Dalmia Cement Limited Vs. Commissioner
of Income Tax, New Delhi  INSC 215 (10 September 1976)
RAY, A.N. (CJ) BEG, M. HAMEEDULLAH
CITATION: 1976 AIR 2150 1977 SCR (1) 554 1976
SCC (4) 614
Income Tax Act, 1922, s. 2(4)--When can a
single and isolated sale be a business transaction within the meaning of--Onus
probandi on the Taxation Department--Initial purchase with intention of
advantageous sale--Earning profit on delivery of goods not necessary.
In 1946, the appellant ordered cement
manufacturing machinery from a in Denmark, for its factory in Dandot, but long
before the machinery was due, the Country was partitioned and Dand ot went to
Pakistan. Instead of cancelling his order, the appellant imported the
machinery. It was found that the appellant did so with the intention of selling
it at a profit, to the Orissa State. At the time of the sale, the appellant
charged only the invoice price initially paid by it, but later, obtained a
profit. The Income Tax Officer treated the profit as income earned pursuant to
an adventure in the nature of trade, and taxed it as such. The appellant's
appeals were rejected by the Appellate Taxation Authorities. The matter was
then referred to the High Court u/s. 66 (1 ) of the income Tax Act, but was
The appellant contended that making a profit
was not its intention at the time of sale, and that being a single and isolated
transaction of purchase and sale, it was not an adventure in the nature of
trade within the meaning of s. 2(4) of the Act, and that the onus of proving
anything to the contrary, lay upon the Department.
Dismissing the appeal, the Court-
HELD: (i) It is well settled that even a
single and isolated transaction can be held to be capable of failing within the
definition of "business" if it bears clear indicia of trade. The fact
that the transaction is not in the way of business of the assessee does not in
any way alter the character of the transaction.
[556H,--557A] Narain Swadeshi Weaving Mills
v. Commissioner of Excess Profits Tax (251` I.T.R765), G. Venkataswami Naidu
.& Co. v. The Commissioner of Income Tax  Supp. (1) S.C.R.
646, Sarol Kumar Mazumdar v. The Commissioner
of Income Tax, West Bengal, Calcutta  Supp. (2) S.C.R. 846 followed.
(2) It is a correct proposition of law that
as it was a single and isolated transaction of purchase and sale, the onus of
proving that it was a transaction in the nature of trade lay on the department[560
D-E] (3) The appellant had the dominant intention of selling the Dandot
machinery to its own advantage, and acted with the set purpose of taking an
advantage of its position as the owner of the imported machinery Even if the
appellant had not earned any profit whatsoever at the time of the sale or very
soon thereafter, the transaction, in the facts and circumstances of this case,
would nonetheless have been an adventure in the "nature of trade",
and a business transaction within the meaning of Section 2(4) of the Act.
[560H, 561B, 562A-B] Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax (Supra). and G. Venkataswami Naidu & Co. v. The Commissioner of
Income Tax (Supra) followed.
Kishan prasad & Co. Ltd. v. Commissioner
of Income Tax, Punjab (27, I.T.R. 49). Saroj Kumar Mazumdar v. The Commissioner
of Income Tax. West Bengal, Calcutta (Supra). janki Ram Bahadur Ram v.
Commissioner of Income Tax., Calcutta  3 S C.R. 604. and Ajax products
Ltd. v. Commissioner of IncomeTax, Madras (43 I.T.R. 297) distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1437 of 1971.
(Appeal by Special Leave from the Judgment
and order dated 28-4-1970 of the Delhi High Court in Income Tax Reference No.
50/ 65) V.S. Desai, Mrs, Leila Seth and Parveen Kumar for the Appellantt.
S.T. Desai & M.N. Shroff, for the
The Judgment of the Court was delivered by
SHINGHAL, J.--This appeal by special leave is directed against the judgment of
the Delhi High Court dated April 28, 1970 in a reference made by the Income-tax
Appellate Tribunal (Delhi Bench A) under section (36(1) of the Income-tax Act,
1922, hereinafter referred to as the Act. in respect of the following
question,-"Whether on the facts and circumstances of the case the sum of
Rs. 7 lakhs received from M/s Orissa Cement Ltd. was pursuant to an adventure
in the nature of trade and as such tanable under the Indian Income-tax Act,
1922 ?" The High Court has answered the question in the affirmative.
We shall refer to the facts giving rise to
the controversy in some detail when we state them in a chronological order. It
may be mentioned, meanwhile, that the Dalmia Cement Ltd., hereinafter called
the appellant, owned certain cement factories and it placed an order for the
supply of four complete units of cement manufacturing machinery with M/s F.L.
