1. The question referred under section 66(2) for our opinion is as follows :
'Whether the Tribunal misdirected itself in law or acted without any legal evidence in holding that the purchase and sale of the two plots in question constituted a venture in the nature of trade ?'
2. We are concerned with the assessment year 1950-51 corresponding to the assessee's accounting year which is the calendar year 1949. Bhogilal H. Patel is the assessee. He has been assessed as an individual. He carried on several business, inter alia, of manufacturing an selling sizing materials, dealing in chemicals, mill stores, and china clay. He has also a business in forward transactions in shares and bullion. He has branches at Calcutta, Coimbatore, Ahmedabad and other places in India and besides income from partnership firms. Apart from his business income he also has house property and investment in shares and agricultural lands.
3. The subject-matter of this reference consists of two parcels of land, one being survey No. 150/2 and the other parcel consisting of survey Nos. 140/1-1 and 140/2 of village Kochrab on the outskirts of Ahmedabad city. Survey No. 150/2 admeasures 10,890 sq. yds. and survey Nos. 140/1-1 and 140/2 together 21,751 1/2 sq. yds. The assessee purchased these two plots by two different sale deeds dated respectively 6th February, 1945 and 9th February, 1946, for a consideration of Rs. 10,285-10-6 and Rs. 79,335-1-0, respectively. At this price the rate of purchase per sq. yard works to 15 1/2 annas per sq. dy. and Rs. 3-11-3 per sq. yd., respectively.
4. Having purchased these two plots in 1945 and in 1946 the assessee kept them with him for about 2 1/2 years to 3 years and agreed to sell them in one lot on 5th October 1948. It must be stated here that the assessee had also purchased in the same village survey No. 148 on 7th April, 1942, and this field was also included in the agreement of sale, dated 5th October, 1948. The agreement stipulated for payment in one case by the end of November, 1949, and in the other case by the end of May, 1949. The rates at which the two plots were sold were Rs. 25 per sq. yd. in the case of survey Nos. 150/2 and Rs. 30 per sq. yd. in the case of survey Nos. 140/1-1 and 140/2. Calculated at this rate the assessee received as the sale price for these two plots Rs. 2,72,250 and Rs. 6,22,545, respectively. The sale deeds were executed on 16th November 1949, and 14th May, 1949. In regard to survey No. 148 a similar sale deed was executed on 20th October, 1949. Thus though the agreement for the sales of all these plots was a common agreement the purchaser took from the assessee separate sale deed for each of the three separate plots. After deducting the price at which these two plots were purchased from the price at which they were sold, the department assessed the gross profit in the case of plot No. 150/2 at Rs. 2,61,964 and in the case of plots Nos. 140/1-1 and 140/2 at Rs. 5,43,210 thus making a total of Rs. 8,05,174 as the gross profit on the two plots. After deducting certain legal expenses amounting to Rs. 11,626 the department arrived at the net profit of Rs. 7,93,548.
5. The assessee in showing cause why he should not be assessed to this figure of profits had stated that he was a patidar and an agriculturists by custom and he had only invested funds available to him in the capital account of his business. No moneys were borrowed in order to pay for these plots. During the time that the plots were in the possession of the assessee he had cultivated the plots and received agricultural income from them. When they were sold they were in the same condition as when they were purchased. The land were not the property of the assessee's business but were the joint property of his family. He filed in support of his claim land revenue receipts and records of rights. He also pointed out that the plots were not within the limits of the Ahmedabad Municipality nor included in any town planning scheme but were situated in the village of Kochrab for agriculture and that even after he had so them the plots were being utilised for purposes of agriculture. The assessee stated that he was compelled to sell these family lands as he had to make heavy payments of income-tax and meet other liabilities. He also stated that he would have suffered heavily by fall in the price if he had delayed the sale of these plots and that the alleged amount of profits was nothing but a surplus realised by the assessee from his agricultural capital investment and was exempt from taxation. In support of the assessee's case he also filed an affidavit by the purchaser of these plots, one T. C. Patel, admitting that the plots were purchased at the price mentioned in the sale deeds, that the lands which T. C. Patel purchased were situated in the new town brought into existence at Ahmedabad in which subsequently costly buildings were constructed. He also admitted that after he purchased the land the prices of these lands rose high.
6. The present assessment proceeding were considerable protracted because of a remand and we may now state the facts pertaining to the several orders passed by the different authorities. The Income-tax Officer did not accept the assessee's contentions and by an order passed on the 15th February, 1955, held that the sold intention of the assessee at the time of purchasing these lands was to sell them at a substantial profit when the price of land went up and that in any case the extricate amounts which he had realised on the sale of the plots could not be called capital receipt in view of the fact that it was an adventure in the nature of trade. He held the excess amount realised by the assessee as a revenue receipt. He therefore added the sum of Rs. 7,93,548 to the total income of the assessee.
7. The Appellate Assistant Commissioner by his order dated 25th February, 1957, confirmed the view taken by the Income-tax Officer. He held that he could not accept the assessee's contention that this was a purely capital transaction. He found that the price of land in that particular locality had gone up due to the setting up of the Gujarat University near the village Kochrab and that the decision to shift the university to this area was known to the assessee before the assessee bought these plots. The assessee had purchased the land knowing full well that the prices would go up tremendously in the near future. It was therefore impossible to escape the conclusion that 'the re-sale was on of the metes which prompted the appellant to buy the land.' The Appellate Assistant Commissioner then proceeded to consider whether it was the sole motive with which the assessee had bought these lands and he referred to several circumstances in holding that that was his sole motive. Those circumstances are firstly that the purchase price which the assessee paid was too high for ordinary agricultural land; secondly that the yield from the land was less than 1% and he could not imagine by businessman being satisfied with such a merger return on his investment. He also pointed out that if cultivation was the real motive of the assessee in purchasing these lands, he would not have bought these lands which were 10 miles away from the rest of his land holdings for such a high price. He brushed aside the contention of the assessee that during the time that these plots were in his possession he had actually carried on agriculture by saying that even the present owner (the purchaser from the assessee) was also carrying agriculture although he had paid a sum of nearly Rs. 9 lakhs for the 10 acres of land. He held that this fact showed the absurdity of the assessee's submission that agriculture was the motive behind the purchase by the assessee.
