1. This is a reference by the Income-tax Appellate Tribunal at the instance of the Commissioner under s. 66(1) of the Indian I.T. Act, 1922. The assessee concerned is an individual. The assessment year in question is 1959-60, the corresponding previous year being the calendar year 1958. The only point in dispute and which is concerned in the reference in the addition of two amounts of Rs. 33,860 and Rs. 35,063; these amounts represent the surplus realised by the assessee on two decrees purchased by him, in which decrees the judgment-debtors were the Kalyan Mills Ltd., Ahmedabad. This was a textile mill at Ahmedabad. At the relevant time, the assessee and his associates had substantial interest in the said Mills. It was ascertained by us from counsel for the revenue that the interest of the assessee and his associates was nearly 81% of the total shareholdings of the said company. The Kalyan Mills were indebted to several parties. Two of these creditors had obtained decrees against the Mills respectively for Rs. 1,38,663 and Rs. 2,16,504. Gangadhar Baijnath and Rameshwarprasad Bagla were the judgment-creditors in the first decree, and one Krishnakant Ramakant was the judgment-creditor in the other decree. These two judgment-creditors in their turn were indebted to a third party, viz., Radheshyam Satyanarayan, a firm in which the assessee was a partner. This firm, in its turn, was indebted to a company called Amalgamated Commercial traders Private Ltd., the extent of the debt being Rs. 3,90,310. This private limited company was the sole selling agent of a sugar refinery company and the assessee was a director in the company managed by the sugar refinery company.
2. On April 28, 1957, the assessee purchased the decree in favour of Gangadhar Baijnath and Rameshwarprasad Bagla for Rs. 1,04,803, i.e., at a discount of Rs. 33,860. Similarly, he also took over the decree in favour of Krishnakant Ramakant for Rs. 1,81,441, i.e., at a discount of Rs. 35,063. However the consideration, viz., Rs. 2,86,244 to the account of Radheshyam Satyanarayan in this books, giving a corresponding debit to the account of Kalyan Mills. On the very same day an amount of Rs. 3,90,310 was transferred from the account of the of Radheshyam Satyanarayan to the account of Amalgamated Commercial Traders Private Ltd., in the books of the assessee. By February, 1958, however, the assessee received the full amount of the decrees from the Kalyan Mills and accordingly obtained the surpluses of Rs. 33,860 and Rs. 35,063, respectively. The question which arises is whether these amounts were liable to be included in the assessee's business profits. The assessee's main business was speculation. He also received income by way of interest from loans and advances. In addition to these, he was also receiving salary from M/s. Gannon Dunkerly & Co., in the capacity of an adviser.
3. Before the ITO, it was contended on behalf of the assessee that these receipts were of a casual and non-recurring nature within the meaning of s. 4(3)(vii) of the Indian I.T. Act, 1922, and not arising from business. According to the ITO, in the present case, the assessee had bought the interests of more than one person in the decrees, he had no liquid funds and had to enter into transactions with a number of persons in order to earn profit. The ITO held that the surpluses realised were profits made by the assessee arising from an adventure in the nature of trade by reason of the following facts and circumstances :
'(1) The assessee had no liquid funds for making any investment at the time when he purchased the decrees.
(2) A person acquires an asset for personal use, such as consumption or pride of possession, as an investment with a view to derive income therefrom, or for the purposes of trading therein. A decree by its very nature cannot be an item of personal use. The fact that the assessee had no liquid funds at the relevant time shows that he had not acquired the decrees fro the purpose of making any investment. If the decrees were not acquired for the purpose of personal use or investment, then the only purpose for acquiring them was to trade in them.
(3) The assessee had purchased the decrees from two different persons about the same time, arranged for the discharge of his liabilities to these persons by a series of interconnected transactions which show a purpose and design to earn income.
(4) The assessee had purchased the decree for less than the amounts payable by the debtor on those decrees, fully knowing that there was a possibility of his realising a higher amount than the amount paid by him. If there was no possibility of his earning a higher amount than the amount paid by him, the assessee would not have bought the decrees, for, these decrees were not acquired by him for personal use or investment. This clearly shows that the assessee had the intention of making a profit out of these transactions.'