Smidth and Co., Copenhagen, on February 7, 1946. to increase the production in
the following factories,-,
3. Dalmianagar, 4. Dalmiapuram.
Since the factory in Dandot fell within the
territory of Pakistan on constitution with effect from August 15, 1947, the
appellant transferred the machinery which was meant for the Dandot factory
(hereinafter referred as the Dandot machinery), to a new company known as
Orissa Cement Ltd. sometime in 1950-51, and charged only the invoice price
which it had paid to M/s F.L. Smidth and Co. The appellant thereafter asked for
a higher price and after some negotiations the Orissa Cement Ltd. agreed on
December 4, 1951, to pay a further sum of Rs. 7 lakhs, in lieu of which 70,000
fully paid up ordinary shares of Rs. 10/each. were given to the appellant in
that company. The Income-tax Officer treated that amount as income earned by
the appellant pursuant to an adventure in the nature of trade in 1952-53 assessment
year, and taxed it as such. On appeal, the Assistant 4--1234SCI/76 556
Appellate Commissioner also held in his order dated September 16, 1958 that the
transfer of the Dandot machinery was an adventure in the nature of trade and
the payment of Rs. 7 lakhs was a revenue receipt which was rightly taxed by the
Income-tax Officer. The matter went up in appeal to the Income-tax Appellate
Tribunal (Delhi Bench) which remanded the case to the Income-tax Officer by its
order dated September 13, 1960, for report on certain specific points. On
receipt of the Income-tax Officer's report, the Tribunal held that the
transaction in question was "certainly an adventure in the nature of
trade" and dismissed the appeal.
It however drew up a statement of the case,
and that is how the aforesaid question of law was referred to the High Court
under section 66(1) of the Act. The High Court held that by the time the
appellant placed the dispatch order with M/s Smidth & Co., "its
intention was to purchase it with an idea to resell" and that the fact
that it was a single and isolated transaction did not materially affect the
case. In reaching that conclusion the High Court took the subsequent
developments into consideration, and rejected the contention that the machinery
was purchased by way of an "investment".
The present appeal has been filed against
that judgment of the High Court dated April 28, 1970.
Under section 10 of the Act, income-tax is
payable by ,m assessee under the head "Profits and gains of business,
profession or vocation", inter alia, in respect of the profits and gains
of any "business" carried on by him, and the controversy in this case
is whether the receipt of the additional sum of Rs. 7 lakhs, over and above the
cost of the Bandot machinery, could be said to arise out of any
"business" of the appellant. The term "business" has been
defined as follows in clause (4) of section 2 of the Act,"(4)
"business" includes any trade, commerce, or manufacureor any
adventure or concern in the nature of trade, commerce or manufacture." The
question in this case is whether the transaction was an "adveuture"
in the "nature of trade" within the meaning of the definition ? Some
decisions have been rendered by this Court on the point, and our attention has
been invited to the decisions in Narain Swadeshi Weaving Mills v. Commissioner
of Excess Profits Tax, (1) Kishan Prasad and Co. Ltd.
v. Commissioner of Income-tax Punjab,(")
G. Venkattaswami Naidu & Co. v. The Commissioner of Income-tax,(3) Soroj
Kumar Mazurndar v. The Commissioner of Income-tax West Bengal Calcutta, (4) and
Janki Ram Bahadur Ram v. Commissioner of Income-tax, Calcutta(5). Even so, on
general principle can, for obvious reasons, be laid down to cover. all cases of
this kind because of their varied nature, so that each case has to be decided
on the basis of its own facts and circumstances. It is however well settled
that even a single and isolated transaction can be held to be capable of
falling within the definition if it bears clear indicia of trade (vide Natgin
(1) 26 I.T.R. 765. (2) 27 I.T.R. 49.
(3)  Supp. (1) S.C.R.. 646. (4) (1959)
(2) S.C.R. 846.
(5)  3 S.C.R. 604.
557 Swadeshi Weaving Mills v. Commissioner of
Excess Profits, G. Venkataswami Naidu & Co. v. The Commissioner of
Income-tax, and Sarol Kumar Mazumdar v. The Commissioner of Income-tax, West
Bengal, Calcutta (supra)). It is equally well settled that the fact that the
transaction is not in the way or business of the assessee does not in any way alter
the character of the transaction (vide G. Venkataswatni Naidu & Co. v. The
Commissioner of Income-tax, and Saroj Kumar Mazumdar v. The Commissioner of
InCome-tax, West Bengal, Calcutta (supra). It would not therefore help the
appellant's case merely to urge either of these points for the answer to the
question will depend on a consideration of all the facts and circumstances.
