Decided on January 30,1979



B.J.DIVAN, J. - (1.) BOTH these references arise out of the same set of facts. In its order out of which Reference No. 168 of 1975 arises, the Tribunal followed its earlier order out of which Reference No. 224 of 1975 arises. The assessee in both the cases are brothers and it is out of their transaction jointly entered into in connection with a plot of land at Surat that these two cases have come up before this Court and hence we will dispose of both of them by this common judgment. The question which has been referred to us for our opinion in each of these matters is also in identical terms and the question is : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the transaction in question was not an adventure in the nature of trade and it did not give rise to business income and the assessee was subject to tax on profit arising out of the transaction as long term capital gains ?"
(2.) THE facts leading to these two references are as follows : We are concerned with the asst. yr. 1968 69, in the case of each of the two assessees before us, the relevant previous year being Samvat 2023. The two assessees before us are carrying on the business of manufacturing art silk cloth at Surat. Each of them has his own independent factor for manufacturing art silk cloth. The two assessees jointly purchased agricultural lands by two transfer deeds. By the first deed dated July 22, 1960, an area of 1,09,626 square yards was purchased for the price of Rs. 44,999 and by another transfer deed dated February 15, 1963, an area of 6,534 square yards was purchased for the total price of Rs. 22,999. Thus, making allowance for other amounts, the total cost of acquisition of the entire area of agricultural land admeasuring 1,16,160 square yards came to Rs. 80,100. In the year 1965, the assessee got the lands converted to non agricultural use and 90,393 square yards were sold on May 2, 1967, for the consideration of Rs. 16,25,000. The case of the assessee is that before the Collector and the Revenue authorities would give permission for the sale of the land on May 2, 1967, the assessees were required to donate an area of 4,843 square yards to a charitable institution known as Nari Graha functioning at Surat, and the balance of the lands is still held by the two assessees. It has been pointed out to us that in the course of the town planning scheme of Surat Municipal Corporation, a part of the balance of the lands out of the original area has been taken away for the purposes of the town planning scheme. In the original return, the assessee disclosed long term capital gains of Rs. 7,56,347 in respect of this transaction after adjusting costs and other expenses and working out the assessee's half share. That was done by each of the two assessees in his respective return. Subsequently, a revised return was filed excluding the long term capital gains. The ITO found that the land was situated in Navagam village but that area had been brought within the municipal limits of Surat Municipal Corporation some time in the year 1963. The Government of Gujarat had acquired lands in the vicinity of the lands in question for construction of a depot for the State Transport Corporation. According to the ITO, this area was fast developing as an industrial and residential area. The ITO, therefore, held that the assessee's sole intention in purchasing the land was for selling it at a profit and the assessee had also spent a substantial amount on improvement of the land. He, therefore, assessed the share of profit from purchase and sale of the land on the footing that this was an adventure in the nature of trade and brought to tax the amount of Rs. 7,61,347 by his assessment order. Against the decision of the ITO, the assessee took the matter in appeal before the AAC and that officer held that the land in question was held by the assessee as a capital asset and, therefore, the excess, if any, between the sale consideration and the cost would be taxable as capital gain in the hands of the respective assessees. The AAC held that the transaction could not be treated as an adventure in the nature of trade. The Revenue took the matter in appeal before the Tribunal and the appeals in the cases of both the assessees were heard by the Tribunal. The Tribunal considered the position in detail in the case of the assessee in whose case IT Ref. No. 224 of 1975 has been made and that decision was followed in the case of the assessee in IT Ref. No. 168 of 1975. The Tribunal dismissed the appeal of the Revenue and upheld the conclusion of the AAC. The Tribunal came to the conclusion that the transaction under reference was not a transaction in the nature of trade and it did not give rise to business income. Thereafter, at the instance of the Revenue, these two references have been made to this High Court for our opinion.
(3.) THE principles for the purpose of determining as to when a transaction can be said to be an adventure in the nature of trade and when it cannot be so called, have been laid down by a series of decisions, both of the Supreme Court and of this High Court. The first of these decisions was in G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). There the Supreme Court considered a number of cases from England, Scotland, etc., and held that the expression "in the nature of trade" postulates existence of certain elements in the adventure which in law would invest it with the character of trade or business ; and that would make the question whether a transaction is in the nature of a trade and its decision one of mixed law and fact. It was further held that when the IT Act refers to an adventure in the nature of trade, it clearly suggests that the transaction in question cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them ; and so, even an isolated transaction can satisfy the description, of an adventure in the nature of trade, provided at least some of the essential features of trade are present in the isolated or single transaction. 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 relevant, such as, whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it ; the nature and quantity of the commodity purchased and resold ; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable ; any act prior to the purchase showing a design or purpose ; the incidents associated with the purchase and resale ; the similarity of the transactions to operations usually associated with trade or business ; the repetition of the transaction ; the element of pride of possession. A person may purchase a piece of art, hold it for some time and if a profitable offer is received, 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 transaction being in the nature of trade. The presence of all these relevant factors may help the Court to draw an inference that a transaction is in the nature of trade ; 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. In cases 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 a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive ; and it is conceivable that, on considering all the facts and circumstances in the case, the Court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted.;

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