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Petitioner: Khalid Hussain and Muhammad Amin Butt for Appellant. VS Respondent: Sultan Mansoor and Muhammad Jehangir Khan, D.R. for Respondent.
Court Name: Income Tax Appellate Tribunal Judge(s): Junejo M. Iqbal, Sayed Amjad Hussain Bokhari Title:Khalid Hussain and Muhammad Amin Butt for Appellant. vs Sultan
Mansoor and Muhammad Jehangir Khan, D.R. for Respondent. Case No.: I.TA. No. 222(IB) of 1989 Date of Judgment:1991-08-29 Reported As: 1991 PTD (Trib.) 786 Result: Appeal accepted Judgment ORDER SAYED AMJAD HUSSAIN BUKHARI (JUDICIAL MEMBER).----This appeal relating to the charge year 1987-88 is directed against the order dated 31-3-1990 whereby the learned Commissioner of Income-tax (Appeals), Rawalpindi rejected the appeal filed against the assessment order, dated 18-6-1989. A brief account of the facts of the case is that the assessee-appellant is an individual. He filed a return for the assessm ent year under consideration to declare loss of Rs.26,730 as follows:-- Income declared Exemption claimed (i) Income from salary Rs. 48,909 (ii) Profit from sale of Plot No. 54 Blue Area, IslamabadRs. 59,09,0000 (iii) Interest from P & L accountRs. 75,069 Rs. 60,32,978 2. The Assessing Officer processed the case under section 62 of the Income-tax Ordinance, 1979 (hereinafter called the Ordinance) and finally determined a gain of Rs.59,09,000 accruing from the sale of commercial Plot No.54 (hereinafter to be referred to as the plot), Blue Area. Islamabad. On appeal, the learned C.I.T.(A), Rawalpindi set aside the assessment order for fresh determination, vide his order, dated 20-1-1989. Thereafter, a fresh notice under section 62 along with a notice under section 61 of the Ordinance was issued to the appellant by the Income-tax Officer. The
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learned Authorised Representative of the appellant, Mr. Noor Ali Ismaili, I.T.P. Appeared on 21-8-1988 before him and tiled a reply to the notice issued under section 62 of the Ordinance, explaining the position regarding the gain of Rs.59,09,000 as under:-- (1) The gain of Rs.59,09,000 which arose on sale of plot is of casual nature, there is no element of adventure in the nature of trade and the same is exempt under clause (65) of the Second Schedule to the Income-tax Ordinance, 1979. (2) Initial investment of Rs.6,70,000 was made by taking loan from: (a) Justice (Retd.) Muhammad Daud Khan, Resident of Tattar, Tehsil Mansehra, District Abbottabad. Rs.2,80,000 (b) Ltd.-Col. (Retd.) Malik Aman, (PA) No. 4663) Deputy Finance Adviser, Defence Production Division Pak. Secretariat No. 2, Rawalpindi, 02-30-0494448. Rs.2,40,000 (c) Lt.-Col. Muhammad Younis, Housing Directorate, GHQ, Rawalpindi, 02-11-0309261 Rs.50,000 (d) Muhammad Amin Khan s/o Abaidullah Khan Garri Habib Ullah Tehsil and District Mansehra Rs.50,000 (e) Mst. Yasmin Ayaz w/o Muhammad Ayaz Lt.-Col. P.A. No. 7115, Garri Habib Ullah, Tehsil and District Mansehra.Rs. 50,000 Total: Rs.6.70.000 The I.T.O. Accepted the source of investment explanation after examining the creditors named by the appellant. 3. On examining the case, the ITO noted that the appellant had purchased the plot for a sum of Rs.11,94,666.67, on 30-9-1981. An advance amount of Rs.6,70,000 was paid by the appellant to the C.D.A. At the time of allotment of the plot. The balance price of Rs.5,24,666 was deposited by the appellant with the C.D.A. Out of the full price received by him from Ch. Mushtaq Hussain to whom the plot had been sold for a consideration of Rs.74,00,000. A specific notice under section 62 of the Ordinance, was therefore, sent to the appellant in order to confront him with the situation, in the following manner:-- "You sold plot No. 54 Blue Area Islamabad between (F.6 & G-6) measuring 48" x 224 i.e. 1194-6/9, sq. Yards for Rs.74,00,000 on 14-7-1986 and claimed Rs.59,09,000 profit arising from its sale as exempt from Income-tax. The profits arising from the sale proceeds of abovementioned plot are taxable as adventure in the nature of trade and not exempt under clause (65) of tire Second Schedule to the Income-tax Ordinance, 1979 for the following reasons:-- (i) You had applied for allotment of a `Commercial Plot' which was allotted to you on 30-9-1981 and confirmed vide CDA's allotment letter No. CDA/EM-27/ (1077)/75/85, dated 3-1-1982. Para. II of C.D.A's. Allotment letter already states that the plot was meant for the construction of five-storey building for commercial purposes (ground floor) and upper floor for clinic and residential apartments. The very fact that the plot was commercial one signifies that you wanted to earn profit from the sale of shops and apartments and the plot was not allotted exclusively for making a clinic. (ii) You did not have the means to pay for the plot, as such funds were raised by borrowing from relatives and payments were made to the CDA accordingly, including the balance payment which was paid out of advance received from the purchase of plot. (iii) Earlier you had taken the plea that you applied for loan to IDPB and UBL for setting up of clinic, which were refused on legal grounds. The plot was allotted to you in September, 1981 whereas you applied to IDBP on 10-2-1984 which indicates that you were certainly not serious in setting up of a clinic. (iv) Para. II of CDA's letter mentioned above is reproduced:--
