1961-VIL-92-MAD-DT

Equivalent Citation: [1964] 51 ITR 631 (Madras)

MADRAS HIGH COURT

TAX CASE NO. 24 OF 1958 (REFERENCE NO. 12 OF 1958)

Dated: 03.10.1961

M.C. CHERIAN

Vs

COMMISSIONER OF INCOME-TAX

Bench

S.RAMACHANDRA IYER CJ. AND SRINIVASAN, J.

JUDGMENT

Srinivasan, J.

The assessment in question relates to the assessment year 1944-45. The assessee was originally assessed under section 23(1) of the Act on January 30, 1945, on an income of Rs 5,403. On December 30, 1948, there was a reassessment under section 23(3) and section 34, and the revised assessment was in respect of a total income of Rs 16,041. During the course of the assessment proceedings for the assessment year 1952-53, the Income-tax Officer came to be in receipt of information indicating that a certain income of the assessee had escaped assessment in the assessment year 1944-45. He accordingly reopened the assessment after the issue of a notice under section 34(1)(a) and brought to assessment a sum of Rs 1,75,000 said to have been the profit earned by the assessee during the account year relevant to that assessment year in a certain transaction involving the purchase and sale of a coffee estate. The facts that emerge from the records and the statement of the case are briefly as follows:

The assessee, along with some others, purchased in the year 1937 a group of coffee estates in the Mysore State from the Tea Estates (India) Ltd. Out of this purchase, the assessee, his uncle, M.C. Pothan, and another, K.M. Cherian, got as their share of the purchase an estate known as the Devadanam Group which was valued at Rs 35,000. In 1940, part of the estate was taken away by K.M. Cherian. Accordingly, the remaining extent of that estate was left with the assessee and his uncle, M.C. Pothan, and in this estate, the two persons were entitled in the ratio of 7 : 4.

In or about the year 1943, the assessee and the above-said Pothan promoted a public limited company called the Anaparai Estates Ltd. To this estate, they sold the Devadanam Coffee Estate for a consideration of rupees six lakhs and the consideration was received by them in the shape of shares allotted to them in that company. The assessee was allotted 1,90,909 shares which at Rs 2 each were valued at Rs 3,81,818. The other sharer, M.C. Pothan, was allotted 1,09,091 shares valued at Rs 2,18,181, Even at this stage, it may be mentioned that on January 30, 1944, apparently on an enquiry proceeding from the Income-tax Officer, the assessee gave details of this purchase and sale of the Devadanam Coffee Estate. Besides mentioning the above facts, he stated then that the divid- end which he had received on 1,02,400 shares had not been included in the return for the year ending March 31, 1945, as it was received after the close of the accounting year. He also stated that he had neither sold nor purchased any other properties or estates even outside British India.

The Income-tax Officer rejected the contention of the assessee that the proceedings under section 34 were barred by limitation. He rejected also the contention that the assessee was not a dealer in the purchase and sale of coffee estates for the reason that the joint purchaser, M.C. Pothan, had been held to be a dealer in the purchase and sale of such estates ; he was of the view that these two persons did not have any fluid cash for making the purchase in question but did so on borrowed capital, which circumstance the Income-tax Officer thought to be conclusive on the question. He accordingly brought to assessment a sum of Rs 1,75,000 only as the estimated profit arising out ofthe transaction.

The Appellate Assistant Commissioner in the appeal before him concurring in the view taken by the Income-tax Officer, observed that "the surrounding circumstances in the appellant's case clearly establish the intention of the appellant to purchase, develop and sell the estates with a view to make profit from the sale thereof." He, therefore, held that the surplus was not in the nature of capital accretion but was clearly a revenue gain.

In the appeal before it, the Tribunal expressed itself thus :

"The assessee belongs to a planting family and at the time of the purchase, he was associated with a firm of managing agents of plantation companies. In the form of a syndicate, consisting of himself and two other partners of the managing agency firm and several others so as to divide risks, he purchased the property in question not with any ready money available awaiting investment but by Obtaining the entire finance from the Travancore National Bank which was ready to advance the money on an overdraft, without any margin. These facts are adequate to establish that the purchase was purely an adventure of the assessee in the; nature of a trade in which the motive must be wholly one of profit. The profit realised by the sale clearly, therefore, is a profit that has arisen in the adventure and not capital."

