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Petitioner: FANCY FOUNDATION VS Respondent: COMMISSIONER OF INCOME TAX, KARACHI
Court Name: Supreme Court of Pakistan Judge(s): Mian Saqib Nisar, Umar Ata Bandial, Faisal Arab Title: FANCY FOUNDATION vs COMMISSIONER OF INCOME TAX, KARACHI Case No.: Civil Appeal No. 8 of 2007 Date of Judgment:2017-04-13 Reported As: PLJ 2017 SC 481 Result: Appeal allowed
Judgment ORDER Mian Saqib Nisar, CJ.--The facts of this appeal are that the appellant, namely, Fancy Foundation, is a registered charitable trust. It purchased property bearing Plot No. 7/3, Survey Sheet SR-1, Serai Quarters, I.I. Chundrigar Road, Karachi (the property) vide a registered sale-deed, on 28.06.1963, for a consideration of Rs. 1,895,183/-. It finally sold the property for Rs. 18,287,500/- in the year 1995. The appellant filed its income tax return for the year 199697, in which it claimed exemption from payment of income tax on the surplus/differential between the purchase and sale prices of the property in terms of Section 27(2)(a) of the Income Tax Ordinance, 1979 (the Ordinance). However, the department passed an assessme nt order to the effect that the profit made upon the sale of the property was income from business thus the appellant was liable to pay income tax thereupon in light of Section 22 read with Section 2(11) of the Ordinance. The appellant's appeals before the Commissioner Income Tax (Appeals) and the Income Tax Appellate Tribunal, and the income tax reference before the learned High Court all failed. Leave was granted on 03.01.2007 to consider whether "the petitioner was not an adventure in the nature of trade and was not liable to tax under the Income Tax laws as the surplus amount/profit received by the petitioner Foundation from the transaction of sale was in the nature of capital gain which is exempt from charge to tax." 2. Heard. We will first attend to the argument of the learned counsel for the respondent that the reference before the learned High Court was not maintainable as no question of law arose from the order of the Tribunal. In the judgment reported as Naseer A. Sheikh and 4 others z,s. The Commissioner of Income-Tax (Investigation), Lahore and others ;1992 PTD 621) this Court held that the High Court had errec. in returning the reference to the Tribunal without answering the questions refer. red to it because whether or not the sale of the second lot of shares resulting in a gain to the
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appellants) constituted an adventure in the nature of trade, was a mixed question of law and fact whilst the High Court had wrongly treated it as a pure question of fact. Thus we hold that the question of whether the sale/purchase of prepaid mixtlutes 'business' within the meaning of Section 2(11) of the Ordinance and its effect on the taxpayer, involves a factual determination of the characteristics of the transaction in question and an interpretation of the aforesaid provision of law, therefore, this is a mixed question of fad and law and the reference before the learned High Court was maintainable. 5. Sections 22 and 27 of the Ordinance (relevant parts) read as under: 22. Income from business or profession.--The following incomes shall be chargeable under the head "Income from business or profession", namely:-- (a)profits and gains of any business or profession carried on, or deemed to be carried on, by the assessee at any time during the income year; (b) ; and (c) Explanation 27. Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place. (2) For the purposes of sub-section (1) and Sections 28 and 29,-- (a)"capital asset" does not include-- (i); and (ii)any immovable property; and (b)"transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishment of any rights therein, but does not include-- 4. Section 15 of the Ordinance provides various heads of income for tax purposes. The two relevant heads are 'income from business or profession' [Section 15(d)] and 'capital gains' [Section 15(e)]. According to Section 27 of the Ordinance, any profits or gains arising from the transfer of a capital asset shall be chargeable under the head 'capital gains' and shall be deemed to be income of the (income) year in which the transfer took place. As per Section 27(2)(ii) of the Ordinance, for the purposes of Section 27(1) thereof, capital asset does not include any immovable property. It is the appellant's case that the property they sold was an immovable property and not a capital asset: therefore the profit/gain from its transfer was not chargeable to income tax under the head 'capital gains'. Whereas the department's stance is that the purchase and ultimate sale of the property was an "adventure in the nature of the trade" in terms of Section 2(11) of the Ordinance thus the profit/surplus made on the sale thereof was a profit and gain of a business carried on by the appellant and was chargeable to income tax under the head 'income from business or profession' under Section 22(a) of the Ordinance. Hence the terms 'adventure' and 'trade' need to be defined. The ordinary dictionary meaning of 'adventure' is as follows: Black's Law Dictionary (9th Ed.) 1. A commercial undertaking that has an element of risk; a venture. Chamber's 21st Century Dictionary 1. an exciting and often dangerous experience. 2. The excitement of risk and danger. Oxford Advanced Learner's Dictionary (9th Ed.) 1. an unusual, exciting or dangerous experience, journey or series of events. P. Ramanatha Aiyar's Concise Law Dictionary (4th Ed.) A mercantile or speculative enterprise of hazard; a venture; 'Trade' has been defined as under:-- Black's Law Dictionary (9th Ed.) 1. The business of buying and selling or bartering goods or services, (n) 2. A transaction or swap. 3.1