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`The plot is meant for the construction of five-storey building for commercial purposes (Ground floor) and upper floors for clinic and residential apartments.' It is clear from above that completion of such a huge project required substantial amount of investment and you did not have money even at the initial stage to pay for plot, therefore, you had been waiting for an appropriate time to sell the plot and earn profit from the same since this was your only intention right from the beginning as you never wanted to go for construction on this plot. Following case-law is also referred:-- "Where land was purchased for building a Theatre or Hotel but it was converted into house sites and sold and the assessee had no money to build a Theater and had even borrowed money for purchase of land. Held, that the transaction was an adventure in trade and the profit therefrom was taxable as business income." P. Kannan (Karu) (1985) 154 I T R 441; In the light of above your action of selling Plot No. 54, Blue Area, Islamabad for consideration of Rs.74,00,000 on 14-7-1986 is not accepted as exempt income under clause (65) of the Second Schedule of the Income-tax Ordinance, 1979 and earning profit of Rs.59,09,000 is treated as adventure in the nature of trade and is taxable under the Income Tax Ordinance, 1979. The following cases are also referred:-- Isolated transaction: "As insolated transaction and sale of land can be treated as an adventure provided there is intention to re-sale." Dinshaw Irani v. C.I.T. (1957) 311 T R 92. "Single and isolated business may constitute an adventure in the nature of trade Naseer Ahmad v. C.I.T. PLD 1977 Lah. 753. Since I intend to bring to tax net profit on Rs.59,09,000 earned by you through sale of Plot No. 54, Blue Area, Islamabad, therefore, your reply if any should be submitted on or before 30-4-1989 positively." 4. In response to the notice the learned A.R. Of the appellant attended the office of the Assessing Officer and filed a reply which was not found to be satisfactory for the following reasons:-- (i) The assessee was allotted a commercial plot and the contents of the allotment letter clearly specify that the plot is meant for the construction of 5-storey building for commercial purposes (ground floor) and upper floor for clinic and residential appartment. This fact is confirmed vide C.D.A.'s Letter No. CDA/EM-27 (1077)/75/85, dated 3-1-1982. It is very clear that the assessee was waiting for the prices to escalate and the sell the plot at appropriate time when he was sure of considerable gain from the adventure of selling his plot. (ii) The assessee did not have means to pay for the plot as such funds were raised by borrowing from relatives and payments were made to the C.D.A. Including the balance payment which was received from the purchaser of plot. (iii) The assessee was allotted plot in September, 1981 whereas he applied to I.D.B.P. On 10-12-1984 for setting up clinic, which indicates that he was not serious in setting up a clinic at all. (iv) It is understood that completion of such a huge project requires substantial amount of investment and the assessee did not have money even to make payment for plot, therefore, he had been waiting for a proper time to sell the plot and assessee earned profit from the sale since this was his only intention right from the beginning, as he could have never been able to start the construction due to lack. Of financial resources. Following case-law is referred:-- (1) "Where land was purchased for building a Theatre or Hotel but it was converted into house sites and sold and the assessee had no money to build a Theatre and had even borrowed money for
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purchase of land. Held that the transaction was an adventure in trade and the profit therefrom was taxable as business income." P. Kannan (Karn) (1985) 154 I.T.R. 441. (2) An isolated transaction and sale of land can be treated as an adventure provided there is intention to re-sale. (3) Single and isolated business may constitute an adventure in the nature of trade. Naseer Ahmed Sheikh v. C.I.T. PLD 1977 Lah. 753. 5. Based on the position highlighted by him with reference to the respondent's reply to the notice issued under section 62 ibid, the I.T.O. Observed that profit of Rs.59,09,000 arising out of the sale of the plot by the appellant could not be treated as exempt income, as envisaged by clause (65) of the Second Schedule to the Ordinance, because the transaction was an adventure in the nature of trade. He, therefore, rejected the declared version of the appellant and computed the income, as below:-- (i) Profit on sale of plot No. 54 Blue Area, IslamabadRs. 