8. The assessee carried the matter in appeal to the Tribunal and the Tribunal found that the investigation of the case had not been properly made; that certain aspects of the matter had not been considered and that since both the sides were agreeable that the case should be remanded to the Appellate Assistant Commissioner for proper verification of facts, they decided to send the case back to the Appellate Assistant Commissioner. They held :
'In the circumstances we vacate the order passed by the Appellate Assistant Commissioner and restore the case on his file. He will give a reasonable opportunity to both the parties to adduced such evidence as they might like and then decide the question de novo according to law.'
9. Thus the first proceedings for assessment of the assessee for the year 1949-50 ended. In the second investigation it appears that the Appellate Assistant Commissioner gave an opportunity to both the sides to adduce evidence and the Appellate Assistant Commissioner gave the Income-tax Officer an opportunity to cross-examine the assessee who had filed an affidavit. Both the affidavit and the cross-examination are on the record and we shall presently refer to them.
10. The Appellate Assistant Commissioner has given certain findings which are of importance for the purposes of this reference. He first of all held that :
'The Income-tax Officer had also checked the appellant's books and was satisfied that no moneys had been borrowed in order to pay for the cost of the land.'
11. He then proceeded to consider the affidavit filed by the assessee and the cross-examination and observed that so far as the profit from the sale of the land is concerned the only new fact which had to be considered by him was that the appellant had been paying heavy interest charges both during the year in which the land had been purchased and during the subsequent years. He held that the explanation which the assessee had given in respect of the purchase of these lands could not be accepted and stated the following reasons : Firstly, 'that the payment for land was made out of appellate's business books of account and figured in the appellant's balance-sheets; secondly 'that no fresh capital was introduced by the Appellants submission that the land had been purchased out of his private funds'; thirdly, 'that in buying the land the appellant had to pay heavy interest charges' and concluded 'as no businessman likes to incur unnecessary expense one can expect that the appellant would have reacted to this huge balance by reducing his borrowing and by not letting this amount lie idle for several years.'
12. Though these were the reasons which the Appellate Assistant Commissioner gave in the second order which he passed after the remand he has also relied upon the reasons given in his earlier order.
13. Against this order the assessee appealed to the Income-tax Appellate Tribunal and by their order dated 4th March 1959, from which the present reference arises, the Tribunal upheld the order of the Appellate Assistant Commissioner. The Tribunal found that the assessee had made a huge profit of Rs. 8 lakhs on a purchase of about 31,000 sq. yds. for a sum of about Rs. 90,000; that during the time that the land remained with the assessee the agricultural income from the land never exceeded Rs. 1,000 per year and in one year it was much less; that in the year preceding also the assessee had sold two plots of land on which he had realised a profit of Rs. 4 1/2 lakhs in one transaction and 'about Rs. 3/4 lakhs in the other transaction' and therefore it is not possible to accept the assessee's contention that the land was purchased with a view to do agriculture and lastly, that the price and paid for the land appeared to be considerably higher than the price of farm land - presumably at the time of the purchase. For these reasons the Tribunal concluded :
'We think that the Appellate Assistant Commissioner has given valid reasons for coming to the decision that the land was purchased by the assessee with the primary purpose of doing a venture in the nature of trade.'
14. In the arguments before us counsel on behalf of the assessee has controverted each one of these findings and the reasons given for the same and has contended that the orders of income-tax authorities as well as of the Tribunal are not based upon any evidence or material which can be accepted. He has pointed out that such reasons as these authorities have given are no more than mere surmises and conjectures and do not amount to legal evidence. Thus, the findings are not based upon any evidence. We will deal with the individual contentions advanced against each of the reasons given by the Tribunal and the tax authorities when we consider each of these reasons separately.
15. It is now settled law that the nature of a transaction like this must be determined on a consideration of the totality of circumstances and that all the facts brought on the record by the Income-tax authorities must be taken into account. The burden in upon the revenue to establish that the profit earned in a particular transaction is within the taxing provisions and is on that account liable to be taxed. 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 and therefore we must necessarily go into the facts in order to see whether the conclusions reached by the Tribunal are correct and supported by any evidence.
16. It was the assessee's case that he had purchased this land as an agriculturist and that he was patidar and well conversant with agriculture. According to the assessee he was purchased these plots with the view to add to his agricultural lands and and no idea of re-selling them. The fact that he is a patidar and an agriculturist was not disputed but the assessee's claim that he was in possession of about 1,200 acres of land in the vicinity of Ahmedabad city has been controverted. The only material which we find upon this issue is the affidavit filed by the assessee on the 29th September 1956, in which the assessee stated in paragraph 5 (b) that he had purchased these lands as he belonged to a family of patidar doing agriculture 'on an extensive scale'; that he used these lands for cultivation and even though he received various officer for disposal, he turned down the same. This was the affidavit and the sole material on the question and though the assessee was as stated before, closely cross-examined by the Income-tax Officer before the Appellate Assistant Commissioner on the same day, the fact that he was long agricultural on an extensive scale does not appear to have been challenged (vide answer (g)). We must, therefore, hold that the assessee was an agriculturist and doing agriculture on an extensive scale.
17. Some reference was made by counsel on behalf of the department to an affidavit dated 19th February 1959, particularly paragraph 6 thereof to controvert this statement of the assessee. This affidavit was not before the Tribunal or the Income-tax authorities when they passed their respective orders. This affidavit appears to have been filed in the proceedings commenced against the assessee for the assessment year 1949-50 under section 34 of the Indian Income-tax Act 1922, in respect of the sale of survey No. 148. It was also produced before this court as an annexure to an affidavit filed in this court in support of an application under section 66 (2). Since this affidavit does not form part of the record and was not before the income-tax authorities or the Tribunal when they passed their respective orders we do not think that simply because it was filed along with an application under section 66 (2) before this court we would be entitled to look at it. Strong objection was taken on behalf of the assessee by Mr. Kolah, though it must be said in fairness to the assessee that Mr. Kolah also argued that even if it was taken on record he was in a position to show that the facts stated therein were correct and in no way detracted from the assessee's case in present proceedings. However, since in our view the affidavit cannot be looked at by us because it is not part of the record, we do not propose to consider those contentions of Mr. Kolah.
