IRFAN SAADAT KHAN, J. The instant ITRA was filed against the order passed by the Appellate Tribunal Inland Revenue (ATIR) in ITA No.1042/KB-2016 dated 16.4.2018 by raising a number of questions of law. However vide order dated 22.5.2018 only the following questions of law were admitted for regular hearing. i) Whether on the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified in holding that there was no claim under Section 79(1)(e) of the Income Tax Ordinance, 2001 in the earlier round of proceedings initiated under section 122(5A) of the Income Tax Ordinance for the same tax year, therefore, additional assessment made under Section 122(5A)
Income Tax Ordinance, 2001 was justified under the facts and circumstances. ii) Whether on the facts and the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified in holding that the surplus from the sale of property distributed to the shareholders being payment made to shareholders on liquidation of the company does not fall within the definition of Section 79(1) of the Income Tax Ordinance, 2001? iii) Whether on the facts and the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified in holding that the definition of disposal of assets under section 75 of the Income Tax Ordinance, 2001 does not apply in cases of liquidation under section 79(1)(e) of the Income Tax Ordinance, 2001? iv) Whether on the facts and the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified in treating the payment made to the shareholders during liquidation as dividend and liable to withholding tax?
2. Briefly stated the facts of the case are that the applicant was a limited company engaged in the business of weaving of textiles. However clue to continuous losses voluntary winding up process of the company was filed before the competent authority. The return of income for the year under consideration i.e. 2011 was filed by declaring 'Nil' income, however an amount of Rs.356,237,146/- was claimed as exempt on account of sale of land admeasuring 9.33 acres in Survey Nos.340, 341 and 376 in Taluka Tando Jam District Hyderabad and a land admeasuring 6.30 acres in Survey No.336, located in the same District, under Section 79(1)(e) of the Income Tax Ordinance, 2001 (hereinafter referred to as "the Ordinance") in its return of total income, filed on 14.1.2012. As per the provisions of Section 120 of the Ordinance the said return was considered as deemed assessment.
The concerned Assistant Commissioner (A.C) then proceeded against the applicant under Section 122(5) of the Ordinance and required from the applicant to furnish certain details and documents, with regard to the claim of exempt income. The applicant replied to it and thereafter the Department, vide order under section 122(5A) of the Ordinance dated 30.1.2015, dropped the proceedings initiated against the present applicant. However. subsequently the case of the applicant was selected for audit and was duly informed in this regard, vide communication dated 28.8.2015. The applicant then attended the office of the concerned A.C. and submitted various details/ document etc. Queries were raised by the Department with regard to the claim of exempt income from the assessee, in respect of which replies, details/documents were duly furnished.
However, the Department came to the conclusion that the income declared by the applicant does not enjoy exemption and thereafter treated the same as income from the business as per Section 18 of the Ordinance and taxed the said amount accordingly vide assessment made under Section 122(4) read with Section 122(5) and Section 161(1)(a) of the Ordinance. Being aggrieved with the said order an appeal thereafter was preferred before the concerned Commissioner (Appeals), who vide order dated 21.7.2016 dismissed the appeal of the applicant. Then an appeal was preferred before ATIR, who also dismissed the same, It was then the present ITRA was filed.
3. Messrs Anwar Kashif Mumtaz, and Ullman Alam, Advocates have appeared on behalf of the applicant and stated that duo to heavy losses the company placed itself under liquidation before High Court through Mr. Abid Siddiq, liquidator, They stated that previously also the Department initiated proceedings against the applicant under Section 122(5A) of the Ordinance on the same subject matter and thereafter dropped the same by accepting the gain earned on sale of land as exempt under Section 79(1)(e) of the Ordinance vide Order dated 30.1.2015. They stated that without prejudice to their other submissions the selection of the case for audit on the same set of facts was illegal and uncalled for and is nothing but an afterthought and change of opinion on the part of the Department. They stated that the Taxation Officer erred in treating the distribution of the amount of Rs.35,25,00,000/- as dividend liable to be taxed under clause 'C' of subsection (19) of section 2 of the Ordinance, The learned counsel stated the sale of land was nothing but capital gain in the hands of the company as the company was under liquidation and was obliged to clear all its liabilities and to distribute the remaining balance, if any, to its shareholders in accordance with relevant provisions of the law, Learned counsel invited our attention to subsection (19) of Section 2 of the Ordinance as well as to the Section 79(1)(e) of the Ordinance to show that the distribution to a shareholder of company upon liquidation is not taxable.
4. Learned counsel next stated the profit arising out of sale of land is never considered to be taxable in the hand of a company as the same is exempt from tax being capital gain and in support thereof placed reliance on an unreported decision given in the case of Fecto Cement Limited v. Additional Commissioner Inland Revenue, in C.F. No.D. 2595/2015. Learned counsel also relied upon the decision given in the case of M/s. Julian Hoshang Dinshaw Trust and others v.
