Exemption – Whether all Adventures (Transactions) are Covered in Business Definition for Levy of Income Tax
PRELUDE: The general rule under the Income-tax Act is that all revenue receipts are taxable unless a receipt is specifically exempt and equally well, all capital receipts are exempt from taxation unless an item falls within the provisions of the Act. I would like to deal with the issue concerning taxability or otherwise of certain assets which are seemingly covered by the provisions of chapter IV(E) but falls outside the tax net if it is shown that such income was not earned by carrying any activity which may fall within the meaning of expression ‘Adventure in the nature of trade’. Despite the fact that this issue was considered by the Apex court way back in 1958 in the case of G. Venkataswami Naidu & Co. v. CIT 35 ITR 594, the courts had to time and again address this issue to match the facts and circumstances of each case with the principle laid down therein. Therefore it remained as a moot issue since what constitutes an adventure in the nature of trade is held to be one of mixed question of fact and law. Therefore a brief prelude to the provisions and its scope and ambit needs a mention.
INTRODUCTION: Section – 28 of The Income-tax Act, 1961 states that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income-tax under the head “Profits and gains of business or profession”.
“Profession” may be defined as a vocation, or a job requiring some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Section – 2(36) of the Act states that Profession includes Vocation.
What constitutes business is provided under Section – 2(13) of the Act which is as follows
“”business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”
Though business is defined under Income-tax Act still there are some complexities in treating what is business more particularly with respect to adventure. So, we shall discuss the concept of adventure or concern in the nature of trade with relevant case law and detailed analysis:
ADVETURE IN THE NATURE OF TRADE:
The term ‘adventure in the nature of trade’ has not been defined in the Income-tax Act, 1961. The expression “in the nature of trade” postulates existence of certain elements in the adventure which in law would invest it with the character of trade or business and that would make the question whether a transaction is in the nature of a trade and its decision arises out of mixed parameters i.e, law and fact.
Specific mention of adventure in the nature of trade in business definition clearly suggests that the transaction in question cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade, provided at least some of the essential features of trade are present in the isolated or single transaction.
If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as,
- whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it ;
- the nature and quantity of the commodity purchased and resold ;
- any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resalable ;
- any act prior to the purchase showing a design or purpose ;
- the incidents associated with the purchase and resale ;
- the similarity of the transactions to operations usually associated with trade or business;
- the repetition of the transaction ;
- the element of pride of possession.
A person may purchase a piece of art, hold it for some time and if a profitable offer is received, sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction and if such a claim is upheld that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help to draw an inference that a transaction is in the nature of trade but it is not a matter of merely counting the number of facts and circumstances that are pro and con. what is important to consider is their distinctive character.
Therefore, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. In cases where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade.
In the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC) Apex Court eloquently considered the matter and laid down the following guidelines:
“……Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade.”
The metaphoric expression, ‘a single plunge in the waters of trade’ may partake of the character of the adventure in the nature of trade or ‘appearance of one swallow does not make a summer’ used by the Apex Court are conveniently being used either to the advantage of the Revenue or to the advantage of an assessee and therefore this area can be sorted out by holistically considering the facts of each case to bring out the intention of an assessee; merely because an assessee would like to sell a property for a better price, it should not be assumed. With all such transactions of earning higher income should be considered as ‘adventure in the nature of trade’. There are catena of decisions of Supreme Court, High Courts and ITAT, both under the Income-tax Act as well as Wealth tax Act, wherein the principle enunciated by the Supreme court(supra) was considered, appreciated and followed. To avoid making the article lengthy, I would touch upon few important decisions based on the frequently asked questions in the seminars, etc.
It is well settled that, sale of land by plotting and developing to realise a better price cannot be treated as adventure in the nature of trade, as it lacks to constitute a trade or business since there was no intention to resell at the time of purchasing the property. Hence it can be understood that all isolated transactions cannot satisfy the description of adventure in the nature of trade. Various High Courts and Tribunals had affirmed this view.
