1. Two questions have been referred by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922. They are:
' 1. Whether, on the facts and circumstances of the case, it could be held that the assessment made under Section 34(1)(a) of the Indian Income-tax Act, 1922, was valid ?
2. Whether, on the facts and circumstances of the case, it could be held that the surplus on the sale of land arose out of an adventure in the nature of trade and as such was rightly brought to tax '
2. The reference relates to the assessment year 1954-55, the relevant previous year being the financial year ending March 31, 1954. The assessee has been assessed in the status of an association of persons.
3. On August 19, 1946, four persons, Baijnath, Hari Shanker, Panna Lal and Ratan Lal, jointly purchased a plot of land measuring 33,226 square yards from one L. C. Jain for Rs. 1,50,000 in the joint names of Baijnath and Hari Shanker. The four purchasers contributed almost equally towards the purchase money. Thereafter, the plot of land was divided into about 95 plots of different sizes. The plots were sold by auction on two occasions, one in 1947, and again in 1950, and were sold to different parties resulting in a surplus being realised over the purchase price. The sale deeds were registered on various dates between 1947 and 1957, the first sale deed being registered on October 6, 1947.
4. It may be mentioned at this stage that in the year 1952, Ratan Lal died and his place in the group of joint purchasers was taken by his son, L. C. Jain.
5. For the assessment year 1948-49, the Income-tax Officer taxed the surplus of Rs. 71,155 under the head ' capital gains '. But, subsequently, proceedings were initiated under Section 34 of the Indian Income-tax Act for bringing to tax that surplus as business income. Proceedings were also initiated under Section 34(1)(a) for the assessment years 1949-50 to 1951-52. These assessment proceedings were challenged by two writ petitions in this court, in respect of the assessment year 1948-49, on the ground that the service of the notice under Section 34 was not valid and in respect of the remaining assessment years on the ground that the proceedings under Section 34(1)(a) were invalid. The pleas found favour with Manchanda J. who heard the writ petitions, and the proceedings were quashed and the Income-tax Officer was prohibited from continuing those proceedings. The Income-tax Officer, therefore, dropped the proceedings for the assessment years 1948-49 to 1951-52.
6. For the assessment year 1954-55, with which we are concerned here, the Income-tax Officer issued a notice under Section 34(1) on January 17, 1958. The assessee attempted to show that the surplus arising during the year from the sale of the plots was not taxable as its business income. The Income-tax Officer did not agree, and on November 30, 1952, made an assessment order treating the surplus as the assessee's taxable income. On appeal by the assessee, the Appellate Assistant Commissioner took the same view. The assessee proceeded in second appeal, and the Income-tax Appellate Tribunal has dismissed that appeal. And now this reference has been made at the instance of the assessee.
7. On the first question referred, learned counsel for the assessee contends that the notice under Section 34(1) having been issued within 4 years from the end of the assessment year it was a case under Clause (b) of that provision, and inasmuch as the assessment order was made more than four years after the end of the assessment year it was barred by limitation. The contention of learned counsel is plainly without substance. Merely because a notice under Section 34(1) is issued within 4 years of the end of the assessment year does not necessarily imply that the proceeding is one under Clause (b). It could as well be a case under Clause (a). At the relevant time, Section 34(1) declared that in cases falling under Clause (a) the notice under that sub-section could be issued at any time within' 8 years of the end of the assessment year. Whether a case falls under Clause (a) or Clause (b) will not depend upon the point of time when the notice under Section 34(1) is issued. It will depend upon whether the considerations leading to the issue of the notice are those mentioned in Clause (a) or Clause (b). TheIncome-tax Officer enjoys two distinct and mutually independent jurisdictions under Section 34. He may resort to one or the other depending upon whether the conditions precedent exist upon which jurisdiction is founded. If he has reason to believe that by reason of the omission or failure on the part of the assessee to make a return of his income for the year or to disclose fully and truly material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that assessment year or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, he should proceed with reference to Clause (a). If notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act or that excessive loss or depreciation allowance have been computed he should proceed by reference to Clause (b). Reference may be made to what was said by one of us in Raghubar Dayal Ram Kishan v. Commissioner of Income-tax. Now, if the case falls under Clause (a) the notice can be issued at any time within eight years, and under Clause (b) it can be issued at any time within four years, of the end of the assessment year. The two periods of limitation commence from the same point of time, that is to say, the end of the assessment year. They run concurrently for four years. Upon the expiry of four years the period of limitation expires in respect of cases falling under Clause (b), while it continues to run for another four years in cases falling under Clause (a). The mere circumstance that a notice under Section 34(1) has been issued within four years of the end of the assessment year is, we think, of no significance in determining whether it has been issued under Clause (a) or Clause (b).
