TMI Blog1986 (10) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. During the course of assessment proceedings, it transpired that the assessee along with her mother and brother had become a partner in the firm of M/s. Ashni Construction Company. In the firm, the assessee, her mother and brother had contributed land as their share of capital contribution. There were seven other partners who contributed no capital whatsoever. The book value of the land as on March 31, 1970, was Rs. 34,728. As on April, 1, 1970, the assessee in her books of account put the market value of the land at Rs. 4,45,929. The surplus of Rs. 4,11,192 was transferred to the capital account No. 2 of the assessee. It is an admitted position that similar entries were made in the books of account of her mother and brother also. It was claimed by the assessee that the surplus was not capital gain inasmuch as there was neither transfer of any capital asset nor was there any sale or exchange. The Income-tax Officer found that only the assessee and two other partners (i.e., her mother and brother) had contributed capital in the form of land. The other seven partners had not contributed any capital whatsoever in the firm of M/s. Ashni Construction Company which was formed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as business income in the hands of the assessee. For this purpose, adequate opportunity of making representations and submissions was given to the assessee. Before the Commissioner, the assessee contended that the land was firstly treated as stock-in-trade in the assessee's own books of account and then transferred to the firm as stock-in-trade and as capital contribution. The learned Commissioner found that the firm of M/s. Ashni Construction Company had filed a return for the first time for the assessment year 1972-73 on November 12, 1974. For the accounting year, period commencing from April 1, 1970, to June 30, 1971, a loss of Rs. 3,286 was shown as arising on account of expenses of advocate's fees and payment of land revenue, etc. There were no receipts. The address of the firm was given as new Cotton Mill No. 1 Compound, Outside Raipur Gate. One of the seven partners, namely, Shri Gunvantlal M. Mistry, was serving in New Cotton Mills on a salary of Rs. 10,000 per annum. In the next accounting year ending on June 30, 1972, the income of the firm was shown by way of sale of grass to the tune of Rs. 4,530 only. In the subsequent accounting year ending on June 30, 1973, an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Adarsh Co-operative Industrial Estates Ltd. On February 1, 1973, possession of the land was given in part performance of the banakhat. After obtaining necessary permission under the provisions of the Gujarat Vacant Land in Urban Areas (Prohibition and Alienation) Act, 1972, the sale deed was executed in favour of the aforesaid society on December 15, 1973, for the purpose of construction of buildings. The Commissioner of Income-tax, after narrating the facts as stated above, observed as follows: " All the facts and circumstances indicated that the assessee, along with her mother and brother acting jointly, chose to show the land as sold through a partnership firm with the sole object of avoiding the payment of tax on the huge profit actually earned and received by the assessee, her mother and brother jointly throwing the land into partnership and retiring therefrom immediately thereafter was only a device adopted to conceal taxable profits which would have been plainly visible had the land been sold outright to or through the seven parties who were shown as partners of the firm. According to the Commissioner of Income-tax, the assessee earned and received income. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Income-tax Officer's order was liable to revision under the provisions of section 263 of the Act. Accordingly, the Commissioner of Income-tax directed the Income-tax Officer to enhance the assessment by a sum of Rs. 4,14,192 under the head " Business " and consequently deleted the addition of Rs. 5,000 of short-term capital gains as made by the Income-tax Officer. This order was passed by the Commissioner of Income-tax on March 26, 1976. The assessee preferred an appeal before the Income-tax Appellate Tribunal, Ahmedabad Bench-A (hereinafter referred to as " the Tribunal "). Before the Tribunal, the assessee contended that the expression " business " connotes a continuous activity with a view to earn profit and this test was not satisfied. It was also contended that the profit did not arise out of an adventure in nature of business inasmuch as when a person makes investment in land, ordinarily, the assumption is in favour of an investment rather than an adventure in the nature of business. The Tribunal passed its order on July 14, 1977. In para. 11 of the order, the Tribunal observed as follows: " The controversy before us is whether the said amount of Rs. 4,14,192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal did not deal with these contentions raised by the learned departmental representative. This aspect will be discussed in detail a little later. The Tribunal also observed that the formation of partnership and introduction of land as capital contribution would not amount to sale by a partner to the firm and according to the Tribunal, the same will be the position in the case of retirement of a partner. The Tribunal held that the conclusion reached by the Commissioner of Income-tax that the order of the Income-tax Officer was erroneous in so far as it was prejudicial to the interest of the Revenue on the ground that the income from profits and gains