Janki Ram Bahadur Ram Vs. Commissioner
of Income Tax, Calcutta [1965] INSC 90 (31 March 1965)
31/03/1965 SHAH, J.C.
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION: 1965 AIR 1898 1965 SCR (3) 604
CITATOR INFO:
RF 1966 SC1256 (4) R 1969 SC1241 (7) R 1975
SC2106 (14) D 1976 SC2105 (3,12) RF 1986 SC1695 (31)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s.
10--Purchase of a different business--Sale-Profit--If taxable.
HEADNOTE:
The assessee who was dealing in iron scrap
and hardware had purchased a jute press and sold it at a profit. The Income-
tax Officer brought to tax in the hands of the assessee, the profit arising out
of this sale. The Appellate Tribunal modified the order and reduced the total
income. At the instance of assessee the Tribunal referred to the High Court,
the question, whether the surplus received by the assessee as a result of the
sale of the jute press arose out of an adventure in the nature of trade and
was, therefore, liable to tax. The High Court answered the question in affirmative.
In appeal;
HELD: The question must be answered in the
negative.
Granting that the assessee made a profitable
bargain when he purchased the property and granting further that the assessee
had, when he purchased it, a desire to sell the property, if a favourable offer
was forthcoming, these could not without other circumstances, justify an
inference that the assessee intended by purchasing the property to start a
venture in the nature of trade. [609H-610A] A profit motive in entering a
transact on is no decisive, for, an accretion to capital does not become
taxable income, merely because an asset was acquired in the expectation that it
may be sold at a profit. [608F] Purchase of the property by the assessee was an
isolated transaction not related to the business of the assessee.
[608G] Case law referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 308 of 1964.
Appeal by special leave from the judgment and
order dated September 10, 1962 of the Calcutta High Court in Income-tax
Reference No. 115 of 1957.
A.V. Viswanatha Sastri, B. Sen Gupta and P.K.
Ghosh, for the appellant.
N.D. Karkhanis and R.N. Sachthey, for the
respondent.
The Judgment of the Court was delivered by
Shah, J. The appellant is a Hindu undivided family and carries on business as a
dealer in "iron scrap and hardware". Messrs Hoare Miller and Company
Ltd.--hereinafter called 'the Company' --were owners of a jute pressing factory
installed on a piece of land belonging to the Company. Adjacent to that land
were two pieces of land: one was leasehold, and the other held by the Company
as a licensee from the Government of West 604 605 Bengal. On January 21, 1941
the Company leased out to one Ramnath Bajoria the jute pressing factory
together with the machinery standing on the land owned by the Company for ten
months commencing from January 10, 1941. Ramnath Bajoria failed to vacate and
deliver up possession of the premises demised to him, after the expiry of the
period of the lease, and the Company instituted a suit in ejectment against
him.
By an agreement dated October 31, 1942 the
appellant agreed to purchase all the rights of the Company in the factory and
the appurtenant premises for Rs. 2,45,000. On November 14, 1942 the Company
delivered to the appellant possession of the property agreed to be sold, save
and except the factory demised under the lease to Ramnath Bajoria and the
machinery included in the lease. On February 26, 1943 the Company executed a
conveyance in favour of the appellant conveying the factory and the appurtenant
premises.
On June 12, 1943 the appellant agreed to sell
to one Ranada Prasad Saha the property purchased from the Company for Rs. 4,73,364/3/6
free from all encumbrances. On August 10. 1943 the appellant was substituted as
a plaintiff in the suit filed by the Company against Ramnath Bajoria, and
obtained possession of the factory premises. By a deed of conveyance dated
September 30, 1943 the appellant conveyed to Ranada Prasad Saha the factory and
the appurtenant premises and delivered possession thereof. In the deed of
conveyance the property sold was described in three separate Schedules.
Schedule I, Press House, office, residential
buildings and three warehouses on land owned by the Company: Schedule 11 ;
leasehold land together with a warehouse known
as Kalibari godown: Schedule II1; two warehouses on land held as licensee by
the Company from the Government of West Bengal.
