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Tax Publishers Babulal v. ITO [ITA No. 887/Bang/2019, dt. 28-1-2021] : 2021 TaxPub(DT) 577 (Bang-Trib) Capital gains or business income *Facts:* Assessee offered capital gains from sale of a land in his return. On inquiry it was found out that he had sold one piece of land which was divided into plots and thus the assessing officer and Commissioner (Appeals) confirmed that this ought to have been assessed as income from business or profession as it was an adventure in the nature of trade. The Assessee's plea was that he purchased the land for constructing a house for self-occupation and since he could not do so, he decided to sell the same. There were no buyers to buy such large plot of land due to slump in real estate market. So he applied to the development authority to divide the land into plots and then sold them piecemeal as plots. Held in favour of the assessee that the intent of the assessee is to be seen prima facie as deciding factor which was to construct a house for self-occupation. Once there was no intent from him to do business and the division of plots and their sale was only consequential to enable selling the land which was not longer required it cannot be assessed as profits and gains of business and profession but it will need to be assessed as capital gains. *Applied:* CIT v. Hotel Sreeraj [ITA No. 282/2002, dated 6-12-2007 Karnataka High Court] ACIT v. Narendra J.Bhimani [ITA No. 411/Rjt/2012, dated 31-1-2018 Rajkot ITAT] : 2018 TaxPub(DT) 0857 (Rkt-Trib) *Dissented:* Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC) : 1961 TaxPub(DT) 0226 (SC) CIT v. B. Narasimha Reddy (1984) 150 ITR 347 (Karn.) : 1984 TaxPub(DT) 1625 (Karn-HC) *Read into:* G. Venkataswamy Naidu (1959) 35 ITR 594 (SC) : 1959 TaxPub(DT) 0121 (SC) "It is impossible to evolve any formula which can be applied in determining the character of isolated transaction 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 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. 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 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 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. 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."

Tax Publishers

Babulal v. ITO [ITA No. 887/Bang/2019, dt. 28-1-2021] : 2021 TaxPub(DT) 577 (Bang-Trib)

Capital gains or business income

Facts:

Assessee offered capital gains from sale of a land in his return. On inquiry it was found out that he had sold one piece of land which was divided into plots and thus the assessing officer and Commissioner (Appeals) confirmed that this ought to have been assessed as income from business or profession as it was an adventure in the nature of trade. The Assessee's plea was that he purchased the land for constructing a house for self-occupation and since he could not do so, he decided to sell the same. There were no buyers to buy such large plot of land due to slump in real estate market. So he applied to the development authority to divide the land into plots and then sold them piecemeal as plots.

Held in favour of the assessee that the intent of the assessee is to be seen prima facie as deciding factor which was to construct a house for self-occupation. Once there was no intent from him to do business and the division of plots and their sale was only consequential to enable selling the land which was not longer required it cannot be assessed as profits and gains of business and profession but it will need to be assessed as capital gains.

Applied:

CIT v. Hotel Sreeraj [ITA No. 282/2002, dated 6-12-2007 Karnataka High Court]

ACIT v. Narendra J.Bhimani [ITA No. 411/Rjt/2012, dated 31-1-2018 Rajkot ITAT] : 2018 TaxPub(DT) 0857 (Rkt-Trib)

Dissented:

Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC) : 1961 TaxPub(DT) 0226 (SC)

CIT v. B. Narasimha Reddy (1984) 150 ITR 347 (Karn.) : 1984 TaxPub(DT) 1625 (Karn-HC)

Read into:

G. Venkataswamy Naidu (1959) 35 ITR 594 (SC) : 1959 TaxPub(DT) 0121 (SC)

"It is impossible to evolve any formula which can be applied in determining the character of isolated transaction 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 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. 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 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 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. 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."