THIS JUDGMENT PASSED BY: FAHIM AHMED SIDDIQUI, JUSTICE:---.---

This single order would suffice to dispose of the instant appeals filed by the appellant against the combined order dated 14-11-1999 passed by the then learned Income Tax Tribunal, Karachi in respect of assessment years 1994-95 to 1996-97 (all inclusive) under section 135 of the Income Tax Ordinance, 1979 (hereinafter referred as "˜the Ordinance').

2. In respect of the impugned order, the appellant has raised teaming number of questions of law but at the time of hearing, the learned counsel for the appellant under instruction does not press the rest of the questions except Questions Nos. 2 and 8, which are as under:

Question No. 2

Whether the learned Income Tax Appellate Tribunal was justified in confirming the order passed by the Deputy Commissioner of Income Tax and confirming that the profit of Rs. 9,73,260/- earned on the sale of Plot No. 64/1, Khayaban-e-Sehar, Phase-V, DHA, Karachi was taxable, especially when there was no material before the Tribunal for drawing an inference that the appellant was regularly dealing in real estate business?

Question No. 8

Whether the learned Income Tax Appellate Tribunal was justified in treating the capital gain on sale of plot of Rs.9,73,260/- (or Rs. 3,15,976/- in I.T.A. No. 325 of 2010) as a taxable profit in spite of the provisions contained in Section 27(2)(a)(ii) of the Ordinance?

Since both the above questions of law are interlinked; therefore, we consider it appropriate to discuss them simultaneously and conjointly.

Background

3. Per memo. of instant appeal, the appellant is doing textile business as Managing Director (Chief Executive) of Messrs Ellcot Spinning Mills Ltd., Lahore and also as a Director of Messrs Nagina Cotton Mills Ltd, Karachi. Previously, the appellant was settled at Karachi with his family in his self-occupied house bearing No. 39, Street 20, Phase-V, DHA, Karachi and managing the affairs of his aforementioned two industrial concerns as well as three other textile mills at Lahore. The appellant has purchased the following properties in the year 1988-89 and 1989-90:

(a) Plot No. 64/1, Khayaban-e-Sehar, Phase-V, DHA, Karachi (1988-89)

(b) Plot No. 9/C, Badar Commercial, Phase-V, DHA, Karachi (1988-89)

(c) Self-occupied residential house built on Plot No.39, Street 20, Phase-V, DHA, Karachi (1989-90)

4. Allegedly, the appellant and his family members were receiving threats, while the city atmosphere was also unbecoming for business. Meanwhile, some disputes and differences developed within the immediate family of the appellant. In these context, the appellant ultimately decided to resettle in Lahore during the assessment year 1993-94, where he had already some business activities. For the sake of transferring his business and family from Karachi, the appellant purchased a property bearing No.104-C, Model Town, Lahore for an amount of Rs.70,78,358/- in the assessment year 1994-95. He also invested an additional amount of Rs.17,27,097/- for raising construction on it during assessment year 1995-96, as such he declared the cost of a residential house at Lahore as Rs. 88,05,455/-, which was occupied by the appellant and his family in the assessment year 1995-96.

Contextuality of I.T.A. No. 549/2000

5. Since, the appellant has decided to shift for good from Karachi and he needed funds for his new residential house in Lahore; therefore, he sold out Plot No. 64/1, Khayaban-e-Sehar for an amount of Rs.15,33,260/- and declared capital gain on such sale as Rs. 9,73,260/- in his Income Tax Return and Wealth Statement for the assessment year 1994-95 by claiming for the said amount as "˜exempt' from the provisions of the Ordinance. During the assessment proceedings for the assessment year 1994-95, the Deputy Commissioner of Income Tax issued a notice under section 62 of the Ordinance dated 06-03-1995, showing intention to treat the said receipt of Rs. 9,73,260/- as taxable income.

Contextuality of I.T.A. No. 325/2000

6. Similarly, it is claimed by the appellant that he was compelled to sell his open plot bearing No. 9/C, Badar Commercial, Phase-V, DHA, Karachi for an amount of Rs. 6,40,750/-. Purportedly the entire amount was utilised in purchasing of new family residential house at Lahore. Nevertheless, the appellant declared capital gain of Rs. 3,15,976/- on the investment of said property in his Income Tax Return and Wealth Statement for the assessment year 1995-96. During the assessment proceedings for the assessment year 1995-96, the Deputy Commissioner of Income Tax issued a notice under section 62 of the Ordinance, showing intention to treat the said receipt of Rs. 3,15,976/- as taxable income.

7. As per referred two notices under section 62 of the Ordinance, the Assessing Officer was of the opinion that the appellant was dealing in the real estate business, since multiple number of plots were owned by him. The replies to such notices under section 62 of the Ordinance were not considered by the Deputy Commissioner Income Tax as such he rejected both of his replies. Resultantly, the capital gain in respect of the two plots was declared as taxable income by the Deputy Commissioner by holding that the same falls under the definition of "˜adventure in the nature of trade'.

