1990 PLP (Trib (PTD)

The assessee, a Private Limited Company, has filed this further appeal assailing the order of the learned CIT (A) Zone‑1, Lahore dated 22‑7‑1986. The year involved is assessment year 1982‑

83. This appeal was laid for hearing at Karachi before a Division Bench comprising of the then Chairman, Mr. Muhammad Mazhar Ali and Mr. Manzur‑ul‑Haq, Accountant Member. The Chairman was elevated as Judge of the Sindh High Court. The Headquarter Office reported that file of this appeal has been misplaced and as such no order could be passed. By the orders of the Acting Chairman, duplicate file was reconstituted after verification from the departmental record. In this background by order of the acting Chairman this appeal has been fixed for hearing before us. The facts of the case are that on 15th April, 1977 a Private Limited Company styled as NHS Enterprises Limited was incorporated with initial authorised capital at Rs. 10,00,

000. In 1982 the authorised capital was raised to Rs. 50,00,

000. The Memorandum of Association of the company as originally registered contained the following clauses: To carry on the business of construction of buildings, roads and Railways on contract or any other basis, anywhere in the world. To carry on the business of constructing low‑cost buildings, buying and selling lands and buildings and to lease, hire, mortgage or otherwise deal with all kinds of immovable property whether belonging to the company or not, to advance and loan, money to builders and others who may be willing to improve or build any lands and buildings for the construction of dwelling houses, trade premises, public and other buildings and to advance and lend money or assets of all kinds on such terms in connection with all or any of the company's objects or purposes as may be determined." On 30th April, 1977 the company purchased a plot of land measuring 4 kanals 19 marlas and 92 sq. ft. at Egerton Road, Lahore for a consideration of Rs. 24,25,

577. After including the cost of incidental charges, total purchase price was evolved at Rs. 25,98,

301. The present Managing Director of the assessee company namely Ch. Abdul Latif was stationed at Dubai. He being interested to return to Pakistan and to establish some sort of business,. he alongwith his wife, wife's brother and two sister's sons decided to purchase the aforementioned plot of land. The outgoing Managing Director of the Company persuaded to accept suggestion that instead of getting sale of plot through a registered sale‑deed, he should en bloc purchase the shares of the company and in that way ownership of the plot will be automatically transferred without incurring any registration charges. Accordingly on 10‑7‑1978 the deed was completed and in consequence Ch. Abdul Latif alongwith his aforementioned close relatives purchased the entire shares of the company. In new ownership Ch. Abdul Latif became the Managing Director and his relatives as the Directors. After acquiring ownership of the company and its sole asset i.e. plot of land, the new management decided to construct a hotel on the plot of land owned by the company. In furtherance of this intention, following steps were taken: (i) On 2‑11‑1979 a building plan was got prepared from the renowned Architects namely Sarwar Associates, 94‑Ferozepur Road, Lahore. (ii) Correspondence was made with Messrs Sanfrancisco Hilton and Tower California USA for seeking collaboration for construction of hotel and reply was received on 14‑10‑1979. (iii) An application was made for obtaining loan of Rs. 60,00,000 from Messrs Union Bank of Middle East who on 11‑2‑80 declined the request. As the efforts to establish and construct the hotel were frustrated on account of delay of initiation of project and refusal of loan by the Bank, the assessee company abandoned its pursuit and opted to recoup the capital already invested. On 18‑2‑1981 the assessee company sold the plot to Messrs City Bank Ltd. for a consideration of Rs. 62,00,

000. Out of the sale price the assessee company paid Rs.6,65,942 as gains tax to the Provincial Excise Department and Rs. 79,374 to the L.D.A. as building period extension charges. As a result net capital gain available with the assessee company was at Rs. 28,56,

382. In the balance‑sheet this amount was shown as capital reserve and surplus. After raising further loan the assessee company invested this amount in purchase of shares of Fine Gas Company Ltd. and shares in M/s. Gulistan Cinema, Lahore.

4. For the year under review in response to the ITO's notice return was filed declaring loss at Rs. 5,

966. On 11‑5‑1985 the ITO issued a notice to the assessee company stating that clause 2 of the Memorandum of the Association of the Company provided dealings in land as one of the objects and as such the transaction of sale of plot amounted to venture in the nature of trade and the profits earned therefrom were taxable as revenue receipts. The notice was duly replied by the assessee company stating that it had neither any such intention nor was the transaction in the course of trade. It was further stated that sale and purchase of land as one of the objects of the company as stated in the Memorandum of Association was not conclusive factor for determining the assessee's intention. It was suggested that it was mere a capital gain which was not taxable by virtue of entry No. 50 in Fourth Schedule Part‑I appended to the Constitution of Pakistan which prohibits the making of any laws imposing the tax on capital gains on immovable property. Reliance was also placed on Section 27 of the Income Tax Ordinance, 1979 (hereinafter referred to as the Ordinance), according to which capital assets such as immovable property were expressly excluded from the definition of the capital assets liable to tax. According to the assessee company it was a mere casual and non‑recurring receipt which was exempt from tax liability by virtue of clause 65 contained in Part‑I of the Second Schedule of the Ordinance. The assessee's reply did not find favour with the ITO who while relying on Clause 2 of the Memorandum of the Association of the Company added a sum of Rs. 28,56,382 as a revenue receipt representing the surplus from the sale transaction. The ITO did not accept the assessee's plea of construction of hotel on the aforesaid plot because of delay of 2‑1/2 years in commencing the efforts. The assessee company unsuccessfully assailed the assessment before the learned CIT (A) who though agreed with the contention that entry in the Memorandum of the Association was not conclusive but came to the conclusion that there was no evidence. to show the intention of the assessee company to construct hotel at the time of purchase of plot.