Income Ma. Officer and others (1992 SCMR 250). Learned counsel in the end stated that the Department went wrong in taxing the gain arising from the sale of land as taxable and this reference may be allowed by answering the proposed and reformulated questions of law in favour of the applicant and against the Department.
5. Mr. Kafeel Ahmed Abbasi, Advocate has Appeared on behalf of the Department and opposed the instant 1TRA and stated that concurrent findings, as that of Taxation Officer, Commissioner (Appeals) and that of the ATIR are against the present applicant. He stated that no new fact has been brought in the knowledge of this Court and all the issues, now proposed in the present ITRA and reformulated were thoroughly thrashed out by the Department, He stated that the plot of land was sold after developing the same which amply proves that the applicant has ventured and developed the land and thereafter sold the same. Learned counsel stated that had the plot of land being sold as a going concern then it could be said that a capital gain has arisen in favour of the applicant but in the present case, It Is an established fact that the piece of land was sold In piecemeal after developing the same, hence for all practical purposes the land sold was an adventure in the nature of trade in the hands of the applicant and is taxable and would not fall under the exempt clause, as mentioned by the applicant, He stated the land sold was nothing but gain on the sale of land falling under the respective head of subsection (1 U) of Section 2 of the Ordinance and thus is taxable In the hands of the applicant. He therefore, stated that answer to the questions may be given In favour of the Department and against the applicant.
6. Learned counsel further stated that while proceeding under Section 122(5)(A) of the Ordinance previously, the Department did not thrash out the issue with regard to sale of land In detail and thereafter quite rightly selected the case of the applicant for audit. However when the matter was thoroughly examined and thrashed out, it revealed that the gain on the sale of land was not exempt from tax and was taxable In the hands of the applicant. The learned counsel Invited our attention to various portions of the assessment order, order of the Commissioner (Appeals) and the ATIR to support his view point. He stated that while conducting the audit proceedings due opportunity was provided to the applicant by issuing notice under Section 122(9) of the Ordinance and all the replies of the applicant were even reproduced In the assessment order. He stated that it was only after considering the replies of the applicant the Department came to the conclusion that the claim of the applicant made under Section 79(1)(e) of the Ordinance was not entertainable. He stated that due reasons were given by the Assessing Officer for taxing, the gain with regard to development of land into residential plots and then selling out the same to individuals which amply proxies that the piece of land was not sold in one go but firstly it was developed into residential plots and thereafter sold to various individuals, which proved that the intention was to make profit out of the sale of land. According to the learned counsel it is an admitted position that the business activities of the applicant were closed down and the company was under liquidation, therefore, the management thought its expedient to develop the land into residential plots then sold out the same to various individuals to earn profit from the sale of land, which in his view is nothing but adventure in the nature of trade and is taxable as business income of the applicant under section 18 of the Ordinance. Learned counsel stated that under the given circumstances the provisions of Section 79(1)(e) of the Ordinance are not attracted so as to allow exemption to the company.
7. Learned counsel next stated that the plot of land was not even sold to the shareholders so as to qualify for the exemption as provided under the Ordinance; hence in his view the said gain is not exempt from tax and was quite rightly taxed by the Department as business income of the company which was under liquidation. He thus prayed that the present ITRA may be dismissed by answering the proposed and reformulated questions in favour of the Department and against the applicant.
8. We have heard all the learned counsel before us and have also examined the facts, law and the decisions relied upon by the counsel for the applicant.
9. Before proceeding any further, we deem it expedient to reproduce the relevant provisions of law relied upon by the learned counsel, which reads as under:- Subsection 19(c) of Section 2 (19)(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not;
79. Non-recognition rules.-- (1) .......................................
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(e) by a company to its shareholders on liquidation of the company; or
10. The facts of the case reveal that the applicant claimed exemption of an amount of Rs.356,237,146/- on account of sale of land, being capital gain in the hands of the company and not liable to be taxed under Section 79(1)(e) of the Ordinance. The facts further reveal that the concerned A.C. proceeded against the applicant under Section 122(5) of the Ordinance in respect of the said claim and thereafter dropped the proceedings on 30.01.2015, after finding the sale of land to be exempt. However the case of the applicant was subsequently selected for audit. The applicant joined the proceedings of the audit and submitted details and documents, whatever required by the Assessing Authority (AA), through its liquidator. After obtaining the relevant details and documents the department, after confronting the applicant and obtaining its reply, found out that the claim of exemption on the sale of land was not exempt rather the applicant in fact has not given the true facts of the case previously and thereafter added the amount in the income of the applicant as an income liable to be taxed as its normal business income. It is apparent from the record that the applicant claimed the sale of land on "As is where is basis", however when the matter was thoroughly thrashed out by the AA it revealed that the applicant modified and developed the land before its disposal and even got the map approved from the concerned authorities.
