1. This is a reference made by the Income-tax Tribunal (hereinafter referred to as the Tribunal) under section 66(1) of the Indian Income-tax Act. The assessment year is 1950-51, the relevant accounting year being 1st April, 1949, to 31st March, 1950. The assessee is a private limited company. Prior to 31st March, 1949, the business of the assessee was manufacture and sale of Ayurvedic drugs and medicines. The assessee discontinued its business as from 30th of March, 1949, and on that date the assessee under a deed of transfer dated 30th March, 1949, transferred it to a public limited company, called Dhootpapeshwar Industries Limited. As from the date of the transfer, the assessee has been acting as a managing agent of the said public limited company. Now, although the Dhootpapeshwar Industries Limited had purchased the business of the assessee company under a deed of 30th March, 1949, it had not purchased the finished goods, which were with the assessee company. Those finished goods, the assessee company sold by an independent agreement to another concern known as Dhootpapeshwar Sales Corporation Limited. All the finished goods were sold at the cost price amounting to Rs. 5,04,911. This transfer of finished goods also took place on 30th March, 1949. Between 30th March, 1949, and 31st December, 1949 , the Sales Corporation sold certain parts of these finished goods for Rs. 1,91,835 making thereby a profit of Rs. 51,025. The Sales Corporation found it difficult to sell the remaining goods. An agreement, therefore, appears to have been reached between the Sales Corporation and the assessee company in respect of these remaining finished goods. There is not a written agreement on records. Under this agreement the assessee company agreed to buy back the remaining finished goods only on the condition that the sales Corporation would had over to it the sale proceeds of Rs. 1,91,835 inclusive of Rs. 51,025, the profit made by the Sales Corporation on the said sales. This transaction took place in December, 1949. Subsequent to the repurchase of the goods, the assessee company sold a part of the remaining goods worth Rs. 2,90,000 to the Dhootpapeshwar Industries Limited without making any profit in the transaction. The remaining goods were sold by the assessee company at a profit of Rs. 23,924. Thus the total profit in the hands of the assessee company on the sale of the finished goods amounted to Rs. 74,949 (Rs. 51,025 profits made by the Sales Corporation and taken over by the assessee company in the transaction of repurchase plus Rs. 23,924 profits earned by the assessee company by sale of the goods subsequent to December, 1949). In the aforesaid assessment year the assessee company credited this amount in the profit and loss account. The Income-tax Officer brought the said amount of Rs. 74,949 to tax. An appeal against the order of the Income-tax Officer was taken to the Appellate Assistant Commissioner. At this stage it is necessary to refer to the contentions raised by the assessee in his assessment of the previous year, i.e., the assessment year 1949-50. As already stated the assessee had discontinued its business on 30th March, 1949. The assessee, therefore, had claimed relief under section 25(3) of the Income-tax Act on the ground that it had discontinued its business. This contention of the assessee was not accepted by the Income-tax Officer in its entirety. The Income-tax Officer held that the assessee had discontinued its business of manufacture of Ayurvedic drugs and medicines but had not discontinued its business of sale of goods. These findings of the Income-tax Officer were also confirmed by the Appellate Assistant Commissioner in appeal and the assessee had taken a second appeal to the Tribunal. The Tribunal, by its order of 25th May, 1956, allowed the appeal and set aside both the orders of the Income-tax Officer as well as the Appellate Assistant Commissioner holding that the assessee had on 30th March, 1949, discontinued its business both of manufacture and sale of Ayurvedic drugs and medicines. The sale of Ayurvedic drugs and medicines effected by it nine months after 31st March, 1949, was a different venture. Now, when this order was made by the Tribunal on 25th May, 1956, the aforesaid appeal of the assessment year 1950-51 was pending before the Appellate Assistant Commissioner. Relying on the aforesaid decision of the Tribunal of 25t May, 1956 the assessee raised two contentions before the Appellate Assistant Commissioner. In the first instance it contended that the profits amounting to Rs. 51,025 earned by the Sales Corporation were profits made on the sale of capital goods and were, therefore, not taxable. The profits amounting to Rs. 23,924 made by the assessee were not taxable because it was not profit earned in any business venture. The Income-tax Appellate Assistant Commissioner allowed the assessee to raise these two contentions for the first time in appeal but rejected both of them. The assessee then took a second appeal to the Tribunal reiterating both these contentions before the Tribunal. The Tribunal held that the agreement of December, 1949, between the Sales Corporation and the assessee company was a business venture and the receipt of Rs. 51,025 was incidental to that business venture and being a revenue receipt was taxable. The assessee company in its business venture has further made a profit amounting to Rs. 23,924, which was a profit earned by the assessee in its business venture. In this view of the matter, the Tribunal negatived both the contentions of the assessee and held that the assessee was properly taxed on the amount of Rs. 74,950. On an application made by the assessee under section 66(1) of the Income-tax Act, the Tribunal has referred the following question to us :
'Whether on the facts and in the circumstances of the case the two sums of Rs. 51,025 and Rs. 23,924 or either of them was a revenue profit liable to tax ?'
