When Property Kept For Investment Is Sold, Gain Will Fall Under “Capital Gains” & Not Under “Adventure Of Trade”: Kerala HC
The Kerala High Court has observed that if a property kept for an investment purpose is sold, the gain will fall under the head ‘Capital Gains’ and not under ‘Adventure of Trade’.
The Bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. observed, “When a property kept not for trade, but for an investment purpose is sold, the gain has to fall under head 'capital gains' and such transaction is only taxable under capital gain and not under adventure of trade. If the Revenue intends to prove the contrary, then the burden is upon it to prove it by reliable evidence. Merely because the assessee makes some profit in a particular transaction, it can not be treated as an adventure in the nature of trade so long as the initial intention or a reason investing money was to hold the property and utilise it for a different purpose.”
Senior Advocate PKR Menon appeared for the Appellants whereas Advocates P. Jayabal and P. Deepak appeared for the Respondents.
The challenge in the appeals, filed by the Revenue, was confined to the correctness of taxing profits from the sale of lands as ‘business income’ instead of treating the same as ‘capital gain’.
The Assessee/Respondent runs a medical shop and is also a partner in certain other medical shops under the trade name “SEVANA”. There was a search under Section 132 of the the Income Tax Act, 1961 (‘IT Act’) in the residential and business premises of the assessee and while completing the assessment, the AO had treated the income from the sale of landed property as ‘income’ under the head ‘business’ as against the claim of the assessee that it was ‘income from capital gain’.
According to the AO, there has been systematic purchase and sale of large extents of land in various locations continuously over many years either in an individual capacity or in collaboration with other individuals.
Revenue contended that though the primary business activity of the assessee is that of running medical shops under the Trade name ‘Sevana’, he had during the relevant assessment years indulged in buying and selling of landed property to earn profit. This, according to the Revenue can only be termed as an 'adventure like trade' as envisaged in Section 2(13) of the IT Act thus making the income derived from the sale of landed property to be business income as against the claim of the assessee that it was in 'the nature of capital gains’.
As regards the definition under Section 2(13) of the IT Act, the Court said that the term ‘adventure’ used in the definition though in the semantic sense presupposes the existence of an element of ‘risk’ and or ‘uncertainty’ either concerning the manner in which the trade, commerce or manufacture is carried out or regarding its final outcome, the term ‘concern’ that follows it qualifies its meaning as an activity or enterprise which has the nature of trade, commerce or manufacture.
“It may fall short of the established drapings or paraphernalia of a trade and may have some randomness about it, still if it has a commercial design and has profit making as its central purpose or motive, then it constitutes a ‘business’ as used in the Income Tax Act, 1961 making the income earned therefrom, exigible to tax.”, the Court added.
As regards the issue of whether the Revenue has sufficient evidence to prove that the activities of the assessee constituted an adventure in the nature of trade, the Court said that the asseessee had held the landed property as investment and disposal of the same would not convert, what was a capital accretion, to an adventure in the nature of trade and the finding arrived at by the ITAT based on the facts and circumstances available at hand, that the assessee had treated the landed property as an investment acquired over the years and did not choose to carry on any commercial activity with reference to such land and had upon noticing favourable market conditions, sold the land and fetched a good price, did not justify the action of the AO to treat the activities of the assessee as adventure in the nature of trade.
Accordingly, the Income Tax Appeal was dismissed.
Cause Title: The Principal Commissioner of Income Tax v. Arun Majeed (Neutral Citation: 2024:KER:53805)
Appearances:
Appellants: Senior Advocate PKR Menon, Standing Counsels Jose Joseph, Susie B Varghese and Navaneeth N Nath.
Respondents: Advocates P. Jayabal, P. Deepak, Anil D. Nair, Telma Raju, Edathara Vineeta Krishnan, P.K. Biju and Anjana A.