1. This is a reference at the instance of the assessee under s. 66(1) of the Indian I. T. Act, 1922. The assessee before us is Smt. Bhanumati A. Sanghavi, an individual, who had received certain gifts from her mother and sister in 1948. We are concerned in this reference with the assessment year 1961-62.
2. With an idea to employ the gifted amounts profitably, the assessee started purchasing plots of land. In Samvat Year 2009, she purchased a plot of land measuring 1,570 sq. yards with a built up house thereon for Rs. 6,001 which house was subsequently let out by the assessee on rent. In Samvat Year 2011, she again purchased a plot at Wadala in Bombay City admeasuring 997 sq. yards for Rs. 1,247. This piece of land was subsequently sold by her in S. Y. 2013 for Rs. 30,160 earning thereby a surplus of Rs. 28,913. This surplus was treated as a capital gain by the income-tax department. The contention of the assessee was that the sale was effected to enable her to purchase a bigger plot. In S. Y. 2012, the assessee purchased another plot in the same locality admeasuring 804 sq. yards for a sum of Rs. 2,791. This plot was subsequently sold by her after a short interval for the sum of Rs. 24,000 resulting in the surplus of Rs. 21,209. The sale was effected in S. Y. 2014. Again the contention of the assessee that this surplus was a capital gain was accepted by the income-tax department. It may be mentioned that the purchaser of the latter plot was Messrs. Swastic Construction Company in which the assessee was a partner. The business of that company was to construct buildings and one building was subsequently constructed on this plot. Thereafter, the assessee purchased a big plot consisting of 8 sub-plots in the very same locality for the total sum of Rs. 66,301. All the purchases were effected in S. Y. 2013. The details of these eight plots, the name of the assessee's vendor, the area and the purchase amount are as under :
------------------------------------------------------------------------Sr. Plot S.Y. Party from Area PurchaseNo. No. (purchase) Whom purchased Sq. Yd. ValueRs.----------------------------------------------------------------------1. 323 Wadala, 2013 Maxhard Pvt. Ltd. 755 8,359Bombay.2. 324 ' ' 715 7,9513. 325 ' ' ' 821 7,6034. 326 ' ' ' 821 9,0685. 329 ' ' ' 710 8,1326. 330 ' ' ' 753 8,7197. 331 ' ' ' 695 8,3358. 333 ' ' ' 710 8,134------------------------------------------------------------------------
3. It appears that two out of all these eight plots were sold in the assessment year under consideration for the gross sale price of Rs. 61,183. After deducting brokerage and incidental expenses, a net surplus of Rs. 53,594 was realised by the assessee.
4. When the matter was considered by the ITO, it was contended by the assessee that as a matter of fact she had purchased the lease rights in the plots which had been passed on to the purchaser. It was claimed that the resultant gain to the assessee was a capital gain. According to the assessee, her intention at the time of purchase was to construct a residential house, but as the municipality could not give possession of the plots she could not start the construction and the said plots were required to be sold away. The ITO found that this argument was not acceptable. He found that in respect of all the plots which had been sold by the assessee (including the two for the year under consideration by him) she was able to ensure that the respective purchaser obtained possession of all the plots from the municipality. The officer also examined the assessee on oath. It was found that she had no idea about the size of the plots. Similarly, she had no idea about the sizes of the houses to be constructed, nor about the finances required for construction. The ITO accordingly came to the conclusion that in his opinion the assessee's statement that she had purchased the plot or plots to construct a residential house or houses could not be accepted. In his view, the only idea of the assessee was to purchase the rights in the land and sell out such rights at profitable bargain as and when the municipality was about to give possession. It was found that the assessee had entered into a series of such transactions year after year. There was a clear intention to earn profit. In this view, for the year under consideration the ITO was of the view that the surplus was required to be considered as a revenue gain.
5. The aggrieved assessee carried the matter in appeal to the AAC. The AAC also noted the number of land transactions entered into by the assessee. It was contended before the AAC that the sales effected by the assessee were in the nature of realisation of investment and could not be considered as an adventure in the nature of trade. It was also pointed out that the assessee had ample funds. It was urged before the AAC that the assessee was required to sell the sub-plots because she had lost all hopes of getting possession and felt that it would be better to transfer these rights and re-invest the amounts realised elsewhere. The AAC felt unable to accept these submissions. Reliance was placed on the frequency of the transactions. The AAC felt further that the assessee was not able to show that she had purchased the plots either as investment or for constructing a residential house. It was, inter alia, contended before the AAC that leasehold rights were not assets and could not be the subject-matter of an adventure in the nature of trade. This argument was not accepted. It may be mentioned that subsequently this argument in its limited form has been given up before the Tribunal.
6. In the result, the AAC agreed with the decision of the ITO and upheld the conclusion that the surplus was required to be considered as a revenue gain.
7. The assessee carried the matter in further appeal to the Income-tax Appellate Tribunal. It is unnecessary to set out or refer to the factual portion of the Tribunal's order. The Tribunal expressed its opinion that it was difficult to accept the submission made on behalf of the assessee that the assessee's intention all along was to make an investment in the land with a view to earn income therefrom after putting up construction on the land. The assessee's further case that she was compelled to sell the plots because she was unable to obtain possession of the plots from the municipality was also considered. After considering the submission in the background of the facts on record, the submission also did not find acceptance with the Tribunal. The Tribunal noted that for two earlier years such surplus had been treated as a capital gain. In its opinion, however, this fact would not help the assessee. On the contrary, according to the Tribunal, the history of purchase and sale of plots suggested that there had been regular activity at short intervals by the assessee. The nature of purchases, the locality in which the plots are situate and the history of purchase and sale were considered by the Tribunal and the Tribunal up-held on those facts the conclusions earlier reached by the ITO which had been subsequently upheld by the AAC.
