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Commissioner of Income-tax, Gujarat-iv Vs. Hiralal Manilal Mody - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 204 of 1975
Judge
Reported in(1981)25CTR(Guj)275; [1981]131ITR421(Guj)
ActsIncome Tax Act, 1961 - Sections 5
AppellantCommissioner of Income-tax, Gujarat-iv
RespondentHiralal Manilal Mody
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate K.C. Patel, Adv.
Excerpt:
.....thus impugned amount not liable to be included in income of assessee for relevant assessment year - tribunal on materials on record rightly held that assessee was not dealer in immovable property - considering all circumstances and evidence on record assessee not proved to be dealer in immovable property - question answered in affirmative. (ii) total income - whether tribunal justified in holding that impugned amount having been received by assessee by way of damages on account of breach of agreement committed by sellers not to be treated as assessee's income - said amount represented damages which vendors had agreed to pay to assessee - said amount was by way of damages for loss of good bargain which assessee had to forgo as vendors not prepared to execute conveyance deed -..........the decision of the aac, the revenue went in appeal to the income-tax appellate tribunal and the tribunal held that the assessee was not proved to be a dealer in immovable property. the tribunal further held that the properties purchased by the assessee were by way of investment. it took into consideration the fact that out of rs. 24,431 sought to be brought to tax in the year under reference rs. 8,000 had been shown in the assessment year 1965-66 and rs. 8,000 had been shown in the assessment year 1966-67. as regards the assessment year 1965-66, there was an order of the aac deleting that amount from the total income of the assessee and as regards the assessment year 1966-67, the amount had not been brought to tax at all. the tribunal observed that, thus, out of the amount of rs......
Judgment:

Divan, C.J.

1. In this case, at the instance of the revenue, the following three questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not a dealer in immovable properties and, therefore, the amount of Rs. 24,431 is not liable to be included in the income of the assessee for the assessment year under reference

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that since the amount of Rs. 16,000 out of Rs. 24,431 was dealt with in the assessment years 1965-66 and 1966-67, it could not be included in the assessee's total income for the assessment year under reference

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 24,431, having been received by the assessee by way of damages on account of the breach of the agreement committed by the sellers, Mody Kalidas Hargovandas and another, could not be treated as the assessee's income ?'

2. The facts leading to this case are as follows : We are concerned with assessment year 1969-70, the previous year being calendar year 1968. The assessee is an individual and he has no personal books of account. The assessee filed return of income on June 30, 1969, in respect of the assessment year 1969-70, declaring a total income of Rs. 39,285. The assessee had entered into an agreement with one Modi Kalidas Hargovandas and another for the purchase of an immovable property situate on Gandhi Road, Ahmedabad, for a sum of rupees two lakhs. The agreement was entered into in 1956, and under the terms of the agreement, the sellers had to execute the deed of conveyance within a period of three years. At the time of the agreement, the assessee paid an amount of Rs. 50,000 as earnest money and the balance of Rs. 1,50,000 was to be paid at the time of the execution of the deed of conveyance. The vendors failed to execute the deed of conveyance as stipulated and the agreement executed in 1956 was cancelled. Thereafter, the assessee entered into a fresh agreement dated May 12, 1964, with the same vendors for the purchase of the same property. Under the terms of this agreement of 1964, the deed of conveyance was to be executed within six months (wrongly mentioned in the statement of the case as three years) from the date of execution of the agreement. The vendors again failed to execute the deed of conveyance as agreed. On December 21, 1964, a settlement was arrived at between the assessee and the vendors and under that agreement the vendors agreed to pay Rs. 8,000 to the assessee by way of damages and this amount was to be treated as having been paid towards the consideration of rupees two lakhs. In other words, the assessee was deemed to have paid Rs. 8,000 in addition to Rs. 50,000 which were paid by way of earnest money and Rs. 58,000 were to be treated as paid towards the consideration of rupees two lakhs. The sellers did not execute a sale deed but again agreed to pay a further amount of Rs. 8,000 by way of damages on July 8, 1965. This amount of Rs. 8,000 was also to be treated as paid towards the consideration. The assessee paid a further sum of Rs. 10,000 towards the consideration on November 10, 1965, and the period for execution of the deed of conveyance was extended up to June 30, 1966. The vendors failed to execute the deed of conveyance as agreed.

