SUBBA RAO, C.J. - This reference made by the Commissioner of Income-tax under section 66(2) of the Indian Income-tax Act raises the following question :
'Whether on the facts and in the circumstances of the case, the sums of Rs. 8,300, Rs. 8,020 and Rs. 35,000 (R. A. Nos. 1347 of 1952-53, 1348 of 1952-53 and 1349 of 1952-53) respectively could be regarded as income liable to be assessed.'
The facts that gave rise to the reference may be briefly stated. The Assessee is a money-lender carrying on business since a few decades. During the course of his business, he advanced loans to several persons. In the case of some debtors, presumably because they were not able to repay the advance in cash, he took their lands in discharge of their debts. On September 17, 1935, he took 3 acres 51 cents of land in Upparapalem owned by one of his debtors, Shaik Nanne Bibi of Vinukonda, valued at Rs. 2,000 in full discharge of his debt. But on September 27, 1945, the said extent was sold and a sum of Rs. 10,000 was realised.
On February 15, 1925, the assessee purchased 4 acres 56 cents for a sum of Rs. 4,480 from two other joint debtors Venkatachalapathi Rao and Subbarao. The assessee paid in addition to the discharge of the debt, some other amounts making up the consideration. The said property was sold by the assessee to one Subbarao on May 5, 1947, for a sum of Rs. 11,400. The assessee purchased from his debtors Akkamma and others land of the extent of 12 acres 29 cents on November 20, 1933, for Rs. 11,000. He bought also 5 acres 77 cents for Rs. 4,500 from one Veeriah on March 25, 1932, and 1 acre 37 cents for Rs. 800 from Ankamma on November 20, 1933. Out of the first item, on August 12, 1943, he sold 8 acres 29 cents along with another piece of land and 1 acre 13 cents purchased by him in 1939 for a total consideration of Rs. 30,955. He sold the other two items for Rs. 20,474 in 1948-49. On the basis of the aforesaid sales, he made a total profit of Rs. 35,000 in the year 1949-50.
Neither the statement of the case nor the record submitted along with it discloses how the lands purchased were treated by the assessee. The said items were sold by the assessee 10 years, 22 years, 11 years and 16 years respectively after the date of their purchase. It is not disputed that the items purchased were not entered in the accounts as part of the stock-in-trade and that no part of the income from the business was utilised to meet any expenditure incurred in connection with the properties so purchased. The assessee continued to so money-lending business and, during the accounting years he increased his money-lending capital by bringing in the money realised by the sale of the properties.
On those facts, the Income-tax Officer, in the first instance, and, on appeal, the Appellate Assistant Commissioner and, on further appeal, the Tribunal held that during the three assessment years 1946-47, 1948-49 and 1949-50, the assessee was liable to tax on the difference between the prices at which the properties were purchased and sold by him. The question, therefore, is whether the profit made by the assessee by selling the land purchased by him earlier from his debtors in discharge of their debts is a profit or gain from money-lending business.
Learned counsel for the assessee argues that the lands acquired by him were not made part of the stock-in-trade of his money-lending business and that his subsequent sale of those properties after many long years and investing the proceeds in the business could not retrospectively make the properties or the proceeds part of the stock-in-trade from the date of their purchase, while learned counsel for the Commissioner contends that as at the inception the said properties were purchased in discharge of the loans advanced in the course of money-lending business and that, after they were sold, the proceeds were utilised for the business, it should be inferred that the properties all through continued to be the assets of the business and, therefore, the difference in the purchase price and the sale price must be deemed to be income from money-lending business.
The decided cases cited at the Bar have considered the question raised under varying situations and a reference to them may afford a useful guide to solve the problem presented in this case.