4. The matter was thereafter carried in appeal to the AAC, where it was argued on behalf of the assessee that the reduced prices at which the decrees were purchased were not calculated to operate as a means for earning profits but were intended solely to provide a safety margin or cover to ward off the possibility of loss in case the Kalyan Mills Ltd., Ahmedabad, were not able ultimately to discharge their liabilities to the fullest extent. The balance-sheets and the financial position of the said company for the years ended March 31, 1957, and March 31, 1958, were filed with the AAC and after perusing them he opined that the gloomy picture pained by the chartered accountant, who appeared on behalf of the assessee, was not in accordance with the facts. The AAC was of the opinion that this conclusion was also borne out by the assessee being able to recover his dues from the Mills in full without resorting to any legal process in the short period of about nine months. The AAC, therefore, concluded that the only purpose for which the decrees and claims were purchased at a discount was to gain a substantial profit in due course. The AAC was also of opinion that the assessee must have had a speculative motive when he entered into the transactions under review. In the view of the AAC, therefore, the two transactions connected with the recovery of money from Kalyan Mills Ltd., were entered into by the assessee as a speculative venture of the nature of trade and accordingly he upheld the course of action adopted by the ITO.
5. The matter was carried in further appeal to the Income-tax Appellate Tribunal. The Tribunal found itself unable to uphold the findings of the income-tax authorities that the assessee realised the aggregate surplus of Rs. 68,923 as a result of an adventure in the nature of trade. According to the Tribunal, the financial position of the Kalyan Mills Ltd., as on March 31, 1957, was not at all encouraging. Although it realised the force of the position that the assessee was in the know of the true financial position of the company, it could not spell out a scheme of profit making from the time the debts were taken over by the assessee. It was urged before the Tribunal that the assessee was interested in the Kalyan Mills Ltd., as also in Radheshyam Satyanarayan and the Amalgamated Commercial Traders Private Ltd., and he took over the decrees and claims for Gangadhar Baijnath and Rameshwarprasad Bagla and Krishnakant Ramakant, respectively, as a part of the arrangement to settle the claims and counter-claims of these persons. It was further urged that the debts were taken over at a discount having regard to the financial difficulties of the Kalyan Mills Ltd., at the time of taking over and it was submitted that the fact that a surplus was realised thereafter was accidental. The Tribunal did not fully accept the explanation of the assessee that debts were taken over for settlement of liabilities between friends. According to the Tribunal, 'A more realistic reading seems to be that the assessee wanted Kalyan Mills to be relieved of the pressure and at the same time wanted to expedite the realisation of debts of Amalgamated Commercial Traders Private Ltd., in which he was interested. Keeping a comfortable margin by way of discount the assessee confronted Gangadhar Baijnath and Krishnakant Ramakant with a proposal which they accepted in the interest of immediate realisation of what they considered a doubtful debt. In the event the assessee's judgment was vindicated and he realised a surplus. But in the circumstances of the case it could not reasonably be traced to any adventure in the nature of trade.' The Tribunal observed, which appears to be the agreed and admitted position, that neither before nor afterwards the assessee had undertaken any such transaction. It then observed :
'Moreover it is clear form the background of the transaction that the assessee was interested in the debtor, Kalyan Mills, and also the final creditors 'D' (Amalgamated Commercial Traders Private Ltd.,) and the motive, if it was possible to read it, was more to save embarrassment to the debtor and to ensure settlement of account for the creditor.' According to the Tribunal, there was no indicia of trade. The Tribunal found it difficult to connect the transactions either with the assessee's business or with any scheme of profit-making with any indicia of trade. Accordingly, the Tribunal held that the amount of Rs. 68,923 was not chargeable to tax as profits of business. It is this conclusion of the Tribunal which is assailed in this reference by the commissioner.
6. The following question has been referred to us by the Tribunal for our opinion :
'Whether, on the facts and in the circumstances of the case, any adventure in the nature of trade could be spelt out in the transactions resulting in a surplus of Rs. 68,923 for the assessment year 1959-60 ?'