had escaped assessment at the time of original assessment, could not be sustained. The Tribunal also found that the source from which the income arose was not established and, therefore, it was not correct to say that the amount received by the assessee on retirement was taxable on the ground that the income had accrued when the right to receive the same arose. Therefore, according to the Tribunal, the amount could not be taxed as capital gains. Both the assessee and the Commissioner of Income-tax filed applications before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee were of the type of adventure in the nature of trade and that the Tribunal, without looking into the evidence referred to and relied upon by the Commissioner of Income-tax, has held that, according to the ordinary notions, a solitary transaction of the type cannot by any stretch of imagination be held to be " business ". Before arriving at this conclusion, the Tribunal has not even referred to the arguments advanced by the departmental representative and has not considered the question as to whether there was a device to avoid payment of tax arising out of business profits. Alternatively, learned counsel for the Revenue submitted that as held by the Commissioner of Income-tax, the receipt in the hands of the assessee was chargeable to tax as representing capital gains. In his submission, there was a well-planned device for transferring the capital asset by resorting to the arrangement of forming a partnership and then retiring therefrom by leaving the capital contribution of land in the hands of the partnership firm. If this was done by a device or as a subterfuge to avoid the tax, then it is open to the court to pierce the veil and look at the substance of the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court has observed to the effect that the High Court is not a court of appeal in a reference under section 256 of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at a finding of fact contrary to that of the Appellate Tribunal. It is also observed that the High Court should confine itself to the facts as found by the Tribunal and answer the question in the setting and context of those facts. In Kusumben D. Mahadevia's case [1960] 39 ITR 540, the Supreme Court has held that, in reference jurisdiction, the High Court has no power to decide a different question of law not arising out of the order of the Tribunal. It may be that the same question of law may involve different approaches for its solution and the High Court may amplify the question to take into consideration all the approaches, but the question must remain the same as which was before the Tribunal and decided by it. The High Court cannot reframe the question in such a way that the question may become entirely a different one which was not before the Tribunal. Learned counsel for the assessee also relied upon a decision of the Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para. 3 of the statement of the case submitted by the Tribunal, these facts have been reproduced and there is a clear reference to the device adopted to conceal taxable profits. It may be noted that a draft statement of case was placed before both the parties and the suggestions made were duly incorporated (para. 10 of the statement of case). In view of this position of record, it cannot be said that the question regarding device being adopted by the assessee to conceal the income was not there before the Tribunal. However, in fairness to the learned counsel for the assessee, it must be said that the Tribunal has not dealt with this aspect at all. It is clear that the question was very much there before the Commissioner of Income-tax. He has elaborately discussed the same. Before the Tribunal, on this aspect, arguments were advanced by the departmental representative. Still, however, surprisingly the Tribunal even without discussing the points raised by the departmental representative and without answering the same, has come to the conclusion that there was only a solitary transaction in land and, therefore, there was no business activity. In para. 9 of the order of the Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later date at a substantial profit and all the facts and circumstances indicated that the assessee had chosen to show the land as sold through a Partnership firm with the sole object of avoiding Payment of tax on the huge Profit actually earned and received. The assessee, her mother and brother jointly adopted a device of forming a partnership and retiring therefrom to conceal taxable profits which would have been plainly visible if the land had been sold outright. (ii) The Commissioner of Income-tax came to the aforesaid conclusion on the basis of examination of (a) entries made by the assessee in her books of account as on March 31, 1970, and as on April 1, 1970; (b) deed of partnership dated April 1, 1970; (c) deed of retirement with effect from August 31, 1970, which was executed on October 24, 1970; and (d) sale deed dated December 15, 1973, executed by Ashni Construction Company in favour of Adarsh Industrial Co-op. Estates Ltd., wherein the assessee along with her mother and brother is a confirming party. (iii) That the assessee did feel aggrieved by the finding regarding device given by the Commissioner of Income-tax and raised the point in the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the expression 'question of law arising out of such order' in section 66(1) is not restricted to take in only those questions which have been expressly argued and decided by the Tribunal. If a question of law is raised before the Tribunal, even if