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Heritage Estates (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)11ITD519(Mum.)
AppellantHeritage Estates (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
1. the assessee has filed this appeal on various grounds mainly relating to the assess ability of compensation received from the maharashtra government in february 1979 in respect of 181 acres of land at oshiwara near jogeshwari, compensation received from the bombay municipal corporation for a piece of land at parel and balance of sale proceeds received from oshiwara land development corporation (p.) ltd. in respect of 542 acres of land, as business income.2. at the time of hearing on an earlier occasion, i.e., on 28-6-1984, the counsel for the assessee had sought leave to take some additional grounds challenging the validity of the assessment. the grounds being purely legal were admitted. there are as many as eight additional grounds. for the sake of convenience, we will take up the.....
Judgment:
1. The assessee has filed this appeal on various grounds mainly relating to the assess ability of compensation received from the Maharashtra Government in February 1979 in respect of 181 acres of land at Oshiwara near Jogeshwari, compensation received from the Bombay Municipal Corporation for a piece of land at Parel and balance of sale proceeds received from Oshiwara Land Development Corporation (P.) Ltd. in respect of 542 acres of land, as business income.

2. At the time of hearing on an earlier occasion, i.e., on 28-6-1984, the counsel for the assessee had sought leave to take some additional grounds challenging the validity of the assessment. The grounds being purely legal were admitted. There are as many as eight additional grounds. For the sake of convenience, we will take up the additional grounds first. The counsel for the assessee has grouped the additional grounds into four effective grounds. It is contended that : (i) the order of the assessment made by the ITO under Section 143(3)/144B of the Income-tax Act, 1961 ('the Act') is barred by limitation ; (ii) the assessment order is invalid as the ITO had prepared and forwarded two draft assessment orders, which is against law ; (iii) the assessment order is invalid as the ITO had completed the same without complying with the mandatory directions of the IAC under Section 144B(4) ; (iv) the assessment order is invalid as the time taken in the proceedings, commencing from the date the ITO forwarded the draft assessment order to the assessee and ending with the receipt of the IAC's directions under Section 144B(4) by him, exceeded 180 days.

3. The assessee is a company. The proceedings relate to its assessment for the assessment year 1979-80, for which the previous year is the financial year 1978-79. Ordinarily, as laid down in Section 153(l)(a)(iii) of the Act, the assessment could be completed on or before 31-3-1982. However, the provisions of Section 144B were admittedly applicable in this case. The ITO had forwarded the draft assessment order to the assessee on 24-3-1982 and had received the IAC's directions under Section 144B(4) on 25-9-1982. The assessment was completed on 27-9-1982. It is pertinent to mention that the ITO had prepared another draft assessment order, which he had forwarded to the assessee on 27-3-1982, and had, while completing the assessment on 27-9-1982, evidently not done anything in pursuance of the IAC's following directions under Section 144B(4) : 3. (vi) The next objection is against not allowing deduction in respect of short term capital loss of Rs. 39,150. In this connection, the ITO has mentioned that the deduction will be given under Section 154 on production of proper evidence. The remark of the ITO on this point is not proper. The assessee has, however, not furnished details regarding short-term capital loss during Section 144B proceedings. The ITO should obtain details of short-term capital loss before completing the assessment. He should give a categorical judgment for allowing or disallowing loss.

4. As stated above, the counsel for the assessee has challenged the validity of the assessment by raising additional grounds. It is stated that in terms of Explanation l(iv) to section 153, the time to be excluded from the ordinary period of limitation of two years is the time taken between the two dates, viz., the date when the ITO forwarded the draft assessment order to the assessee and the date on which he received the IAC's directions subject to a ceiling of 180 days. Since, according to him, the time taken in this regard is more than 180 days, the assessment could have been completed on or before 25-9-1982. For this purpose, Shri Ajay Thakore has given us three or four methods of calculation of time by pointing out to the fact that the assessment is barred by limitation by two to five days. In support, reliance is placed on the instruction issued by the CBDT being Instruction No. 1167 (XXIV/l/14-Sections 144A and 144B of the Income-tax Act, 1961 and clarification regarding). For the purpose of showing that the ITO could not have prepared and forwarded more than one draft assessment order and that time exceeding 180 days could not have been taken in these proceedings, the counsel has strongly relied on the Delhi High Court's decision in the case of Sudhir Sareen v. ITO [1981] 128 ITR 445.