8. We have been referred by learned counsel for the assessee to the decision of Manchanda J. in Writ Petition No. 89 of 1962 (decided on May 18, 1962), where notices under Section 34(1) for the assessment years 1949-50 to 1956-57 were challenged by the assessee. It is pointed out that in respect of the notice for the assessment year 1954-55, the learned judge observed that as the action had been taken within the period of four years the provisions of Section 34(1)(b) would be attracted. On that basis he held the notice to be valid. Learned counsel urges that this finding operates as res judieata and is binding on us. It does, not appear that this plea was raised before the Tribunal in the proceedings which have given rise to this reference. What was urged there was that the same reasoning should be adopted by the Tribunal as prevailed with Manchanda J. and it should proceed on the basis that action under Clause (a) could be taken only after the expiry of four years. This contention cannot be construed as a plea of res judicata. A plea of res judicata amounts to requiring the court not to try or decide a certain issue but to adopt the decision on that issue already rendered earlier by a court 01 competent jurisdiction. The contention which was raised before the Tribunal invited a fresh decision of the issue although on the same lines as that rendered in the writ petition. Moreover, Manchanda J. did not, while disposing of the writ petition, make any final order against the income-tax department for the assessment year 1954-55. Indeed, the final order was against the petitioner. A special appeal to a Division Bench lay against this order but having regard to the refusal of relief to tKe assessee it was not necessary for the department to appeal nor would it have been competent to do so. On this ground also, the plea of res judicata now raised before us must fail.
9. The next contention on behalf of the assessee is that the notice under Section 34(1) was in the form prescribed for the years before 1948 and, therefore, the notice was invalid. The submission is that the notice contained the words ' definite information ' according to the language of the section as it stood before it was amended by the Income-tax and Business Profits Tax (Amendment) Act, 1948. Those words were dropped in Section 34 consequent to the amendment. In our opinion, the argument proceeds upon a pure technicality without affecting the validity of the notice.
10. It is said that the notice, for it to be taken as a valid notice under Section 34(1)(a), should have contained a recital of the conditions contained in that clause; otherwise it cannot be known that those conditions were considered. That submission also has no substance. It is now settled law that in the case of a notice or order resulting from the exercise of power which depends upon the satisfaction of a condition precedent the absence of the recital of such satisfaction in the notice or order will not invalidate the notice or order. Whether or not the condition precedent has been satisfied is a matter turning on proof. The recital, or absence of it, in the notice or order as to the satisfaction of the condition precedent affects the burden of proof. If there is no recital in the notice or order that the condition precedent has been satisfied, the onus lies upon the authority relying on the notice or order to establish that the condition precedent has been satisfied. But if the notice or order contains such recital, the onus lies on the party challenging the notice or order to show by evidence that the recital is incorrect. Further, it is not necessary that the notice should indicate whether it is issued under Clause (a) or Clause (b) of Section 34(1). Reference may be made to Kantamani Venkata Narayana & Sons v. Ist Addl.Income-tax Officer. It is also not possible to say that the assessee could have been misled by anything stated in the notice under Section 34(1), The assessee had not filed a return of its income for the assessment year 1954-55, and was aware of that. The notice could only have been a notice on account of the failure on the part of the assessee to file a return.
11. Learned counsel for the assessee next contends that the service of the notice under Section 34(1) was invalid because it was not served on the principal officer of the association of persons. It appears that the notice was served by the Income-tax Officer on all the members of the assessee. That is sufficient in law, as was held by the Supreme Court in M, M. Ipoh v. Commissioner of Income-tax.
12. As none of the contentions raised before us in respect of the first question referred by the Tribunal succeed, we answer the question in the affirmative.
13. The second question referred by the Tribunal raised the point whether the surplus realised on the sale of land could be said to arise out of an adventure in the nature of trade. Section 10 of the Indian Income-tax Act, 1922, provides that tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. The expression ' business' has been defined by Section 2(4) to include ' any adventure in the nature of trade '. What is ' an adventure in the nature of trade ' has not been defined in the Act, but innumerable cases have arisen where the courts were called upon to decide whether the assessee had engaged in an adventure in the nature of trade. It has always been ' a matter of impression' with the court whether a particular transaction is in the nature of trade or not. A host of considerations come into play, and they have been, if we may say so with respect, admirably set out by the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax.
