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  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Shailesh Bhadrayulal Majmudar
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  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Shailesh Bhadrayulal Majmudar
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Smart Summary

Summary of the Opinion (Reference Questions from the Revenue)

Factual and Procedural Background

The opinion concerns a reference by the revenue on three questions arising from the assessment year 1969-70 (previous year 1968). The assessee, an individual without personal books of account, filed a return on June 30, 1969, declaring a total income of Rs. 39,285. The factual nucleus is a long-running attempt by the assessee to purchase immovable property on Gandhi Road, Ahmedabad from vendors Modi Kalidas Hargovandas and another.

Key factual events (as stated in the opinion):

  • An agreement for purchase was executed in 1956 for Rs. 2,00,000; Rs. 50,000 earnest money was paid then; vendors were to execute conveyance within three years but failed and the agreement was cancelled.
  • A fresh agreement was executed on May 12, 1964 (deed of conveyance to be executed within six months). The vendors again failed to execute the deed.
  • On December 21, 1964, a settlement provided that Rs. 8,000 would be paid as damages and treated as part of the consideration; vendors later agreed to pay another Rs. 8,000 by way of damages on July 8, 1965; the assessee paid an additional Rs. 10,000 on November 10, 1965 and the execution period was extended to June 30, 1966; vendors still failed to execute the deed.
  • The assessee filed Civil Suit No. 1068 of 1968 for specific performance; the suit was compromised on April 1, 1968. The vendors agreed to pay Rs. 85,431 (including Rs. 50,000 earnest money, Rs. 16,000 previously referenced as damages/consideration components, Rs. 10,000 payment, Rs. 8,431 further damages, and Rs. 1,000 costs).
  • Income-tax proceedings: For assessment year 1965-66 the ITO had assessed Rs. 8,000 as income from "other sources"; the AAC deleted that addition and treated it as a capital receipt (not challenged). For 1966-67 an Rs. 8,000 item was shown in the return and not brought to tax. For assessment year 1969-70 the ITO contended the assessee to be a dealer in property and brought Rs. 24,431 (Rs. 8,000 + Rs. 8,431 + other amounts) to tax as business profit; the AAC deleted the addition and the Tribunal affirmed the AAC, holding the assessee not a dealer and that Rs. 24,431 were damages and not assessable as income.

Thereafter, at the instance of the revenue, three specific questions were referred to the court for opinion.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not a dealer in immovable properties and, therefore, the amount of Rs. 24,431 is not liable to be included in the income of the assessee for the assessment year under reference?
  2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that since the amount of Rs. 16,000 out of Rs. 24,431 was dealt with in the assessment years 1965-66 and 1966-67, it could not be included in the assessee's total income for the assessment year under reference?
  3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 24,431, having been received by the assessee by way of damages on account of the breach of the agreement committed by the sellers, could not be treated as the assessee's income?

Arguments of the Parties

Revenue's Arguments (as recorded)

  • The revenue contended that the assessee was a dealer in immovable property and that amounts received by way of damages (Rs. 24,431) represented profit from a business transaction and therefore were taxable as income.
  • Mr. Raval (for the revenue) pointed to the assessee's transaction history between November 1958 and February 1963: about fifteen transactions of sale or purchase of immovable property; of fourteen properties purchased, eight were sold and six not sold; of the sales there were profits in only three resale transactions (profits of Rs. 1,000; Rs. 3,000; and Rs. 775) and losses/no profit in others. The revenue relied on these transactions as evidence that the assessee was in the trade of dealing in property.

Assessee's Position (as recorded)

  • The assessee maintained that amounts such as the Rs. 8,000 items were not income but capital receipts or reductions of purchase price in respect of a capital asset.
  • In earlier proceedings the assessee successfully argued before the AAC that Rs. 8,000 (assessment year 1965-66) was a capital receipt and should not be taxed as income; the AAC's deletion of that addition was not challenged.
  • For the 1966-67 assessment year, an Rs. 8,000 item was shown in the return and was not brought to tax by the ITO; that fact was relied upon in later proceedings to show those amounts had already been dealt with.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Premji Gopalbhai [1978] 113 ITR 785 (Guj) Establishes that the burden of proving a transaction to be an "adventure in the nature of trade" (i.e., dealing as trade rather than investment) lies on the revenue; that burden can be discharged by pointing to circumstances indicating intention to resell at profit; purchase of land solely to resell is a strong factor indicating trade. The court relied on this principle to require the revenue to prove dealer status; applying it, the court found the revenue did not discharge that burden on the facts and circumstances before the Tribunal.
CIT v. Gordhandas Trikambhai Patel [1979] 118 ITR 81 (Guj) Affirms and elaborates the approach in determining whether dealings in land constitute trading: asks whether the manner of dealing stamped the transactions as a trading venture and considers the totality of circumstances and earlier decisions. The court relied on the legal tests and observations in this case (including the question posed in the judgment) to assess the transactions here and to uphold the Tribunal's conclusion that the assessee was not proved to be a dealer in immovable property.