Inviting our attention to the draft assessment order, the IAC's directions under Section 144B(4) (quoted above) and the final assessment order completed on 27-9-1982, Shri Thakore submits that the ITO has evidently completed the assessment without doing anything in compliance with the IAC's directions, perhaps for want of time. This, according to him, has made the assessment order invalid.

5. Strong reliance has been placed on the order of the Commissioner (Appeals) by Shri Roy Alphonso, the senior departmental representative on behalf of the revenue; According to him, the plain reading of Section 153(l)(a)(iii), along with Explanation 1(iv), makes it clear that there is no time limit laid down in that section or in any other section regarding time to be taken from the stage of forwarding the draft assessment order to the assessee and the receipt of the IAC's directions under Section 144B(4) by the ITO. The expression within the brackets in the Explanation 'not exceeding 180 days' refers to a ceiling on the maximum time that could be excluded from the ordinary time limit for completion of assessment, i.e., two years. According to the departmental representative, whenever time taken in this regard is more than 180 days, the period of 180 days alone is to be excluded from the ordinary time limit of two years, which would mean that the time limit for completion of the assessment in such a case would stand extended by 180 days. The Board's instruction, relied upon by the assessee's counsel, supports his reading of the section rather than that of the assessee's counsel. If so calculated, the last date for the completion of assessment in this case was 27-9-1982 and the assessment has been completed on that date. Fairly admitting that the Delhi High Court has held in its decision in Sudhir Sareen's case (supra) that the ITO has to prepare and forward only one draft assessment order, the departmental representative points out that in this case the so-called second draft assessment order is not really a draft assessment order.

What has happened is that while preparing the first draft assessment order, the ITO had omitted to mention that penal provisions of Section 273(a) and Section 271(l)(a) of the Act are attracted. This has been mentioned as a finding in the second draft order. In other words, the second draft assessment order is in the nature of a rectification of the first draft assessment order. In any case, the same, if considered improper, may be ignored. This fact by itself does not make the assessment order invalid. As regards the allegation that the ITO did not comply with the directions of the IAC, it is submitted that the ITO has done it according to his understanding of the IAC's directions. In case, it is felt that his understanding of the IAC's directions is not correct, he may be directed to do so after giving him clear guidelines.

6. Having heard the parties and after carefully going through the provisions of Section 144B(4) and Sub-section (l)(a) and Explanation 1 of Section 153, we find that Section 153(l)(a)(iii), which is applicable for the year under appeal, provides for a time limit of two years from the end of the assessment year, i.e., 31-3-1980. This means that the assessment for the year under appeal could have been completed on or before 31-3-1982 in the normal course. Explanation 1 to Section 153 further provides that in computing the period of limitation, time taken in various proceedings mentioned in various clauses shall be excluded. There is no ceiling for the time to be excluded from the period of limitation in any clause other than Clause (iv) and this is, according to us, for good reason. In the other clauses, time to be excluded is referable to some act of omission or commission wholly or partly to the proceedings before agencies over which the income-tax department has no control such as, the Courts, Settlement Commission, auditors. The Legislature's anxiety has been that the ITO assessing officer should have full period of two years for completing the assessments at his disposal. There is a ceiling of 180 days for the time to be excluded under Clause (iv), because under this clause time is taken not by an outside agency but by the ITO and the IAC, who are officers of the income-tax department and they cannot be allowed to use this clause to overcome the period of limitation by their own default.