14. The case of the assessee before the Tribunal was that the land was purchased not with the intention of resale but in order to construct residential buildings for the members of the association of persons, that all the four persons agreed to contribute equally to the purchase price of the land and, therefore, each of them had equal rights in the land, that building plans were submitted to the Cantonment Board in respect of the construction of four residential bungalows in the year 1946, soon after purchase of the land, and that circumstances subsequently changed obliging the assessee to sell the land after dividing it into plots. The changed circumstances,according to the assessee, arose from the land being situated in the Cantonment area and the possibility that the authorities could assume possession of the land without giving any compensation, that the title of the land was not free from doubt, and that building material was not easily available in the market and the construction of the houses would involve much trouble and that even if the houses were constructed there would be no guarantee that they would be available for the personal residence of the members as the Rent Control Order had come into force. In the circumstances, the assessee, it is said, started searching for buyers of land and finally appointed Messrs. P. Stanwill & Co., as auctioneers and, thereafter, the plots of land were auctioned and sold.
15. After hearing the parties, the Tribunal expressed the opinion that the purchase of the land, its development, its parcelling out into plots for constructing residential houses and the expenditure of a huge amount thereon constituted an organised activity. It observed that the appointment of an auctioneer for entering into private negotiations for sale of the plots constituted a well laid out scheme for the sale of the plots. It did not find any circumstance which could be said to have compelled the assessee to part with the land. Even if the assessee had not embarked upon an adventure in the nature of trade when it purchased the land, it must be said to have done so, the Tribunal said, in early 1947 when it made efforts to dispose of the land at the best available price. The price which the assessee got for the plots was very lucrative. Upon all the facts taken together, the Tribunal held that the transactions constituted an adventure in the nature of trade and, therefore, the surplus realised upon the sale of the plots was rightly brought to tax.
16. Now the Tribunal has found that after the purchase of the land no circumstances arose which could have compelled the assessee to part with the land. Evidently, it did not accept the case of the assessee that after purchasing the land the assessee found that it was cantonment land which the cantonment authorities could resume at any time without payment of compensation, that the title of the land was doubtful and that difficulties in procuring material and undertaking the construction of the houses greatly discouraged the members from building houses for themselves and that there was no guarantee that the houses would be available for their personal residence. Apparently, the Tribunal found no material to support these allegations. Once the case set up by the assessee of a change in the circumstances is excluded, the matter acquires the merit of simplicity. Here, we have four persons coming together for the purpose of jointly purchasing land. It is a large tract of land, almost seven acres, situated within the cantonment limits of a town. They are men of disparate means whose annual income, according to the department and not disputed by theassessee before the Tribunal, was about Rs. 50,000 in the case of the most affluent among them and Rs. 5,000 in the case of two of them. Yet, according to the assessee each one of them must be taken to have intended to construct a residential building for himself over as much as about 1 3/4 acres of land. There is evidence that subsequently, Ratan Lal, whose annual income was said to be about Rs. 15,000, built a house but the plot on which it was built had an area of only 330 square yards. Pannalal and Baijnath, whose annual income was said to be below Rs. 5,000, purchased plots of 650 square yards and 700 square yards, respectively, but sold them away without building any house thereon. There is nothing to show that the ownership of the land brought them any income or that they derived any personal enjoyment merely by virtue of its ownership. On the contrary, soon after the land was purchased in August, 1946, they entertained within a few months, in early 1947, an offer from the Posts and Telegraphs Department to purchase the land. Shortly after, the land was divided into about 95 building plots and developed by the construction of roads, lanes and culverts after incurring an expenditure of as much as Rs. 35,977. An auctioneer, Messrs P. Stanwill & Co., was appointed lor auctioning and selling the land. In other words, there was an attempt to find purchasers and sell the land at the highest price available. The auctions took place in 1947 and subsequently in 1950. the first sale deed being registered in October, 1947. There was a continuing attempt to realise the property within a short time of its acquisition. The sales which took place from October, 1947, to January, 1948, were sold for about Rs. 1,66,000 and the plots so disposed ot represented about one-eighth of the total area of the land. All these facts were before the Tribunal, and when it came to the finding that from the very outset the assessee was engaged in an organised activity with a view to purchase and sell land at a profit and that it embarked upon a well laid out scheme for the sale of the plots it cannot be said, in our opinion, that the finding is without evidence. Having regard to the material before it, the Tribunal, we think, rightly held that it was an adventure in the nature of trade.
17. Reliance has been placed by the assessee on C. H. Rand v. Alberni Land Co. Ltd. In that case, the assessee-company was incorporated with the primary object of acquiring, managing and developing with a view to ultimately selling certain lands in British Columbia which were held in trust for various persons who were interested therein as owners, joint owners or as trustees. The company had power to deal in other land, but it had not at any time exercised that power. The share capital of the company was fixed at a nominal amount solely to facilitate division among the beneficiaries and was not determined by reference to the value of the landacquired. All the ordinary shares had been allotted in consideration of the conveyance of the land to the company and these shares had been continuously held by the original allottees or their representatives. Working capital had been provided by the issue to ordinary shareholders of preference shares for cash. Subsequently, the company created and allotted to persons other than the ordinary shareholders deferred shares in return for service which enhanced the value of the land. That eminent judge, Rowlatt J., held that the assessee-company had done no more than to provide the machinery by which the private land owners were enabled, under the peculiar circumstances of their divided title, to properly realise the capital of the property which they held in the lands in question and that, therefore, it was not income or the proceeds of trade. The decision turned on the consideration that the assessee-company had merely acted as a medium for enabling the owners of the land to dispose of their property. It could not be said that the assessee-company had entered into the activity of buying and selling the land as its own commercial venture. And so far as the original land owners are concerned, there is no evidence that they acquired the land solely for the purpose of selling it later at a profit.