The Income-tax Officer. District Ii(1),
CAlcutta. brought to tax in the hands of the appellant Rs. 2,24,864 bring the
profit arising out of the sale of the property to Ranada Prasad Saha. The
Income-tax Appellate Tribunal partially modified the order and reduced the
total income by Rs.
7,000. The Tribunal then drew up a statement
of case and referred the following question to the High Court of Judicature at
Calcutta:
"Whether on the facts and in the
circumstances of the case, the Tribunal was right in holding that the surplus
of Rs. 2,35,211 received by the assessee as a result of the sale of the jute
press referred to in the Appellate order arose out of an adventure in the
nature of trade and was therefore rightly assessed to tax?" The High Court
answered the question in the affirmative.
With special leave granted by this Court, the
appellant has appealed to this Court.
L/P(N)4SCI-12 606 At the material time,
capital gains were not taxable, and the only question failing to be determined
is whether profit made by the appellant by sale of the property to Ranada
Prasad Saha was taxabIe under s. 10 of the Indian Income-tax Act. The Tribunal
found the following facts proved:
The appellant was carrying on business in
iron scrap and hardware and never carried on any business in jute or in
pressing jute. At the material time when the purchase of the Jute Press was
made, the appellant had, because of abnormal conditions prevailing in the town
of Calcutta, closed its business in iron scrap and hardware. The appellant
purchased the jute press and the premises appurtenant thereto subject to
litigation pending in the High Court, effected certain repairs and kept the
factory in running condition, but made no attempt to start or organise the
business of pressing jute, and his plea that he was not able to secure labour
for working the press was not true. Soon after he bought the factory, the appellant
received an offer from Ranada Prasad Saha to buy the factory and he immediately
accepted the offer to sell it to him.
These facts in the view of the Tribunal
indicated that the appellant purchased the jute press, subject to litigation,
with the sole object of reselling at profit at the earliest opportunity, and
therefore the transaction was in the nature of a trading venture. The High
Court substantially agreed with this view.
Section 10 of the Indian Income-tax Act, 1922
makes profits and gains of business, profession or vocation carried on by an
assessee taxable. The expression "business" is defined in s. 2(4) as
inclusive of "any trade, commerce, or manufacture or any adventure or
concern in the nature of trade, commerce or manufacture". It is common
ground that the transaction of purchase and sale of the factory and appurtenant
premises was an isolated venture. To reiterate the sequence of material events:
the appellant agreed to purchase the Jute Press from the Company on October 31,
1942 subject to litigation pending in the High Court of Calcutta:
possession of the property except the
premises in the occupation of the tenant was obtained on November 14, 1942 and
the sale deed was obtained on February 26, 1943: on June 12, 1943 the appellant
agreed to sell the press to Ranada Prasad Saha: on August 10, 1943 the
appellant was substituted as plaintiff in the suit flied by the Company against
Ramnath Bajoria, and after obtaining possession of the demised premises the
appellant executed on September 30, 1943 a sale deed conveying the property and
delivered possession to Ranada Prasad Saha. Do these facts make out the case
that the transaction was an adventure in the nature of trade? It is for the
revenue to establish that the profit earned in a transaction is within the
taxing provision and is on that account liable to be taxed as income. The
nature of the transaction must 607 be determined on a consideration of all the
facts and circumstances which are brought on the record of the income-tax
authorities. It has consistently been held by this Court that the question
whether profit in a transaction has arisen out of an adventure in the nature of
trade is a mixed question of law and fact: see G. Venkataswami Naidu &
Company v. The Commissioner of Income-tax(1) in which case this Court held that
the expression "adventure in the nature of trade" in sub-s. (4) of s.