On the application of the assessee, the following questions stand referred to us under section 66(1) of the Act:

"1. Whether the assessment of 1944-45 has been validly reopened under section 34?

2. Whether the sum of Rs 1,75,000 is assessable as profit from a venture in the former Native State of Mysore remitted into British India as it then was?"

In the view that we take of the transaction, it is really not necessary for us to consider the first question, though there appear to be materials which suggest that all the incidents relating to this transaction came to the knowledge of the department even in the year 1946. It is true that the department took the view that income, profits or gains chargeable to income-tax had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. But the failure to disclose appears, to have been for the reason that the assessee treated, rightly or wrongly, any profit arising from the transaction as one of a capital nature. In the statement of the case, the Tribunal stated that on the 30th January, 1946, the assessee appeared before the Income-tax Officer and after the interview, the Income-tax Officer recorded the following note in the order-sheet:

"The assessee appears. He says that the family owned an estate by the name of Anaparai Estates which was bought seven years ago, that this estate was sold for a lump sum and that he is not a dealer in estates. I have called for a statement to this effect and he has promised to file it in a day or two…………"

No action was taken by the department after 30th January, 1946, when the above note was recorded. It is clear from that note that the assessee's case was that he was not a dealer in estates and that the profit arising out of the transaction represented a capital accretion. There is considerable substance in the plea advanced by the assessee before the Appellate Assistant Commissioner that there had been a full disclosure of all materials necessary for his assessment and that in fact the assessment was reopened in 1948 for the inclusion of the escaped income of the assessee in another partnership; the failure of the department to take any action in respect of the profit from this sale transaction should be taken as indicating that the department accepted the assessee's contention and that merely by a changed opinion with regard to the transaction, the department is not justified in taking proceedings beyond what may be said to be the normal period of limitation of four years. As We stated, however, we do not propose to express any opinion on this aspect in view of the more fundamental question, namely, whether the profit was one resulting from an adventure in the nature of trade. We only refer to these details in passing.

It seems to us that the Tribunal's view of the surrounding circumstances is exceedingly difficult to support. That the assessee belongs to a planting family, as far as we can see, can lead to no conclusion as to the nature of his activities. It is not indicated anywhere in the statement of the case whether this "planting family "was engaged in transactions of this kind. Indeed, if the family was so engaged and if the assessee was a party to such transactions, it seems to us that it was hardly necessary for the department or the Tribunal to depend upon the establishment of an adventure in the nature of a trade. If any such circumstances existed, there could have been an assessment under the head of business income itself, The purchase of the property with borrowed capital is again not a clinching circumstance as the Appellate Assistant Commissioner or the Tribunal seem to have thought.

Certain other features which the Tribunal has referred to in the statement of the case but has not given any consideration to in arriving at its conclusion may now be mentioned. In paragraph 4 of the statement of the case, the Tribunal records that the estate was managed by an employee who sent monthly reports of the working of the estate to each of the two owners. Both the co-owners were also visiting the estate from time to time. The working profits of the estate were utilised in liquidating the loan to the bank and the balance withdrawn by the partners from time to time.

We may briefly refer to certain decisions which serve to explain what an adventure in the nature of trade is and under what circumstances an inference of such an adventure can be made. In Alexander v. Commissioner of Income-tax [1952] 22 ITR 379, the assessee, who was a planter, sold his main estate when he was in the employ of planting associations. Subsequently, he purchased a group of estates for rupees two and a half lakhs and within a few months thereafter sold the estates for rupees five and a half lakhs. The conduct of the assessee during this period was not inconsistent with that of a regular dealer in such plantations.. It was held that there was sufficient evidence in that case to justify the conclusion of the Tribunal that the transaction was an adventure in the nature of trade. But the learned judges point out that even an isolated transaction of purchase and sale of land, even if it is not business as it is normally understood, can be an adventure in the nature of trade. Such an isolated transaction may be a speculation and every speculation is an adventure, but unless it is an adventure in the nature of trade, the profits will not be income assessable to income-tax. They further held that if the estate had been purchased without any intention then of re selling it at a profit, the sale under changed circumstances would not stamp the transaction of sale with a business character. Such a sale by itself would not be an adventure in the nature of a trade, though the profit motive might have actuated the sale. Even a dominant or sole intention to re-sell was held not by itself to be conclusive proof but only a relevant factor in deciding whether the transaction of purchase and re-sale was an adventure in the nature of trade and in conjunction with other circumstances, including the conduct of the assessee, such intention might establish that the adventure was in the nature of a trade.