18. The assessee also refers to Commissioners of Inland Revenue v. Reinhold, Leeming v. Jones, Saroj Kumar Majumdar v. Commissioner of Income-tax, and Janki Ram Bahadur Ram v. Commissioner of Income-tax, and urged on the basis of what was decided in those cases that the purchase of property with a view to resell it does not necessarily make it an adventure in the nature of trade. Now, that may be true so far as it goes without anything more. But, it seems to us that if the intention to resell the property is accompanied by conduct and circumstances which are usually found in a commercial or trading activity dealing in such property, the transaction could be regarded as an adventure in the nature of trade. The test employed by Clyde L.P. in Commissioners of Inland Revenue v. Livingston is, we think, most apposite here. He pointed out that the test was ' whether the operations involved in it (the venture) are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made. ' In the instant case, the division of the land into a number of suitable building sites, its development by the construction of roads, lanes and culverts, and the appointment of auctioneers to sell the plots at the highest price available, all constitute definite evidence of that kind.
19. For the assessee, reliance is placed on Commissioner of Income-fax v. P. K. N. Co. Ltd. But, the primary object of the assessee in that case wasto take over the assets of the firm, to carry on the business of planters and to earn profits by the sale of rubber. The acquisition of the estate, it was found, was not for the purposes of carrying on business in real estate. It was that the incidental sale of uneconomical or inconvenient plots of land could not convert what was essentially an investment into a business transaction in real estate.
20. And in Janki Ram Bahadur Ram our attention has been invited to the observation that a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. But it was also observed that an inference that the transaction is an adventure in the nature of trade ' would arise where a commodity is purchased and subdivided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture. '
21. In Saroj Kumar Majumdar, which was also placed before us, the assessee, who was a prosperous businessman, agreed to purchase a plot of land with a view to building a residential house for himself and constructing a workshop. The land was under acquisition by the Government. After a year the assessee changed his mind and assigned his rights under the agreement to a third party at a profit. The Supreme Court held that in the absence of any evidence to show that the isolated transaction constituted an adventure in the nature of trade it should be regarded as on capital account. The facts make it clearly distinguishable.
22. Another case to which we have been referred is Janab Abubucker Sait v. Commissioner of Income-tax. And that is also distinguishable. There, agricultural land purchased by the assessee was subsequently sold at a profit. The Supreme Court held that the transaction was not an adventure in the nature of trade. It adverted to the circumstance that there was a pride of possession in respect of agricultural land and to the absence of any conversion of the land into housing sites at the time of its resale.
23. Finally, the assessee relies on Bhogilal H. Patel v. Commissioner of Income-tax. The assessee, it appears to us, can derive no help from it. It was found there that the intention of the assessee both at the inception and subsequently was to treat the 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 those plotsfrom 1945 to 1949 the assessee did not evince any intention to deal with them by way of business. He did not alter the nature of the land while it was in his possession. During the time 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. When he sold the land it was because he was indebted and wanted to wipe off all his liabilities.
24. We are of opinion that in the instant case the assessee engaged in an adventure in the nature of trade and that, therefore, the surplus profits earned during the previous year relevant to the assessment year under consideration were taxable. The second question referred is answered in the affirmative.
25. Before concluding, we may refer to a submission made on behalf of the assessee. It is to the effect that as Ratan Lal died in 1952 the association of persons which purchased the land must be taken as dissolved, and that when Ratan Lal's son, H. C. Jain, joined the surviving members it was a new association of persons which came into existence. It is contended that the finding of the Tribunal to the contrary is erroneous. The argument is that, as H. C. Jain cannot be said to have acquired the land, there was no question in this case of considering whether the land had been acquired and subsequently disposed of with the sole intention of making a profit. Now, the Tribunal has found that the son was admitted in the place of his deceased father and the association of persons did not dissolve but continued with merely a change in its constitution. Neither in the books of account maintained by the original association of persons nor otherwise was it ever treated as dissolved on the death of Ratan Lal. In the circumstances, the appeal was rightly decided on the basis that the association of persons continued throughout.
26. Accordingly, both the questions referred by the Tribunal are answered in the affirmative. The Commissioner of Income-tax is entitled to his costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.