an aspect of that question is not raised, in our judgment, that aspect may be urged before the High Court. " Thus the legal position is abundantly clear. Simply because the Tribunal did not deal with an aspect of the question, though there was enough material and arguments were advanced by the party, it cannot be said that the question was not there before the Tribunal and, therefore, the High Court would be precluded from dealing with the same in a reference under section 256 of the Act. As stated hereinabove, the question was very much before the Tribunal. Necessary material on record of the case was also there. Arguments were also advanced, but the Tribunal did not deal with the same. In the aforesaid background, if the contention raised by the counsel for the assessee is accepted, it would amount to penalising the Revenue for the fault of the Tribunal. This can never be done. If the Tribunal failed to deal with certain factual and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court and that the question did not arise out of the order of the Tribunal. Learned counsel for the Revenue submitted that it was not the case of the Revenue that there was any organised activity of sale and purchase of land and of developing the same for the purpose of construction for residence and commerce. But the specific case of the Revenue was that the assessee along with her mother and brother purchased the land with view to sell the same later on for a profit. The purchase of land in the year 1962 was an adventure in the nature of trade. This was covered by the definition of " business " given in section 2(13) of the Act. The definition of the term " business " is an inclusive one. It includes any adventure in the nature of trade. Here again the learned counsel for the assessee submitted that there was no question as to whether the transaction was an adventure in the nature of trade or not. In his submission, neither was there any contention nor a finding on this point. Therefore, this question also cannot be said to arise out of the order of the Tribunal. The contention cannot be accepted for the simple reason that the entire order of the Commissioner of Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the conclusion regarding the character of the transaction. This aspect would undoubtedly be a matter of law and, therefore, if there is an error in the application of these principles, it can certainly be challenged as an error of law. This is the view taken by the Supreme Court in the case of G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594. In this background let us see what the Tribunal has done in the instant case. In para. 11 of its order, as regards the business activity, the Tribunal has observed: " It is difficult to infer from the above facts that there was any organised business activity on the part of the assessee which could clothe the above transaction with attributes of a business transaction. " Thereafter the Tribunal referred to the observations of the Supreme Court in the case of Narain Swadeshi Weaving Mills' case [1954] 26 ITR 765, which read as follows (at page 773): " The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection, learned counsel for the assessee has relied upon the following decisions of the Supreme Court and of this High Court: 1. G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC), 2. Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC), 3. Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), 4. CIT v. P. K. N. Co. Ltd. [1966] 60 ITR 65 (SC) and 5. D. S. Virani v. CIT [1973] 90 ITR 255 (Guj). In G. Venkataswami Naidu's case [1959] 35 ITR 594, the Supreme Court has stated to the effect that while deciding the character of such transactions, several factors are treated as relevant. After referring to some such factors, the Supreme Court observed (at pages 609 and 610): " The presence of all the relevant circumstances mentioned in any of them may help the court to draw a similar inference; but it is not matter of merely counting the number of facts and circumstances pro and con ; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is not decisive. Similarly, profit motive while entering into the transaction is also not considered decisive. In the case of D. S. Virani [1973] 90 ITR 255, this court held that one "V " purchased land with three brothers who were not residing in India. In this case, after referring to the various decisions of the Supreme Court in which the aforesaid principles have been laid down, the court came to the conclusion that the purchase of land by the three brothers who were not residing in India was not an adventure in the nature of trade, while purchase of land by one of the four brothers who was residing in India was an adventure in the nature of trade and, therefore, a business activity. This High Court has not laid down any new principle in this behalf. As result of the total cumulative effect of all the relevant factors and circumstances present in the case, the court came to the conclusion as stated above. The principles which emerge from the aforesaid decisions of the Supreme Court are that there are several relevant factors which count in the process of reaching a conclusion as to whether a transaction is an adventure in nature of trade or not. But no single factor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mind of the court by all the facts and circumstances disclosed in that particular case. Hence, while deciding the nature and character of a particular transaction, no decided case can, strictly speaking, be a precedent which could govern the decision of a later case involving a similar