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A business or industry occupation; a craft or profession (vb) Chamber's 21st Century Dictionary 1. a. the act, an instance or the process of buying and selling; 3. a. business and commerce, especially as opposed to a profession or the owning of landed property; Oxford Advanced Learner's Dictionary (9th I. the activity of buying and .selling or of exchanging goods or services between people or countries. P. Ramanatha Aiyar's. Concise Law Dictionary (4th Ed.) Trade in its primary meaning is the exchanging of goods for goods or goods for money; in its secondary meaning it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished from the liberal arts or learned professions or agriculture. State of Punjab v. Bajaj Electricals Ltd., AIR 1968 SC 739, 741. -5, Is the buying and selling of a single property an adventure in the nature of trade, rendering it a business? From the above definitions, "any adventure in the nature of trade" means an enterprise, venture or activity involving the buying and selling of goods or services. On a strict interpretation, the action of buying and selling property by the appellant may conceivably tantamount to business. But, as per Section 2(11) of the Ordinance, 'business' "includes any, trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. "The use of the word 'includes' in the definition means that the definition is not exhaustive or all- encompassing, and it may well cover things other than those mentioned therein. Therefore 'business' has to be given its widest possible amplitude by examining its ordinary dictionary Heaning, in the light whereof "adventure in the nature of trade" needs be understood. 'Business' has been defined as under:-- Black's Law Dictionary (9th Ed.) 1. A commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in for livelihood or gain. 2. Commercial enterprises. 3. Commercial transactions. Chamber's 21st Century Dictionary 1. the buying and selling of goods and services. Also called commerce, trade. 3. A regular occupation, trade or profession. Oxford Advanced Learner's Dictionary (9th Ed.) 1. the activity of making, buying, selling or supplying goods or services for money. Ramanatha Aivar's Concise Law Dictionary (4th Ed.) The word "business" is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour. or skill with a view to earning an income. Barendera Prasad v. I.T. Officer, AIR 1981 SC 1047, 1953. [Income-tax Act (43 of 1961), S. (1)(i) (a). Alaior Law Lexicon (4th Ed.) 2010 An element of continuity and habit is essential to constitute the exercise of a profession or business. [AIR 1919 All. 13(2)1 Business connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose. [Narain Swadeshi Mills v. Commissioner of Excess Profits Tax, AIR 1955 SC 1761 In its ordinary parlance, 'business' entails regularity or continuity in an activity with the intention of earning income. Consequently, generally the adventure in the nature of trade must involve regular and continuous activity. Before giving a conclusive finding on what does or does not constitute an <i>"adventure in the nature of trade"</i> and is a 'business' within the contemplation of Section 2(11) of the Ordinance, it is pertinent to advert to the case law on the matter. 6. In Commissioner of Income-Tax (Central), Karachi vs. Messrs Habib Insurance Co. Ltd., Karachi
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(PLD 1969 Karachi 278), the case was decided in favour of the department on the facts but the learned Division Bench of the High Court of Sindh held that: .... in order to constitute a business, there must be a continuous exercise of activity for the purpose of gain. This element of continuity is essential to constitute a business of investment. The reason for this condition is that in modern society people no longer hold their savings in gold or cash but are encouraged to invest their savings in property and securities, yet a man who invests his savings in buying a property would not be said to be carrying on a business if he lets out the properly on rent, nor would a person who has purchased shares out of his savings be said to carry on business merely because he derives income from his investments. If, however, he regularly buys and sells property or shares, so as to make profit out of the fluctuations in the prices of property or shares, then it would be said that he was carrying on the business of investment; there is thus a fundamental distinction between the business of investment, and the purchase and sale of investments by a person. As pointed out by Lord Wright, in the definition quoted, even occasional speculation in sham does not amount to carrying on a business; therefore, a person, who buys property or shares and retains them for a long period of time, would not be considered to be carrying on the business of investment. In Naeeer A. Sheikh's case (supra) this Court, while considering whether a transaction of sale of shares by the assessee was an adventure in the nature of trade, held as under: It is to be noticed that even if a receipt is of casual and non-recurring in character, it shall be liable to tax, if it arises out of business. The definition of the term "business", as given in Section 2(4) of the Act, has already been noticed. The question as to whether or not that (sic) a transaction is an adventure in the nature of trade has to be determined, keeping in view the intention of the assessee, in the light of the legal requirements of concept of the business. In the case of Commissioner of Income Tax us. Mahmood Ali (2008 PTD 82) the High Court of Sindh opined as under: The intention must be deduced from the facts and circumstances of each case and whether a man makes a business of speculation the same must be deduced from the facts of each case. The mere change of investment would not amount to adventure in nature of trade. It will be beneficial to quote the law laid down in the case of (1966) 62 ITR 578. In that case the company was a family company which was formed for the purpose of dealing in properties transferred to it and it had power to purchase and sell properties. The company made profits on the sale of land but it was held that the transaction of sale of plots was one that prudent owner of land would engage in and which was, therefore, no more than realization of a capital investment or conversion of land into money and not a venture in the nature of trade. 18. We may further observe that in determining the nature of the transaction regard has to be made to the nature of the property, length of its ownership and holding, actual conduct. of the assessee in respect of it all along and other factors including absence of evidence of any trading activity of the speculative venture. In another case the Indian Supreme Court in the case reported as AIR 1959 SC 1252, while striking down the finding of the department, pointed out that mere fact that the assessee had realized that the property was valuable and would increase in price was no reason to hold that it should be treated as income and reliance was placed on a decision of the House of Lords in which it was held that: "An accretion of capital does not become income merely because original capital was invested in the hope and expectation that it would rise in value. If it so rises its realization, does not make it income." ,;ain the High Court of Sindh had the opportunity to dwell upon the of what constitutes an adventure in the nature of trade in the judgment reported as Major General (Retd.) M. Jalaluddin vs. ACIT, 'R-VI, Zone-C, Karachi (2011 PTD 1377) in which the Court held: 6. Before adverting to the issue in hand, it would be pertinent if the law regarding adventure in the2