The leading case on the point is that of the Federal Court in A. H. Wadia v. Commissioner of Income-tax. The material facts in that case were : The Gwalior Durbar derived income form properties situated in British India which were : purchased by the Durbar at execution sales in enforcement of mortgage decrees against mortgagors who had failed to pay the amounts advanced to them in the course of the money-lending business of the Durbar. The question was whether the property after its purchase continued to be part of the assets of the business of the Durbar so that the income arising from the properties could be subject to income-tax. The following observations of Kania, C.J., at page 76 may usefully be extracted :
'From this recital it only appears that the original money-lending transactions consisted of advancing loans on mortgages. They had come to an end with the sale of the properties under the directions of the court...... The fact that the properties are left in the hands of the Durbar, in my opinion, leads to no conclusion one way or the other. This is not a case where a money-lending sets apart a specified sum for his business and continues to keep an account of the properties as a part of the same business............ Under the circumstances of this case, I am unable to accept the view of the High Court that the burden of proof is one the Durbar to establish that the properties had been taken out of the money-lending business. In the absence of a finding by the Commissioner that these properties form part of the trading assets of the Durbar, the assessment cannot be upheld and the answer of the court should be that the Durbar is not liable in respect of the income of these properties for the year of assessment'.
Mahajan, J., makes observations much to the same effect at page 106 thus :
'It was a question of fact that had to be determined in this case whether the properties after they were purchased, or their income were still a part of the assets used by the Durbar in the money-lending business. If it was found that the income of these properties was still being used in money-lending operations or any operations connected with the money-lending business, the answer to the question would obviously be against the Durbar.'
The learned Judge proceeded to state at page 107 :
'Mere ownership of properties even if purchased from a source which originally was employed in the money-lending business, does not automatically make such properties part of such business, in the absence of any finding that the income of these properties was being used in that business or that those properties were subsequently treated as stock-in-trade of that business except perhaps in the case of banking institutions.'
Adverting to the question of onus of proof, the learned Judge says at page 106 :
'It may be that in determining the question of fact, under certain circumstances, an inference would be drawn under the provisions of section 114 of the Indian Evidence Act one way or the other. But no onus can be said to rest on the assessee to prove that he did some unequivocal act by which he withdrew these properties from his money-lending business and constituted them an independent investment.'
This decision is authority for the position that it is a question of fact in each case whether the properties purchased from a source which was originally employed in money-lending business, continued to be part of the stock-in-trade after the said purchase. It also lays down that the onus of proof is not on the assessee to establish that he had withdrawn the properties so purchased from the stock-in-trade.
Learned counsel for the Commissioner contends that this decision is based upon the fact that, after the purchase, the assessee ceased to do business and that if he continued to do money-lending business, the Federal Court would have come to a contrary conclusion. It is true that the assessee ceased to do business after the purchase and though that fact might have been one of the considerations that weighed with the learned Judges, they clearly accepted and laid down the principle that the question, namely, whether properties purchased in discharge of loans advanced in the course of money-lending business continued to be part of the stock-in-trade falls to be decided on the facts of each case, having regard to the considerations pointed out by the learned Judges.
A similar question arose in Gurucharan Prasad v. Commissioner of Income-tax, whether properties allotted to the assessee, who was a money-lender, in discharge of his debts were part of the stock-in-trade of the money-lending business. Bhargava, J., in holding that they did not, observed at page 51 :
'The assessee kept those properties with him for a period of 18 years. During this period, obviously, these properties or their value were not available to the assessee for carrying on his money-lending business. His retention of these properties for such a long period clearly indicates that he treated these properties as his own property which had been received by him in satisfaction of his debts due from Lala Lachhman Das. He did not convert the properties almost immediately into cash for the purpose of carrying on his money-lending business............ There is an further circumstance that, during all this period, the assessee received income from these properties but he never credited it in the loan account of Lala Lachhman Das which he should have done in case he was acting on the assumption that those properties were the stock-in-trade of his money-lending business and were not properties received by him in lieu of his debts due from Lala Lachhman Das.'
This judgment also indicates that the mere purchase of properties by a money-lender in discharge of his loans does not automatically lead to the conclusion that the properties so purchased formed part of the stock-in-trade of the money-lending business, but the said fact should be established by evidence.
