Commissioner of Income Tax vs Nathalal Dahyabhai

Y.B. Bhatt, J.—The present reference u/s 256(1) of the Income Tax Act raises the following questions for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 8,000 was taxable as business income ?

If the answer to question No. 1 is in the negative, whether the amount is taxable as capital gains ?

If the answer to both the questions are in the negative, whether the Tribunal was justified in taxing it under the head ''Other sources''?"

The relevant assessment year is 1973-74. The assessee being a registered-firm had entered into an agreement to purchase a plot of land. This agreement, inter alia, contained a provision that in case the vendor does not execute a sale deed, the purchase (assessee) would be entitled to refund of any amount paid towards the consideration, and also interest at the rate of 12% on such amount. There is no dispute that the assessee had paid Rs. 70,000 under the agreement in question and that since the vendor could not execute the sale deed contemplated by the agreement, the assessee in fact received Rs. 8,000 by way of interest as contemplated in the agreement.

The Income Tax Officer treated this amount of Rs. 8,000 as business income, and taxed it accordingly, on the basis that the assessee had entered into a number of such transactions in land in the past and had also made substantial gains from such business. Another fact relied upon by the Income Tax Officer for this conclusion was that the five partners taken together had a huge debit balance since many years prior to the assessment year.

In appeal by the assessee, the Appellate Assistant Commissioner found that this could not be treated as business income since the transaction in question could not be treated as a business transaction; but the amount of Rs. 8,000 can be treated as capital gains of a long term nature. The Appellate Assistant Commissioner, therefore, directed the Income Tax Officer to treat it accordingly.

This decision of the Appellate Assistant Commissioner was challenged by the Revenue by filing an appeal before the Income Tax Appellate Tribunal.

The Tribunal has arrived at a finding of fact that the amount in question cannot be treated as business income at least so far as the relevant assessment year is concerned, in view of the fact that since the last five assessment years the Tribunal had consistently come to the conclusion in the case of the assessee that the assessee is not a dealer in land. Thus, even in respect of the assessment year in question, the Tribunal came to the same conclusion as in the earlier years, viz., that the assessee was not a dealer in land. Since this is a finding of fact, we accept it as such. Moreover, there is no material or other material from which any contrary conclusion can be drawn.

Under the circumstances, the assessee cannot be taxed on the amount of Rs. 8,000 as business income.

The other aspect considered by the Tribunal was whether this amount can be taxed as capital gains, whether by way of short-term capital gains or otherwise. The facts clearly indicate, and on which there is no dispute, that the amount in respect of which tax is sought to be levied is the amount which was received by the assessee on the failure of the transaction, contemplated by the agreement of sale. To our mind, clearly there was no capital asset which was transferred from which any capital gain could possibly accrue to the assessee. Obviously, therefore, the amount in question cannot be taxed as capital gains.

The next question which requires to be considered is whether the amount in question can be considered under the head "Other sources". Clearly the amount would be taxable under the head "Other sources", the only possible exception being the amount not being taxable "as income" at all. This aspect we are not required to consider looking to the questions referred to us for our opinion. Thus, the amount of Rs. 8,000 would clearly be taxable under the head "Other sources".

In view of our findings above, questions Nos. 1 and 2 are answered in the negative, in favour of the Revenue and against the assessee, and question No. 3 is answered in the affirmative, in favour of the Revenue and against the assessee. This reference stands disposed of accordingly with no order as to costs.