18. When the assessee purchased these lands he got the entries in the cultivation registers maintained by the revenue department changed. The fact that the lands were mutated in the name of the assessee his wife and two minor sons is established upon the annexures 'L-1' and L-2' which are the extracts from the cultivation register. If his intention had been to sell away the property within a short time he would not have taken the trouble to have these lands mutated. That circumstance is thus in favour of the assessee.
19. It is not in dispute that during the entire period that these lands were in the possession of the assessee he cultivated them throughout like his other lands from 1945 to 1949 evincing an interest on behalf of the department is not that he did not cultivate the lands but that he derived a very small income from these lands - an income of only about 1% on the value of these lands which according to the authorities was a negligible income.
20. The Appellate Assistant Commissioner in paragraph 6 of his order after the remand has made certain computation on the basis of the yield from the lands for the years 1945 to 1949 the period during with the lands were in the possession of the assessee and having regard to the fact that the total cost of the land was Rs. 89,620 he has come to the conclusion that the yield was less then 1%. In the first place, the yield can hardly be a valid test when the question to be determined is whether the assessee bought the lands with a view to invest his capital or with a view to do business. The point was adverted to in a recent decision of the Madras High Court in Janab Abubucker Sait v. Commissioner of Income-tax, where similar purchases of land by a coffee planter who was also growing oranges and gall-nut on the other lands came to be considered. One of the circumstance stressed on behalf of the department was that the returns were low and in answering the point, the Madras High Court held :
'A purchaser of agricultural lands does not always judge the wisdom of the transaction by the returns he would get. Other considerations also prevail in the matters of such purchase namely the pride of possession of agricultural lands, security which is inherent in the investment of money in such property etc.'
21. 'The fact', they held, 'that the income derived does not bear a proper proportion to the investment cannot therefore be taken as conclusive on the question.'
22. In the present case, moreover we do not think that the income was so low as to indicate that the assessee could not think of investing his moneys in the lands. It has to be remembered that the agricultural income was free of tax and for a person like the assessee who had a large income, the income-tax saved would itself come to a seizable amount. All these consideration as well as the important consideration that the being in management of large lands he could conveniently add these further acquisitions to his capital may have weighed with him. Moreover, no enquiry seems to have been made from the assessee as to how this low income was received. The smallness of the income may be due to several factors - adverse climatic condition want of rainfall and possible leakage of produce by those employed by the assessee to carry on the agricultural operations. It cannot necessarily be attributed to the fact that the price paid was excessively high.
23. If at all the question of the quantum of the Income can be relevant it can be relevant only in so far as it impinges upon the question whether a proper price was paid for the land. But in this respect it seems to us that this finding of both the Appellate Assistant Commissioner and the Tribunal that the price of land paid by the assessee in the present case was considerably higher than the price of farm land at the time of the purchase is contrary to the positive evidence on the record. That finding has been given in the teeth of and contrary to the very report of the inspector of income-tax dated 17the June, 1957, which was expressly called for by the Appellate Assistant Commissioner's order. In this report (annexure 'H') the inspector has first of all given facts regarding the purchase of the Kochrab agricultural lands and the prevailing prices before and after the notification was out for the purpose of acquiring the lands for the purpose of establishment of the Gujarat University and the conclusion which the inspector drew was stated by him as follows :
'From the above figures, it is quite evident that the purchase price paid by the appellant (the assessee) during the C. Y. 1945 and 1946 (calendar year) for purchase of about 9 acres of lands at Rs. 89,620 was a reasonable one.'
24. This was certainly material which could have been taken into account but was totally ignored. It is flatly conflicting with the findings given by the Appellate Assistant Commissioner and the Tribunal. In the fact of this direct evidence on the question of the purchase price it was idle to speculate whether the price paid was fair on the basis of the yield. It therefore seems to us that the finding as to the price was based on convenient speculation and the positive material on record was ignored. We may beside also point out here that in the initial queries which the Income-tax Officer made several questions were asked no question was put to the assessee regarding the fairness of the price.
25. The assessee on his part submitted for the consideration of the authorities a statement showing comparable purchases of land in Kochrab village from 1942 to 1947 and he supported it by his affidavit dated 29th September 1956. In paragraph 5 (f) thereof he stated on oath that,
'the said agricultural lands were purchased at an average rate of Rs. 2-12-0 per square yard equivalent to Rs. 7,000 approximately per biga. This favourably compares with the rate of other agricultural lands in the vicinity sales in respect of which are hereto annexed in a statement marked 'C'.'
26. The assessee purchased the two pieces of land in question on 6th February, 1945, and 9th February, 1946, and the purchases on these dates, as shown in the statement show that the rate of land per square yard was Rs. 4-4-7 on 14th February 1945, and Rs. 7-8-0 on 29th May, 1946. In other words, the price at which the assessee purchased the lands war far below the land value at that time. Here again the positive material directly bearing on the question of the price paid was ignored. We are really surprised that without any reference to the assessee's statement to his affidavit and to the report of the inspector the Appellate Assistant Commissioner and the Tribunal should have ventured the conclusion that the price paid for the land was considerably higher than the price of farm land at the time of the purchase.
27. The inspector's report was made on the 17th June, 1957, and the assessee was thereafter called and questioned by the Appellate Assistant Commissioner (vide annexure 'G') and though he was asked various questions pertaining to the purchase of these lands and his knowledge that the Gujarat University was going to be established no question was pout to him suggesting that the prices paid by him were high. Thus the evidence on this crucial question in entirely opposed to the findings given by the Tribunal and the Appellate Assistant Commissioner. There is absolutely not an iota of evidence to suggest that the price paid by the assessee at the time of the purchase was not the reasonable market value or was considerable higher than the price of farm land at the date of the purchase. The finding on this issue is based on mere speculation or surmise. If the price paid was a reasonable price and there is no other conclusion possible upon the material before us then it seems to us that the point taken as to the income from the land would become in significant. As we have said the smallness of the income may have been due to various other reasons than the learns of the price.
