1963-VIL-47-KER-DT

Equivalent Citation: [1964] 51 ITR 829

KERALA HIGH COURT

Dated: 21.08.1963

RAMAN PILLAI (M.)

COMMISSIONER OF INCOME-TAX

Judgment / Order

STATEMENT OF CASE

By this application, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law, which are said to arise out of the Tribunal's order dated 13th February, 1962, in I. T. A. No. 10051 of 1960-61. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up an agreed statement of the case and refer it to the High Court of Kerala at Ernakulam under section 66(1) of the Indian Income-tax Act.

2. The assessee is a registered military and P. W. D. contractor. He also maintained palace buildings. The assessment year is 1959-60 and the accounting year ends on March 31, 1959. On 25th of April, 1958, he entered into a contract with one J. M. Sawyer, for the purchase of land, 92 cents in extent, the buildings thereon fetching a rent of Rs. 677 per mensem and a ground rent of Rs. 85 per mensem, opposite the Kerala Government Secretariat at Trivandrum, for a consideration of Rs. 1,40,000 and paid an advance of Rs. 5,000, the transaction to be completed by the 30th of August, 1958. Actually, the sale was effected by a deed dated 23rd of August, 1958. In the meanwhile, the assessee had entered into the following transactions :

(a) He had agreed with one N. G. Raghavan Nair to sell 7 cents. with a building thereon for Rs. 13,300 and received an advance of Rs. 8,000 on August 20, 1958, the sale itself being completed on September 13, 1958, when the balance of consideration was paid ;

(b) On August 23, 1958, he entered into an agreement to sell 3+ cents of land for Rs. 14,000 to the Bank of New India and received a sum of Rs. 13,900. The sale deed was executed on August 26, 1958.

(c) He entered into an agreement with Yoonis Sait to sell 5 cents and a building (which Yoonis Sait was already in occupation of) for Rs. 20,000.

(d) On September 13, 1958, he sold further a parcel of land 7 cents in extent to Dr. P. R. Balakrishna Pillai for Rs. 13,300.

3. The consideration for the purchase of the property was met as follows :

	Rs.
(i) Cheques from P. W. D	33,489
(ii) Another cheque from P. W. D	24,015
(iii) Land sold and advance received on August 23, 1958	33,900
(iv) Overdraft from bank	45,000
(v) Balance due not cleared yet	3,596

These are details from the letter of the assessee dated February 24, 1960. The interest on the bank overdraft was 12 per cent ……

4. The Income-tax Officer found :

" The assessee, a person engaged in business, ventured to purchase the property paying a considerable sum, mainly from borrowed funds, fully aware of the price it was going to fetch, having entered into deeds which definitely assured him of the margin he was going to make on the property as a whole. The motive of reselling property at a profit is established and the profits made by the assessee in the transaction is taxable under section 10 as profits from an adventure in the nature of trade. "

After making adjustments for values, having regard to the frontage and side, he found that the assessee had made a profit of Rs. 58,187 and brought the profit to tax under section 10.

5. The Appellate Assistant Commissioner, on appeal, wrote :

"The Income-tax Officer observed that the appellant being a P. W. D. contractor was in the knowledge of the value of properties which he had purchased from Mr. J. M. Sawyer. He also observed that the appellant knew that the property could be sold at a very high rate when he entered into the contract. This was why he was even prepared to purchase the land by taking loans and overdrafts from the bank"

"……. that the actual number of transactions will not be the correct criterion for considering the question whether a particular transaction is in the nature of business or not . . . "

"The appellant is a P. W. D. contractor and it must be presumed that he will have a good knowledge of the value of land site in the Trivandrum area. When this site of land in the heart of Trivandrum came up for sale it is only a reasonable presumption that the appellant at once anticipated the profit which could accrue to him if he purchases the site knowing fully well that this site could be sold for a good profit . . . "

" It might be that there were certain difficulties or some extra business considerations for selling the plots of land which have been sold ………"

" In my opinion the appellant must have anticipated the valuable nature of these sites and hence when he purchased it, he had a profit motive in his mind and as soon as the purchase was completed he sold out these lands at a very high profit. "

He sustained the Income-tax Officer's order. The orders of the Income-tax Officer and the Appellate Assistant Commissioner are annexures " A " and " B " and form part of the case.

6. The assessee appealed to the Tribunal and contended :

(i) that Yoonis Sait and Raghavan Nair were in occupation of parts of the plot for 25 years and 17 years respectively and could not be ejected easily ;

(ii) that the Bank of New India Ltd. was the assessee's banker and their request could not be refused and so also Dr. Balakrishna Pillai's who was the family doctor ; and so there was no intention at all to make a profit in these ;

(iii) that out of 92 cents purchased, only 22+ cents had been parted with and the balance of 69+ cents remained ;

(iv) that no business in the purchase and sale of plot was carried on and not even a venture in the nature of trade ;

(v) that so far as the quantum was concerned, it was stated that the plot was an oblong one with only 160 feet frontage on the main road and that the department had erred in valuing the plot at an average rate of Rs. 4,000 per cent for the land facing the main road and Rs. 1,900 on the rest ;

(vi) that even if it be held that an adventure in the nature of trade had been carried on, the profits thereon should be finally watched when the venture ended, i.e., when all the plots had been sold off.

7. The departmental representative contended ;

(i) that there was no proof that the assessee purchased the plot for making a construction for his own use and so he could not claim the benefit of the rule laid down in Saroj Kumar Mazumdar v. Commissioner of Income-tax (1) ;

(ii) that in the next relevant accounting year, the assessee had a liability of Rs. 93,000 ;

(iii) that the assessee knew, in connection with contract works and the knowledge of the locality, that the property had a high potential value and so entered into the contract even though he did not possess the resources and, indeed, had to borrow money at a high rate of interest ;

(iv) that so far as the valuation was concerned, it had been made at the average rate and the assessee had nothing to complain.