In other words, if they take more than 180 days in these proceedings, they will be cutting into the time of ordinary period of limitation of two years available to the assessing officer. If considered in this background, it becomes clear that the time to be excluded under Explanation l(iv), relevant for the purpose of this appeal, is actually time taken in these proceedings by the ITO and the IAC subject to the ceiling of 180 days. Thus, the time so taken subject to 180 days will be available to the ITO for completing the assessment over and above the ordinary period of limitation of two years. The assessment was, therefore, to be completed and has been completed on 27-9-1982 and is, therefore, in time. We have very carefully gone through the Board's instruction supra. Other paragraphs of the instruction are general. The illustration given clearly shows that the Board has also understood the provisions in the same manner in which we have understood. In the illustration given, copy of the draft assessment order for the assessment year 1975-76 was forwarded on 10-3-1978 and the directions from the IAC were received on 6-8-1978. The time taken in these proceedings, thus, amounted to 149 days. Excluding the period of 149 days from the ordinary period of limitation of two years, the last date by which the assessment could be completed would be 27-8-1978. The Board has calculated the period in a different manner but the result is the same. It has taken that the ITO having forwarded the draft assessment order on 10-3-1978, the period of limitation stopped running on that date. The ITO had, thus, with him 21/22 days to complete the assessment. The time started tuning again from 6-8-1978, when the JTO received the IAC'S instructions so much so that he could complete the assessment on or before 27-8-1978. We fail to understand how the Board's instructions {supra) support the assessee's contention.

7. We are inclined to accept that the second draft assessment order is in the nature of rectification and is not an independent draft assessment order. The Delhi High Court's decision in Sudhir Sareen's case (supra) is, thus, not applicable. We must frankly admit that we are unable to find any support from the above decision of the Delhi High Court for the view that if such proceeding's take more than 180 days, the order of the assessment becomes invalid. As regards the last contention, we accept the submission of the assessee's counsel that the ITO should have given a hearing to the assessee and applied his mind to the question of allowance or disallowance of the assessee's claim for short-term capital loss as per the IAC'S directions quoted above, which were binding on him in terms of sub Section (5) of Section 144B.However, this, to our mind, indicates that either his understanding of the directions is incorrect or that he was running against time and did not comply with the directions. In either event, this lapse on the part of the ITO does not invalidate the assessment. Accordingly, we hold that the order of the assessment is valid.

8. Coming to the main ground on which the appeal has been filed before us, the facts are that the assessee was registered as a company under the Companies Act, 1956, on 11-6-1975. During the accounting period, the assessee's authorised and paid-up share capital was for the amount of Rs. 5,00,000 and Rs. 1,00,200, respectively. The entire share capital was subscribed and paid-up by Byramjee Jeejeebhoy (P.) Ltd. Thus, the assessee was a 100 per cent subsidiary of Byramjee Jeejeebhoy (P.) Ltd. An agreement was entered into between the assessee and the parent company on 1-11-1975 to the effect that some of the assets and liabilities of the parent company were transferred to the assessee at book value, i.e., Rs. 17,630. The parent company held extensive lands in and around the city of Bombay. It had entered into an agreement dated 25-1-1964, for the sale of land measuring 723 acres at Oshiwara near Jogeshwari to New Swastik Land Development Corporation, a partnership firm. Out of these 723 acres, 181 acres of land were notified by the Government of Maharashtra on 22-4-1960 for acquisition under the Land Acquisition Act, 1894, There was a supplementary agreement on 29-7-1970 between the parent company and the New Swastik Land Development Corporation to the effect that 181 acres of land sought to be acquired by the Government of Maharashtra were excluded from the agreement dated 25-1-1964, in consideration of which the firm was to be given one-third of the compensation, when fixed and received from the Government in respect of 181 acres of land sought to be acquired by the Government of Maharashtra. The sale consideration for the balance of 542 acres of land was, accordingly, reduced to Rs. 18.92 lakhs only. By virtue of the agreement dated 1-11-1975, the assessee got these 181 acres of land from the parent-company, subject to the acquisition proceedings in progress before the Government of Maharashtra in respect thereof. In February 1979, the assessee received an amount of Rs. 99.16 lakhs by way of compensation from the Government of Maharashtra in respect of 181 acres of land acquired by the Government of Maharashtra. Out of this amount, the assessee had paid an amount of Rs. 32.7 lakhs, to Oshiwara Land Development Corporation (P.) Ltd., being the successor-in-interest to Swastik Land Development Corporation, and an amount of Rs. 15,61,083 in respect of the balance of 642 acres of land originally agreed to be sold by the assessee to New Swastik Land Development Corporation.