Court's Reasoning and Analysis

The court's analysis proceeded in several discrete steps, each drawing on facts recorded by the ITO, AAC and the Tribunal and on the legal principles established by the precedents cited:

  1. Burden of Proof: The court reiterated the settled principle (from the cited cases) that the revenue bears the burden of proving that a transaction in immovable property is an adventure in the nature of trade rather than an investment. The revenue must point to circumstances that demonstrate an intention to resell for profit.
  2. Prior Findings and Consistency: The court placed significant weight on prior judicial/administrative findings favourable to the assessee. In particular, for assessment year 1965-66 the AAC had held the Rs. 8,000 to be a capital receipt (deletion of assessment) and that finding was not challenged by the revenue. For assessment year 1966-67 an Rs. 8,000 sum had been shown in the return and was not taxed by the ITO. The court viewed these determinations as material and as limiting the revenue's ability to treat the same amounts as income in 1969-70.
  3. Comparative Treatment of Other Properties: The Tribunal had considered other properties (Raipur property yielding a profit of Rs. 2,000 and Motera acquisition yielding Rs. 775). The Tribunal (and AAC) had not treated those gains as business income but as capital gains. The court observed that the revenue did not challenge those findings, and it would be inconsistent to treat the Gandhi Road transaction as trading while treating the others as investment disposals. This consistency point weighed against characterising the assessee as a dealer.
  4. Evidence of Transactions: The revenue relied on a record of about fifteen transactions in the 1958–1963 period, with mixed results on profit or loss. The court observed the Tribunal had considered that record but concluded the overall circumstances did not establish dealer status. The court found the Tribunal applied the correct legal tests and, on the materials, was justified in concluding the assessee was not a dealer.
  5. Treatment of the Rs. 16,000: The court emphasized that Rs. 16,000 out of the Rs. 24,431 had been dealt with in earlier assessment years (an AAC decision deleting Rs. 8,000 for 1965-66 and the ITO's non-assessment of Rs. 8,000 for 1966-67). Given those prior decisions, the court held that those amounts could not be re-assessed as income in 1969-70.
  6. Nature of the Rs. 24,431: The court accepted the Tribunal's factual characterisation that Rs. 24,431 represented damages paid by the vendors on account of breach of the agreement (i.e., compensation for the loss of a good bargain), not profits from a business activity. The court noted the history: earnest money and subsequent deemed credits, long waiting since 1956, the compromise payment of Rs. 85,431 of which Rs. 60,000 represented sums the assessee had paid and Rs. 24,431 represented damages. On these facts, the Tribunal's view that the amount was not income but damages was upheld.

Holding and Implications

Holding: The court answered each referred question in the affirmative in favour of the assessee and against the revenue:

  • Question 1: The Tribunal was right in law in holding that the assessee was not a dealer in immovable properties; the Rs. 24,431 was not liable to be included in the assessee's income for the assessment year in question.
  • Question 2: The Tribunal was right that Rs. 16,000 of the Rs. 24,431 had already been dealt with in assessment years 1965-66 and 1966-67 and could not be included in the 1969-70 assessment.
  • Question 3: The Tribunal was right in holding that Rs. 24,431, received by way of damages for breach of the agreement by the vendors, could not be treated as the assessee's income.

Direct consequences:

  • The additions made by the ITO of Rs. 24,431 for the assessment year 1969-70 were not sustained; the amounts were not treated as taxable income of the assessee in that year.
  • Out of the aggregate Rs. 24,431, Rs. 16,000 had already been dealt with in earlier assessment years and thus could not be taxed in 1969-70.
  • The Commissioner was ordered to pay the costs of the reference to the assessee.

Broader implications: The court based its decision on application of settled principles (burden on revenue to prove trading character) and on the facts and prior administrative/judicial determinations in the case. The opinion does not purport to lay down a new legal principle; it applies existing precedent to the facts and upholds the Tribunal's factual and legal conclusions.

Disposition

All three questions referred were answered in favour of the assessee and against the revenue. The Commissioner is directed to pay the costs of the reference to the assessee.

Show full summary ...