3. The assessee thereafter filed Civil Suit No. 1068 of 1968 in the City Civil Court at Ahmedabad against Modi Kalidas Hargovandas and another for the specific performance of the agreement for sale. This suit was compromised on April 1, 1968, and under the terms of the compromise, Modi Kalidas Hargovandas and another, the vendors, agreed to pay Rs. 85,431 together with interest to the assessee. This amount of Rs. 85,431 consisted of the following sums :

Rs.50,000 paid as earnest money in 1956;16,000 payable by way of damages as stated above whichwere to be credited towards the consideration;10,000 further amount paid by the assessee on November10, 1965;8,431 further damages; and1,000 towards the costs of the suit. In the income-tax assessment for the assessment year 1965-66, the ITO assessed the amount of Rs. 8,000 which was referred to in the agreement of December 21, 1964, as income from 'other sources'. The assessee objected to the inclusion of the said amount on the ground that it was a receipt of capital nature. The ITO, however, held that the amount was taxable as income from 'other sources'. Being aggrieved by the order of the ITO, the assessee carried the matter in appeal before the AAC. The AAC by by his order held that the amount of Rs. 8,000 could not be taxed as it was merely a reduction in the purchase price of a capital asset. He observed that the assessee was not a dealer in property and that the ITO himself had taxed the amount of Rs. 8,000 not as business income but as income from 'other sources'. He was of the view that the addition of the amount of Rs. 8,000 made in the assessment year 1965-66 should be deleted.

4. As regards the amount of Rs. 8,000, which was referred to in the agreement of July 8, 1965, the assessee showed that amount in his return but contended that this amount was not liable to be taxed ad this contention of the assessee was accepted by the ITO because the ITO did not bring that amount of Rs. 8,000 to tax so far as the assessment year 1966-67 was concerned. As regards the assessment year under consideration, the ITO held that the assessee was a dealer in property. He held that the amount of Rs. 8,000 plus Rs. 8,431 totaling to Rs. 24,431 received by the assessee by way of damages was nothing but profit earned by him in this transaction which was a business transaction. He, therefore, brought this amount of Rs. 24,431 to tax. The assessee carried the matter in appeal and the AAC held that the amount of Rs. 24,431 was not taxable. Against the decision of the AAC, the revenue went in appeal to the Income-tax Appellate Tribunal and the Tribunal held that the assessee was not proved to be a dealer in immovable property. The Tribunal further held that the properties purchased by the assessee were by way of investment. It took into consideration the fact that out of Rs. 24,431 sought to be brought to tax in the year under reference Rs. 8,000 had been shown in the assessment year 1965-66 and Rs. 8,000 had been shown in the assessment year 1966-67. As regards the assessment year 1965-66, there was an order of the AAC deleting that amount from the total income of the assessee and as regards the assessment year 1966-67, the amount had not been brought to tax at all. The Tribunal observed that, thus, out of the amount of Rs. 24,431, the amount of Rs. 16,000 was already dealt with in the assessment years 1965-66 and 1966-67. The Tribunal held that this amount of Rs. 16,000 could not have been included by the ITO in the year under appeal. The Tribunal further held that the total amount of Rs. 24,431 referred to above was received by the assessee by way of damages and this amount was paid to the assessee on account of the breach of agreement committed by the vendors, namely, Modi Kalidas Hargovandas and another. The Tribunal held that the damages count not be treated as the assessee's income and thus in this view of the matter the Tribunal confirmed the order of the AAC regarding this amount of Rs. 24,431. Thereafter, at the instance of the revenue, the three questions hereinabove set out have been referred to us for our opinion.

5. The principal question in this case is whether the assessee was a dealer in immovable property, as was contended for by the revenue. In this connection, it may be pointed out that ordinarily, when a person purchases immovable property or purchases land, it is treated as an investment and it is only in rare cases that purchase and sale of immovable property or land is treated as a business or an adventure in the nature of trade. The question of burden of proof in cases of this nature has been dealt with in several decisions of the Supreme Court and of this court also. In CIT v. Premji Gopalbhai : [1978]113ITR785(Guj) , it was held that the burden of proving that a particular transaction was an adventure in the nature of trade was on the revenue. That burden could be discharged by pointing to circumstances which lead to the conclusion that the transaction was an adventure in the nature of trade. However, even if land which was not a commercial commodity was purchased and it could be shown that the purchase of the land was made solely and exclusively with an intention to resell it at a profit, it would be a strong factor that the transaction would be an adventure in the nature of trade. To the same effect are the observations in CIT v. Gordhandas Trikambhai Patel : [1979]118ITR81(Guj) . All the earlier decisions were considered in Gordhandas Trikambhai Patel's case and the question that was posed in the light of those decisions was : 'Does the revenue, burden being on the revenue, establish that the manner of dealing with the lands in question in the instant case by the two assessee stamped the transaction as a trading venture ?'

6. In the instant case, one factor to be borne in mind is that so far as the assessment year 1965-66 was concerned, as regards the amount of Rs. 8,000 when the matter went in appeal before the AAC, it was held by that officer that the assessee was not a dealer in immovable property and there was no challenge to that particular decision.