In Virappa Chettiar v. Commissioner of Income-tax the Madras High Court lays down the same proposition. There, the assessee, a Nattukottai Chetti carrying on money-lending business in Singapore purchased one item of property in 1919 and another in 1924 and sold them in 1926-27. The Income-tax Officer, proceeding merely on the general presumption of Nattukottai Chetties purchasing and selling lands as part of their money-lending business, assessed the difference in prices as business profit. The learned Judges held that, in the absence of evidence showing that the land income and expenses were brought into the business accounts, there was no legal evidence to justify the assessment. At page 206, the learned Judges observed :
'In the present case there is no evidence afforded by the books that the income derived and the expenses incurred were included and made part of the firms business accounts.......... There is no evidence about what was done with the income. The books are not before the Income-tax Officer and there is nothing to show that the income and expenses were, as a matter of fact, brought into the partnership accounts.'
This decision also is in accord with the principles laid down in the decisions considered supra.
Where in part satisfaction of a mortgage decree, the mortgagee purchased the mortgaged property for Rs. 60,000 and six months later sold the same for Rs. 38,000 it was held by the Bombay High Court in Himatlal Motilal v. Commissioner of Income-tax that the loss on the sale was loss of capital invested in purchase of property and not an allowable business loss in the loan transaction. There, it was the converse case of an assessee setting up the plea that the loss was allowable business loss in a loan transaction. Rejecting that plea, Beaumont, C.J., says at page 161 :
'So far as the property was concerned, it seems to me that the mortgagees, having bought it, it became their absolute property; they were entitled to occupy it themselves, or to let it or to sell it, better at a profit, if they will get one, or at a loss.'
This decision also indicates that the mere fact that the source of the purchase is income of the money-lending business is not decisive on the question that the properties so purchased have become part of the stock-in-trade of the business.
Strong reliance is placed by the learned counsel for the Commissioner on the decision of the Full Bench of the Madras High Court in Chettiappa Chettiar v. Commissioner of Income-tax in support of the contention that the purchasing of lands in satisfaction of debts would automatically impress the property with the character of the stock-in-trade of the money-lending business. The observations relied upon are found at page 222 and they are as follows :
'Then as regards the second question, moneys realised by the sale of certain immovable properties, the finding of the Income-tax Officer is that these transactions took place as a matter of fact in the course of the business, that the properties were taken over with the intention of selling them and that the profit derived from the transactions as a whole including the sales was as much a profit of the firms business as that derived from its other money-lending transactions. The firm got these properties in discharge of debts due to it, re-sold the properties at a profit and the Income-tax authorities consider this as a profit derived from its business.'
Adverting to the argument of the learned counsel, the Full Bench proceeded to state :
'We do not think that any general rule can be laid down in these cases. One has to see what is the course of dealing and though the business is labelled as money-lending business, if as a matter of fact the profits were generally got by taking lands in satisfaction of debts due and selling them for profits later on, such profits must no doubt be considered as derived from such business and cannot escape taxation by saying that the profits have nothing to do with the business of the firm which was merely money-lending.'
These observations must be understood having regard to the facts of that case. The course of the dealings are described thus at page 216 :
'In the course of its business at Ipoh the petitioners firm generally advances money to its debtors on the security of their properties mostly rubber gardens in the Federated Malay States. When it finds that its debtors are not financially strong or that they are not in a position to repay their debts the firm generally takes over the properties secured in full or partial discharge of the loans. Thereafter the firm maintains the property until a favourable opportunity offers for its re-sale. In the meantime the expenses that it incurs on the maintenance of the properties are charged to its business account and receipts from the yield of the properties are taken as the receipts of the business and brought to its Adhayam account.'
It is, therefore, clear from the aforesaid facts that it was part of the scheme of the assessees business to purchase properties from debtors in discharge of debts, to sell them at a later stage for profit and in the meanwhile to treat them expressly as part of the stock-in-trade of the business. On the facts of that case, the Full Bench rightly held that the properties purchased became part of the stock-in-trade of the money-lending business. This decision, therefore, does not lay down any principle different from that stated by the other decisions.