59,09,000 (ii) Profit on P & L Account Rs. 15,000 (iii) Zakat Rs. 1,35,708 Rs. 60,59,708 Loss: Rs.26.730 6. Feeling dissatisfied with the above dispensation, the appellant preferred an appeal before the learned C.I.T.(A), Rawalpindi; but without any success. Hence the present appeal before us. 7. The appellant is represented by his learned counsel, Mr. Muhammad Amin Butt, assisted by Mr. Khalid Hussain, Advocate. The learned Legal Adviser, Mr. Sultan Mansoor, is present on behalf of the respondent. He is assisted by the learned Departmental Representative, Mr. Muhammad Jehangir Khan. Arguments on behalf of the parties have been addressed by Mr. Muhammad Amin Butt and Mr. Sultan Mansoor. The record of the case has been examined in detail. 8. The learned counsel for the appellant has contended that the authorities below have not been able to comprehend and thrash out the matter properly and have proceeded on a misconceived notion that the sale of the plot amounted to an adventure in the nature: of trade, that the appellant had not purchased any property in the past and his only source of income is the salary received from C.D.A., as Executive Director. Capital Hospital, Islamabad, that the case in hand is not one of purchase of property but involves allotment of a plot made in the name of the appellant as an employee of the C.DA. For the construction of a hospital, that application for the allotment of the plot had been submitted by the appellant in 1978 and the allotment was made in 1981, but the formal allotment letter was received by him in 1982, that in 1983, the appellant went to the United States of America for higher studies and returned in 1984, that appellant applied for a loan to build the hospital as he had been served with notices by the C.D.A. For the cancellation of allotment due to his failure to complete the construction within the specified period, that since the appellant had been pressed hard to pay back the loan obtained for the payment of price to the C.D.A., he (appellant) was obliged to dispose of the plot to get money for this purpose, and that the deadline indicated by the C.D.A. For the cancellation of the allotment of the plot was 30-6-1986; whereas the plot was sold by the appellant, on 14-7-1987, because he had all along been trying to tap other financial sources for the repayment of loan. Advancing this arguments further the learned counsel for the appellant has pleaded that the plot was not a trading asset or a stock-in-trade to be disposed of eventually for the purpose of making a gain out of the transaction, that the purchase of the plot in dispute by the appellant was a mere investment and the same was being held as a capital asset, in terms of section 2(12) of the Ordinance, that the onus to prove that the plot was a
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stock-in-trade in the hands of the appellant lay on the department and the same has not been discharged by it, and that any isolated instance of sale of property by a person in some peculiar circumstances does not constitute an adventure in the nature of trade and in order to establish the contrary, it falls heavily on the shoulders of the departmental authorities to prove by a strong and cogent evidence that the property had been purchased with the sole intention of starting an adventure in the nature of trade. 9. The learned counsel for the appellant has added that the I.T.O. Had commenced re-assessment proceedings with pre-occupied mind that the acquisition of the plot by the appellant was an investment in commercial property, although no such inference had been drawn in the original assessm ent, that the I.T.O. Was wrong in assuming so and assessing the appellant for having indulged in an adventure in the nature of trade. In this context, the learned counsel for the appellant has referred to item 11 of section 2 of the Ordinance wherein "business" has been defined to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Dilating further on the issue, he has given out that the gain accruing to the appellant out of the solitary transaction of sale is simply a casual and non- recurring receipt, not covered by item 11 of section 2 ibid and not liable to tax in view of the exemption provided under clause (65) of Part 1 of the Second Schedule to the Ordinance, that the special provision to tax "capital gains", contained in section 27 excludes the general provision enacted in the form of item 11 of section 2 of the Ordinance oil the principle that the special excludes the general that immovable property does not fall within the definition of "capital assets" appearing in section.. 