2. Mr. B. A. Palkhivala, learned counsel for the assessee, has again reiterated the aforesaid two contentions. It is further argued that the finding of the Tribunal that the transaction of 1949 between the assessee and the Sales Corporation was a business venture was without any evidence to support it. On the other hand, according to him, the circumstances that the unsold goods were purchased by the assessee at cost and after repurchase, goods worth Rs. 2,90,000 were sold at cost price to the Dhootpapeshwar Industries Limited, clearly indicated that it was not a business venture. It was further argued that the assessee was acting as the managing agent of the Dhootpapeshwar Industries Limited. It could not, therefore, have entered into a business which was of a competing nature.
3. It is not possible to accept the contentions raised by Mr. Palkhivala. It is true that the assessee had on March, 30, 1949, discontinued its business both of manufacture as well as sale of Ayurvedic drugs and medicines and at that time the finished goods in its hands were not its stock-in-trade but were capital gods, but that character of those goods changed when the assessee company sold them to the Sales Corporation. In the hands of the Sales Corporation they became stock-in-trade of the Sales Corporation. Repurchase of those goods by the assessee company from the Sales Corporation cannot have the effect of restoring those goods to their original character nor can it have the effect of rendering the profits made by the Sales Corporation into capital gain of the assessee company. We fail to appreciate the argument of Mr. Palkhivala that there was no evidence before the Tribunal to hold that the transaction of 1949 between the assessee company and the Sales Corporation was a business venture. The terms of the agreement and the transaction as put forward by the parties before the Income-tax Tribunal was itself evidence of the nature of the transaction. One of the terms thereof, viz., that the assessee had taken over the profits earned by the Sales Corporation, strongly indicated that the assessee company had the profit-sharing motive.
4. In our opinion there was evidence before the Tribunal on which it could record a fining that the transaction between the Sales Corporation and the assessee company in the year 1949 was a business transaction. Looking at the transaction from a commercial point of view, what really has happened is that the assessee company has repurchased the goods not at the cost price but at cost price less Rs. 51,025 and that was a bargain itself. The goods were purchased with a view to resell them by the assessee company itself and in effecting those sales the assessee company has made a profit of Rs. 74,950. It is true that the assessee company had discontinued its business of selling in March, 1949. That does not mean that the assessee company would not think of restarting its business at least for a temporary period for special considerations. It is also true that the assessee company is acting as a managing agent of the Dhootpapeshwar Industries Limited, but having regard to the fact of the case, it can hardly be said that the goods sold by the assessee company would amount to a business competitive in nature to the business of the company.
5. In the result our answer to the question is that both the sums of Rs. 51,025 and Rs. 23,924 are revenue profits liable to tax. The assessee shall pay the costs of the department.
6. Question answered accordingly.