2 of the Act postulates the existence of certain elements in the adventure
which in law would invest it with the character of trade or business and that a
tribunal while considering a question whether a transaction is or is not an
adventure in the nature of trade, before arriving at its final conclusion on
facts, has to address itself to the legal requirements associated with the
concept of trade or business. Such a question is one of mixed law and fact and
the decision of the tribunal thereon is open to consideration under s. 66(1) of
the Act. See also Saroj Kumar Maiumdar v. Commissioner of Income-tax, West
Bengal(2).
A large number of cases were cited at the Bar
in support of the respective contentions of the Commissioner and the assessee.
Passages from judgments in the same case were often cited claiming support for
the respective contentions.
No useful purpose would be served by entering
upon a detailed analysis and review of the observations made in the light of
the relevant facts, for no single fact has decisive significance, and the
question whether a transaction is an adventure in the nature of trade must
depend upon the collective effect of all the relevant materials brought on the
record. But general criteria indicating that certain facts have dominant
significance in the context of other facts have been adopted in the decided
cases. If, for instance, a transaction is related to the business which is
normally carried on by the assessee, though not directly part of it, an
intention to launch upon an adventure in the nature of trade may readily be
inferred. A similar inference would arise where a commodity is purchased and
sub-divided, altered, treated or repaired and sold, or is converted into a
different commodity and then sold. Magnitude of the transaction of purchase,
the nature of the commodity, subsequent dealings and the manner of disposal may
be such that the transaction may be stamped with the character of a trading
venture: for instance, a man who purchases a large quantity of aeroplane linen
and sells it in different lots, and for the purpose of selling starts an
advertising campaign, rents offices, engages an advertising manager, a linen
expert and a staff of clerks, maintains account books normally used by a
trader, and passes receipts and payments in connection with the linen through a
separate banking account: Martin v. Lowry(3): a person who carries on a
money-lending business purchases very cheaply a (2) [1959] Supp. 1 S.C.R. 640.
(2) 37 I.T.R. 242.
(3) 11 T.C. 297.
608 vast quantity of toilet paper and within
a short time thereafter sells the whole consignment at a considerable profit:
Rutledge v. The Commissioner of Inland Revenue(1); a person even though he has
no special knowledge of the trade in wines and spirits, purchases a large
quantity of whisky sells it without taking delivery of it at a considerable
profit: Commissioners of Inland Revenue v. Fraser(2), may be presumed having
regard to the nature of the commodity and extent of the transaction coupled
with the other circumstances, to be carrying on an adventure in the nature of
trade. These are cases of commercial commodities. But a transaction of purchase
of land cannot be assumed without more to' be a venture in the nature of trade.
A director of a company carrying on the business of ware houseman purchasing a
number of houses with a view to resale, and selling them at a profit some years
after the purchase:
Commissioners of Inland Revenue v.
Reinhold(3): a person carrying on business in various lines, including an
Engineering Works, purchasing land which was under requisition by the
Government, negotiating sale thereof before the land was derequisitioned, and
selling it after the land was released: Saroj Kumar Mazumdar v. Commissioner of
Income-tax, West Bengal(4); and a syndicate formed to acquire, an option over a
rubber estate with a view to earn profit, and finding the estate acquired too
small acquiring another estate and selling the two estates at a profit:
Leeming v. Jones(3) may not be regarded as
commencing a venture in the nature of trade. These are cases in which the
commodity purchased and sold is not Ordinarily commercial, and the manner of
dealing with the commodity does not stamp the transaction as a trading venture.
It may be emphasized from an analysis of
these cases that a profit motive in entering a transaction is not decisive,
for, an accretion to capital does not become taxable income, merely because an
asset was acquired in the expectation that it may be sold at profit.
Purchase of the property by the appellant was
an isolated transaction not related to the business of the appellant. The
Tribunal and the High Court were, in our judgment, in error in holding that the
right of the Company was not sold to the appellant in the lands in Sch. II and
Sch. III properties. The land in Sch. II was leasehold, and on it was
constructed a warehouse and the land in Sch. III was held as a licensee and two
warehouses were standing thereon. The conveyance by the Company to the
appellant is not on the record, but the recitals in the deed dated September
30, 1943 definitely indicate that the rights of the Company without any
reservation were purchased by the appellant, and the appellant sold its entire
rights in the properties in Schs. I, (1) 14 T.C. 490.