28. We may at this stage dispose of a short point argued on behalf of the department. It was urged by Mr. Joshi that the statement of the purchase prices at the time of the purchases by the assessee is in square yards and not in acres and that no one who purchases agricultural land as an investment for the purpose of bona fide agricultural mentioned his purchases in terms of square yards. The mention in terms of square yards is indicative of an intention to do business. In the first place this contention is not borne out upon the documents before us. The assessee's agreement of sale dated 5th October 1948, shows that most of the lands have been mentioned by acres and gunthas in the schedule annexed to the agreement though plot No. 148, which we are not concerned, was mentioned in square yards. No doubt the area has been maintained in square yards in the body of the agreement and in the sale deeds, but we do not see what turns upon the adoption of this standard of measurement. Acres can always be converted into square yards and since these were not very extensive plots perhaps the parties found it more convenient to mention them in terms of square yards. We cannot infer from that the assessee bought it only as building land or for purposes of business as counsel would have us to hold.
29. The next index of trade or business which has been stressed on behalf of the department is that money was borrowed to pay for the purchase of these lands and at a high rate of interest. Here again we may say that the finding given is entirely unsupported by any evidence on the record, but that on the other hand, whatever material there is indicates the contrary. The correspondence with the assessee makes this clear. In reply to question No. 4 in the Income-tax Officer's letter dated 4th December, 1954, the assessee in his letter dated 14th December, 1954, had categorically stated :
'No moneys have been borrowed for the purpose of purchasing the land.'
30. When he was cross-examined by the Appellate Assistant Commissioner on 4th March 1958, after the remand also no question was put to him that he had purchased these lands on borrowed money. But apart from this the assessee has produced his balance-sheet and profit and loss accounts for the years 1942 to 1949 (vide annexure 'K'). All these accounts support the case of the assessee. The assessee does not maintain any personal account of his own since he is the sole proprietor of the business and it appears from his accounts that his personal expenses as well as his business expenses were all entered in one and the same account. For the account year ended 31st December 1943, the assessee's account showed a net profit of Rs. 14,80,999 in round figures. For the account year ended account year ended 31st December 1944, there was a net profit of Rs. 6,42,333 and in the account year ended 31st December 1945, a net profit of Rs. 2,68,739. In the account year ended 31st December, 1946, in which year the plots with which we are concerned were purchased his net profits has been shown to be Rs. 1,34,155 after deducting the price of the plots of the plots purchased. These profits have been shown after large investment in shares and immovable properties were made in each year running into lakhs of rupees. For the account year ended 31st December 1945, his investment in share of joint stock companies and securities amounted to Rs. 5,41,923 and his investment in immovable properties to Rs. 3,07,242. In the account year ended 31st December 1946, his investment in immovable properties including Rs. 89,620 spent for the purchase of the plots with which we are concerned was Rs. 4,02,786. The assessee was doing business on a very large scale. In the account year ended 31st December, 1943, the total amount standing to the credit of the assessee was Rs. 24,38,077 and his liabilities were Rs. 11,57,469. In the account year ended 31st December 1944, the assessee's account stood at Rs. 28,49,609 and his liabilities at Rs. 4,41,209. In the account year ended 31st December 1945, the assessee's account stood at Rs. 24,47,536 and his liabilities at Rs. 10,56,165 and in the account year ended 31st December, 1946 (the year in which he purchased the plots), his personal account stood at Rs. 22,59,577 and his liabilities at Rs. 14,99,018. In this year he invested over Rs. 7 lakhs in shares and securities and over Rs. 4 lakhs in immovable property including the purchase of these plots for Rs. 89,620. Thus each year the account and undoubtedly the assessee for the purpose of his business did incur liabilities and for that reason had to pay interest but it cannot be said that the borrowed money for purchasing this land.
31. The rate of interest if calculated upon the basis of his liabilities does not exceed above 3% which is by no means an excessive rate of interest in business. It cannot however upon these accounts be concluded, as the Appellate Assistant Commissioner and the Tribunal seem to have done that moneys were borrowed in order to purchase these lands or that interest was paid on that account. It was general composite account and though no doubt interest was paid upon the liabilities that was merely incidental to the general business and cannot be attributed to the purchase of these minor pieces of land. Even in account year with which we are concerned the purchase of these plots for Rs. 89,620 was only a fraction of the total immovable properties purchased by the assessee which amounted to over Rs. 4 lakhs and the total investment in shares and securities which he had made was over Rs. 7 lakhs. In his affidavit dated September 29, 1956, in paragraph 5 (h) the assessee averred : '........... it may be noted that the annual turnover of the deponent's businesses range between Rs. 40 lakhs and Rs. 70 lakhs per annum. It is obligatory for an man of the dependent's commitments to have a minimum cash balance from say Rs. 4 lakhs to Rs. 5 lakhs looking to his very large the payment of some interest for the business is inevitable reasonable and understandable. It is difficult, therefore to jump to the conclusion as the Appellate Assistant Commissioner and the Tribunal seem to have done that the amount paid for the purchases of these plots was borrowed and interest was paid on that amount. The statement of the assessee in his affidavit and the account books are the only relevant pieces of evidence and looking to that material it is impossible to sustain the finding of the Appellate Assistant Commissioner and of the Tribunal that the borrowing and the interest paid thereon had anything to do with the lands in question.
32. When all this material was pointed out on behalf of the assessee, counsel for the department alternatively urged that the Tribunal in this order has reached finding which does not hold that any amount was borrowed for the purchase of theses plots. In our opinion, the finding is no doubt cryptic but that is what is clearly suggested in the order of the Tribunal in paragraph 2 by the following words :
'It was also established that in the business carried on by the assessee he had paid interest on borrowings. No specific advance was, however, taken for the purpose of financing the purchase of the land.'
33. If the Tribunal was not attributing the interest or part of interest on the borrowing to the purchase of these lands we can see on purpose why they made the statement quoted above. Even upon the submission of counsel at the most it may be held that no finding has been given by the Tribunal on the question of any interest paid for the purchase of these lands which again would be a point in favour of the assessee. So far as the Appellate Assistant Commissioner is concerned there is a clear finding given in the second order passed :
'Therefore, I must hold that in buying the land the appellant (the assessee) had to pay higher interest charges which is an additional ground for holding that the transaction under consideration was an adventure in the nature of trade.'