8. The appellant approached the Commissioner of Income Tax (Appeals) against such findings, where he succeeded in getting a favourable order. The Department challenged the finding of CIT (A) before the learned Income Tax Appellate Tribunal of Pakistan. After hearing the parties, the learned Tribunal remanded the matter for de novo assessment through the impugned order. However, the appellant is aggrieved by some of the observations in the impugned order manifest that the learned Tribunal conceives the of sale of the two plots referred above as an adventure in the nature of trade. The impugned order also demonstrates that the additions of Rs. 9,73,260/- in the assessment year 1994-95 incomes and (I.T.A. No. 549/2000) and an addition of Rs.3,15,976/- in assessment year 1995-96 (I.T.A. No. 325/2000) is not properly explained and only by declaring the same as "˜exempt' from taxable income is not sufficient to declare so.

9. Mr. Salman Pasha, learned counsel for the appellant, prefers his arguments at length. His arguments are focused upon the findings of the Assessing Officer regarding adventure in the nature of trade. According to him, purchasing of two plots was not enough to declare that it was an adventure in the nature of trade. According to him, due to the problematic situation of law and order, the appellant was forced to shift from Karachi to Lahore due to which the plots were sold out. He submits that the family finally decided to shift the entire business and severe all connections from Karachi when the brother of appellant was kidnaped for ransom and was released after payment of the same. He argues that it is always the intention that has to be considered during the time of purchase of the plots. According to him, the residential plot was purchased for the son of the appellant, while the commercial plot was purchased for establishing consolidated offices of different industries/businesses of the appellant. He draws our attention towards the fact that there was not a series of transactions but only a solitary transaction, which was done several years back; as such there was no intention of the appellant to enter into business of real estate in any way. In support of his contentions, he relied upon 2007 PTD 1687, 2011 PTD 1317, 1992 PTD 621, PLD 1962 Supreme Court 128, (1989) 176 ITR 393, (1976) 102 ITR 202, 1989 PTD 445, 1990 PTD 345 and (1959) 37 ITR 242.

10. On the other hand, Mr. Kafeel Ahmed Abbasi, learned counsel for the Department, prodigiously opposes the instant appeals. After reading the assessment orders, he submitted that the orders bear good reasonings. He contends that the reply of Question No. 2 is important in order to resolve the controversy. He submits that the reason for shifting and selling is not convincing, as such the gain on the investment was assessable as income. He contends that when the plots were sold out; the law and order situation had already considerably improved. In the end, Mr. Abbasi suggests that it would be appropriate that the appeals may be dismissed and let the matter be remanded to the Assessing Officer, where the appellant has the opportunity to present his case afresh. In support of his contention, he also relied upon 2017 PTD 1687.

11. After hearing the valued submissions made by both the learned members of the bar, we have scanned the entire material in the light of such submissions.

12. In the instant matter, the definition of "˜an adventure in the nature of trade' is important. Actually it is 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 term "˜an adventure in the nature of trade' suggests that the transaction cannot properly be considered as trade or business. It is the similar nature of the transaction, which may be considered as trade or business but in fact it is not actually the trade or business itself, in which the assessee/taxpayer is actually involved. It may have characteristics or essential features that make up trade or business but not all of them; but by nature it is an activity having intention to make additional or supplementary profit for the assessee/taxpayer. If the intention of making additional or supplementary profit is there, then even an isolated transaction can satisfy the description of an adventure in the nature of trade. However, if the intention is missing, as series of transection itself is not a ground for declaring such transection as an adventure in the nature of trade. The Hon'ble Supreme Court has addressed this question in the case of Commissioner Income Tax, East Pakistan, Dacca v. The Liquidator, Khulna Bagerahat Railway Company Ltd. (PLD 1962 Supreme Court 128), in which it is held as:

"We have considered the various Articles by which this Company was governed. We have no hesitation in agreeing with the view of the High Court that the normal business of the Company was the construction and the running of the Railway and not investment of its moneys on interest. Other powers were also given to the Company by the Articles of Association but it is not contended that all those powers pertained to the earning of normal business-income. If the Company, instead of retaining its surplus moneys in idle condition, invested them under, the powers given to them by their Articles of Association, it would not follow that the income so derived would be part of the Company's normal business-income. Each case must be decided on its own facts and in the instant case, the circumstances brought out in the evidence do not indicate that the receiving of interest on invested money was really included in the business income of the Company. We are, therefore, of the opinion that: the view taken by the High Court is not open to any legal exception. The appeal fails and is hereby dismissed with costs."