6. The assessee's AR contended that provisions of the Memorandum of Articles of Association were not conclusive against or in favour of the company rather the determining factor was whether any actual business of purchase and sale of plots was carried on by the Company. It was further stated on behalf of the assessee that no other purchase and sale of plot was undertaken and the solitary transaction of purchase of plot was inherited by the assessee company at the time of purchase of total shares of the company and at the time of taking over the company had no intention to sell the plot. The assessee's AR further argued that the assessee company made genuine efforts for construction of hotel on the plot but failing therein the plot was sold and the sale price was shown as capital reserve and surplus which ultimately was utilized by the company in purchase of shares of Fine Gas Company and M/s. Gulistan Cinema Ltd. The D.R. in his turn reiterated the reasons as advanced by the assessing officer as well as the first appellate authority. It was stated by the D.R. That there was no evidence to show the intention of the assessee that at the time of purchase, object was construction of hotel. According to the D.R. it was a simple case of earning of capital gain by sale of plot at a higher price.

7. We have heard the arguments of the representatives of the parties at considerable length. After giving due consideration to their submissions, we feel no hesitation in concluding that a solitary transaction can be a venture in the nature of trade provided it is established that the purchaser had the intention of gaining profits after resale of the property. In the facts and circumstances of this case we feel that both the departmental officers erred in taxing the surplus reserve of the assessee company as the revenue receipts. The assessing officer as well as the learned CIT (A) proceeded on erroneous assumption of facts and law on the subject. Basically the ITO fell in error in holding that the assessee company had purchased plot with the intention of making profits of sale and it failed to establish its intention of construction of hotel. In fact the plot was not purchased by the present Managing Director and Directors of the Company rather their predecessors in interest had purchased the plot. The present management had purchased shares of the company in toto and as such the departmental officers erroneously proceeded on incorrect facts.

8. For deciding whether any transaction is in the venture of trade and profits earned therefrom are revenue receipts or not there is no absolute rule to hold that provisions in Memorandum of Articles of Association will determine the commercial nature of the transaction made by the Company. The Memorandum of Association simply specifies the functions which could be undertaken by the Company but it does not furnish the sale criteria to judge what the company actually did. It depends on the facts and circumstances of each case as to what was the real intention of the company in undertaking a particular venture. In this. regard we proceed to examine the proposition: Mr. Kanga in his Commentary of Income Tax Act has stated:‑‑ "The Memorandum of the Association of Company only provide for objects either wider than the purpose it has actually as in view. A company income to construct a bridge over a waters of Leath of Bale will probably take powers wide enough to cover the bridges of the Bosphorus," and "In short the provisions of the Memorandum and Articles of Association are not conclusive against or in favour of the company for the question is not what business the tax‑payer professes to carry on but what business he actually carries on." In 5 TC 258 (words missing) "No doubt power was also taken to sell any part of the undertakings and property of the company, I assume that promoters of syndicate had in view from the first that it might become expedient to do so. What I am unable to infer from this fact takers alongwith ultimate sale of the entire assets of a new company is that it was part of the trade syndicates to purchase and sale lands." In this case it was held that profits of sales were mere appreciation of capital. In 35 TC 196 where a company in its Memorandum of Association had taken the powers to buy and sell heritable properties and the company had bought the stock in trade of speculative builders, question arose as to whether the profits from sales of plots by this company in 1944‑49 were taxable. It was held that there was no evidence on which the Commissioner was entitled to find that sales fetched by the company were made in the course of trade carried on by it. As such the contents of an entry as to the sale and purchase of land in the Memorandum of the Association was not conclusive to hold that any dealing in transaction in land by the company concerned had to be constituted as a venture in the nature of trade. In fact the company has to act through its agents whether Directors or anybody who are men of flesh and bones and who act as human beings and their intention has to be ascertained through physical manifestations. In nutshell the result is that mere narration of sale and purchase of land as one of the objects of the company in itself is not sufficient to hold that the company undertook any transaction in the nature of trade.