34. That finding in our opinion is not borne out upon such evidence as there is in this case. So far as the Tribunal is concerned upon the submission of counsel on behalf of the department it did not give any such finding. In other words it did not confirm the finding of the Appellate Assistant Commissioner and, even if it did, that finding is incorrect and not supported by any evidence whatsoever.
35. The principal contention on behalf of the department before us has been to press the case on the line of the findings given by the Appellate Assistant Commissioner in his first order that :
'The decision to shift the university to this area was known to the appellant before he had bought the land. He had done so knowing full well that the price would go up tremendously in the near future. It is accordingly impossible to escape the conclusion that re-sale was one of the motives which prompted the appellant to buy the land. The point to be considered is whether it was the sole motive.'
36. Counsel urged that it was a matter of common knowledge by the year 1943 that the Gujarat University was to be established and that the people's education society and others had started collecting funds for the establishment of that university. It was also well known that a university would be established on lands partly within the area of Kochrab village and that the appellant (the assessee) having come to known of these facts decided to speculate in the purchase of properties with a view to earning a handsome profit by re-selling them at a higher price.
37. So far as the assessee is concerned from the start the assessee had stated that he had purchased the lands for cultivation alone and not with a view to make any profits either by way of their development or their disposal and that he had no knowledge whatsoever that the Gujarat University was going to acquire these lands or the land in the vicinity. This is clear from paragraph 5 (c) of his affidavit dated 29th September, 1956.
38. The sheet-anchor of the contention of counsel on behalf of the department on this point is firstly the notification issued by the then Government of Bombay under section 4 and 6 of the Land Acquisition Act in connection with the proceedings for acquisition of about 500 acres of land for the University of Gujarat. The income-tax inspector's report dated 17th June, 1957, which was made after the remand order of the Tribunal is also pressed into service. The notification under section 4 of the Land Acquisition Act was published in the Bombay Government Gazette on 31st October 1946, stating that the land mentioned in the schedule attached to the notification 'are likely to be needed for the purpose specified above', namely for a university engineering college buildings etc. There was a notification by way of amendment on 30th December 1946, which need not detain us here. The notification under section 6 was published in the Bombay Government Gazette on the 20th May, 1948. Surprising as it may seem, the assessee's plots Nos. 150, 140/1-1 and 140/2 as also plot No. 148 do not find mention in any of the schedules to this notification. Thus the assessee's lands were not the subject of acquisition at all and we fail to understand therefore what purpose this notification fan serve vis-a-vis the assessee's lands. But it was contended that since a large area was being acquired parlay consisting of lands in Kochrab village itself and, since the area to be acquired was near to or contiguous with the plots purchased by the assessee, the assessee could take advantage of the fact that the university and its buildings were coming up in the vicinity of these plots. The assessee purchased the plots in question before us on 6th February, 1945, and 9th February 1946, and both these notifications had not been published on those dates. The first notification was issued on the 22nd October 1946, and the second on the 20th of May, 1948, long after either of the two purchases made by the assessee. We find it a little difficult to see therefore how upon these notification the assessee could be fixed with there knowledge that the areas near about the plots in question were going to be acquired for the purposes of the Gujarat University. When pressed, counsel submitted that it was a matter of wide and general knowledge and it must be held that the assessee know what every one less knew that the Gujarat University was going to be established in the vicinity. We do not think that we can draw any such inference without the slight material on the record. We certainly cannot presume that the assessee must have knowledge. So far as the notifications are concerned, they are of on value whatsoever in fixing knowledge on the part of the assessee that if not his own land at least the contiguous land, were going to be acquired for the Gujarat University.
39. Another piece of evidence relied on is the report of the income-tax Inspector. What the inspector had said may be sated in his own words :
'Inquiries made go to disclose that the negotiations were started to have a separate Gujarat University in the Calendar year 1935 and from the calendar year 1936, they started to raise funds for it. It was in the calendar year 1940 that a site for it was selected near Kochrab lands and they began to purchase these lands from the agriculturists who were utilizing them for cultivation purposes, from the calendar year 1942 onwards. All purchases were carried out through the Government and is purchase price ranged from Rs. 1-8-0 to Rs. 9-0-0 per sq. yd. according to the situation of the land acquired. It is reported that as such the university acquired in all up to the calendar year 1950, 500 acres of lands for the purposes.'
40. The first thing that may be noted about this report is that even assuming that it can be used against the assessee, it says that the price ranged from Rs. 1-8-0 to Rs. 9-0-0 per sq. yd. and the prices which the assessee paid for the two plots were at the rate of Rs. 0-15-6 and Rs. 3-11-3 per sq. yd. full well within this range so that the assessee can hardly be said to have paid a high price for these plots even on the report of the inspector. The report itself further shown that the prices of land began to rise only after the university started its construction work and other schemes of the municipal corporation were passed after the Government approval. All this could only have been done long after 1946 when the notification were published. The construction work could not have begun until the land was acquired.
41. But, apart from this, strong exception was taken by Mr. Kolah on behalf of the assessee to any use being made of the inspector's report. He pointed out that at no stage was the inspector's report submitted to the assessee nor was the assessee asked to give his reply to what was stated therein or to controvert it by evidence. Mr. Kolah says that the assessee would have shown that a number of statements in the first paragraph of the report are utterly false and that there is no evidence to suggest that a site was selected near the Kochrab land in the calendar year 1940, or that purchases of lands from agriculturists took place from the calendar year 1942, onwards. The report itself is moreover vague and it says '........... they began to purchase' without specifying who those persons or bodies were.
