2018 (3) TMI 796 - HC - Income Tax

Sale of asset - Whether a particular transaction would constitute adventure in the nature of trade or would be the normal sale of assets attracting long term capital gain? - Held that - No material from records to suggest that at the time of acquisition of the properties such acquisition was for the purpose of undertaking a business venture. What we are to look at now is as to whether there was a business venture simultaneously with the development agreement. Major portion of the developed building was to remain with the assessee after construction. Sale of one unit therefrom per se would not have constituted an adventure in the nature of trade. Materials available on record do not show that building construction formed part of normal activity of the Assessee. Determining factor in this appeal, as urged by Revenue, becomes the intervening arrangement of agreement for sale and its subsequent cancellation when the property fetched better price. Revenue s stand is that pursuit of higher profit by itself would confer on the transaction the character of business venture. We are, however, unable to agree with this submission. It might be natural for a person, who is not undertaking any business venture, to seek higher return from sale of his assets. That would be a rational pursuit and in our view reflects normal human behaviour and not a special attribute for a trader or a businessman. Just because for a particular unit, an intervening transaction is aborted for the reason that the property would fetch a better price, if sold to another person, grievance may be caused to the person with whom the earlier arrangement was entered into. But such an exercise would not transform the nature of activity from normal sale of capital asset to a business venture. There is substantial gap in time between the day of acquisition of the asset and its development and part-sale. The original assessee was not a property dealer but a member of the Indian Revenue Service, working with the Income Tax department itself. Only a portion of the property was sold. In these circumstances, the test laid down in the case of G.Venkataswami Naidu & Co. (1958 (11) TMI 5 - SUPREME Court) has to be decided in favour of the assessee.

Issues Involved:

1. Classification of ?80 lakh sale proceeds as business income or long-term capital gains.
2. Determination of whether the transaction constituted an adventure in the nature of trade.
3. Analysis of the Tribunal's decision in light of Supreme Court precedents.

Issue-wise Detailed Analysis:

1. Classification of ?80 lakh Sale Proceeds:

The primary dispute revolves around the classification of ?80 lakh received from the sale of the third floor of a building along with roof rights. The Assessing Officer treated this amount as business income, considering it an adventure in the nature of trade. Conversely, the respondent (legal representative of the deceased assessee) argued that it should be taxed as long-term capital gains after indexing. The Commissioner of Income Tax upheld the Assessing Officer’s view, but the Income Tax Appellate Tribunal reversed this decision, treating the amount as long-term capital gain. The Tribunal's decision was challenged by the Revenue, leading to the current appeal.

2. Determination of Whether the Transaction Constituted an Adventure in the Nature of Trade:

The Assessing Officer and the Commissioner of Income Tax viewed the transaction as an adventure in the nature of trade, citing the assessee's intention to enter into a business venture. The Revenue’s counsel argued that the intervening agreement for sale and its subsequent cancellation indicated a business venture. The counsel referred to Supreme Court decisions in Raja J. Rameshwar Rao Vs. Commissioner of Income Tax and Khan Bahadur Ahmed Alladin Vs. Commissioner of Income Tax, which established that even a single transaction could qualify as a business venture if it involved a well-calculated scheme of profit-making.

In contrast, the respondent’s counsel relied on a decision by a Coordinate Bench of the Calcutta High Court in Principal Commissioner of Income Tax-3 Vs. Rungta Properties Pvt. Ltd., where the Court held that transactions involving the sale of a part of a building constructed through a developer did not constitute an adventure in the nature of trade. The Court emphasized that the intention to resell at a profit, coupled with other factors such as retaining substantial portions for self-use and the absence of a joint venture agreement, did not transform the transaction into a business venture.

3. Analysis of the Tribunal's Decision in Light of Supreme Court Precedents:

The Supreme Court’s judgment in G. Venkataswami Naidu & Co. vs. CIT provided parameters for determining whether a transaction is an adventure in the nature of trade. The Court noted that several factors, such as the purchaser's intention, the nature of the commodity, the quantity purchased, and subsequent actions to improve the commodity, must be considered. The Court also highlighted that the presence of an initial intention to resell at a profit does not conclusively determine the nature of the transaction; it must be weighed against other factors.

In this case, the Tribunal found no evidence suggesting that the original assessee intended to undertake a business venture when acquiring the property. The property was held for a substantial period before its development and part-sale. The original assessee was an officer of the Indian Revenue Service, not a property dealer. The Tribunal concluded that the sale of one unit did not constitute an adventure in the nature of trade, and the pursuit of higher profit did not transform the transaction into a business venture.

Conclusion:

The High Court upheld the Tribunal's decision, dismissing the Revenue’s appeal. The Court found no material evidence indicating that the acquisition of the property was for the purpose of undertaking a business venture. The sale of a portion of the developed property, even with an intervening agreement for sale, was deemed a normal sale of a capital asset rather than a business venture. The Court emphasized that seeking higher returns from the sale of assets is a rational pursuit and does not necessarily indicate a business activity. Thus, the ?80 lakh was rightly classified as long-term capital gains, not business income.

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