Where a person, who was carrying on business as a money-lender, borrowed money for his money-lending business and lent it out to constituents and was obliged, in the course of business, to receive agricultural lands in repayment of his debts from such constituents, a Division Bench of the Madras High Court in Chellapa Chettiar v. Commissioner of Income-tax held that the assessee was entitled to a deduction of the interest paid by him also on so much of the capital borrowed by him for business purposes as is represented by the agricultural lands got in, under section 10(2) (iii) in computing the profits and gains of his money-lending business. In this case, both the assessee as well as the Commissioner assumed that the property purchased was part of the capital. On that basis, the assessee claimed deduction for interest on the capital borrowed by him represented by the agricultural lands purchased by him and the Commissioner contended that he was not entitled to any such deduction on the ground that the money was invested in agricultural lands, the income from which was exempt from income-tax under section 4(3)(viii) of the Act. The learned Judges held that the assessee was entitled to the deduction. This case does not purport to decide the question whether and under what circumstances property purchased by a money-lender in discharge of his debts becomes part of the stock-in-trade.
To sum up : the general principle is that it is a question of fact in each case whether a property purchased by a money-lender in discharge of a loan advanced by him has been made part of the stock-in-trade of this business. The burden is upon the Department to prove that fact though the onus may shift to the assessee having regard to other circumstances or presumptions. If it is a part of the stock-in-trade, the profit made in the purchase and sale of that property becomes taxable income. The incorporation of the property purchased with stock-in-trade may be effected by diverse ways. The value of the property may be added in the accounts to that of the assets of the business. The income from it and the expenditure incurred in respect thereof may be brought into the business accounts as cross-items. It may be mortgaged or otherwise charged to swell the capital of the business. It may be part of an integrated scheme of buying and selling systematically followed depending upon the ebb and flow of the tide of the market not only as a means of realisation of the debts but as a device to earn profits. The said dealings do not exhaust the modes of acquisition of properties by a money-lender. There may be honest cases of purchase of land in discharge of a loan for the purpose of investment in immovable property without any intention of making it a part of the assets of the business. There may also be cases, particularly during the days of depression when the prospects of money-lending business are bleak, when a money-lender may close his business and convert his cash, which is in the shape of loans, into immovable property or reduce his business to the minimum extent possible and invest his excess cash on hand or money lent on loans in immovable properties without any idea of bringing them into his business with the faint hope that in future he may again improve his business. It cannot, therefore, be predicated as a proposition of law that, whenever a money-lender purchases properties in discharge of loans to third parties, the said properties become part of the assets of the business. That question falls to be considered on the facts of each case.
In the present case, the Department has proved only two facts, namely, that the assessee purchased some items and sold them in some cases after 11 years and in others after more than 20 years. Though after the purchase, the assessee continued to do money-lending business and though the properties were of an appreciable extent, it has not been established that either the properties or the income therefrom and the expenditure incurred on them were brought into the business accounts. No part of the income from the properties was utilised for the business and no part of the income from money-lending was spent for the repair of the properties or for the payment of taxes in respect thereof. The only fact ascertained is that, after a long number of years in some cases covering a period of about a quarter of a century, the assessee sold the properties and increased his capital. On the aforesaid facts, the reasonable inference is that owing to the unparalleled depression in the market during those days -it is well known that many money-lenders closed their businesses completely and some reduced their capital to the minimum extent possible - the assessee had reduced his business, purchased properties from his debtors in discharge of his debts and kept them as investments. The fact that, after many years, particularly after the Second World War when conditions for increasing the business in money-lending became propitious, he sold some of his immovable properties, converted them into liquid cash and increased the capital of his business, is not sufficient to hold that, during the long period from the date of his purchase till the date of sale, he kept the said properties as part of the assets of the stock-in-trade of his business. The question is, did he, after purchase, treat the properties as part of the stock-in-trade of the business. There can only be one answer to this question and that is that he did not, for the simple reason that there is absolutely no evidence to prove that he did.
The Income-tax Appellate Tribunal further held that, in regard to another small item, the assessee was a dealer in lands as well. The learned counsel for the assessee did not question the correctness of this finding of the Tribunal.
We, therefore, answer the question in the negative. The respondent will pay the petitioners costs. Advocates fee Rs. 250.
Reference answered in the negative.