    Commissioner Of Income-Tax, Gujarat-Iv v. Hiralal Manilal Mody

    1. In this case, at the instance of the revenue, the following three questions have been referred to us for our opinion :

    "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not a dealer in immovable properties and, therefore, the amount of Rs. 24,431 is not liable to be included in the income of the assessee for the assessment year under reference ?

    (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that since the amount of Rs. 16,000 out of Rs. 24,431 was dealt with in the assessment years 1965-66 and 1966-67, it could not be included in the assessee's total income for the assessment year under reference ?

    (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 24,431, having been received by the assessee by way of damages on account of the breach of the agreement committed by the sellers, Mody Kalidas Hargovandas and another, could not be treated as the assessee's income ?"

    2. The facts leading to this case are as follows : We are concerned with assessment year 1969-70, the previous year being calendar year 1968. The assessee is an individual and he has no personal books of account. The assessee filed return of income on June 30, 1969, in respect of the assessment year 1969-70, declaring a total income of Rs. 39,285. The assessee had entered into an agreement with one Modi Kalidas Hargovandas and another for the purchase of an immovable property situate on Gandhi Road, Ahmedabad, for a sum of rupees two lakhs. The agreement was entered into in 1956, and under the terms of the agreement, the sellers had to execute the deed of conveyance within a period of three years. At the time of the agreement, the assessee paid an amount of Rs. 50,000 as earnest money and the balance of Rs. 1,50,000 was to be paid at the time of the execution of the deed of conveyance. The vendors failed to execute the deed of conveyance as stipulated and the agreement executed in 1956 was cancelled. Thereafter, the assessee entered into a fresh agreement dated May 12, 1964, with the same vendors for the purchase of the same property. Under the terms of this agreement of 1964, the deed of conveyance was to be executed within six months (wrongly mentioned in the statement of the case as three years) from the date of execution of the agreement. The vendors again failed to execute the deed of conveyance as agreed. On December 21, 1964, a settlement was arrived at between the assessee and the vendors and under that agreement the vendors agreed to pay Rs. 8,000 to the assessee by way of damages and this amount was to be treated as having been paid towards the consideration of rupees two lakhs. In other words, the assessee was deemed to have paid Rs. 8,000 in addition to Rs. 50,000 which were paid by way of earnest money and Rs. 58,000 were to be treated as paid towards the consideration of rupees two lakhs. The sellers did not execute a sale deed but again agreed to pay a further amount of Rs. 8,000 by way of damages on July 8, 1965. This amount of Rs. 8,000 was also to be treated as paid towards the consideration. The assessee paid a further sum of Rs. 10,000 towards the consideration on November 10, 1965, and the period for execution of the deed of conveyance was extended up to June 30, 1966. The vendors failed to execute the deed of conveyance as agreed.

    3. The assessee thereafter filed Civil Suit No. 1068 of 1968 in the City Civil Court at Ahmedabad against Modi Kalidas Hargovandas and another for the specific performance of the agreement for sale. This suit was compromised on April 1, 1968, and under the terms of the compromise, Modi Kalidas Hargovandas and another, the vendors, agreed to pay Rs. 85,431 together with interest to the assessee. This amount of Rs. 85,431 consisted of the following sums :

    Rs.

    50,000 paid as earnest money in 1956;

    16,000 payable by way of damages as stated above which were to be credited towards the consideration;

    10,000 further amount paid by the assessee on November 10, 1965;

    8,431 further damages; and 1,000 towards the costs of the suit.

    In the income-tax assessment for the assessment year 1965-66, the ITO assessed the amount of Rs. 8,000 which was referred to in the agreement of December 21, 1964, as income from "other sources". The assessee objected to the inclusion of the said amount on the ground that it was a receipt of capital nature. The ITO, however, held that the amount was taxable as income from "other sources". Being aggrieved by the order of the ITO, the assessee carried the matter in appeal before the AAC. The AAC by by his order held that the amount of Rs. 8,000 could not be taxed as it was merely a reduction in the purchase price of a capital asset. He observed that the assessee was not a dealer in property and that the ITO himself had taxed the amount of Rs. 8,000 not as business income but as income from "other sources". He was of the view that the addition of the amount of Rs. 8,000 made in the assessment year 1965-66 should be deleted.

