ADVENTURE IN THE NATURE OF TRADE

[Mr. M. GOVINDARAJAN]

Sec. 2(13) of the Income Tax Act, 1961 defines the term 'business'.  The term 'business' includes -

• any trade, commerce or manufacture; or
• any adventure or concern in the nature of trade, commerce or manufacture.

        In this article the concept of 'Adventure in the nature of trade is going to be discussed with relevant case laws.

        The term 'Adventure in the nature of trade' has not been defined in the Income Tax Act, 1961.  As far as the dictionary meaning of the word 'adventure' is concerned, it implies a pecuniary risk, a venture, a commercial purpose.   The word 'venture' is defined as a commercial activity in which there is a risk of loss as well as a chance of gain.   The term 'trade' in the context of the definition of the expression 'business' is a wider concept and once this term associated with the term 'adventure' the scope further enlarged.   The adventure in the nature of trade is allowed to transaction that constitutes a trade or business but may not be a business itself.   The business has characterized by some of essential ventures such as repetitive transactions, holding of stock-in-trade, dealing with the customers and implied intention between the parties, etc.,   But, contrary to this even an isolated transaction can satisfy the description of an adventure in the nature of trade.   For an adventure, it is not necessary that there should be a series of transactions, i.e., both of purchase and of sales.   A single transaction or purchase and sale may be outside the assessee's line of business, can constitute an adventure in the nature of trade.   Therefore, neither repetitive nor continuity of similar transaction is necessary to constitute a transaction then it is nothing but carrying on a business and in such situation, the question of adventure in the nature of trade can hardly arise.   To supplement as also to further elaborate  this discussion, it can be added that the word 'adventure' may be in the realms of travel, voyage, hunting etc., but it is attached with other words, i.e., adventure in the nature of trade, then the move  adventure is attached with motive of trade.

       In 'G. Venkataswami Naidu & Co., V. Commissioner of Income Tax' - 1958 -TMI - 49633 - (SUPREME Court) the appellant contended that four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realized that cannot impress the transaction with the character of an adventure in the nature of trade.   The Supreme Court observed that the  appellant, however, is a firm and it was not a part of its ordinary business to make investment in lands.   Besides, when the first purchase was made it is difficult to treat it as a matter of investment.   The property was a small piece of 280.25 cents and it could yield no return whatever to the purchaser.   It is clear that this purchase was the first step taken by the appellant in execution of well-considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit.   Just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resalable is a relevant factor in determining the character of the transaction, so would his conduct prior to the purchase be relevant if it shows a design and a purpose.   As and when plots adjoining the mills were available for sale, the appellant carried out his plan and consolidated his holding of the said plots.  

       The appellant is the managing agent of the Janardana Mills and probably it was first thought that purchasing the plots in its own name and selling them to the mills may invite criticism and so the first purchase was made by the appellant in the name of its benamidar V.G. Raja.  Later the appellant changed its mind and took the subsequent sale deeds in its own name.  The conduct of the appellant in regard to these subsequent to their purchase clearly shows that it was not interested in obtaining any return from them.  No doubt the appellant sought to explain its purpose on the ground that it wanted to build tenements for the employees of the mills; but it had taken no steps in that behalf for the whole of the period during which the plots remained in its possession.   Besides, it would not be easy to assume in the case of a firm like the appellant that the acquisition of the open plots could involve any pride of possession to the purchaser.   It is really not one transaction of purchase and resale.   It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holding that at a convenient time it sold the lands to the Janardana Mills in two lots.  When the Tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment the appellant did neither and just allowed the property to remain  unutilized except for the net rent of Rs.80 per annum which is received from the house on one of the plots.   The reason given by the appellant for the purchase of the properties by the mills has been rejected by the Tribunal; and so when the mills purchased the properties it is not shown that the sale was occasioned by any special necessity at the time.   In the circumstances of the case the tribunal was obviously right in inferring that the appellant knew that it would be able to sell the lands to the mills whenever it thought it profitable so to do.   Thus the appellant purchased the four plots during two years with the sole intention to sell them to the mills at a profit and this intention raises a strong presumption in favor of the view taken by the Tribunal.   In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts the presumption arising from the initial intention; on the other hand, most of them corroborate the said presumption.  The Supreme Court, therefore, held that the High Court was right in taking the view that, on the facts and circumstances proved in this case, the transaction in question is an adventure in the nature of trade.

          In 'Deputy Commissioner of Income tax V. Gopal Ramnarayan Kasat' - 2009 -TMI - 78705 - (Bombay High Court)  the assessees were brothers.   The assessesses along with one Shri Narayan Ramdayal Lathi, who was advocate by profession, purchased certain agricultural lands during the period 1992 to 1998.   The lands were acquired immediately thereafter by the State Government.   The assessees received compensation/enhanced compensation towards the acquisition of lands during the assessment years 2000-01, 2001-02 and 2002 - 03.   The assessees had filed their returns for those years.   The assessment was reopened under Sec. 147 of the Income Tax Act, 1961.   The Assessing Officer came to the conclusion that the material placed on record indicated that the assessee did not have any intention to hold the lands and cultivate it.  He, therefore, concluded that the surplus received by the assessees was liable to be taxed as business income terming the transaction an 'Adventure in the nature of trade' as defined under the provisions of Sec. 2(13).  The High Court held that from the material placed on record, on the basis of which the three authorities had concurrently held that the transactions were 'adventure in the nature of trade', it could clearly be inferred that the assessees were involved in a series of transaction of purchasing lands which were notified or likely to be notified for acquisition by the Government. The transactions were not only pertaining to the Jalgaon District but also Aurangabad District, which was far away from the place of residence of the assessee.   The High Court further held that there was no perversity in the finding of the fact recorded by the Assessing Officer and confirmed by the Commissioner (Appeals) and the Tribunal that the transactions were 'adventure in the nature of trade' and the gains therefore were chargeable to tax under the head 'Profits and gains of business/profession'.

Discussions to this article

[DEV KUMAR KOTHARI]

One more aspect of importance is that a business can also be 'an adventure in nature of commerce' (not necessarily in nature of trade). Therefore, even activities of buying, holding, carrying, exploiting of any property - house property, shares and units, debentures, gold and silver, paintings ... are adventure in nature of commerce. There are risks associated right from stage of buying- whether you have purchased a property property at proper time and price, risks associated with holding and carrying property investments, risks associated with use (e.g. whether tenant shall pay rent on time, or whether he will vacate property on demand or as per agreement,. whether price will go up or come down, what will be inflation and whether rent  earned will keep pace with inflation.. etc.).Therefore, in case of adventure in nature of commerce also income need to be computed under proper  heads- recurring income by way of rent of house property as income from house property, recurring income by way of rent of machines as income from business of other sources, recurring income by way of interest , dividend,  security lending commission, hedging gains  etc.are also to be assessed as income form business or other sources. When a property not kept for trade but for investment purpose is sold the gain will fall under head 'capital gains'.

It is wrong to say that costs for holding and carrying capital assets is not allowable - they are allowable under head 'business' when the activity of investment is an adventure in nature of commerce an constitute business. .