7. Even as regards the assessment year under consideration, there is a further factor, as has been pointed out by the Tribunal in para. 9 of its order, that there was another property called Raipur property situated as Ahmedabad in connection with which the assessee had made a profit of Rs. 2,000 and in connection with which acquisition of some land belonging to him at Motera on the outskirts of Ahmedabad City an amount of Rs. 775 was shown as profit, being the difference between the amount received by way of compensation in land acquisition proceedings and the cost of acquisition. Now, as regards these profits of Rs. 2,000 and Rs. 775 made by the assessee, the Tribunal held that they could not be treated as the assessee's business income. The assessee was not a dealer in immovable property and, therefore, these amounts could be taxed only as short-term or long-term capital gains as held by the AAC. Regarding the two amounts of Rs. 2,000 and Rs. 775, which were not treated as business income of the assessee, no question has been referred to us at the instance of the revenue and it cannot be that for the purpose of one property, namely, this property at Gandhi Road at Ahmedabad, the assessee is to be treated as a dealer in immovable property and for the other two properties - Raipur property and Motera property -the assessee is to be treated as an investor. Under these circumstances, it seems to us that apart from discharging the burden of proof which lay on the revenue to show that the assessee was a dealer in immovable property or that he was indulging in an adventure in the nature of trade, the revenue has not challenged the findings recorded in favour of the assessee, namely, that he was not a dealer in immovable property so far as the assessment year 1965-66 was concerned, and so far as the assessment year under reference is concerned as regards these two items of Rs. 2,000 and Rs. 775. Under these circumstances, it cannot be held that the assessee was a dealer in immovable property. In our opinion, therefore, the Tribunal on the materials placed before it was right in coming to the conclusion that the assessee was to a dealer in immovable property.

8. Mr. Raval for the revenue drew our attention to the fact that between November, 1958, and February, 1963, the assessee had entered into about fifteen transactions of sale or purchase of immovable property. Out of fourteen properties purchased by the assessee, he had sold eight properties. Six of the properties purchased were not sold. Out of the properties sold by him, the assessee had not made any profit in five transactions. In one transaction of resale he had suffered a loss of Rs. 500 and there was only profit in three transactions of resale, Rs. 1,000 by sale of property on November 7, 1963, Rs. 3,000 on sale of property on July 20, 1960 and Rs. 775 during the year of account relevant to the assessment year under appeal. (This is in reference to the land acquisition proceedings for land at Motera). The Tribunal held that considering all the circumstances and evidence on record the assessee was to proved to be a dealer in immovable property.

9. In our opinion, the Tribunal has applied correct legal tests for the purpose of arriving at its conclusion that the assessee was not proved to be a dealer in immovable property and on the facts before it, the Tribunal was justified i coming to that conclusion in the light of the legal principles laid down in the decided cases referred to above.

10. As regards the amount of Rs. 16,000 out of the aggregate amount of Rs. 24,431, it is clear that there is a decision, against the revenue in the shape of the decision of the AAC as regards the assessment year 1965-66 where the AAC had deleted the amount of Rs. 8,000 and had treated it as capital receipt in respect of a capital asset and had said that it could not be treated as part of the assessee's income. That decision of the AAC was not challenged. Again as regards the second item of Rs. 8,000 which was referred to in the agreement of July 8, 1965, this amount was mentioned in the return of income for assessment year 1966-67, and it was processed by the ITO and it was not brought to tax. So, as regards these two items of Rs. 8,000 each, aggregating to Rs. 16,000 out of the total of Rs. 24,431, there were decisions of the I.T. authorities, namely, the AAC and the implied decision of ITO for the assessment year 1966-67, and in no circumstance could this amount of Rs. 16,000 be brought to tax in the assessment year 1969-70 which is the year under reference.

11. It must be borne in mind that the assessee had been waiting since 1956 for the completion of this transaction of sale. The agreement of sale was entered into in 1956 and the earnest moneys of Rs. 50,000 had been paid by the assessee on that occasion. Thereafter, by a subsequent agreement, the transaction was kept alive and an amount of Rs. 8,000 was deemed to have been paid by the assessee to the vendors towards the total consideration of rupees two lakhs. This way by virtue of the agreement of December 21, 1964. Again, a further amount of Rs. 8,000 was deemed to have been paid towards the consideration by virtue of damages. A further amount of Rs. 10,000 was paid on November 10, 1955, and it was only after a suit had been filed by the assessee that the vendors compromised the matter and agreed to pay the aggregate amount of Rs. 85,431 to the assessee. Out of this amount of Rs. 85,431, Rs. 60,000 represented the money which the assessee had paid to the vendors and the remaining amount of Rs. 24,431 represented damages which the vendors had agreed to pay to the assessee. This amount was not by way of income but by way of damages for the loss of a good bargain which the assessee had to forgo because the vendors were not prepared to execute the deed of conveyance. The balance of Rs. 1,000 was towards the costs of the suit. In view of these peculiar facts and circumstances, the Tribunal was justified in coming to the conclusion that the amount of Rs. 24,431 did not represent income of the assessee but was damages for the loss of the bargain and hence the Tribunal was justified in not treating it as income of the assessee.

12. In the light of the above discussion, we answer the question referred to us as follows :

Question No. 1. -In the affirmative, that is, in favour of the assessee and against the revenue.

Question No. 2. -In the affirmative, that is, in favour of the assessee and against the revenue.

Question No. 3. -In the affirmative, that is, in favour of the assessee and against the revenue.

13. The Commissioner will pay the costs of this reference to the assessee.


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