question. Those decisions can be used only by way of illustrations of the different viewpoints which may have a bearing on the decision of the case in hand. In this case, the Tribunal ought to have addressed itself as to whether the totality of the facts and circumstances led to the conclusion that the transaction was an adventure in the nature of trade or not. Unfortunately, the Tribunal has not only failed to address itself to this question but it has also failed to deal with the points raised and arguments advanced by the Departmental representative. Without referring to the well-settled principles of law, the Tribunal, by mere ipsi dixit, stated that " because there was a single transaction, by no stretch of imagination it could be said to be a business activity ". With respect, the Tribunal lost sight of the fact that only when there is no continuous activity with a view to earn profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent to which its language permits or rather does not prohibit, suffer adjustments through judicial interpretation so as to accord with the requirements of the fast changing society which is undergoing rapid social and economic transformation." In the same para, it is further observed to the effect that law is intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. In the case of National Textile Workers' Union v. P. R. Ramakrishnan, AIR 1983 SC 75, in para.9 of the judgment [1983] 53 Comp Cas 184 at p. 205, the Supreme Court has observed : " We cannot allow the dead hand of the past to stifle the growth of the living present. Law cannot stand still; it must change with the changing social concepts and values." In the same para, it is further observed: " Law must, therefore, constantly be on the move adapting itself to the fast changing society and not lag behind. It must shake off the inhibiting legacy of its colonial past and assume a dynamic role in the process of social transformation. " We are conscious of our limitations. Wherever there is a bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ane, with the avowed object of preventing profiteering and speculation from the scarce commodity called urban land, the Urban Land (Ceiling and Regulation) Act, 1976, was required to be enacted. It is trite knowledge that it is recognised by various committees and commissions that land is a convenient form of adjusting black money. It may be noted that agricultural income is free from income-tax. Therefore, many people become agriculturists on paper. They use land neither as an investment nor as a commodity of commerce, but to them, it is a convenient instrument of converting black money into regular money. Similar is the case with construction activity. All these factors have considerably changed the entire complexion and thereby the attitude of members of business and commercial community. In this changing socio-economic situation and in entirely different commercial background, the transaction in question has taken place. At the relevant time, the State of Gujarat and particularly the city of Ahmedabad was embarking upon its separate and independent journey towards the goal of socio-economic development when there was spurt in building activity. In this background, it is difficu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. This decision of the Collector was subject to revision and remained in litigation for quite some time. The title of the land was in dispute even with regard to the real holder of the land Bai Hira, in whose name the land was entered in the revenue records, and she had in support of her title to the land only the entry in her name in the revenue records. It goes without saying that entries in the revenue records are made for fiscal purposes. These entries at the most raise a presumption of title in favour of person whose name is entered in the record. Such entries are not and cannot be treated as documents of title. Again the entry in the name of Bai Hira was ordered to be mutated by order dated February 17, 1962. Prior to that, the name of one Chimanlal was there in the record of rights. The land was purchased from Bai Hira by 15 Persons for the purpose of business. This transaction took place on February 23, 1962, the day on which the entry was actually mutated in the name of Bai Hira. Within a very short period, i.e., on March 12, 1962, these 15 persons who had purchased the land for the purpose of business, sold the same to the assessee, her mother and brother. The total cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtainty about the return to be received from the investment made in business and also the facing of many imponderables and even the risk of losing the capital invested, are inherent in the activity called " business The same will be the case with regard to a transaction which is an adventure in the nature of trade or business. Safety of capital coupled with certainty and regularity of return are terms which are alien in the world of business. Risk, uncertainty, foresightedness to visualise the imponderables and capacity to overcome the unforeseen hurdles are the essential requisites for business activity. So would be the case with regard to a transaction which is an adventure in the nature of trade. Now, let us examine the facts of the case in the aforesaid background. When the assessee purchased the land, the assessee took the risk of clearing the disputed and defective title. The assessee also took the risk of facing litigation. The litigation lasted up to April 2, 1970. Be it recalled that the Collector rendered his decision on February 17, 1962 and, thereafter, on February 23, 1962, the name of