7. The learned counsel for the revenue submitted that the following facts were very material for the proper conclusion to be drawn and that these were : (1) That the assessee was a speculator and a financial adviser drawing salary as such from Gannon Dunkerley & Co. (2) The assessee and his associates had a large shareholding in Kalyan Mills Ltd., and that by reason of this connection with the judgment-debtors under the two decrees, he would be in the know of the true financial position as also be in a position to realise the full amounts of the decretal claims. (3) The assessee had realised the full amounts of the decrees within a period of none to ten months. (4) The assessee had failed to bring on record the material which would disclose the real motive or compulsion for the acquisition of the decrees. (5) The assessee had not laid out any funds for the purchase of the decrees or made other investment, but the decrees had been purchased by mean of cross-entries or havala entries in the manner earlier explained. It was further submitted that if the argument of the assessee's chartered accountant before the Tribunal to be found in para. 5 of its order is considered along with the grounds of appeal before the Tribunal, it will be observed and realised that the Tribunal had made out a new case for the assessee which was not the case advanced on behalf of the assessee and had reached the findings which were based on mere conjectures or surmises and which were not based on any material on record. According to him, further, the facts involved in this reference were similar to those before a Division Bench of this court in CIT v. Himalayan Tiles and Marble P., Ltd. : 100ITR177(Bom) , where on similar venture was liable to be included in the income of the assessee under s. 10 of the Indian I.T. Act, 1922.
8. We will, therefore, deal with the Himalayan Tiles' case : 100ITR177(Bom) immediately. In that case, the assessee was a private limited company. It took over two businesses as going concerns in 1956. At that time, however, the outstandings and liabilities of the concerns were not transferred to the company. In 1957, when it was under no obligation nor under any compulsion to do so, it purchased two claims of the firms whose business had been earlier taken over, for the aggregate amount of Rs. 57,716. In 1958-59, there was an award in regard to one of the claims, under which the assessee received a large sum of money, the surplus realised being Rs. 60,940. The court emphasised that at the time of the purchase of the actionable claims the assessee was under no obligation or compulsion to do so. In point of time, there was close proximity between the purchase of the claims and the realisation. In these circumstances, the court held that the assessee had purchased the claim with the expectation of making a profit and further that the transactions bore the indicia of trade and accordingly the surplus realised from the venture was liable to be included in the income of the assessee under s. 10. It must be realised that one of the claim which the assessee had purchased in the Himalayan Tiles' case : 100ITR177(Bom) was a claim in a suit against the Government for recovery of certain amount for work done as also damages for wrongful breach of the contract, which claims in the suit had been referred to the sole arbitration of a counsel. Thus, the assessee who had defendants to the claim against whom the award was ultimately made; and it was found by the court that there was no motive or compulsion obliging the assessee to purchase the claim from the claimants who were agitating the claim against the Government in the said arbitration.
9. On the other hand, the admitted position in our case is that the assessee is very much concerned with the judgment-debtors, viz., the Kalyan Mills Ltd., and is also having business relationship with the two decree-holders in their turn are indebted. There is also a business relationship with the Amalgamated Commercial Traders private Ltd., which is a creditor of this firm and which ultimately becomes the direct creditor of the assessee by reason of the various entries made in the assessee's books.
10. We were then referred to a very brief judgment of the Madras High Court in Kanwarlal Manoharlal v. CIT : 101ITR439(Mad) , where the Madras High Court followed its earlier decision in Rukmani Co. (P.) Ltd. v. CIT : 52ITR599(Mad) , and observed that the fact that the purchase of a decree was the first of its type and that there was no subsequent similar purchase was irrelevant. This decision does not carry the matter any further, because similar contentions on behalf of the assesse had been rejected by the Bombay High Court in the Himalayan Tiles'case : 100ITR177(Bom) itself following the decision of the Supreme Court in G. Venkataswami Naidu & Co. v. CIT : 35ITR594(SC) .
11. The matter was more elaborately considered by a Division Bench of the Madras High Court in Rukmani Company's case : 52ITR599(Mad) , where it was observed that in every case where an adventure in the nature of trade is involved, it is the net result of all the features surrounding the transaction that should be had regard to. It was further observed that no set rule or principle can be laid down in reaching such a conclusion. In the matter before the Madras High Court in Rukmani Company's case : 52ITR599(Mad) , the assessee, which carried on the business of money-lending, purchased a money decree of the face value of Rs. 1,44,035, which one S, who was a customer of the assessee, had obtained against a zamindar. The purchase was for the sun of Rs. 41,200 only. The assessee was able to realise the sum of Rs. 1,38,240 towards the decree from the compensation paid to the zamindar on the abolition of his zamindari; and after deducting the total outlay, the assessee made a profit of Rs. 68,880. It was observed that a money decree not an asset which one would acquire for keeping it for his enjoyment and accordingly the intention of the assessee must have been to realise the decretal amount. On the facts it was held that the purchase of the decree was an adventure in the nature of trade or a transaction in the line of the assessee's business and the profit made was not a casual or non-recurring receipt not arising from business but was assessable as income from business. Very strong reliance was placed by Mr. Joshi upon this decision.