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nature of trade be first examined. It is a trite proposition of law that facts of one case are to be examined on the basis of the surrounding circumstances of that case only. There may be occasions where the facts of one case may be akin to the facts of the other case but as no two sun rises are same so are the cases of tax laws. The prime consideration is the cases wherein the question of adventure in the nature of trade is involved is to examine and gather information from which it can be deduced as to what the intention of the purchaser was at the time of the purchase of the plot. If from the facts gathered it becomes imperative that the said plot was purchased with the intention of resale then the case squarely falls under the ambit of adventure in the nature of trade but if due to subsequent facts and circumstances the assessee had to sale a plot for some reasons to convert an un-remunerative asset into a remunerative asset and obtains a gain, specially in the case of sale of plot, the gain arising there-from is a capital gain on which no tax is applicable subject to the condition that the assessee is neither a dealer nor a habitual purchaser and seller of the plots, though this gain is not considered to be a yardstick so far as the sale of plots are concerned. It has been held in some decisions that under the given circumstances an isolated transaction of sale of the plot was held to be an adventure in the nature of trade and under different circumstances a series of sale of plots can be held not to be so. Therefore, no yardstick or parameter, as far this aspect is concerned, could be laid down and each case is to be judged on the basis of the facts pertaining to that case only. It is also a trite proposition of law that the onus of proving adventure in the nature of trade lies squarely on the department. Iri Pakistan Steel Mills Corporation (Pvt.) Ltd., Karachi vs. commissioner Inland Revenue (Legal Division), Karachi and another (2012 PTD 723) the High Court of Sindh observed that: "12. In order to establish that a transaction whereby a plot of land has been sold out for profit constitutes as "adventure in the nature of trade", we have to take cognizance of the entire transaction keeping in view intention of the assessee at the time of purchasing the said land as well as future transaction whereby such land has, been sold out by the assessee with a intention to earn profit. No hard and fast rule can be adopted in cases of adventure in the nature of trade and each transaction has to be examined on the basis of its own facts." 7. Coming to cases from the Indian jurisdiction, in the case of. Messrs Narain Swadeshi Weaving Mills vs. The Commissioner of Excess Profits Tax (AIR 1955 SC 176) the Supreme Court, while interpreting the term 'business' as defined in Section 2(5) of the Excess Profits Tax Act, 1940 (which is identical to the definition of `business' in the Ordinance), held that:-- "14. ...Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand it has been pointed out by the Judicial Committee in the - 'Commissioner of Income-tax, Bengal u. Shaw Wallace & Co.', AIR 1932 PC 138 (A), that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word, 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is. In the facts and circumstances of the case, the Indian Supreme Court was of the opinion that the letting out of plant, machinery, etc., could not be held to fall within the definition of 'business' under Section 2(5) ibid. In the judgment reported as G. Venkataswami Naidu Co. .us. The Commissioner of Income Tax (AIR 1959 SC 359) the Indian Supreme Court, in great detail, observed as under: 16. As we have already observed it is impossible to evolve any formula which can be applied in
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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 data 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 is generally the subject- matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the Court to draw a similar inference; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to the facts before us. 17. 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 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 such cases he 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
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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. In the case of Saroj Kumar Mazumdar vs. Commissioner of Income tax, West Bengal (AIR 1959 SC 1252), the Indian Supreme Court, while determining whether the transaction in question had characteristics which would allow one to conclude that it was a venture in the nature of trade, held: Hence, the possibility or the probability that the site may appreciate in value, would not necessarily lend itself to the inference that the transaction was a venture in the nature of trade, as distinguished from a capital investment. In all the circumstances of this case, the total in pression created on our mind is that it has not been made out by the Department that the dominant intention of the appellant was to embark on a venture in the nature of trade, when he entered into the agreement which resulted in the profits sought to be taxed. In The Commissioner of Income Tax, Punjab, Haryana, Jammu and Kashmir and Himachal Pardesh vs. Prabhu Dayal (dead) by his Legal Representatives (AIR 1972 SC 386) the Supreme Court of India, while dealing with the question whether the compensation received by the assessee for the termination of the agreement was a capital receipt and hence not taxable, held as follows: 11. Business as understood in the income-tax law connotes some real, substantial and systematic or organised course of activity or conduct with a set…
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