CHANDRA REDDY, C. J. - The questions referred to this court by the Income-tax Appellate Tribunal under section 66 (1) of the Indian Income-tax Act are :
'(1) Whether, on the facts and in the circumstances of the case, the proceedings initiated under section 34 for the assessment year 1950-51 were legal and
(2) Whether, on the facts and in the circumstances of the case, a sum of Rs. 13,879 being the profit in the sale of the land acquired in the course of carrying on of the money-lending business is profit from the business ?'
At the outset it must be mentioned that the first question was not argued before us, since a decision on the second question will serve the purpose of the assessee and also because the answer to the first question seems to be obvious, namely, that at the time of the original assessment, the assessing authority was not aware of the profit earned by the assessee from the transaction in question. It was only the second question that was debated before us.
The material facts necessary to appreciate the controversy that has arisen in this case may be narrated. The reference relates to the assessment year 1950-51. The assessee, who is an agriculturist, has also been carrying on money-lending business, for a few decades. In the course of the business, he lent some money to one Seshureddi, prior to 1923 and, in that year, it was found that a sum of Rs. 1,400 was found due by him. That swelled up to Rs. 4,534 by 1933. As the debtor could not repay the debt, a suit was filed and the assessee obtained a decree for a sum of Rs. 4,690 against the debtor and, in satisfaction of the decree, he took in 1934 a piece of land belonging to the judgment debtor. The judgment-debtors account was thus squared off and the assessees personal account was debited with a sum of Rs. 4,690 being the purchase price of the land.
When the circumstances were propitious, he sold the same parcel of land for Rs. 20,000 in the year 1949 and thus made a profit of nearly Rs. 15,000. As the concerned Income-tax Officer had no knowledge of this transaction at the time he made the assessment, he re-opened the assessment under section 34 of the Income-tax Act when he came to know of the profit made by the assessee.
It was contended on behalf of the assessee that the gain which he made out of the purchase of the land could not be regarded as a gain accruing from the money-lending business in which case alone the income could be made subject to tax.
The pleas of the assessee did not find acceptance with the Income-tax Officer with the result that he treated this amount also as taxable income.
On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer in the view that section 34 could be properly invoked and that the assessee was rightly assessed to tax.
The further appeal carried by the assessee the Tribunal was unsuccessful. The Tribunal took the view that since the sale proceeds again took the shape of money and promissory note and the money went to increase the stock-in-trade of the assessee and the promissory note went to increase the money-lending business of the assessee, it partook the character of gain from the money-lending business.
The question now for consideration is whether the nature of profit is correct. It is urged on behalf of the assessee that the land acquired by him was not made part of the stock-in-trade of the money-lending business and the subsequent sale of this property and the use of the sale price for the business could not make the property the stock-in-trade of the money-lending business and, consequently, the gain in question could not be brought to tax.
We are inclined to give effect to this argument. On the facts found it is clear that it was never treated as an asset of the money lending business of the assessee. It is plain from the statement of the case that as soon as the property was purchased in satisfaction of the decree, the account of the judgment-debtor was closed and a sum of Rs. 4,690 representing the purchase price was debited in the assessees personal account. The income from the land was blended with income from his other agricultural income, though it was entered in the same set of books wherein money-lending transactions also were entered, since the assessee got only one set of books for all his activities. The expenditure incurred for the improvement of this land was never brought into the business account and no part of the income from this property was utilised for the business. It is thus abundantly clear that throughout the period of fifteen years, the assessee treated this land as the property of his family and not as part of the stock-in-trade of the money-lending business. That being the situation the mere fact that the sale price was utilised for the purpose of increasing the capital of the business would not impress the property with the capital of the business would not impress the property with the character of the stock-in-trade of the money-lending business.
The instant case falls within the doctrine of Alapati Ramaswami v. Commissioner of Income-tax. That case is on all fours with the facts of this case except for the fact that there the assessee was a pure and simple money-lender, whereas, in the present case, the assessee is also an agriculturist. In the cited case, the assessee, in the course of his money lending business, advanced loans to several persons. As several of the debtors were unable towrope the advances, he took over their assets at a particular value and the debtors accounts were squared of. Later, when the prices of land were going up, he sold them and made considerable profits out of these transactions. The sale proceeds of the lands went in the purchase of other properties. The assessee continued to do the money-lending business with the increased capital. On these facts, a Bench of this court consisting of Subba Rao, C. J. (as he then was) and Kumarayya, J., held that there was evidence to prove that the properties formed part of the money-lending business of the assessee and, therefore, the excess of the realisations by sale of the properties over their cost to the assessee was not income liable to tax. Their Lordships dealt with this point exhaustively reviewing all the case law on the subject.
Reference was also made to the leading case on the topic, namely, A. H. Wadia v. Commissioner of Income-tax.
In similar circumstances, their Lordships of the Federal Court ruled that the property purchased by the Gwalior Durbar (the assessee) did not form part of the trading assets of the Durbar and, consequently, the assessment could not be upheld. The observations made by Kania, C. J., in the course of the judgment, are instructive :
'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-lender 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 on 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 from 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 the these properties for the year of assessment.'
The remarks of Mahajan, J., in the judgment are also pertinent in this enquiry :
'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.'
Again, the learned judge continued : '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.'
The Bench which decided Alapati Ramaswami v. Commissioner of Income-tax adverted to the decisions of other High Courts which contain similar propositions, and it is unnecessary for us to make a copious citation in this behalf.
The judgment of the Full Bench of the Madras High Court in Chettiappa Chettiar v. Commissioner of Income-tax does not really assist the Department because in that case it was found that the transactions in question 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. It also appears that the assessee firm charged to its business account the expenses that it incurred on the maintenance of the properties and receipts from the yield of properties were taken as the receipts of the business and brought to its adhayam account.
It is seen from the facts of that case that it was a part of the scheme of the assessees business to purchase properties from the debtors in satisfaction of the debts, to sell them at a later stage for profit and in the meanwhile to treat them as part of the stock-in-trade of the business. Therefore, the Full Bench of the Madras High Court did not lay down any principle different from that embodied in Alapati Ramaswami v. Commissioner of Income-tax. The present case falls within the rule stated in the later case and, in fact, it is an a fortiori case.
For these reasons, we answer the second question in favour of the assessee. The assessee will get his costs from the Department. Advocates fee Rs. 250.
Reference answered accordingly.