    4. As regards the amount of Rs. 8,000, which was referred to in the agreement of July 8, 1965, the assessee showed that amount in his return but contended that this amount was not liable to be taxed ad this contention of the assessee was accepted by the ITO because the ITO did not bring that amount of Rs. 8,000 to tax so far as the assessment year 1966-67 was concerned. As regards the assessment year under consideration, the ITO held that the assessee was a dealer in property. He held that the amount of Rs. 8,000 plus Rs. 8,431 totaling to Rs. 24,431 received by the assessee by way of damages was nothing but profit earned by him in this transaction which was a business transaction. He, therefore, brought this amount of Rs. 24,431 to tax. The assessee carried the matter in appeal and the AAC held that the amount of Rs. 24,431 was not taxable. Against the decision of the AAC, the revenue went in appeal to the Income-tax Appellate Tribunal and the Tribunal held that the assessee was not proved to be a dealer in immovable property. The Tribunal further held that the properties purchased by the assessee were by way of investment. It took into consideration the fact that out of Rs. 24,431 sought to be brought to tax in the year under reference Rs. 8,000 had been shown in the assessment year 1965-66 and Rs. 8,000 had been shown in the assessment year 1966-67. As regards the assessment year 1965-66, there was an order of the AAC deleting that amount from the total income of the assessee and as regards the assessment year 1966-67, the amount had not been brought to tax at all. The Tribunal observed that, thus, out of the amount of Rs. 24,431, the amount of Rs. 16,000 was already dealt with in the assessment years 1965-66 and 1966-67. The Tribunal held that this amount of Rs. 16,000 could not have been included by the ITO in the year under appeal. The Tribunal further held that the total amount of Rs. 24,431 referred to above was received by the assessee by way of damages and this amount was paid to the assessee on account of the breach of agreement committed by the vendors, namely, Modi Kalidas Hargovandas and another. The Tribunal held that the damages count not be treated as the assessee's income and thus in this view of the matter the Tribunal confirmed the order of the AAC regarding this amount of Rs. 24,431. Thereafter, at the instance of the revenue, the three questions hereinabove set out have been referred to us for our opinion.

    5. The principal question in this case is whether the assessee was a dealer in immovable property, as was contended for by the revenue. In this connection, it may be pointed out that ordinarily, when a person purchases immovable property or purchases land, it is treated as an investment and it is only in rare cases that purchase and sale of immovable property or land is treated as a business or an adventure in the nature of trade. The question of burden of proof in cases of this nature has been dealt with in several decisions of the Supreme Court and of this court also. In CIT v. Premji Gopalbhai [1978] 113 ITR 785 (Guj), it was held that the burden of proving that a particular transaction was an adventure in the nature of trade was on the revenue. That burden could be discharged by pointing to circumstances which lead to the conclusion that the transaction was an adventure in the nature of trade. However, even if land which was not a commercial commodity was purchased and it could be shown that the purchase of the land was made solely and exclusively with an intention to resell it at a profit, it would be a strong factor that the transaction would be an adventure in the nature of trade. To the same effect are the observations in CIT v. Gordhandas Trikambhai Patel [1979] 118 ITR 81 (Guj). All the earlier decisions were considered in Gordhandas Trikambhai Patel's case and the question that was posed in the light of those decisions was :

    "Does the revenue, burden being on the revenue, establish that the manner of dealing with the lands in question in the instant case by the two assessee stamped the transaction as a trading venture ?"

    6. In the instant case, one factor to be borne in mind is that so far as the assessment year 1965-66 was concerned, as regards the amount of Rs. 8,000 when the matter went in appeal before the AAC, it was held by that officer that the assessee was not a dealer in immovable property and there was no challenge to that particular decision.

    7. Even as regards the assessment year under consideration, there is a further factor, as has been pointed out by the Tribunal in para. 9 of its order, that there was another property called Raipur property situated as Ahmedabad in connection with which the assessee had made a profit of Rs. 2,000 and in connection with which acquisition of some land belonging to him at Motera on the outskirts of Ahmedabad City an amount of Rs. 775 was shown as profit, being the difference between the amount received by way of compensation in land acquisition proceedings and the cost of acquisition. Now, as regards these profits of Rs. 2,000 and Rs. 775 made by the assessee, the Tribunal held that they could not be treated as the assessee's business income. The assessee was not a dealer in immovable property and, therefore, these amounts could be taxed only as short-term or long-term capital gains as held by the AAC. Regarding the two amounts of Rs. 2,000 and Rs. 775, which were not treated as business income of the assessee, no question has been referred to us at the instance of the revenue and it cannot be that for the purpose of one property, namely, this property at Gandhi Road at Ahmedabad, the assessee is to be treated as a dealer in immovable property and for the other two properties - Raipur property and Motera property -the assessee is to be treated as an investor. Under these circumstances, it seems to us that apart from discharging the burden of proof which lay on the revenue to show that the assessee was a dealer in immovable property or that he was indulging in an adventure in the nature of trade, the revenue has not challenged the findings recorded in favour of the assessee, namely, that he was not a dealer in immovable property so far as the assessment year 1965-66 was concerned, and so far as the assessment year under reference is concerned as regards these two items of Rs. 2,000 and Rs. 775. Under these circumstances, it cannot be held that the assessee was a dealer in immovable property. In our opinion, therefore, the Tribunal on the materials placed before it was right in coming to the conclusion that the assessee was to a dealer in immovable property.

