' IKRAM ULLAH GHOURI, (JUDICIAL MEMBER).---This appeal has been filed by the taxpayer against the order No,258/2013 dated 21.11.2013 by the learned Commissioner Inland Revenue (Appeals-III), Islamabad for the assessm ent year 2005 on the following common grounds.-- I. That the order of the learned CIR (A) as well as the order of the assessing officer is bad in law and against the facts of the case. II. That the learned CIR (A) was not justified to consider the sale of property/plot as income from real estate merely on the ground that the property in F-11/3 purchased by the appellant for residential purposes was subsequently sold out, which is a one off transaction and cannot be treated as trading of property, whereas in actual the appellant is engaged in the profession of chartered accountancy and has been paying taxes on its professional income religiously. III. That the learned CIR(A) has grossly erred in law by not considering our detailed written submissions in elaboration of our grounds of appeal and deciding the order referring to the non attendance without considering the whole facts of the case as explained to, him and provided in the written submissions. IV. That the learned CIR(A) has acted prejudicially by not considering our technical grounds of appeal that the order issued by the assessing officer is barred by time limit without to provide in-spite of the request made and of copying fee. V. Without prejudice to the above: - ' The learned CIR (A) was not justified to confirm the action of the learned Assessing Officer who has acted prejudicially by levying tax of Rs,489,231/- under section 122(5A) of the Ordinance without considering and verifying the facts of the case.
' The learned assessing officer has grossly erred in levying default surcharge under section 205 of the Ordinance of Rs,420.606/- VI. That the appellant craves, leave to alter, amend or set forth any grounds of appeal at or before the time of hearing.
2. Brief facts of the case are that the taxpayer is an individual, deriving income as a professional chartered accountant and from business of real estate. Return of income of tax year 2005 was filed declaring net income at Rs,1,940,070/- and assessment was deemed to be completed under section 120 of the Income Tax Ordinance, 2001. Later on, the ADCIR, Zone-II RTO, Islamabad issued a show cause notice under section 122(5A) confronted the taxpayer that as he is engaged in the business of sale and purchase of immovable property therefore he was obliged to offer the amount at Rs,6,000,000/- for tax purpose on account of gain on sale of land, but he failed to do so.
The AR of the appellant submitted the reply along with some documentary evidence but the assessing officer was not satisfied, and assessment for the year was amended under section 122(5A) of the Income Tax Ordinance, 2001 by adding the amount at Rs,1,696,000/- on account of aforesaid head.
3. Being aggrieved the appellant filed appeal before the learned Commissioner Inland Revenue (Appeals) who decided the case in order No,258/2013 dated 21.11.2013. Aggrieved with this order, the taxpayer has preferred appeals before this forum.
4. This case came up for hearing on 12.05.2015. The learned AR argued that a one off transaction cannot be treated as trading of property because the appellant was a professional chartered accountant and was not engaged in the real estate business. He further stated that the property in question was purchased by the appellant for residential purpose. In order to construct the house, the appellant borrowed funds from Faysal Bank amounting to Rs,24 million. However, after some time the appellant realized that the burden of markup on the debt was too heavy and therefore, decided to sell of the property in order to get rid of the bank's debt. He reiterated that sale of the property in question was not for any business purpose and its treatment as a business income was misconceived and without authority of law.
5. The learned DR argued that even a single transaction of purchase and sale of a property could be lawfully treated as trade in property as frequency of transaction was immaterial in terms of the definition of business as contained in section 2(9) of the Income Tax Ordinance, 2001. He supported his contention by citing a case law in G. Venkataswami Naidu and Co. v. Commissioner of Income Tax 1958 IMI 49633 (Supreme Court of India) in which, a single transaction of purchase and sale of land was declared to be trade in property. He further argued that the appellant himself declared in his tax return that the property in question was his investment, therefore, this property was liable to be treated as trade in property and the profit earned by its sale was liable to be characterized as income from business.
6. I have gone through the facts of the case and carefully considered contentions of both the parties. The issue involved in this case is whether a single or one time or infrequent transaction of purchase of property and its disposal/sale after two or three years against a sale consideration higher than cost of purchase is liable to be treated as adventure in property and therefore, liable to be characterized as income from business of real estate. The dictionary meanings of business comprises expressions such as occupation, employment, profession, dealings commercial or industrial or agricultural operation or even an errand, however, generally business is understood as an occupation for making a living. The legal definition of business while defining business emphasizes that a trade or commerce should be in the nature of trade. The legal definitions of business and income from business given in Income Tax Ordinance, 2001 is reproduced below:-- Income Tax Ordinance, 2001 Section 2(9) Definition of business: "business" includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment."
Income Tax Ordinance, 2001 Section 18 Definition of Income from business:--
(1) The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head "Income from Business"
(a) the profits and gains of any business carried on by a person at any time in the year;
(b) any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members;
(c) any income from the hire or lease of tangible movable property;
(d) the fair market value of any benefit or perquisite, whether convertible into money or not, derived by 'a person in the course of, or by virtue of, a past, present, or prospective business relationship; and
(e) any management fee derived by a management company (including a modaraba management company).
7. The reading of the two sections in juxtaposition shows that before taxing income from business, the existence of business itself has to be established. Business is meant for making a living and the essence of business is income earned from business. Every person makes transaction of purchase and sale but every such transaction of sale or purchase is not business, commerce, adventure or trade. In common sense a business is an activity which is characterized by repetitive transactions for commercial purpose. Apparently, no case law of Pakistani courts interpreting what exactly constitutes trade or business is available for guidance. However, in G. Venkataswami Nadu & Co. v.
Commissioner of Income Tax, the Supreme Court of India held that the essential ingredient of business or adventure is a commercial motive. In another case titled Deputy Commissioner of Income Tax v. Gopal Ramnarayan Kasat 2009 TMI 7870,. The Bombay High Court held that the motive of business of trade in property can be deemed to exist only if there is evidence of recurring income through repetitive transactions in. Property.
13. From the tax point of view, the difference between the sale consideration and cost of sales is liable to capital gain in term of section 18(1)(a) as a distinguishable head of income qua income from business which is chargeable to tax under section 18(1), (b), (c), (d) and (e) of the Income Tax Ordinance, 2001. However, during the tax year in question, the capital gain from sale of property was not liable to any tax. It seems that the Revenue's incentive to characterize the appellant's profit from sale of house as business income is driven by the nonexistence of any law taxing the capital gain during the tax period in question. This incentive however finds no support from the definition of business or income from business as contained in sections 2(9) and 18(1)(e) of the Income Tax Ordinance, 2001 or even the common understanding of what a business means. Clearly the appellant did not engage in repetitive transactions in property, hence the motive of trade in real estate is absent. Had the appellant constructed a commercial plaza for sale, the motive of business could have been attributed to him, even if it was a one off transaction. However, no commercial motive is discernable from the transaction in question as it relates to the purchase of plot and after construction of house on it, its sale against some profit falling in the category of capital gain. Therefore, guided by the criteria of trade motive, repetitive transaction and recurring income as laid down in the case law .Referred infra I conclude that the Revenue's treatment of the appellant's transaction as trade in property and characterization of capital gain as business income is without the authority of law as there is no evidence of the appellant's engagement in repetitive transaction of property or recurring income from sale of property. Therefore, the orders of the learned CIR (A) as well as the order of the Assessing Officer treating the appellant's capital gain as business income are annulled. The appellant's appeal is accepted.