In the case of Devineni Avinash v. PCIT (2019) 412 ITR 28 (T&AP.), the High Court observed that mere execution of development agreement of land, soon after purchase of land, would not, by itself mean that the owner of the land intends to carry on business; for the owner may well have decided to part with the said land for other reasons also.
The Gujrat High Court in the case of PCIT v. Hennaben Bhadresh Mehta (2018) 409 ITR 196 (Guj.) held that even though an agricultural land was sold within 15 to 16 months with an intention to earn huge profits by the assessee, such intention alone nor the quantum of profit, could be the determinative factor to treat a receipt as business income and the transaction carried out by the assessee could not be treated as an adventure in the nature of trade.
In the case of CIT v. Magunta Raghava Reddy Charitable Trust (2017) 398 ITR 663 (Madras), the hon’ble Court observed that if the predominant object was different, mere sale of immovable property at a higher rate, cannot be the sole factor to treat the same as business income.
In the case of B. Narasimha Reddy v. Income Tax Officer(1994) 48 TTJ (Hyd.) 329, the Division Bench of I.T.A.T. Hyderabad ‘A’ Bench has held that:
“Assessee plotting out his ancestral agricultural land and selling them at the rate of per square yard after getting approval for the lay out from Gram Panchayat. It was held that assessee never dealt in purchase and sale of real estate. Land was capital asset within the meaning of Section 2(14) read with Section 2(1-A) being situated within 8 kms. of municipal limited. Transaction was, therefore, to realise the maximum from out of capital asset. Profits, therefore, not income from adventure in the nature of trade but capital gains.”
This view was upheld in the case of B.Venu Madhav vs. ACIT (ITA No. 1698/Hyd/2012, A.Y 2006-07).
In the case of Commissioner of Income Tax v. A. Mohammed Mohideen(1988) 74 CTR (Mad) 129, the Division Bench of the Madras High Court has held that:
“Plotting and developing of land before sale by itself would not establish that the person concerned was indulging in a trading activity. It may be that for realising the maximum price, he undertakes certain acts which any other owner would undertake. Revenue has to establish by positive evidence that the purchase and sale of property was with the view to earn profits through trading transaction. In the present case, circumstances relied on by Revenue only throws suspicion on the assessee’s act of purchasing a property which did not immediately yield income, but there are no materials to further prove that assessee intended to indulge in a trading activity. Transaction of assessee in purchasing and selling the property did not, therefore, amount to an adventure in the nature of trade.”
Further, In the case of CIT vs. Suresh Chand Goyal [209 CTR 410 (MP) 2007] Madhya Pradesh High Court conclusions are as follows,
“Considering the aforesaid facts and circumstances of the case, we are also of the view that the selling of own land after plotting it out in order to secure better price, is not an adventure in the nature of trade or business. The word “business” has been defined under Section 2(13)of the Income Tax Act, 1961, which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. An isolated transaction or activity can also be part of business, but to consider the question of business, there must be regular activity of purchasing and selling. In this case, there is nothing on record to show that the land was purchased for the purpose of selling into plots. Basically, it is a gifted land and the land was developed and was sold after converting into the plots with a view to secure the better price, therefore, the isolated activity cannot come within the purview of adventure in the nature of trade and business………” Para 15
CONCLUSION: Broadly the approach of the revenue of all adventures/transactions as business for levy of Income-tax, may fall in the category of ‘pedantic approach’, from the point of view of assesses since a one-time sale of ancestral property or an artwork which was held as pride of possession cannot be considered as a trading activity merely because it resulted in a higher return; multiple factors are significant to arrive at such conclusions and what factor plays key role varies from case to case since facts of each case may be unique. In other words, taking support from the metaphoric expression used by Hon’ble justice Gajendragadkar that one swallow cannot make the summer if the word swallow is meant to express transaction and summer resembles an adventure in the nature of trade.
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Excellent analysis. Basics are dealt with thoroughly