    8. Mr. Raval for the revenue drew our attention to the fact that between November, 1958, and February, 1963, the assessee had entered into about fifteen transactions of sale or purchase of immovable property. Out of fourteen properties purchased by the assessee, he had sold eight properties. Six of the properties purchased were not sold. Out of the properties sold by him, the assessee had not made any profit in five transactions. In one transaction of resale he had suffered a loss of Rs. 500 and there was only profit in three transactions of resale, Rs. 1,000 by sale of property on November 7, 1963, Rs. 3,000 on sale of property on July 20, 1960 and Rs. 775 during the year of account relevant to the assessment year under appeal. (This is in reference to the land acquisition proceedings for land at Motera). The Tribunal held that considering all the circumstances and evidence on record the assessee was to proved to be a dealer in immovable property.

    9. In our opinion, the Tribunal has applied correct legal tests for the purpose of arriving at its conclusion that the assessee was not proved to be a dealer in immovable property and on the facts before it, the Tribunal was justified i coming to that conclusion in the light of the legal principles laid down in the decided cases referred to above.

    10. As regards the amount of Rs. 16,000 out of the aggregate amount of Rs. 24,431, it is clear that there is a decision, against the revenue in the shape of the decision of the AAC as regards the assessment year 1965-66 where the AAC had deleted the amount of Rs. 8,000 and had treated it as capital receipt in respect of a capital asset and had said that it could not be treated as part of the assessee's income. That decision of the AAC was not challenged. Again as regards the second item of Rs. 8,000 which was referred to in the agreement of July 8, 1965, this amount was mentioned in the return of income for assessment year 1966-67, and it was processed by the ITO and it was not brought to tax. So, as regards these two items of Rs. 8,000 each, aggregating to Rs. 16,000 out of the total of Rs. 24,431, there were decisions of the I.T. authorities, namely, the AAC and the implied decision of ITO for the assessment year 1966-67, and in no circumstance could this amount of Rs. 16,000 be brought to tax in the assessment year 1969-70 which is the year under reference.

    11. It must be borne in mind that the assessee had been waiting since 1956 for the completion of this transaction of sale. The agreement of sale was entered into in 1956 and the earnest moneys of Rs. 50,000 had been paid by the assessee on that occasion. Thereafter, by a subsequent agreement, the transaction was kept alive and an amount of Rs. 8,000 was deemed to have been paid by the assessee to the vendors towards the total consideration of rupees two lakhs. This way by virtue of the agreement of December 21, 1964. Again, a further amount of Rs. 8,000 was deemed to have been paid towards the consideration by virtue of damages. A further amount of Rs. 10,000 was paid on November 10, 1955, and it was only after a suit had been filed by the assessee that the vendors compromised the matter and agreed to pay the aggregate amount of Rs. 85,431 to the assessee. Out of this amount of Rs. 85,431, Rs. 60,000 represented the money which the assessee had paid to the vendors and the remaining amount of Rs. 24,431 represented damages which the vendors had agreed to pay to the assessee. This amount was not by way of income but by way of damages for the loss of a good bargain which the assessee had to forgo because the vendors were not prepared to execute the deed of conveyance. The balance of Rs. 1,000 was towards the costs of the suit. In view of these peculiar facts and circumstances, the Tribunal was justified in coming to the conclusion that the amount of Rs. 24,431 did not represent income of the assessee but was damages for the loss of the bargain and hence the Tribunal was justified in not treating it as income of the assessee.

    12. In the light of the above discussion, we answer the question referred to us as follows :

    Question No. 1. -In the affirmative, that is, in favour of the assessee and against the revenue.

    Question No. 2. -In the affirmative, that is, in favour of the assessee and against the revenue.

    Question No. 3. -In the affirmative, that is, in favour of the assessee and against the revenue.

    13. The Commissioner will pay the costs of this reference to the assessee.

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    Comments

    Commissioner Of Income-Tax, Gujarat-Iv v. Hiralal Manilal Mody
    (Sep 22, 1980)