2017 (9) TMI 467 - AT - Income Tax

Receipt of security deposit - business income or capital gain - nature on income - Held that - In order to hold that an activity is in the nature of an adventure, there must be positive materials to prove that the assessee intended to trade in such an activity. Moreover, the expression adventure in the nature of trade appearing in the definition of business postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business. In this regard, it is observed that the A.O. has erred in the present case in taxing the receipt of Security Deposit as an income in the realm of Adventure in the nature of trade because there has to be at first a transaction in the nature of purchase or sale resulting in a gain or profit. On the contrary, there has been no such transaction/ and thus there is no gain or profit. In the absence of these two important ingredients it cannot be said that there has been taxable income. Thus we are of the considered view that Ld. CIT(A) has rightly deleted the addition on account of impugned receipt of security deposit as income of the assessee as Adventure in the nature of trade, which does not need any interference on our part, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute and reject the ground in dispute raised by the Revenue.

Summary

Issues:
- Whether the Ld. CIT(A) erred in deleting the addition amounting to ?6,42,25,228/- made by the AO on account of amount received being adventure in the nature of trade.

Analysis:
1. Facts of the Case: The assessee owned 22.2625 acres of land, along with family members owning additional land. The lands were leased to a company for development into an IT/ITES Special Economic Zone. The company paid a security deposit of ?6,42,25,228/-.

2. AO's Position: The AO treated the security deposit as income from an adventure in the nature of trade, as the company was to derive income from allotment of plots/shops after obtaining SEZ approval. The AO added the deposit to the assessee's income.

3. Arguments: The assessee contended that no change in ownership occurred, no land was sold, and no profit was realized. The AO's classification of the deposit as business income was challenged.

4. Tribunal's Decision: The Tribunal found that no sale of land occurred during the relevant year, and the company did not act upon obtaining SEZ approval. The AO's conclusion that the deposit was income from trade was deemed incorrect.

5. Legal Analysis: The Tribunal noted that for an activity to be considered an adventure in the nature of trade, there must be a transaction resulting in gain or profit. In this case, no such transaction took place, and the deposit did not constitute taxable income under the head of business.

6. Judicial Precedent: Referring to Lahore Electric Supply case, the Tribunal emphasized that a business activity must be continuous with a profit motive. The absence of a profit-generating transaction led to the rejection of the AO's classification.

7. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the addition of the security deposit as income from an adventure in the nature of trade. The appeals filed by the department were dismissed, affirming that the deposit did not qualify as taxable income.

This detailed analysis highlights the key arguments, legal principles, and the Tribunal's reasoning behind dismissing the department's appeals regarding the treatment of the security deposit as income from an adventure in the nature of trade.