(2) 24 T.C. 498.
(3) 34 T.C. 389.
(4) 11 T.C.297.
(5) 15 T.C.333.
609 II and III without any reservation. It is
true that the appellant had put the factory in a working condition, but had not
organized a jute pressing business, had not obtained a licence for working the
factory, had not attempted to secure orders for pressing jute, and had not
employed labourers, The appellant's claim that it was not s9 done because the
appellant could not secure labourers has not been accepted. But that is not a
decisive circumstance. The factory was in the occupation of the lessee Ramnath
Bajoria and possession was obtained after August 10, 1943. But before the 10th
of August an agreement of sale was executed by the appellant in favour of
Ranada Prasad Saha. In the light of the sequence of events, the inference that
the appellant had no intention to commence doing jute pressing business does
not necessarily follow. Even if that inference be regarded as binding upon the
Court it cannot be presumed that the sole intention of the appellant was to
start a venture in the nature of trade. Barring the expectation of profit and
realization of profit by sale of the property, there is no evidence bearing on
the intention with which the property was purchased.
In the deed of conveyance dated September 30,
1943 there is a reference to delivery of "joists, girders, fabricated
steel, C.I. roofs, bolts, nuts, hooks and ceiling planks, being portions of the
materials of the godowns and structures" standing on the land described in
the third schedule. It was submitted that after purchasing the factory and the
appurtenant premises the appellant demolished "certain godowns" in
Sch. III land and sold the material as scrap. This, it was claimed, was--if not
part of the business-=-a venture similar to the normal business of the
appellant. But there is no evidence on the record as to how many warehouses
stood originally on Sch. III land. The sale deed dated September 30, 1943
clearly states that there were two warehouses on steel-frames on the land held
as licensee by the Company and possession of these was given to the purchaser
Ranada Prasad Saha. Beside these warehouses there were three warehouses on the
land described in Sch. I and one warehouse on the land described in Sch. II. It
is not claimed that these warehouses were insufficient for carrying on the
business of jute pressing: nor is there any evidence that the warehouse or
warehouses which were demolished were in a serviceable condition. The only fact
which may be taken to be established is that a warehouse or warehouses were
demolished by the appellant and the materials were sold as part of the property
sold under the deed dated September 30.
2943. From this circumstance, an inference
that the entire property was purchased with intent to demolish and dispose of
as scrap cannot be raised.
Granting that the appellant made a profitable
bargain when he purchased the property. and granting further that the appellant
had when he purchased it a desire to sell the property if a favourable offer
was forthcoming. these could not without other 610 circumstances justify an
inference that the appellant intended by purchasing the property to start a
venture in the nature of trade. Absence of advertisement inviting offers for
purchasing the property, and absence of brokers in the negotiations for sale
between the appellant and Ranada Prasad Saha, are circurmtances which lead to
no positive inference. There is nothing to show that the appellant desired to
convert the property to some other use.
No brokers were employed for entering into a
transaction of sale. It appears that Ranada Prasad Saha on coming to learn that
the factory was for sale approached the Company after the sale deed was
executed in favour of the appellant and he was informed that it had already
been sold to the appellant.
Thereafter Saha contacted the appellant and
agreed to purchase the property. The property purchased was not such that an
inference that a venture in the nature of trade must have been intended by the
appellant in respect thereof may be raised. A person purchasing a jute press
may intend to start his own business even if he is not already in that
business, or he may let it out on favourable terms. The property purchased by
the appellant was capable of being let out and it had in fact been let out by
the Company before the date of sale in favour of the appellant. It was capable
of fetching annual income, and there is no evidence that at the material time
it could not be reasonably let out. We therefore discharge the answer given by
the High Court in respect of the question submitted by the Tribunal and record
a negative answer. The appeal is allowed. The Commissioner to pay the costs in
this Court and the High Court.
Appeal allowed.
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