8. It was submitted before the Tribunal that if the Tribunal were to hold that the surplus realised was a profit earned in an adventure in the nature of trade, then for the purpose of computing the surplus the cost of purchase should not be considered, but the market value of the plot as at the beginning of the accounting year should be taken into consideration. The Tribunal did not accept this alternative submission also. In its view, on the facts before it, it could be held that the assessee's intention throughout was to sell the plots at a profit, if possible, and the intention did not develop suddenly in S. Y. 2016 which was the year under consideration in the appeal. The Tribunal, accordingly, upheld fully the conclusions as well as the calculations made by the ITO. It is from this decision of the Tribunal that the following three questions have been referred to us :
'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 53,394 realised by the applicant on transfer or sale of certain plots of land situate in the city of Bombay has been rightly treated as the income of the applicant from an adventure in the nature of trade and is liable to Income-tax
2. Whether the alternative claim of the applicant to substitute the market value on the date of conversion of the loan into stock-in-trade was rightly reject
3. Whether there was evidence to justify the finding that the applicant's intention throughout seemed to have been to sell the plots at a profitable ?'
It is clear that question No. 3 is based on the alternative submission urged before the Tribunal which also the Tribunal rejected.
9. The learned counsel for the assessee pointed out that in her examination as well as in subsequent letters addressed to the ITO, it has been specifically contended by the assessee that the plots had been purchased by her for construction of a residential house. Accordingly, it was submitted that there was no material brought on record by the revenue to show that this was not the intention of the assessee. It was further contended that it was for the revenue to establish that the profit earned in the transaction is within the taxable provision and is on that account liable to be taxed as income. The very fact that the assessee had made a profitable bargain or had at the initial or at a subsequent time the desire to sell the property if a favourable offer was forthcoming, was not by itself sufficient to justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade.
10. In connection with this submission, our attention was drawn to the observations to be found in Janki Ram Bahadur Ram v. CIT : 57ITR21(SC) . It was observed by the Supreme Court in the above decision that the question whether profit in a transaction had arisen out of an adventure in the nature of trade was a mixed question of law and fact. It was further observed 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. The relevant observations which need not be extracted are to be found at pages 24 to 26 of the report. In Janki Ram's case : 57ITR21(SC) , it was observed that barring the expectation of profit and realisation of profit by sale of the property, there was no evidence bearing on the intention with which the assessee had purchased the property. It was submitted that the matter before us was identical and a similar conclusion was required to be reached.
11. The Supreme Court had occasion to consider a similar question in a later decision in P.M. Mohammed Meerakhan v. CIT : 73ITR735(SC) . It has been observed in the aforesaid decision that it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction.
12. It is unnecessary to set down in our judgment the facts in Janki Ram's case : 57ITR21(SC) as also the facts in P.M. Mohammed Meerakhan's case : 73ITR735(SC) inasmuch as the facts in neither case are or can be identical with the case before us. It has to be conceded that the facts on which the decision was given against the assessee in P.M. Mohammed Meerakhan's case were a little stronger for the revenue than the facts before us. On those facts (summarised at page 742 of the report) it is abundantly clear that the assessee had earned profit in the course of a profit-making scheme and, therefore, the surplus realised was required to be considered a revenue surplus as having arisen out of an adventure in the nature of trade. Having, however, given anxious consideration to the submissions made on behalf of the assessee, we are of opinion that the overall impression left by the course of transactions entered into by the assessee before us would result in the same conclusions being reached as were arrived at by the ITO and subsequently confirmed by the AAC and the Tribunal.
13. Mr. Mehta on behalf of the assessee submitted that the sales effected by the assessee for the earlier years should be ignored or that they must be properly considered as sales which would further the assessee's case inas much as the department itself had accepted her plea that only capital gains had accrued to her. We are afraid, there is no substance in this submission. The whole history of the dealings in land has to be considered. Further, it is possible to hold that the very first transaction or the first two (as in the case before us) were not part of a profit making scheme and the surplus realised from these one or two transactions may, therefore, be allowed as capital gains but with more ventures occurring with greater frequency, the same happy conclusion for the assessee may no longer be proper and the further amounts realised by the assessee might have to be considered as profits earned from her trading activity being part of a regular profit-making scheme as established by the facts on record.
14. Mr. Mehta also submitted that the Tribunal was in error in holding that there was no intention whatsoever of building a residential house and observing that from the very beginning the assessee's intention was not to have any construction. Similarly, he was at pains to point out that the Tribunal has very cavalierly made observations as regards the financial incapacity of the assessee when the fact of the matter was otherwise.
15. It is possible to point at some small mistakes in mentioning the facts committed by the Tribunal here and there. However, bearing in mind the totality of the facts brought on record it is impossible for us to uphold the submission that the Tribunal was in error either in its approach to the problem or the answers that it gave to the questions which arose for consideration. We are inclined on these facts to agree with the Tribunal and the officers below that the plots were purchased not for any alleged construction, but for the purpose of making profit by resale if possible. If that were so and the activity is held to be an activity in the nature of trade, then the Tribunal's conclusion as well as the computation would be required to be upheld.
16. In our opinion, further elaboration is unnecessary on the facts arising in this reference. In the result, the questions referred to us are answered as follows :
Question No. 1. - In the affirmative and in favour of the revenue.
Question No. 2. - In the affirmative and in favour of the revenue.
Question No. 3. - In the affirmative and in favour of the revenue.
The assessee will pay to the Commissioner the costs of the reference.