12. We were also referred to Jaldu Manikyala Rao v. CIT : 28ITR220(AP) . It may be mentioned that after this decision was given by a Division Bench of the Andhra Pradesh High Court, the assessee went in appeal to the Supreme Court by special leave and obtained a remand to the Tribunal for giving a certain finding. The decision of the High Court thereafter is reported in Jaldu Manikyala Rao v. CIT : 54ITR409(AP) . In the earlier decision, it is observed that the nature of the thing to which the transaction relates, the scale of the transaction, the motive in entering into it, the relation of the particular transaction to the ordinary business of the assessee, the nature of the operation involved in acquiring and disposing of the thing, and the question whether the transaction is an investment are relevant factors for consideration in arriving at a conclusion of fact on the question as to whether a particular transaction is or is not an adventure in the nature of trade or business. In the case before the Andhra Pradesh High Court, the assessee, a trader interested in several lines of business, had purchased a share in a final mortgage decree for sale. He instituted proceedings for the execution of the decree and brought to sale some of the mortgaged properties. Ultimately, a surplus was realised, as the amount obtained exceeded the price paid by him for the purchase of the decree. One of the arguments advanced on behalf of the assessee was what he had no profit motive in entering into this transaction and that he was actuated by one or both of the two motives, viz., (a) to help S and his sons (decree-holders) out of their financial embarrassment, and (b) to help his own brothers who had purchased the equity of redemption in two of the villages included in the mortgaged property by ensuring that the execution of the decree was confined to the other properties. The evidence in support of this aspect of the case was not accepted by the income-tax authorities and the Tribunal. It is on that footing that the court found against the assessee. But the position would conceivably have been different had the motive suggested been established. The court in fact at page 226 observed :
'Of course, it is conceivable that a man may purchase a decree to accommodate the decree-holder or the judgment-debtor or it may be even to harass or annoy the one or the other of them, but such a motive has been ruled out in this case.'
13. It was held that it was a clear case of laying out money with a view to reap a profit. The ruling out of such motive and the element of laying out money in order to earn profit had been the clear findings given by the Tribunal in the case being considered by the Andhra Pradesh High Court in Jaldu Manikyala Rao v. CIT : 28ITR220(AP) , and on these findings the High Court opined that the surplus was a receipt from business and not of a casual or non-recurring nature exempt under s. 4(3)(vii) of the Indian I.T. Act, 1922.
14. As stated earlier, the matter was carried in appeal to the Supreme Court by special leave, and before the Supreme Court, counsel on behalf of the assessee contended that the assessee had taken an assignment of the decree at the instance of his brother and the latter's son-in-law so that the mortgaged properties purchased by them might not be put up to sale and the mortgage claim might to satisfied from the other properties. He made a grievance that the Tribunal had not come to a clear finding on this contention, and the Supreme Court found justification in this grievance. Accordingly, the matter was referred back for such a finding. The order under appeal, i.e., the decision of the High Court in Jaldu Manikyala Rao v. CIT : 28ITR220(AP) , was set aside and the case wax remanded to the High Court with a direction that the High Court would refer the case back to the Tribunal for a finding as to whether the assessee had, in acquiring the decree, the intention of assisting his brother and the latter's son-in-law by preventing the mortgaged properties purchased by them from being sold in execution of the decree. In the section judgment given in the vere case reported in jaldu Maniky ala Row v. CIT : 54ITR409(AP) , the High Court had observed that no such contention as referred to by the counsel for the assessee before the Supreme Court was ever raised before the Tribunal. From this decision, it is found that when the matter came up before the Tribunal on remand, the assessee wanted to lead further evidence, which was not permitted to be due; and the Tribunal gave its finding on the evidence on record that the assignment of the decree was not taken with a view to help the assessee's brother and the brother's son-in-law. It is clear that on such a finding the matter had to be decided against the assessee, and this was accordingly done by the High Court in the second judgment also.