42. In our opinion the inspector's report cannot be relied upon on behalf of the department. It was a report unilaterally obtained at the instance of the Appellate Assistant Commissioner and on opportunity was afforded, which we can say was even a reasonable opportunity to the assessee to peruse that report or to counter if. The report certainly suggests that some of the lands were purchased from the calendar year 1942 onwards through the Government suggesting thereby that they were being acquired; other wise there would be no question of purchasing the lands through Government but the two notifications to which we have referred clearly show that the acquisition commenced only towards the end of 1946 on and after 31st December, 1946, and not before and therefore some of the statements in the report themselves are not accurate - not to mention that they are utterly vague. But such as it is a fair opportunity ought to have been afforded to the assessee to meet this report. Counsel on behalf of the department referred to the cross-examination of the assessee where this report was put to the assessee (vide annexure 'G') question Nos. 32 to 35. No doubt in this cross-examination the report has been put to the assessee but we would be surprised if any assessee much less the present assessee could have under-stood and answered the contents of that report on the spur of the moment so to say in the witness box, when it was suddenly shown to him and he was questioned about it. The assessee on his part has already averred that he had no knowledge that the Gujarat University was to buy lands in the vicinity of his plots when he purchased the lands, that in any event he was not aware till 1948 of any such decision being taken or that Kochrab village was selected as the site for the Gujarat University. In answer to question No. 35 he has specifically denied that there was speculation in land in Kochrab village between the years 1940 and 1945. In view of this we think that the report cannot be used as a piece of evidence against the assessee to base the contention that he had knowledge of the land being acquired of the Gujarat University and was thereby enabled to take advantage to that knowledge. If the report of the inspector cannot be taken into account, there is hardly any other material from which knowledge can be attributed to the assessee that acquisition of land was going to take place for the Gujarat University in an around Kochrab village. The assessee admits that as soon as the notification was issued he kept a note about it but the purchases were made long prior to the issue of that notification.
43. It is also of some significance that, though the Appellate Assistant Commissioner made this a principal ground for his decision against the assessee, the Tribunal did not make use of this circumstance at all. The Tribunal has not proceeded on the basis that the assessee knew that lands were going to be acquired for a university in Kochrab village and that, therefore, the assessee took advantage of that knowledge and as peculated in purchasing them. The manner in which the Tribunal has looked at the matter is merely to look at the circumstances of the transaction and hold that it was a transaction which was a venture in the nature of trade. Nor can it be said that because the Tribunal has generally said, 'that the Appellate Assistant Commissioner has given veiled reasons for coming to the decision etc.,......... ' the Tribunal must be deemed to have adopted as its own the reason given by the Appellate Assistant Commissioner for holding that the assessee had knowledge. All the other reasons which appealed to the Tribunal have been set forth in detail and we do not suppose that only this reason was accepted merely by reference to the reasons given by the Appellate Assistant Commissioner. To this extent, therefore, it must be held that the Tribunal did not adopt as its won the finding of the Appellate Assistant Commissioner. The Appellate Assistant Commission also has not relied upon the report of the income-tax inspector and rightly because it could not have been used against the assessee, though the assessee may use it as a statement or admission on behalf of the department.
44. The next circumstance pressed for our consideration in the arguments has been that the assessee had been dealing in lands prior to the purchase of these plots. He had purchased and sold two other plots in the preceding year and realised profit and this shown that he was dealing in these plots or at any rate undertaking ventures in the nature of trade in regard to them. The assessee admitted in his letter of 20th December 1954, that another plot No. 148 at Kochrab was purchased by him on 7th April 1942, for Rs. 23,141-4-0 and that the assessee had sold that plot in the year 1948 for Rs. 4,62,325 (vide annexure 'B-6'). This is one of the plots included in the agreement of sale dated 5th October, 1948, by which the plots with which we are concerned were also soled. The assessee explained that he had also purchased these plots by way of investment because he was a patidar and an agriculturist doing agriculture on an extensive scale. He had purchased the land for his own cultivation and not with view to make profits.
45. This plot was the subject of assessment in the previous year and it is not disputed that the department accepted the explanation of the assessee in regard to this plot and held that it was merely a capital accretion in the hands of the assessee and not subject to tax. We do not think, therefore that the transaction regarding the same plot can to day be used in evidence against the assessee but even if it can be taken into account we do not see how it will advance the case of the department any further for this plots with which we are concerned and sold at the same time. Plot No. 148 was purchased on 7th April, 1942, and sold on 26th October, 1949. The circumstances sale deeds were given the agreement of sale was one and the same. We don't think that the purchase of this plot prior to the purchase of the plots with which we are concerned would indicate that the assessee had purchased these plots with a view to deriving profit from them. On the other hand all the circumstances which we have set forth suggest that he being an agriculturist and in the management of large agricultural lands found it convenient to argument his agricultural holding by investing his surplus capital in buying more agricultural land. Throughout the period that all these plots were in the possession of the assessee he cultivated them and took the income from them. All these circumstances suggest that he purchased the plot as an investment and not by way of a venture in the nature of trade.
46. As to the disposal of these plots the assessee had given a positive explanation which again we find has passed noticed in the order of the Tribunal. In his letter dated 12th February, 1955, the assessee has stated 'I was compelled to sell the family land as I had to meet heavy payment of Income-tax and liabilities' (vide annexure 'B-3'). He had similarly said in a letter dated 9th February 1955 (vide annexure 'B-4') :
'The land at Ahmedabad was the old agricultural land and sold during the year. If he same would not have been sold, I would have suffered very greatly in capital. The said sale has nothing to do with my business but the sale was purely of capital investment of the agricultural land as proved to you.'
47. In paragraph 5 (d) of his affidavit dated 29th September 1956, the assessee gave details to support this statement. He stated that he had heavy commitments and liabilities by way of tax payments in respect of his business dealings and at the close of 1948 when the received a substantial offer for the land he parted with the same to another agriculturist, viz., Thakorlal C. Patel who continued to carry on agricultural operations on the said lands. The he stated 'the disposal of the said lands was thus necessitated by circumstances and its proceeds were utilised to meet the assessee's obligations as per statement hereto annexed and marked 'B'. This statement which forms part of the record and is annexure 'G' before us has given every detail of law the money realised by the assessee paid in all tax liabilities of about three years and other loans and trade debts making a total of Rs. 14,53,473 in the account year ended 31st December 1949. The accounts filed by the assessee for the years 1942 to 1949 also support the statement of the assessee and his affidavit dated 29th September 1956. At the end of the account year 1947, the assessee's liabilities were Rs. 17,83,102 in round figures and it appears that he was bent upon reducing his liabilities for at the end of 31st December 1948, in spite of the purchases of Kochrab plots and investments in shares and other immovable properties he reduced his indebtedness to Rs. 11,31,828 and at the end of 31st December, 1949, his liabilities came down to Rs. 8,55,436. At the same item in the account year ended 31st December 1949, he has invested over Rs. 7 lakhs in shares and Rs. 4,87,000 in immovable properties. The payments mentioned in his affidavit are ample proved by account of the assessee. All this shown that the case made out by the assessee that he had heavy liabilities, although he had an affluent business and desired to clear off his liabilities although he had an affluent business and desired to clear off his liabilities therefore decided to sell of the suit plots was a correct statement. After all, the suit plots were, at the time when they were soled in 1948, valuable. That value might not remain for ever and therefore the assessee was justified in parting with that capital asset when urgent necessity arose to meet his business liabilities. If this explanation is accepted - and there is hardly anything to contradict or counter the weight of the material in its favour - it must be held that though the assessee dealt in these plots he did not deal with them in the way of business or undertaken a venture in the nature of trade in regard to them. He merely invested the surplus capital in further agricultural property being himself a patidar and agriculturist.