In Saroj Kumar Mazumdar v. Commissioner of Income-tax [1959] 37 ITR 242; [1959] Supp 2 SCR 846 the Supreme Court had to deal with a solitary transaction of purchase and sale of land. Their Lordships held that where a transaction was not in the line of the business of the assessee but was an isolated or single instance of a transaction, the onus was on the department to prove that that transaction was an adventure in the nature of trade. They indicated that a very important piece of evidence in arriving at a conclusion would be whether the land was purchased with the sole intention of selling it later at a profit. That was also a case where the assessee had effected the purchase on borrowed capital. This circumstance was not in the opinion of their Lordships sufficient to justify the inference that it was an adventure in the nature of trade.

In Ramnarain Sons (Pt.) Ltd. v. Commissioner of Income-tax [1961] 41 ITR 534; [1961] 2 SCR 904, the question was considered whether the purchase of shares far in excess of their market value by the assessee company (which besides being a dealer in shares and securities also carried on business as managing agents), which purchase was made to facilitate the acquisition of the managing agency, was an acquisition of a capital asset or only a part of the stock-in-trade of its business in shares. The headnote reads :

"Neither the circumstance that the appellant company borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by its memorandum of association to deal in shares, was of any effect. Nor could the appellant company by entering the shares of the mills in its statement of shares in which trading transactions were carried on alter the real character of the acquisition. The subsequent disposal of some out of the shares by the appellant company could not also convert what was a capital acquisition into an acquisition in the nature of trade. In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the legal requirements which are associated with the concept of trade or business"

We had occasion to deal with the question of what an adventure in the nature of trade is in R.C. No. 1 of 1957, Janab Abubucker Suit v. Commissioned of Income-tax [1962] 45 ITR 37. We pointed out that the intention of the assessee in the acquisition of the property at the time of the acquisition would be a very relevant factor and that the manner in which the properties were dealt with between the time of the purchase and date of the sale would afford valuable indication of the conduct of the assessee in relation to the properties purchased, conduct from which it could be lawfully inferred whether the acquisition was for the purpose of trading in the property or was of a capital nature. We referred to the observation in Simon's Income Tax, page 23, where it is stated :

"Where there are one or more isolated transactions which are alleged to constitute the carrying on of trade, it is necessary to determine by reviewing all the facts of the case whether the transactions are in the nature of trade ..…….or whether they were merely a conversion of capital in one form into capital of another kind. The test is whether the operations involved in the transaction are of the same character and carried on in the same way as those which characterise what is admittedly trade in the line of the business in question.……….In making up their minds the Commissioners would consider such things as whether or not an organisation for carrying on the adventure was built up and whether steps were taken to mature the asset in question with a view to disposing of it and whether the transaction is associated with the kind of business which the person in question carries on and the nature of the asset in question"

Examining the matter in the light of the above decisions, we are inclined to the view that the materials which the Tribunal relied upon did not justify the conclusion it reached. That the assessee was the member of a planting family without anything more takes us nowhere. It is not stated by the Tribunal that there was any evidence that the assessee's planting family was engaged in the transactions of purchase and sale of coffee estates. That the joint purchaser, M.C. Pothan, appears to have been indulging in such transactions as purchase and sale of coffee estates or that he was assessed in respect of his share of this estate cannot obviously colour the assessee's transaction, when there is no evidence whatsoever that the assessee ever had any other transaction of this kind. We have already pointed out that the mere circumstance that the assessee went in for borrowed capital cannot lead to the conclusion that even at the time of the purchase of the property he was actuated by the intention to sell the property at a profit. Indeed, from the facts which the Tribunal itself has recorded in its statement of the case, the diametrically opposite conclusion seems to be more than justified. The Tribunal has stated that between 1937 and 1943, the two co-owners were working the estate through an employee and the working profits of the estate were utilised in liquidating the loan to the bank and the balance was withdrawn by the partners from time to time. Obviously, therefore, the income from the estate was utilised in discharging the loan and there is further evidence that the balance available out of that income was being enjoyed by the two co-owners. This circumstance clearly negatives the existence of any intention to re-sell the property even at the time of the purchase of the property.