Bai Hira was actually entered in the revenue records. On the same day, i.e., Febru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1970, but the retirement deed referred to therein is executed on October 24, 1970. Even the valuer's report makes very interesting reading. Inter alia, it reads : " Holders of the estates have converted their holdings of land into their stock-in-trade, and they have started a business in partnership for dealing in lands and estate management. For this object the estate holders have brought their above converted stock-in-trade in the contribution of capital for the partnership firm." The date of valuation given is April 1, 1970. It is not understood how and for what reasons this statement regarding the conversion into stock-in-trade and forming partnership, etc., was necessary in the valuation report. Thus, the valuer's report is not free from doubt. It appears to have been obtained subsequently to support the entries made in the books of account. In the above view of the matter, the contention raised by the departmental representative that the entries are not contemporaneous has much force. All these points raised, and arguments advanced, have not been taken into consideration at all by the Tribunal. We see much force in all these arguments advanced and points raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, of business) is that, there is always an element of risk. The greater the risk, the larger the profit. In the instant case, there was risk of defective and disputed title. There was also the risk of litigation. There were several imponderables and uncertainties before the land could be converted for non-agricultural use. The assessee took all these risks. The assessee daringly decided to face the inherent uncertainties in the transaction. The assessee also decided to run the risk of uncertainties of litigation as well as facing many imponderables and hurdles in the way of converting the land from agricultural use to non-agricultural use. In the process of clearing the title and then in getting the permission for non-agricultural use of the land and other permits and sanctions for developing the land, many uncertainties are involved. The assessee without expecting any regular return from the land ran the risk of facing the aforesaid uncertainties and hurdles. The subsequent effort to show that the land was treated as stock-in-trade is not supported by any convincing evidence. On the contrary, the entries made in the books of account are not contemporaneous and appear to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence-oral and documentaryand conduct of the parties to the transaction." Applying the aforesaid principle laid down by the Supreme Court, it was the bounden duty of the Tribunal to unravel the device with a view to determine the true character of the transaction. However, after piercing the veil, the taxing authority could not have given effect to, that is to say, it could not have said that there was no sale in favour of the firm whatsoever. As laid down by the Supreme Court, the Commissioner of Income-tax was within his right when he unravelled the device. He found out the real nature of the transaction and brought within the net of taxation the profits or gains of business which had arisen out of the transaction which the assessee had entered into by forming a partnership and retiring therefrom during the course of the year under assessment. The same view is reiterated by the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77. The Supreme Court has observed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute or the substance of the law. If the Revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion that the appellant was liable to assessment as contended by the Sales Tax Authorities." The submission made by learned counsel for the assessee cannot be accepted. The decision in A.V.Fernandez case [1957] 8 STC 561, related to the interpretation of taxing statutes and it did not relate to the consideration and determination of the correct nature of a transaction. In McDowell's case [1985] 154 ITR 148, the Supreme Court was not dealing with the construction of a particular provision of a taxing statute. The Supreme Court indicated the proper way to construe a taxing statute while considering a device to avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. On an overall consideration of the facts and circumstances of the case and for the reasons stated hereinabove, we are of the opinion that the Commissioner of Income-tax was right when he came to the conclusion that the assessee had adopted a device to conceal the income with a view to avoid payment of tax on business income which arose when the assessee retired from Ashni Construction Company on August 31, 1970. In the above view of the matter, we are of the opinion that the Tribunal was not right in law in holding that the amount of Rs. 4,14,192 received by the assessee on retirement from the firm styled as M/s. Ashni Construction Company was not chargeable to tax as business profits. We, therefore, answer the questions referred to us as follows: Question No. 1 : In the negative and against the assessee. Question No. 2: In the negative and against the assessee. Question No. 3 : In the negative and against the assessee. Question No. 4 : The question is concluded by the decision of the Supreme Court in the case of Kartikeya Sarabhai [1985] 156 ITR 509. As held in that case, the capital contribution by a partner in the firm, would amount to transfer. Follo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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