The question under consideration is
essentially a mixed question of fact and law. It will therefore be desirable,
in the first instance, to re-state the relevant facts in a chronological order;
As has been stated, the appellant owned some
cement factories in various parts of India including the one in Dandot. It
placed an order with M/s. Smidth & Co., Copenhagen, for the supply of four
complete units of machinery for the manufacture of cement, to increase the
production of its factory at Dandot and three other factories. A firm order for
all the four units was placed on February 7, 1946. It was confirmed by M/s.
F.L. Smidth & Company on August 6, 1947 and the appellant was informed that
the supply of the Dandot machinery would be made in various months from February
1948 to October 1948. India was partitioned, and Pakistan came into existence
on August 15, 1947. Dandot fell in the territory of Pakistan. The appellant,
which was an Indian Company, did not however cancel the order in respect of the
Dandot machinery. On the other hand, a Director of the appellant informed the
Orissa Government in his letter dated November 25, 1947 that it had "got a
cement plant for which it had placed order a couple of years back", of
which early delivery was expected, and that it would be willing to put it in
Orissa on "suitable terms." The appellant's General Manager held
discussions with the Orissa Government on January 8, 1948 for the setting up of
a cement factory in Orissa. It was recorded in the note of the proceedings of
that meeting that the appellant had ordered machinery for replacing its cement
plant, the said machinery was expected to be shipped at an early date and parts
of it would start arriving in March 1949. It was further stated that the
complete supply of the plant was estimated to take about six months, and if the
negotiations were fruitful the first lot of cement would be produced by the
beginning of 1950. The appellant's representative insisted that a final
decision might be taken at an early date so that the machinery which had to be
chipped from abroad could be diverted, depending upon the decision, to the
Calcutta or Bombay port. The appellant thereafter wrote a letter to M/s. F.L.
Smidth and Co. (Bombay) Ltd. on September 9, 1948 directing that the plant
meant for the Dandot works might be diverted to Orissa. It was specially stated
in the letter as follows,-"There are certain equipments in the
specifications of the plants for extension No. 3 and 4, which were peculiar to
the layout and design for the extension at Dandot and Shanti 558 nagar and they
will not now fit in exactly in the same manner in our proposed new factories.
As such, it is essential that the whole specifications are carefully
scrutinised and manufacture of the items which are peculiar to the layout of
Dandot and Shantinagar Works only should be kept in abeyance in order to suit
the local conditions." The plants were expected to arrive from March 1949
onwards, but this would not have been possible without an import licence. The
appellant obtained the licence from the Government of India and intimated to
M/s. F.L. Smidth and Co.
in its letter dated August 2, 1948 that it
had been permitted to import in the Indian Dominion the two plants meant for
Dandot and Shantinagar. The suppliers were accordingly requested to intimate
the dates upto which extension was required for the import of the machinery. A
formal agreement was made between the appellant and the Orissa Government on
December 23, 1948. The Dandot machinery arrived in due course. It was delivered
by the appellant to Orissa Cement Ltd. and its actual cost was debited to it.
Quite some time thereafter, on April 7, 1970, a Director of the appellant wrote
a letter to the Industries Minister of the Orissa Government that the machinery
supplied to the orissa Cement Ltd. should be revalued and the appellant allowed
a higher price than the invoice price due to a rise in the cost of the cement
.plant at the time of supply as compared with the price at the time when it was
originally ordered by the appellant. The name of one F.B. Mogensen was
suggested for the revaluation of the machinery. This was agreed to by the State
Government on June 4, 1950. Mogensen reported that the Orissa Cement Ltd, had
benefited to the extent of almost Rs. 21 lakhs in the bargain. The Orissa
Government passed a resolution dated December 4, 1951 allowing a further sum of
Rs. 7 lakhs to the appellant and, in lieu of cash payment, allotted 70,000
fully paid up ordinary shares of Rs. 10/each of the Orissa Cement Ltd. to the
The above facts clearly establish that,-(i)
Even though the appellant initially placed an order on February 7, 1948 for the
purchase of the Dandot Machinery for improving the production in the Dandot
factory, and the supply was not to commence until February. 1948, it did not
make any effort to cancel that order even after Dandot was included in the
territory of Pakistan with effect from August 15, 1947.