13. The issue of deciding the adventure in the nature of trade is exquisitely addressed by the Supreme Court of India in a case reported as G. Venkataswami Naidu and Co. v. The Commissioner of Income-Tax (1959 AIR 359), wherein it is held as:

"As we have already observed it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. 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 treated as relevant. Was the purchaser, a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these questions may furnish relevant date for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may 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 contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions, it would be necessary to remember that they do not purport to lay down any general or universal test. 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 a 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 seek to deduce any rule from them and mechanically apply it to the facts before us. In this connection, it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to resell it at a profit? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise 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 no doubt 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".

14. From the above discussion, it is clear that whenever the question of "˜adventure in the nature of trade' will be raised, the "˜intention' of the assessee/taxpayer will be perceived. It is also a fact that no one is gifted with the power of prophecy so that he may scan the depth of the human brain to declare that he has any intention to make additional or supplementary profit from the transaction in question. Nevertheless, the intention of a person can be traced out from some of his overt act as well as surrounding circumstances. It is necessary for the assessing authorities to give a convincing reasoning regarding the overt act and its surrounding circumstances specially at the time of purchase of the property under which the assessee/taxpayer indulge into the transaction before declaring the same as "˜an adventure in the nature of trade'. In this respect, we take reliance from a cited case of this Court reported as Major General (Rtd.) M. Jalaluddin v. ACIT-IV, Zone-C, Karachi (2011 PTD 1377), authored by my learned brother Mr. Justice Irfan Saadat Khan, wherein his lordship speaks as:

"In the light of the above narrated facts and in the light of the legal proposition as discussed above, we have come to the conclusion that in view of the prevailing facts of the case the sale of the plot by the assessee could not be considered to be an adventure in the nature of trade but the same squarely falls under the ambit of casual income or capital gain being exempt from tax. The mere fact that the owner of an immovable property had sold the same on an accretion is not enough to state that the said transaction was an adventure in the nature of trade until and unless the facts so warrant. The whole emphasis of the lawmakers in respect of the law settled so far was to determine the intention of the person at the time of purchase of any property. If it is proved from the facts that the intention was to resale the same and to make profit out of the same, the same squarely falls under the ambit of adventure in the nature of trade but where it is proved that the intention at the time of acquiring the asset was not to resale it but due to attending circumstances the said property was sold and the profit made out the said gain thus could not be considered to be adventure in the nature of trade or a business transaction."

15. Briefly, to recapitulate the facts, we must emphasise that there is no evidence that the assessee/taxpayer was in the habit of buying and selling estates or have at any time bought an estate and sold it within a few months or even a few years. The occupation of the assessee/taxpayer was to derive income from textile business as he was the Managing Director or Director in a number of companies. In the present case, the appellant has purchased all his properties including his residential house in Karachi almost in the same period and all of these properties were retained for the similar period of time. The properties were continuously declared by him in his returns and statements, which clearly indicate that the investment in the properties was made without any intention of speculation. In the assessment orders, the reasoning of the appellant for shifting from Karachi to Lahore was belied on the ground that at that time the law and order situation was improving. Nevertheless, we are of the view that it is not necessary for a assessee/taxpayer to give reasons for shifting or the changing of his place of ordinary or permanent residence, as every citizen has a right to move or settle anywhere in the country as described under Article 15 of the Constitution of Pakistan, which reads as under;

"Every citizen shall have the right to remain in, and, subject to any reasonable restriction imposed by law in the public interest, enter and move freely throughout Pakistan and to reside and settle in any part thereof."

16. It is a fact that the appellant was permanently residing in Karachi for quite some time and subsequently on account of any reason whatsoever; he shifted along with his family from Karachi to Lahore. The plea of appellant is not denied that he has severed all connections from Karachi and even disposed of a spinning mill situated at Kotri and settled in Lahore, where he had already certain business activities. We are of the view that the reason given by the appellant for selling out both of his plots is quite logical and coherent. When a person has decided to severe all his connections from a town, there remains no logic to keep properties there, which were retained by him for some time with the intention to use the same for his personal affairs. We consider that the very ingredient of "˜intention of making profit' is missing in the entire episode; as such the act of the appellant does not fall under the category of "˜adventure in the nature of trade'. We are; therefore, of the considered view that the appellant has rightly declared the amount of capital gain accrued to him due to sale of the aforementioned two plots in his Income Tax Returns and Wealth Statements as "˜exempt' from the provisions of the Ordinance. In these circumstances, we reply both the questions in NEGATIVE i.e. in favour of the assessee/taxpayer and against the Department. Resultantly, these income tax appeals are allowed and impugned order passed by the then learned Income Tax Appellate Tribunal is set aside.

17. The office is directed to send a copy of this order under the seal or the Court to the Registrar, learned Appellate Tribunal Inland Revenue (previously known as the Income Tax Appellate Tribunal), as required under the law.

SD/-
IRFAN SAADAT KHAN
JUSTICE

SD/-
FAHIM AHMED SIDDIQUI
JUSTICE