Adventure in Nature of Trade

Introduction

Adventure in the nature of trade or commerce is one of the elements in the definition of business as given in Section 2(20) of the Income-tax Act, 2025. Categorization of an income, arising from a transaction, into business income or capital gains or residuary income is significant because the tax rates and computation mechanism for these heads of incomes are different.

1. About

1.1. Continuity is not must

The word ‘business’ in its commercial sense implies an element of continuity. But the income-tax law does not require that there should be a series of transactions to constitute business. Even a single and isolated transaction may fall within the definition of business as being an adventure in the nature of trade, provided the transaction bears clear indication of trade. A transaction can be termed as an adventure in the nature of trade, commerce or manufacture if some elements of trade or business are present therein and not necessarily all elements be present.

1.2. Essential Elements

It is a mixed question of facts and law whether a transaction constituted an adventure in the nature of trade, commerce, or manufacture. Each case has to be examined in the light of available facts. However, some guidance may be sought from the following broad principles, which are based on judicial pronouncements:

1.2-1. Intention to re-sell

When the purchase is made solely with an intention to resell at a profit and purchaser has no intention of holding the property for himself, the transaction is an adventure in the nature of trade. Where the purchase of any article is made without an intention to sell at a profit, a resale under changed circumstances is only a realization of capital investment and does not stamp the transaction with a business character.

1.2-2. Transaction relating to business

If a transaction is related to the business which is normally carried on by an assessee, though not directly part of it, it may be inferred that the transaction is an adventure in the nature of trade.

Example, Mr. X is a cotton merchant. During a crisis in the cotton market, he is appointed under the power of attorney to wind up the affairs of a cotton firm and to dispose of the cotton bales and distribute the sale proceeds. The commission that he receives is taxable as business profits.

1.2-3. The quantity of the commodity purchased

Where the transaction is unrelated to business, which is normally carried on by an assessee, the quantity purchased and sold may throw some light on the nature of the transaction. If the quantity purchased is quite large which cannot be consumed by an assessee and his family in a reasonable time, and it does not give him any pride or possession, such transaction may be inferred as an adventure in the nature of trade.

1.2-4. Where purchased property undergoes alteration and then sold

Where a commodity is purchased, altered, repaired or converted into a different property and then sold, it may be readily inferred that the transaction is an adventure in the nature of trade.

1.2-5. Concern in the nature of a trade

A concern in the nature of trade, commerce, or manufacture also falls within the definition of ‘business’. A concern in the nature of trade implies that it has an adequate degree of business organization for the purpose of carrying on an undertaking. The size of organization must necessarily depend upon the character of the concern itself.

1.3. Judicial Precedents

1.3-1. Transaction of dealing in land

Where a person acquires land with a view to sell it later after developing it, he is carrying on an activity to be described as a business venture. Where the person goes further and develops the land into plots, develops the area, and deals with the land as stock-in-trade, he is carrying on business and making profits

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

1.3-2. Transaction of dealing in shares

The surplus realised on sale of shares would be capital in nature if assessee is an ordinary investor realising his holdings but it would be revenue, if he deals with them as an adventure in the nature of trade

1.3-3. Transaction of dealing in leases

Dealings in real property, activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market as a part of trading operations would fit within the meaning of ‘business’

Leasing out of forest to contractors and recovering royalty from them can be in the nature of business activity

References

Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC)

G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC)

Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 (SC)

S. G. Mercantile Co. (P) Ltd. v. CIT 83 ITR 700 (SC)

CIT v. Khairagarh Timber Traders (1982) 137 ITR 346 (MP)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.