48. Another contention which may at this stage be referred to is the convention that these plots being on the outskirts of Ahmedabad city and of potential value as building sites, that therefore it must be inferred that when the assessee purchase them he did so with a view to do business or in order to undertake a venture in the nature of trade. There is nor evidence in the first palace upon which we may hold that they have potential value as building sites. That was a matter which could have been established upon evidence but it has also been held that the land is of potential value or it is so converted later on after the impugned transaction would not lead to any inference that the assessee had purchased the property with a view to reselling it and make a profit out of it. See Janab Abubucker Sait's case, to which we have already referred in another connection. There is moreover absolutely nothing to show that the assessee was aware of the potential value of these plots.
49. We have thus examined the circumstances attendant upon the transaction sought to be taxed in some detail, in order to show that the several weighty considerations which appear upon the record were not taken into account at all by the Tribunal who disposed of the entire matter in one paragraph (paragraph 2) of their order. The five reasons given by the Tribunal in that paragraph cannot be sustained upon the material before us and having regard to all the circumstances, they are based purely upon surmise or conjecture. Even after taking into account the five reasons stated in paragraph 2 the final conclusion to which the Tribunal came was only that :
'We think that the Appellate Assistant Commissioner has given valid reasons for coming to the decision that the land was purchased by the assessee with the primary purpose of doing a venture in the nature of trade.'
50. The use of the words 'primary purpose' suggest clearly that the Tribunal felt that that was an important purpose but that there were other purposes in those transactions. Upon that finding it seems to us that the Tribunal's order cannot be upheld, for what it is necessary to find in order to hold that the assessee had entered into an adventure in the nature of trade was that the assessee had made the purchase solely and exclusively with an intention to resell the property and that he had no intention of holding the property for himself or otherwise enjoying or using it : see G. Venkataswami Naidu & Co. v. Commissioner of Income-tax.
51. In dealing with the question whether a transaction is in the nature of a capital investment or an adventure in the nature of trade three possible categories of cases can arise, (1) where a person purchases property for his own enjoyment and use only with no intention of trading in it or making a profit out of it; (2) where he intends to us the property for his own use and enjoyment but intends to profit by it if a reasonable price is obtained at some future date; and (3) a case where the property is bought showing no intention to use or enjoy the property at all, but only in order to earn profit. We think that the present case would fall under the second category, though we may say that it was strongly contended on behalf of the assessee that it is clearly a case falling under the first category where the intention is purely an intention to enjoy the property and not to make any profit at all. We will however for the purpose of this reference assume that the assessee intended that if at some future date price were to rise he would sell the property. Even so we think that the purchase of the plots would still be an investment of a capital nature and not an adventure in the nature of trade.
52. Apart from the facts which we have pointed out in our opinion there are certain errors in the decision of the Tribunal which amount to clear errors of law. Firstly, that it did not have present to its mind this distinction between the expectation of profit and the intention to earn profits. In order that it may be held that a person is undertaking a trade or business or centering into an adventure in the nature of trade it is essential into with the intention of earning a profit. Though that is not a conclusive test it is certainly an essential test before such a conclusion could be drawn, but such a case is quite different from the case of a person purchasing true property with the dominant intention of using it himself or enjoying it himself but at the same time expecting at some future date if it goes up in value he made take advantage of the rise in the price. All the circumstance which show perhaps that the assessee expected to make profit out of the land but they do not show that he intended to do business with the land or to enter into an adventure in the nature of trade. The distinction was pointedly brought out in the decision of the English Court of Appeal in Commissioner of Inland Revenue v. Reinhold at page 393, as follows :
'The Lord Advocate suggested in the present case that the admission of the respondent, that he had bought for ultimate sale and instructed that sale whenever a suitable opportunity occurred was as plain an intention of trade as was shown by the terms of a company memorandum. But the mere setting up of a company points to a trading intention because of its implied continuity, whereas a single transaction albeit one in which a sale is contemplated whenever a suitable opportunity for disposal arrives has no such implication. A disclosed intention not to hold what was being bought might as Lord Dunedin said provide an item of evidence that the buyer intended to trade and if the commodity purchased in the single transaction was not of a kind normally used for investment but for trading and if the commodity could not produce an annual return by rotation in the hand of the purchaser then the conclusion may easily be reached that the venture was a trading one. If however the subject of the transaction is normally used for investment - land houses stocks and shares - the inference is not so readily to be drawn from an admitted intention in regard to a single transaction to sell no the arrival of a suitable per-selected time or circumstance and does not warrant the same definite conclusion as regards trading or even that the transaction is in the nature of trade. When the Lord Advocate distinguished between a mean who bought any commodity in the hoped that one day the shares would turn out profitable to sell he was an investor, but a buyer of the same shares who bought at 60 and instrusted, there and then his broker to sell out if the shares reached 80 was engaged in a venture of the nature of trade.'
53. This case is of particular interest. In that case the assessee who was a director of a company carrying on the business of warehousemen and bought four houses in January, 1945, and sold them for a profit in December, 1948, and although he had categorically admitted that he had bought the property with a view to resell it the court held that the fact that the property was purchased with a view to resale did not itself establish that the transaction was an adventure in the nature of trade. The same distinction was adverted to by Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, where they observed :
'Generally speaking it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the borderline that cause difficulty. If a person in vests money in land intending to hold it enjoys its income for some time, and then sells it at profit it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale though profitable are clearly outside the domain of adventures in the nature of trade.'