(ii) On the other hand, in pursuance of an
enquiry by the Government of Orissa whether the appellant would be interested
in putting up a cement plant in the State, one of the appellant's Directors
informed the State Government on November 25, 1947 that it had got a cement
plant for which it had placed an Order a couple of years ago and that it could
be put up in Orissa on suitable terms. The appellant's General Manager in fact
met the State Government authorities in January, 1948 where it was reiterated
559 that the machinery ordered by the appellant was expected to start arriving
in March 1949 and could be diverted to Calcutta and that if the appellant's
negotiations with the State Government were successful, the first lot of cement
could be supplied by the beginning of 1950.
(iii) The negotiations with the Orissa Government
proved successful and the appellant wrote a letter to M/s. F.L. Smidth and Co.
on August 2, 1948 informing it that it had obtained the permission of the
Government of India to import the Dandot machinery in India. The appellant also
informed the suppliers on September 9, 1948 that it should divert the Dandot
machinery to Orissa and supply the same according to the revised specifications
to suit the local conditions.
(iv) A formal agreement was executed by the
appellant and the Orissa Government on December 23, 1948 for the setting up of
a cement factory in Orissa.
(v) The Dandot machinery arrived and was supplied
by the appellant to the Orissa factory against cost price, which was debited to
the Orissa Cement Company.
It would thus appear that, long before the
Dandot machinery was due, the appellant knew that it could not be used in
Dandot. It has been found that after the partition of the country the appellant
could have cancelled the order for the import of the machinery but it did not
do so and decided to import it with a view to supplying it to Orissa on
suitable terms. It therefore resold it to the Orissa factory in accordance with
the terms and conditions of its negotiations with the State Government. The
intention of resale was therefore there almost from the beginning, and was
really the dominant intention in importing the machinery after the partition of
the country. It is also quite clear that the appellant was not inclined to make
it a gratuitous sale, but agreed to it only when it was able to secure a
suitable agreement with the State Government for the setting up of a factory in
Orissa. It was in fact. the appellant's own case that the price of the Dandot
machinery had gone up substantially. Even so, the appellant did not care to
utilise it for any of its own plants, but sold it to Orissa Cement Ltd.
The appellant therefore did not only have the
dominant intention of selling the Dandot machinery to its own advantage but, in
doing so, it acted with the set purpose of taking an advantage of its position
as the owner of the imported machinery of which the price had on the
appellant's own showing, gone up much higher. It was therefore a real
transaction by way of an adventure in the nature of trade and was as such a
business transaction within the meaning of section 2(4)of the Act. It does not
matter if the appellant did not earn a profit immediately on delivering the
machinery, and sold it without any profit in the first instance, for there can
be no denying the fact that even if the appellant had not earned any profit
whatsoever at the time of the sale or even thereafter, the transaction in the
facts and circumstances of the case, would nonetheIess have been adventure in
the 560 "nature of trade" and no other.) We are fortified in this
view by the decisions in Narain Swadeshi Weaving Mills v.
Commissioner Excess Profits Tax (supra) and
G. Venkataswami Naidu and Co. v. The Commissioner of Income-tax (supra).
It is true that the question of asking for
payment in excess of the cost price was raised by the appellant some time
later, but its subsequent course of conduct in bringing about a substantial
profit is a clear pointer to the real intention behind the sale. It was for
that reason that the appellant's Director addressed a letter to the Minister of
Inustries of the Orissa Government on April 7, 1950 stating that the Dandot
machinery should be revalued and the appellant allowed a higher price due to
the rise in its price at the time of the supply. The entire correspondence in
that respect has not been placed on record by the appellant, but it appears
that the appellant was able to secure a further sum of Rs. 7 lakhs, under an
agreement dated December 4, 1951 in lieu of which it was able to secure 70,000
fully paid up shares of Rs. 10/-. The appellant succeeded in doing so merely
because it was able to substantiate its claim for a higher price, or profit, on
thesole ground that it was entitled to it because of the increase in the price
at the time of the sale. There is therefore nothing wrong in the view which has
prevailed with the High Court that it was an adventure in the nature of trade.
It has been argued by Mr. V.S. Desai, for the
appellant that as it was a single and isolated transaction of purchase and
sale,, the onus of proving that it was a transaction in the nature of trade lay
on the department. This is a correct proposition of law and, .as would appear
from what has been stated above, we have examined the controversy on the
assumption that the burden of proving that the transaction was an adventure in
the nature of trade lay on the department. The ancillary argument of Mr. V.S.