27 2)(a)(ii) of the Ordinance and for this reason the difference of Rs.59,09,000 III tile allotment value and sale price of the plot, although a capital gain on immovable property is not taxable as such, that capital gain on immovable property stands excluded from the purview of subsection (1) of section 27 providing for the levy of tax on the capital gains inter alia for the reason that the Federal Legislature has no power to tax the capital gains on immovable property, as envisaged by item 50 of the Federal Legislature list in the Fourth Schedule to the 1973 Constitution of the Islamic Republic of Pakistan, tax on the sale transfer of immovable property can be levied only by the provincial Legislature and in fact it was so levied for several years, but was later on withdrawn, and the assessm ent is liable to be annulled in so far as it relates to tile questioned addition of Rs.59,09,000 treated as profit from the business of sale of immovable property. 10. In order to reinforce his contentions, the learned counsel for the appellant has quoted copious case-law. The relevant extracts, of the precedents are set out hereinbelow: Californian Copper Syndicate Ltd. v. Harris (1904) 5 Tax Cases 159: Held, that it is quite a well-settled principle in dealing with questions of assessment of Income-tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit from an adventure in the nature of trade and hence not assessable to Income-tax. Wragg v. Palmer (1919) a Chancery Division 59: Held, that the word to "invest" when used in an investment clause may safely be said to include as one of its meanings "to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income which it will yield, whilst the noun "investment" when used in such a clause may safely be said to include as one of its meanings the property in the purchase of which the money has been so applied" (1944 12 I T R 209 (Lahore H.C.): Held, that the essential test to determine whether a transaction is an adventure in the nature of trade is the intention with which the property is purchased and that if the purchase is with the intention to invest one's capital with the sole object of selling the property in future to make a profit, the purchase and the subsequent sale are an adventure in the nature of trade.
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Commissioners of Inland Revenue v. Reinhold (1953) 34 Tax Cases 389: Held, that the fact that the property was purchased with a view to resale did not of itself establish that the transaction was an adventure in the nature of trade, and that the Commissioners were justified in treating the profit in question as not assessable to Income-tax, that in order to establish that a transaction was an adventure in the nature of trade, it is not enough for the Revenue to show that the property was purchased with the intention of reselling it some day at a profit, because it is the expectation of most, if not all, people who make investments. (1959) 371 T R 252 (SC of India): Held, where a transaction is not in the line of business of the assessee but is an isolated or single instance of a transaction, the onus is on the Department to prove that it is an adventure in the nature of trade; and a visual profit made on an isolated purchase and sale. Unless merged with similar transactions in the carrying on of a trade, is not liable to tax. (1962) 451 T R 37 (Madras H.C.): Held, that one of the important matters to be considered in deciding whether a transaction of purchase and re-sale amounts to an adventure in the nature of trade is the intention to trade, which must be present at the time of purchase, that the mere circumstance that a property is purchased in the hope that when sold later it would leave a margin of profit could not be sufficient to show an intention to trade at the inception that in determining the intention to re-sell, the nature of the article purchased has to be taken into account, namely, whether it is of such kind and in such quantity as to be capable of commercial disposal only, and not of intention as an investment, or for use by the purchaser personally, that the onus is on the Department to prove that a particular transaction amounts to an adventure, in the, nature of. Trade, that the purchase of property in the shape of agricultural lands is ordinarily an investment and the purchaser does not always judge the wisdom of the transaction by the returns he would get and that other considerations also prevail in the matter of such purchase, like the pride of possession of agricultural lands, security which is inherent in the investment etc. (1966) 571 T R 21 (S.C. Of India): Held, that it is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and that the nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the Income Tax authorities. (1966) 62 I T R 578; (Madras H.C.): Held, that the decision of the question whether profits made by the sale of land by an assessee carrying on business