54. In our opinion the present case clearly falls within the principle laid down in the said case.
55. The other point upon which in our opinion the Tribunal was in error in law was that, in judging the question as to what was the intention of the assessee it failed to note that the important consideration is what was the intention at the commencement of the transaction that is to say, at the date of the purchase and that though the intention subsequently formed may be taken into account it is the intention at the inception that is crucial. This was pointed out in Janab Abubucker Sait's case which we have already referred to. At page 46, the Madras High Court pointed out that :
'One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that when sold later on it would leave a margin of profit would not be sufficient to show an intention to trade at the inception'.
56. Counsel on behalf of the department urged that this principle laid down in the Madras case has not been followed by the Calcutta High Court and has been criticised. In Praise and Co. (Private) Ltd. v. Commissioner of Income-tax, at page 577 the Calcutta High Court referring to the arguments of counsel on the basis of Janab Abubucker Sait's case observed :
'Attractive as this proposition is and nicely though it was advanced by the learned standing counsel it does not connives me. In may view, the said proposition of law cannot be laid down as an abstract proposition applicable to all cases, far less to the instant case. The initial intention is undoubtedly a relevant circumstance (vide the case Venkataswami Naidu, at page 622) but it might also be found by the subsequent conduct (page 623) which seems to me to clear in the case in hand.'
57. It appears that the counsel arguing the case of Praise & Co. urged that it had been held by the Madras High Court as proposition of law that it is only the intention at the inception that must always be taken into account and the intention as disclosed by the subsequent facts and circumstances is excluded and it was in repelling that contention of counsel that the above passage occurs. We really do not think that there is any conflict as such between the principle laid down by the Madras High Court and that laid down by the Calcutta case. In the Madras case also all that the learned judges stated was that one of the essential elements in an adventure in the nature of trade is the intention to trade and that intention must be present at the time of the purchase (see page 46). In other words the Madras High Court held that the intention of the assessee at the inception is an important circumstance and that is precisely what the Calcutta High Court has also stated at page 577 in the case of Praise & Co. Private Ltd. With respect we accept the statement of the law as correct that the initial intention is an important relevant circumstance. In the present case, however, this important requirement of the law does not appear to have been given by attention in the orders of the Appellate Assistant Commissioner and the Tribunal.
58. The third error which appears also in the orders of the Appellate Assistant Commissioner and the Tribunal is that they failed to take into account the nature of the property which was the subject of the dealings in the present case, namely, the land - an agricultural land. We have already referred in this respect to a decision in Reinhold's case, which shows that land 'is normally used for investment'. The following passage in the judgment of Lord Russell at page 394 brings out the point with great emphasis :
'The Lord Advocate contended that if a person buys anything with a view to sale, that is, transaction in the nature of trade; that the purpose of the acquisition in the mind of the purchaser is all important and conclusive; and that the nature of the thing purchased and the other surrounding circumstances do not and cannot operate so as to render the transaction other than an adventure in the nature of trade. In my opinion that argument, so formulated, is to absolute and is not supported by the judicial pronouncements on which it was sought to be based. It takes no account of variety of circumstances which are or may be relevant to the determination of such a question. Among such features adverted to in previous cases reference may be made to such matters as these, viz., whether the article purchased, in kind and in quantity, is capable only of commercial disposal and not of retention as an investment or use by the purchaser personally, e.g., aeroplane linen, toilet paper, whisky; whether the transaction is in the line of business or trade carried on by the purchaser; whether the purchaser before resale has caused expense to be incurred in making the commodity more readily saleable, e.g. a ship converted before resale into a trawler;.... '.
59. The same principle has been referred to in Janab Abubucker Sait's case when they held that the purchase of property in the shape of agricultural lands is ordinarily an investment. In Janki Ram Bahadur Ram v. Commissioner of Income-tax, at page 26, the Supreme Court after referring to two English authorities in Rutledge v. Commissioners of Inland Revenue and Commissioners of Inland Revenue v. Fraser, observed :
'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.'
60. This was thus an important consideration in the present case where we are concerned exclusively with agricultural lands, but the nature of the property and its effect has not been taken into account by either the Appellate Assistant Commissioner or the Tribunal.
61. For these reasons we think that the Tribunal and the tax authorities were in error in law. The question also affects the further question as to the burden of proof in the present case. We have already shown that, in a case like this and especially where the land is concerned, the presumption is that the land was purchased as an investment and therefore the burden would be upon the department to establish that it was purchased with a view to an adventure in the nature of trade.
62. Having regard to the totality of the circumstances in this case, we are unable to sustain the findings of the Tribunal. On the other hand, we think that the intention of the assessee both at the inception and subsequently was to treat this land as his capital investment. He was an agriculturist and possessed extensive cultivation and in order to add to that cultivation he purchased further plots out of the spare capital belonging to him. During the whole time that he was in possession of these plots from 1945 to 1949 the assessee did not evince any intention to deal with them by way of business. He has not altered the nature of the land while it was in his possession. During the time that he was in possession several offers were made to him which he declined, expressly stating that he was holding on to the land because it was meant for cultivation and there is nothing to counter those letters. At the time of sale he has given reasons why he sold them, which reasons, upon the evidence, are amply supported and there is nothing to indicate to the contrary. He was indebted and wanted to wipe off his liabilities and therefore he selected these plots for disposal out of his total property. They were at the time favourably placed to bring him a large price and therefore he decided to sell them. There is no evidence whatever to support the conclusion that he purchased these plots with a view to an adventure in the nature of trade. The reasons given in paragraph 2 of the Tribunal's order are either unsupported by any evidence or material on record or they are in the nature of mere surmises or conjectures or based upon suspicion. On the whole we think that the assessee purchased these plots only by way of investment and they cannot be treated as held for the purposes of business or in order to undertake a venture in the nature of trade.
63. For these reasons we answer the question referred in the affirmative. The Commissioner will pay the costs of the assessee.