15. It is true that in the case before us the full material which would have satisfactory enabled us to come to a clear finding as to the motive of the assessee in making purchases of the decrees is not available on the record. What is available, however, is the fact that the assessee together with the other members of his family and his associates held a substantial interest in the debtor-company, viz., the Kalyan Mills Ltd. It is also clear from a close examination of the balance-sheet of the company that the financial picture presented by the balance-sheet did not reveal a healthy state of affairs. A copy of the balance-sheet as on March 31, 1951, of the judgment-debtors' company, viz., the Kalyan Mills Ltd., has been annexed to the statement of case as annexure 'D'. As against the share capital of Rs. 9,00,000 and premium on shares of Rs. 3,37,000 and secured and unsecured loan of Rs. 9,00,000, the principal asset of the company is the amount of Rs. 18,41,188 due by the Deepak Textile Industries Private Ltd., being the balance of the sale price and interest. This item is examined by the AAC in para. 7 of his order, where he refers to be circumstances leading the said company to discontinue its business, entailing the disposal of its fixed assets by the debenture trustees to the Deepak Textiles Industries Private Ltd. As the balance-sheet shown, the entire plant and machinery, electric equipment, fire service, furniture and fixtures as also buildings on land, which constitute the totally of the fixed assets of the Kalyan Mills, were sold by the debenture-trustees to the said concern (i.e., Deepak). The balance-sheet further indicates that on the assets side is shown the loss carried forward, viz., Rs. 7,50,876. Thus, we have the picture of a company which had discontinued its principal activity, whose fixed assets had been sold by debenture-trustees obviously for payment to the debenture-holders and whose assets against the actual liabilities of Rs. 9,00,000 odd, was a claim to receive the balance of the price from the purchaser. The is the position as on March 31, 1951.
16. We have the co-existing position that two of the creditors of the company had obtained decrees from the court against the company. The comment made by the Tribunal that such a picture is not very encouraging is tinged with euphemism. Since the creditors have had to obtain decrees from the court, it would normally imply that they would be interested in realising the amounts under the decrees further. As there are no actual assets of the company, this would mean taking steps for having the debtor-company wound up. In this state of affairs, since the close connection between the assessee and the group of his associates and the Kalyan Mills Ltd., is admitted, it is reasonable to say that the possible motive of the assessee in making the purchases would be to ward off the coercive process against the Kalyan Mills Ltd., and avert the pressure which might be exerted by the two judgment-creditors in order realise their decrees against the said concern.
17. In the grounds of appeal to the Tribunal it has been averred that the appellant had accommodated certain friends and associates by settling their financial disputes inter se through his agency. In our opinion, this read in a broad and liberal manner would cover the ultimate argument which appealed to the Tribunal, though not in specific words. Further, even if a ground is not specifically urged in the grounds of appeal filed before the Tribunal, it would always be open to an assessee to raise the same if it can be fairly urged on the material already on record before the Tribunal, which appears to have been done in the present case.
18. The mere fact that the full and total material having a bearing on the question is not on the record would not justify the department contending that such a motive for purchase must be ruled out. The question which we have to consider is whether it has been made out that the dominant intention of the assessee was to embark on a venture in the nature of trade when he purchased the two decrees. If the reasonable possibility of the assessee having a motive of assisting the judgment-debtors under the decrees cannot be ruled out, this conclusion cannot be arrived at and it cannot be held that the dominant intention of the assessee has been sufficiently or satisfactorily established. It is true that the assessee had made a profit and realised a surplus. It is true also that this had been done within a fairly short period of nine to ten months. But the mere earning of the surplus or realisation of profits is not equivalent to embarking upon an adventure in the nature of trade. In our opinion, even on the footing that the assessee, having a close relationship with the judgment-debtors, might have been in an advantageous position to realise the possibility of making surplus, would not advance the case of the department. As observed by us, it is not sufficient for the revenue to successes by merely showing that the transaction was entered into having the possibility of making a profit in mind. In addition to this aspect of the matter, it must bear an indicia of trade. For such purpose the motive, the purpose of the transaction, must be decisively held to be not of the nature suggested by the Tribunal; and unless we are in a position to do so, which we are not, we must hold that the Tribunal was not in error in arriving at the conclusion it did. This case must be distinguished from the Himalayan Tiles' case : 100ITR177(Bom) , on the footing that since the assessee was closely involved with the judgment-debtors, the purchase of the decrees against the judgment-debtors could be explained on the footing of a motive to help them. In any case, the possible existence of such a motive cannot be ruled out. If that is so, the conclusion reached in this case must be different from that reached by the Division Bench of this court in the Himalayan Tiles' case : 100ITR177(Bom) .
19. For these reasons, the question referred to us is answered in the negative and in favour of the assessee.
20. The parties, however, will bear their own cost of this reference.