellant found difficulty getting one investor and at the same time, at the back of his mind, the same fear of another adverse possession. by the same milkmen from whom he had been able to obtain vacant possession of the land with difficulty was starring him in the face. The only alternative left for him was therefore to dispose of whatever the part of the land it could sell and this was an easy method he resorted to dispose of the land piecemeal even without obtaining any residential plan sanction from the concerned authorities. The post-haste and the compulsion in the disposal of this plot is apparent from the fact that, within almost two months of the refusal from the Health Department, the appellant had sold of the first piece of this very land. The intention, therefore, at the time of realization of this asset-again appears to be a compelling necessity to retrieve blocked funds. In doing so, if the appellant made gains, these could be nothing but capital gains as has been held in the case relied upon by the learned counsel for the appellant. In that case, it was clearly held that if a person buys land with no intention of selling it and ultimately finds it convenient to sell the same, even though by parceling it out into different plots and also by laying out roads and providing other amenities with a view to get more price, it cannot be said that the activity which he carried on has any element of trade, commerce or business and it cannot, therefore, be said that it is, an activity in the nature of a trade. In the cases on which the departmental representative has placed reliance the dominant motives at the time of purchase and sale were found to be those of making profits and if we were to find out the same to be present here, our conclusions would have been the same but as we have stated above, the acquisition of plot was for the purpose of setting up a factory. The disposal was necessitated by the compulsion of realizing the locked funds. The methods adopted in this connection could be different. The admitted position is that this is the sole purchase and sale of land and that the appellant, never before or after, has indulged in real estate business. Therefore, in order to bring the case within the extended definition of "business" by way of adventure in the nature of trade the presence of the two dominant intentions at the time of acquisition and at the time of its disposal is a necessary elements. Since these two dominant intentions at the time of acquisition and at the time of its disposal are necessary elements. Since these two elements are absent here, the gains that the appellant has made would either be casual gains or as capital gains and nothing else. The actions of the Income Tax Officer for these two years in treating the two surpluses as revenue gains cannot be sustained. In the case on which the learned counsel for the appellant has relied upon, the land purchased was disposed of after a considerable period of time but still, in almost the same manner as in the present case, but their Lordships held that the activity could not constitute within itself any element of trade, commerce, or business and as such no adventure in the nature of trade should spring out of the same; In our opinion this was clearly a case where the transaction was one of an investment of surplus capital with the intended projection of setting up a factory and the profits arising from the sales were, therefore, nothing but of a casual and non? recurring at recurring nature. There: was no speculation involved at the rime of the purchase of the land nor the facts show the disposal was with that end in view. The appellant was selling the property only with a view to converting back his investment into money and was not acting like a speculator who purchases property with a view to sell it and make profits out of it. Hence, on this issue, the appellant must succeed:' The second test for decision of this issue is the subject-matter of transaction. The land purchased by the assessee in 1960 from the Rehabilitation Department was admittedly an agricultural land. It had been in cultivation throughout as is evident from the copies of Khasra Girdawari. The fact that the land was continuously used by the assessee for agricultural purposes for a period of 25 years is in itself sufficient to hold that the same was not a commercial commodity. It can safely be held that transaction made by the assessee in sale of land after 25 years cultivation could not be a transaction of commercial character. In (1978) 37 Tax-236 it was held: "Land is not a commercial commodity. Land alone is also not a trade in itself. Normally the purchase of land represents investment of money in hand. Transaction of purchase of land could not be assumed to be a mode of venture in the nature of trade. An investment in purchasing is also made with a view to corning return on such investment. Therefore, the mere fact that a person invested money for the purposes of reselling whenever a suitable opportunity arises does not give a sufficient ground to hold that the transaction is in the nature of trade." While arriving at this conclusion, reliance was placed on the verdict of Supreme Court given in the case reported as (1959) 35 I.T.R. 59.1 and (1965) 57 I.T.R. 21-' (SC). Therein it was held: "Normally the purchase of land represents investment of money in land. There are cases of commercial commodities but a transaction of purchase of land cannot be assumed to be without a mere venture in the nature of trade." Reliance was placed on the observations of Lord Buck Master dealing with the controversy in Leeming v. Jones (1930) 15 TC 333 wherein it was observed: "An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value, if it does so rise, its realization does not make it income." Dealing with the same question Lord Dunedin observed as under:- "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments but per se it leads to no conclusion whatever." Both these observations were subsequently referred to and relied upon in the decision of House of Lords in Commissioner of Inland Revenue v. Rinhold (1953) 34 TC 389 and in Janki Ram Bahadar Ram v. Commissioner of Income?tax reported as (1905) 57 I.T.R. 21 (SC) it was observed: "It may be emphasised from an analysis of these cases with a profit motive in entering into a transaction is not decisive, for receiving a higher price. The transaction could not be taken to be a trade, It was proved (hat due to influx of a large number of refugees and consequent demand of houses, the assessee realised enhanced value of his investments. Merely because permission for development was obtained from the Town Planner and the land was thereafter parceled out in plots the surplus money realised could not be regarded as profits from business." Another aspect of-the matter is whether a solitary transaction undertaken by an assessee in the case of single sale or isolated transaction can be termed to be dealings in the nature of trade. This issue came up for decision before the Tribunal in the case reported as 1984 P T D (Trib.)