Desai that a question like the present has to be examined with reference to the
indicia or characteristics of the trade, is also quite correct, but counsel has
not been able to contend, in the face of the facts and circumstances mentioned
above, which indicia or characteristics could be said to be lacking to take it
out of the category of an adventure in the nature of trade.
All that Mr. V.S. Desai has pointed out is
that there was no intention to make a profit when the Dandot machinery was sold
to the Orissa Cement Ltd., and it has been urged that would be sufficient to
take it out of the category of an adventure in the nature of trade. Reference
in this connection has been made to the decisions in Kishan Prasad & Co.
Ltd. v. Commissioner of Income-tax, Punjab (supra), G. Venkataswami Naidu and
Co. v. The Commissioner of Income-tax (supra), Saroj Kumar Mazurndar v. The
Commissioner of Income-tax, West Bengal, Calcutta (supra), and Ajax Products
Ltd. v. Commissioner of Income-tax, Madras(1). We have given our reasons for
the contrary view that the transaction would be an adventure in the nature of
trade even if the question of profit was left out of consideration, and that
the appellant in fact acted with the set purpose of reselling the (1) 43 I.T.R.
297 561 Dandot machinery to its advantage and not by way of a favour or a
gratuitous act. We have also shown how the appellant ultimately claimed and
succeeded in securing a higher price merely on the ground that there was an
appreciable increase in the price after the purchase of the Dandot machinery.
Lastly, it has been argued by Mr. V.S. Desai
that in purchasing the machinery the appellant made a capital investment so
that it was merely a capital asset. This argument is also futile for, as has
been shown, the appellant made the purchase with the dominant intention of
reselling the machinery to advantage and made the resale only when it was able
to enter into an agreement with the Orissa Government lot the setting of a
cement factory in that state on terms and conditions which were suitable from
its point of view. It may also be stated that even in its own profit and loss
account and balance sheet, the appellant treated the sale price as a revenue
receipt and not as a capital investment. It was therefore an afterthought to
Claim that the initial purchase was by way of an investment and was a capital
The facts of Kishan Prasad and Co. Ltd. v.
The Commissioner of Income-tax, Punjab (supra), Saroj Kumar Mazumdar v. The
Commissioner of Income-tax, West Bengal, Calcutta (supra) and Janki Ram Bahadur
Ram v. Commissioner of Income-tax, Calcutta (supra) referred to by Mr. V.S.
Desai were different. In the case of Kishan Prasad and Co. Ltd.
(supra) there was agreement to give the
managing agency to the assessee on the erection of the mill because it had
subscribed to shares worth Rs. 2 lakhs. The mill was not erected and the
assessees sold the shares. There was therefore justification for holding that
the purchase of the shares was an investment to acquire the managing agency and
was not an adventure in the nature of trade. In Saroj Kumar Mazumdar's case
(supra) there was a single transaction of sale of rights for the purchase of
land measuring 3/4 acres by the assessee who was an Engineer by profession. His
construction activities declined and that was why he sold his rights in the
land for Rs. 74,000 odd in excess of the amount paid by him. The Income tax
department however failed to prove that the assessees dominant intention was to
embark on a venture in the nature of trade as distinguished from capital
investment. That was also therefore a different case. In the case of Janki Ram
Bahadur Ram (supra) the assessee was a dealer in iron scrap and hardware. He
agreed to purchase all rights of a company in a jute pressing factory, but sold
it at a profit. It was held that as the property purchased by the assessee was
not such that an inference that a venture in the nature of trade must have been
intended could be raised, the profit was not liable to tax. It was held that a
person purchasing a jute press might intend to start his own business or he
might let it out on favourable terms. The property was in fact let out by the
earlier owner before the date of sate. That was also therefore quite a
different case and cannot avail the appellant. In the remaining case of Ajax
(supra) it was held that on the facts the
assessee company having acquired the sick mill to open new line of business,
the purchase was, really in the nature of an investment and the purchase and
sale did not amount to an adventure in the nature of trade. That was therefore
also quite a different case.
562 It would thus appear that in spite of the
fact that the appellant withheld some of the correspondence bearing on the
controversy, the Department has succeeded in proving that the transaction of
sale in question was an adventure in the nature of trade and fail within the
definition of "business" in clause (4) of section 2 of the Act. The
High Court has rightly answered the question in the affirmative, and as we find
no merit in this appeal, it is dismissed with costs.
M.R. Appeal dismissed.