8. The Tribunal held, for reasons stated in its order, copy whereof is annexure " C " and forms part of the case, as follows :

(i) that it was clear that the assessee did not purchase the property for constructing either a residence or a business premises in the plot, and so the rule laid down in Saroj Kumar Mazumdar v. Commissioner of Income-tax [1959] 37 I. T. R. 242 ; [1959] Suppl. 2 S. C. R. 37 did not help the assessee ;

(ii) that having regard to the long connection with maintenance of building and intimate knowledge of the Trivandrum City, it may well be presumed he had good knowledge of the potential value of the property ;

(iii) that there had been no proof of the assessee getting money from the P. W. D. which could form the source for the investments ;

(iv) that the assessee had taken the considered risk in entering into the transactions with those people who had stayed in the land for 25 years and 17 years respectively and who stood to lose by such eviction from a prominent business locality ;

(v) that the elements of foresight, forethought, risk and calculation that all go to characterise the venture in the nature of trade were present in the case ; and, lastly,

(vi) that it was unnecessary to wait till the business was completed to compute the profits.

They upheld the order of the Appellate Assistant Commissioner.

9. On these facts, the question of law that arises is:

"Whether the purchase and sale of part of the property constituted an adventure in the nature of trade, the profits from which could be taxed ? "

10. The other findings are all of fact.

Mathew Muricken, A. S. Narayanan Asan and A. D. Krishnan Asan for the assessee.

G. Rama Iyer for the Commissioner.

JUDGMENT

This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1959-60; and the accounting period, the twelve months ended March 31, 1959. The question referred is :

"Whether the purchase and sale of part of the property constituted an adventure in the nature of trade, the profits from which could be taxed?"

The assessee agreed to purchase 92 cents of land in Trivandrum with the buildings thereon from one J. M. Sawyer for Rs. 1,40,000. The agreement was on April 25, 1958, and the advance paid on that day was Rs. 5,000. The arrangement was that the sale should be completed by August 30, 1958. It was effected within that time, by a sale deed dated August 23, 1958.

Subsequent to the agreement on April 25, 1958, the assessee entered into the following transactions :

(a) He agreed to sell 7 cents from the area to one N. G. Raghavan Nair, with the building thereon, for Rs. 13,300. He received an advance of Rs. 8,000 on August 20, 1958. The sale was completed and the balance of the consideration was paid to the assessee on September 13, 1958.

(b) He agreed to sell 3+ cents from the area to the Bank of New India Limited for Rs. 14,000 on August 23, 1958, and received an advance of Rs. 13,900. The sale was completed and the balance of the consideration was paid to the assessee on August 26, 1958.

(c) He agreed to sell 5 cents from the area to one Yoonis Sait on August 23, 1958, with the building thereon, for Rs. 20,000 and received the whole amount on that date.

(d) He sold 7 cents from the area to one Dr. P. R. Balakrishna Pillai for Rs. 13,300 on September 13, 1958.

It would appear that Raghavan Nair and Yoonis Sait were in occupation of portions of the property for 17 and 25 years respectively and that there was difficulty to get them ejected therefrom. It is also stated that the Bank of New India Limited was the assessee's banker and that Dr. P. R. Balakrishna Pillai was his family doctor.

It is clear from what has been stated above that only 22 cents of the 92 cents purchased were sold by the assessee and that the remaining 69+ cents are still with him and continue to be his property. The only foundation for the assumption that the transaction was an adventure in the nature of trade is the fact that the assessee did sell those 22+ cents for a total consideration of Rs. 60,600 between April 25, 1958, and September 13, 1958. Apart from the said sum of Rs. 6,600 and the balance of the consideration that still remains unpaid, the rest of the amount due to the vendor was found by the assessee not by sale of any portion of the land but from his own sources, Rs. 45,000 being raised by an overdraft from the bank.

The assessee is a P. W. D. contractor. He does not deal in land and the transaction mentioned above constitutes his only transaction in real property. The fact that such a transaction is not part of his normal business, that it forms a solitary and isolated act, though by no means conclusive, is certainly not without its significances.

There is no peculiar characteristic which distinguishes an ordinary purchase and sale from a purchase and sale by way of trade. The distinction depends on the intention with which the transaction is undertaken, and in the realms of intention the factors for detection depend on the facts of each case.

The element of repetition has been stressed in many cases. The leading case stressing its importance in deciding whether a trade was carried on is Pickford v. Quirke [1928] 138 L. T. R. 500.

The absence of repetition, however, is by no means conclusive. As stated by F. E. LaBrio in his book The Meaning of Income in the Law of Income Tax :

"Even an isolated transaction in a commodity which is as stable a form of investment as land will still give rise to income where other circumstances show that the intention throughout is clearly to purchase and re-sell for gain " (page 89).

The difficulty in the way of the department in this case is that there is no valid circumstances whatsoever which will indicate that the intention was to purchase and re-sell for gain and not to make a prudent investment in land in an important portion of an important town when the same was available at a price that was attractive. Part of the consideration was no doubt found by selling a part of the property ; and another part by means of an overdraft. But that is the way in which many investments are made ; and we see no reason to hold that that fact will sustain the conclusion that the transaction was an adventure in the nature of trade.

It follows that the question referred has to be answered in the negative and against the department. We do so. The department will pay the costs of the assessee. Advocate's fee Rs. 150.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.