127. In that case a plot of land was allotted to the assessee by the Government on 6-6-1975 for a consideration of Rs.4,61,256.The allotment was for specific purpose of constructing of Cinema House. Instead of constructing Cinema House, the assessee therein sold the plot vide sale agreement dated 6-6-1979 for a consideration of Rs.25,36,

963. The I.T.O. held in that case that the adventure of sale of land was in the nature of trade and not an investment of capital making the assessee liable to payment of tax on the profits carried therefrom. On appeal finding of the I.T.O. was reversed by the first appellate authority holding that the isolated transaction undertaken by the assessee could not be treated as an. adventure in the nature of trade. The Tribunal dismissed the departmental appeal holding inter alia that it is also a well-settled proposition of law that the onus of proof that an isolated transaction constitutes an adventure in the nature of trade is on the Department. In Commissioner of Inland Revenue v. Ligingston and others (11 Tax Cases 538) the Lord President (Clyde) observed; "If the venture was one consisting simply in an isolated purchase of some articles against an expected rise in price and a subsequent sale, it might be impossible to say that the venture was in the nature of trade; because the only trade in the nature of which it could participate would be the trade of a dealer in such articles and a single transaction falls as far short of constituting a dealer's trade as the appearance of a single swallow does of making a summer. The trade of a dealer necessarily consists of a course of dealing, either actually engaged in or at any rate contemplated and intended to continue." In 14 Tax Cases at page 408 Lord Clyde LP again observed: "A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property if that is all, that is involved in the plunge may easily fall short of any thing in the nature of trade. Transaction of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances." In (1959) 35 I.T.R. 594 Supreme Court of India held as under: "In this connection it would be relevant to refer to another test which is some times applied in determining the character of the transaction. Was the purchase made with the intention to re-sell it at a profit? It is often said that a transaction of purchase followed by re-sale 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 the initial intention to resell in distinguishing adventures m the nature of trade from transaction 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 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 off-set 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 the 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." The last factor in this case is sale of the land by the assessee after a long interval of 15 years. In (1978) 37 Tax 236 it was held: "That in considering whether a transaction amounts to an adventure in the nature of trade, it is not merely a question of 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 determine the character of the transaction." Similar view was taken in the case reported as (1959) 351 TR 59:-- "In this connection it would be relevant to refer to another test which is some times 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 the initial intention to resell in distinguishing adventures in the nature of trade from transaction 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 and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in 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 off-set 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 ease the Court may, despite the 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 transaction in the context cannot be based solely on the application any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances." Under these circumstances we feel no hesitation in concluding that both the departmental officers erred in holding that solitary transaction of sale of 196 Kanals of agricultural land undertaken by the assesses was venture in the nature of trade and profits earned therefrom were taxable as revenue receipts. We would also like to observe that both the departmental officers fell in error in holding that agreement of sale made by the assessee on 11-5-1980 with Sh. Siraj Din did riot tantamount to sale. Findings of the departmental officers on this issue were self contradictory as on one hand sale made by the assessee on the basis of that transaction has been held to- be an adventure in the nature of trade whereas on the other hand, no authenticity has been attached to that agreement. We would also like to bring on record that the departmental officers failed to establish the assessee's intention of purchase of land in 1965 for sale after 15 years in the hope of earning of any profits. The other considerations mentioned by the departmental officers in the form of location and use of the land were totally extraneous considerations as the assessee being owner was the best judge to hold or sell its property according to her best wisdom. The departmental officers having accepted the sale of land, the mode of sale was totally immaterial. The upshot of the above discussion is that the impugned orders of both the departmental officers are vacated holding that the transaction in question undertaken by the assessee was not a venture in the nature of trade and the profits earned therefrom were not liable to tax as a business income or profits The appeal filed at the instance of the assessee succeeds accordingly. M.BA./583/T.????????????????????????????????????????????????????????????????????????? Order accordingly.