11. It is also observed that construction of roads, plotting of land into commercial and residential plots and thereafter selling out the same to a housing society was made by the present applicant.
It is also surprising and astonishing to note that some of the shareholders of the present company were part and parcel of the housing society. It is also noted that it was the applicant who applied to the HESCO on behalf of the housing society, namely, Al-Madina Housing Society, to whom the land was sold, for sanction of electricity load. It is also noted that the land was not sold on "As is where is basis" and in one go rather efforts were made by the company to first develop the land and then sold out the same to the housing society. It is also a matter of record that the land was sold out to various individuals by way of plotting the same into commercial and residential plots. No doubt the company was engaged in weaving and the land was acquired for its factory but equally true is the fact that the said land acquired for the factory was not sold on "As is where is basis" but was sold out after developing the same and enhancing the value of the plot to earn better profit /income /gain.
12. It is also an admitted fact that the company was under liquidation since 2004 and the tax year under consideration was 2011. The record further reveals that ample opportunity was provided to the applicant, before taxing the income /gain, and replies were obtained from the applicant. It is also noted that divergent and retracted submissions were made by the counsel of the applicant as at one place they have stated that the land was sold on "As is where is basis", whereas on other place they stated that the land sold was capital gain. It is also a matter of record that on various occasions, when confronted with certain aspects, either no plausible reply was furnished by the applicant or had remained silent or not replied to the queries raised by the department. It is also noted that before making the said addition complete revenue record, Deh Form and other documents were acquired by the AA from where it was gathered that plots were carved out and the land was sold after developing the same. The record also reveals that the AA before making the addition had even visited the site.
13. It is a settled proposition of law that it is always the intention at the time of the sale of any asset which is to be considered. It could be pleaded by the applicant that at the time of purchase of the plot there was no intention of selling out the land but when the company went into liquidation, due to these changed circumstances, the company decided to sell out the said land. Had the said piece of land been sold in one go, even if to Al-Madina Housing Society, then it could be said that there was no intention to make a gain from the selling out of the land but in the present circumstances the facts clearly reveal that the land was developed, plots were carved out and then after developing the land it was sold out. The manner and method in which the plot of land was sold, in our view, could be termed as an "adventure in the nature of trade". The term "adventure in the nature of trade" though has not been defined under the law but is to be gathered from the facts obtaining in each case. It was held in the case of Fancy Foundation v. Commissioner of Income Tax, Karachi (2017 SCMR 1395) by the Hon'ble Supreme Court of Pakistan that what constitutes adventure in the nature of trade is to be gathered from the facts of each case and no hard and fast rule existed as to whether a transaction constitutes adventure in the nature of trade or not. It is not necessary that for constituting adventure in the nature of trade there should be a series of transactions so as to constitute that a particular person is engaged in that very business, even a single and isolated transaction could constitute adventure in the nature of trade by looking at the manner and method in which transaction took place. In our view the intention with which the asset was purchased originally would be of little significance if the circumstances changes then in such changed circumstances the said transaction could be termed as an adventure in the nature of trade. It was observed by Lord Sands in IR v. Livingstone 11 TC 538 that to consider something as adventure in the nature of trade is a "matter of impression which Court gathers that whether a particular transaction is in adventure in the nature of trade or not" For an adventure in the nature of trade there has to be "indicia of trade" which in our view in the present case was present. The intention of a person in selling out any asset depends upon the conduct of the said person and the circumstances of the case. Now if the facts of the present case are examined it would reveal that the manner and method in which the land was sold out clearly fall under adventure in the nature of trade and thus, in our view, is taxable in the hands of the company and not exempt, as claimed by the company under Section 79(1)(e) of the Ordinance.
14. So far as the assertion of the learned counsel for the applicant that on the same subject matter proceedings under section 122(5A) of the Ordinance were dropped, suffice to observe that in the previous order the procedure through which the issue was probed, during the audit proceedings, was not carried out by the department hence it is neither a case of change of opinion nor could it be said that it was a past and closed transaction. Hence the argument advanced by the learned counsel for the applicant on this aspect is hereby repelled. The decisions relied upon by the learned counsel for the applicant in the case of M/s. Julian Hoshang Dinshaw Trust (supra) is distinguishable from the facts obtaining in the instant case, as in the said matter the land was compulsorily acquired. The other decision of Fecto Cement Limited (supra) relied upon by the learned counsel for the applicant is also found to be distinguishable.
15. In view of the above discussion, we are of the view that all the three authorities below i.e. Taxation Officer, Commissioner (Appeals) and the ATIR were quite justified in reaching to the conclusion that the exemption claimed by the applicant under Section 79(1)(e) is not applicable to the applicant and thus answer the proposed and reformulated question in 'Affirmative' i.e. against the applicant and in favour of the department. The instant ITRA stands dismissed along with the listed application.
Let a copy of the present order be sent to the Registrar of the ATIR for information and necessary action.