9. The question naturally arises as to what is the real test to determine the issue. The real test is the dominant intention of the concerned party at the time of purchase and sale of the land in question. In (1975) 31 Tax 7 Trib an assessee had purchased a piece of land occupied by Govalas. The assessee intended to establish a factory of sewing machines and plot measuring 10 kanals 10 marlas was purchased on 19‑6‑1970 for a sum of Rs.1,50,

000. The Health Department refused to grant NOC as installation of factory was likely to result in unhygienic atmosphere. The assessee carved out of the plots of the purchase land and sold the same. The assessing officer taxed the surplus in two years. The Tribunal held that there was no evidence and intention of the assessee to make profits from the purchase of land, It was held that if a person buys land with no intention of selling and ultimately finds it convenient to sell the same even though by parcelling it out into different plots and also laying out roads with other amenities, with a view to get good price it could not be said that the activity which he undertook has any element of trade, commerce or business and it cannot therefore be said that it is an activity in the nature of trade. The Tribunal concluded: "The post‑haste and the complusion 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 off 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 parcelling it out into different plots, and also 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 complusion of realizing the blocked 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 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 element. Since these two elements are absent here, the gains that the appellant has made would be casual gains or capital gains and nothing else." In (1984) 49 Tax 50 (Trib.) a plot of land measuring 2,306 sq. yards was allotted to an assessee by Chief Minister of Sindh on 6‑6‑1975 at reserve price of Rs. 4,61,

256. The allotment of the plot was for specific purpose of constructing a cinema house. Instead of constructing a cinema the assessee sold the plot for Rs. 25,36,

963. After excluding the cost of land and interest paid to the bank, the ITO determined Rs. 20,20,351 as the assessee's revenue receipts. The first appellate authority annulled the assessment holding that the isolate transaction undertaken by the assessee could not be treated as an adventure in the nature of trade. The Tribunal held that the transaction in question was not a venture in the nature of trade and the profits earned therein by the assessee were not liable to tax as business income or profits. In Californian Copper Syndicate Ltd. v. Harris (5 TC 159) Lord Justice Clerk held: "It is quite a well‑settled principle in dealing with question of assessment of Income‑tax, that where the owner of an ordinary investment chooses to realise it and obtains greater price for it than he originally acquired it at the enhanced price is not profit in the sense of Schedule‑D of the Income Tax Act, 1842 assessable to income tax." In Commissioner of Inland Revenue v. Livingston & others (11 Tax Cases 538) Lord President (Clyde) observed:‑‑ "If the venture was one consisting simply in an isolated purchase of some articles against and 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 648 it was concluded:-- "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 anything 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." The Supreme Court of India in (1959) 35 ITR 594 has thrown sufficient light on this issue holding: ?"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 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 in the nature of trade from 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 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 a 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."

11. In the light of the above discussion and taking into consideration the circumstances of this case the solitary issue requiring determination is whether the transaction undertaken by the assessee company was an adventure in the nature of trade. Decision of this issue mainly depends on the intention of the assessee company at the time of purchase. Findings of the departmental officers on the involved issue are untenable as the following facts fully establish beyond any shadow of doubt that at the time of purchase the assessee company had no intention of sale: (a) That the plot was purchased by the previous management of the assessee=``V' company on 30‑4‑1977 whereas the present management had purchased the entire shares of the company styled as hi/s. NI‑IS Enterprises (Pvt.) Ltd. on 10‑7‑1978. At the time of purchase of entire shares the assessee company had no intention to sell the plot. (b) At the time of purchase of the plot the present management of the assessee company was out of Pakistan and it landed on the scene in 1978. The present management had come from Dubai to undertake some project in Pakistan and the fact (words missing) that it had no intention of sale. (c) The assessee company unsuccessfully made efforts for construction of a hotel and period of about two years was spent in this process. After failure, sale of plot on 18‑2‑1981 i.e. after a gap of about four years establishes that at the time of purchase of shares of the company, there was no intention of making profits merely by sale of the plot. (d) After sale of plot the entire sale price shown. as capital reserve/surplus was invested in purchase of shares of M/s. Fine Gas Co. Ltd., and M/s. Gulistan Cinema Ltd. If the intention of the assessee company was to enter into real estate business after sale of plot it could very conveniently invest the sale price in purchase of another plot. This could have rather given higher margin of profit to the assessee company as compared to purchase of shares of two limited companies. (e) If the assessee company had intention of trading in land it could have fetched much higher price by undertaking sale after making sub‑plotting. The fact of sale of the entire plot establishes that sale was at a lesser margin of profit as compared to sale of sub‑units of the plot. (f) Since from the date of purchase of shares of the assessee company on 30?-4‑1977 neither any business was undertaken by it nor did it enter into transaction of any sale/purchase of plot. In these circumstances, the isolated transaction undertaken by the assessee company establishes that it had no prima facie intention of dealings in real estate business and in the facts and circumstances of this case there does not exist any evidence/proof to hold the isolated transaction undertaken by the assessee company as an adventure in the nature of trade.

12. As a result, we modify the orders of the departmental officers holding that the assessee company had no intention of making profits by purchase of shares of the company and the solitary transaction of sale of plot which happened to be the exclusive asset of the company was not an adventure in the nature of trade and as such profits earned therefrom were not liable to tax as business income. The assessee's appeal succeeds accordingly. M.BA./881/T ????????????????????????????????????????????????????????????????????????????????????? Order accordingly.