There is yet another aspect which calls for consideration. It is, whether, in the instant case, there was profit in the commercial sense of the term. We may at the outset refer to a decision of the Supreme Court in Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 ITR 506 ; [1954] SCR 219. That was a case where a dealer in silver and shares withdrew some silver bars and shares from the business and settled them on certain trusts. Besides being the sole owner of the business, he was also the managing trustee of the trusts in question. In his business, he adopted the mercantile system according to which he valued his stock at cost price both at the commencement and at the end of the year. "The same mode of valuation was adopted in respect of the bars and shares withdrawn from the business. The department purported to hold that when these items of stock-in-trade were so transferred, they should be valued at the market price and that the difference between the market price and the cost price represented the. profits which were taxable. Their Lordships of the Supreme Court held against this claim. They observed :

"It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case, disregarding technicalities, it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances, we are of opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself, which on the face of it is not only absurd but against all canons of mercantile and income-tax law. And worse. He may keep it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be compelled to sell at a profit. But, in this purely fictional sale to himself, he is compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional."

The conclusion reached by their Lordships was that the assessee might have stored up a future advantage to himself, but as the transactions were not business transactions and, as he derived no immediate pecuniary gain, the State amid not tax them, for, under the Income-tax Act, the State has no power to tax potential future advantage.

We may also usefully refer to another decision bearing on this line of reasoning. In Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 ITR 928 a somewhat similar question arose. There, the assessee and his sons formed a private limited company and transferred to that company shares in several join stock companies which the assessee had held jointly with his sons. The difference between the cost price of these shares and the market price at which the transfer had been effected was sought to be subjected to tax on the ground that the assessee had made profit to that extent by the transaction. The learned judges of the Bombay High Court, relying on the Supreme Court decision earlier referred to among other decisions, held that though the assessee and his sons on the one hand and the private limited company on the other were distinct entities in law, the real result of the formation of the company and the transfer of the shares to that company was only that instead of the shares being jointly held as individuals, they were held by these individuals as a limited company and that the so called sale of the shares to the company was riot a business activity entered into with the object of earning a profit and was not really a sale, but merely a procedure adopted for readjustment of their position as holders of the shares and that the assessee did not make any profit or gain in a commercial sense by transferring shares to that company.

It seems to us that the facts of the present case are no different. By transferring the Devadanam Coffee Estate to Anaparai Estates Limited in which the assessee and Pothan were themselves shareholders, it was only the mode of enjoyment of the property that was altered and there could not be said to be a business transaction which resulted in any profits.

To our minds, the circumstances relied upon by the department and the Tribunal are not even equivocal in the sense that ah inference that the transaction was an adventure in the nature of a trade could possibly be drawn from those circumstances. We have pointed out that far from there being an intention to sell the property even at the time of its acquisition, the conduct of the assessee shows that he was interested in working the estate and that he did work the estate for a period of six years. The income derived from the estate was in part applied in discharge of the loan originally taken. There is no evidence whatsoever that a transaction of this kind, viz., the purchase and sale of the property, was in the line of the business of the assessee. His association with a firm of managing agents of plantation companies is vaguely referred to in the appellate order of the Tribunal. Had it been a case of an acquisition of a managing agency and its sale, it would have been possible to hold that any profit arising from such an adventure was in the line of the business of the assessee by reason of his association with the firm of managing agents. This is not the case here. This was an independent transaction of the assessee, which, in our opinion, displays all indications of its being an acquisition of a capital asset, and its subsequent sale after a fairly lengthy interval of enjoyment of that property did not result in any revenue profit.

In the light of the argument addressed to us and in the light of the real point at issue, we modify the second question to read :

"Whether the sum of Rs 1,75,000 is assessable as profit from an adventure in the nature of a trade?"

and answer that question in favour of the assessee and against the department. In this view, it is unnecessary to deal with the other question that has been stated. The assessee will be entitled to his costs. Counsel's fee Rs 250.