are profits from his that very business or merely capital gains will depend on the cumulative effect of all the facts and circumstances, that developing land into building sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment and amounts to conversion of one form of the asset into another, that the surplus in such a case will not be trading or business profit 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. (1970) 77 I T R 253 (S.C. Of India): Held, that if the transaction is in the ordinary line of the assessee's business, there would hardly be any difficulty in concluding that it is a trading transaction; but where it is not, the facts must be property assessed to discover whether it is in the nature of trade, that surplus realised on the sale of shares, would be capital if the assessee is an ordinary investor realising his holding, but it would be revenue if he deals with them as an adventure in the nature of trade and that the fact that originally purchase of property was made with the intention to resell if an enhanced price could be obtained is by itself not enough, but in connection with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction.
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(1977) 107 I T R (sic) (Allahabad H.C.): Held, that land alone is also not a trade in itself, that normally, the purchase of land represents investment of money in land, that transaction of purchase of land cannot be assumed without more, to be a venture in the nature of trade, that investment in purchasing a property is also made with a view to earning return on the sum invested and that the mere fact that a person invested money in property for the purpose of reselling it whenever a suitable opportunity arises, does not give a sufficient ground to hold that the transaction is in the nature of trade. 1990 PTD 345: Held, that the property involved in the case, being land, was not ordinarily a commercial commodity and that its resale took place a little over six years after the purchase, which would militate against any inference being drawn that the purchase itself had been made with the intention of embarking on a venture in the nature of trade. (1978) 1141 T R 253 (Madras H.C.): Held, that where a receipt is sought to be taxed as income, the burden lies on the Department, to prove that it is within the taxing provision and only where the character of the receipt is established as income, the burden of proof that it is not taxable lies on the assessee. (1981) 129 I T R 115 (Madras H.C.): Held, that the purchase of a plot of land by an assessee maintaining horses for races and also making money from betting and racing, and its resale after building roads, drains, etc. In the form of three small units under different sale-deeds was not an adventure in the nature of trade as the assessee had entered into the solitary transaction for the acquisition and sale of land and had not purchased any such immovable property at any time before or after. (1983) 142 I T R 115 (Madras H.C.): Held, that a mere application for permission for a layout of the surplus land or the subsequent sale of the land would not lead to the inference that there was a conversion of the capital asset into a stock-in-trade, that the intention of the assessee to sell the laid out plots was only to discharge the debts and not for carrying on any adventure in the nature of trade and that the sale of the laid out plots instead of selling the entire land was only for the purpose of obtaining the best possible price and not for engaging himself in the real estate trade. (1984) MLD 262 (Kar. H.C.): Held, that in so far as the capital gains arising from sale, exchange or transfer of immovable properties, the same are not chargeable to income-tax but were chargeable to tax under the provincial law relating to the capital gains tax. (1985) 152 I T R 7 (Punjab and Haryana H.C,) Held, that the assessee purchased the land with the intention of putting it to agricultural use, the question of this purchase with any other intention does not arise for consideration and that the subsequent sale of land in the form of plots did not amount to an adventure in the nature of trade because the initial intention with which the land was purchased by the assessee was alone relevant. 1989 PTD (Trib.) 460; Held, that the revenue receipts accruing from the sale in 1980 of the agricultural land purchased by an assessee in 1965, in the form of plots after it came within the municipal limits were not liable to tax as the transaction was not an adventure in the nature of trade. 10. The learned Legal Adviser, while replying to the arguments advanced by the learned counsel for the appellant, has submitted that the appellant had no money to build a hospital; nor did he have any means to purchase a plot, that right from the beginning, his intention was to make profit out of the…
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