9. The parent company had also a land measuring 3,257 sq. yds. at Parel in Bombay City. This land was acquired by the Bombay Municipal Corporation by a resolution dated 20-6-1964. The cost in respect of this land and the building thereon and legal expenses pertaining thereto amounted to Rs. 87,561 as per the books of the parent company.

During the accounting period, the assessee received a compensation of Rs. 1,89,508 from the Bombay Municipal Corporation in respect of this land.

10. The ITO for the detailed reasons mentioned by him in the assessment order, has proceeded to tax the entire surplus out of the compensation and sale proceeds received in respect of the Oshiwara land after deducting the cost thereof, as well as the Parel land, amounting to Rs. 82,91,400 as business income of the assessee as detailed under :1. Compensation received from the Government Rs. Rs. of Maharashtra in February 1979 in respect Jogeshwari.

99,16,000 Less : Compensation paid to Oshiwara Land Development Corporation (P.) Ltd. 32,70,000 66,46,000 respect of 542 acres.

15,61,083 82,07,083 land.

1,89,508 Rs. (c) Legal expenses 23,303 87,561 1,01,947 82,91,400 The main reason for taxing this surplus as business income was the rinding of the ITO that the transaction by the assessee was clearly in the nature of business.

11. The assessee appealed before the Commissioner (Appeals) against the order of the ITO in this respect. It was the case of the assessee before the Commissioner (Appeals) that the assessee was an investment company and the amounts realised by the assessee were by way of realisation of investments and as such were capital receipts. The assessee as well as the parent company had always been treated as an investment company by the department. As the property in question was already under acquisition, there was no question of any dealing in it.

The assessee was not treated as a dealer in respect of any other assets and the profits on sale of land had been assessed as a capital gain all along. The assessee-company was not formed with the idea of taking over certain assets of the parent company and dealing with them, but mainly for administering these assets. The Commissioner (Appeals) took note of the articles and memorandum of association of the assessee-company, which authorised the assessee to carry on business. The Commissioner (Appeals) upheld the action of the ITO on the basis of the articles and memorandum of association and the agreement between the assessee and the parent company, repetition of sale of certain properties year after year and finally, the intention of the assessee as could be ascertained from the nature of dealings to make maximum profits out of the transaction.

12. The assessee has filed a second appeal before the Tribunal against the order of the Commissioner (Appeals) upholding the treatment of the amount of Rs. 82,91,400 as business income. The learned representative for the assessee, in support of the grounds of appeal, has proceeded to point out that the estate was originally held by the family of Sir Byramjee Jeejeebhoy Bart. Later on, for proper administration of the estate, the entire property was transferred to Byramjee Jeejeebhoy (P.) Ltd. Owing to certain compelling domestic circumstances in this family, the present assessee-company was incorporated with a view to take over and administer a part of the estate efficiently. The part of the estate belonged to one branch of the family. Neither the parent company nor the assessee had at any time indulged in any business activity either in the past or even during the accounting period. The agreement to sell in respect of 542 acres of land to New Swastik Land Development Corporation by the parent company, was in the process of gradual realisation of the assets of the parent company. The acquisition of 181 acres of land at Oshiwara was by the statutory action taken by the Government of Maharashtra under the Land Acquisition Act for some public purposes. Even the acquisition of 3,257 sq. yds. of land at Parel was similarly acquired by the Bombay Municipal Corporation for some public purposes. The entire net receipts of Rs. 82,91,400 had accrued to the assessee during the previous year not as a result of any business activity on the part of the assessee but either as a result of the acquisition proceedings initiated by the Government of Maharashtra and the Bombay Municipal Corporation and the sale proceeds of the part of the asset agreed to be sold by the parent company a decade and a half before the incorporation of the assessee company. It was submitted by the learned representative that the matter had come up earlier before the Tribunal for the assessment year 1976-77 in IT Appeal No.1352 (Bom.) of 1980 decided by the Tribunal on 14-3-1981, where the question was regarding the ascertainment of the capital gains on the transfer of certain land. The departmental authorities had not treated the transaction for that assessment year as a business venture. But it was treated as a capital transaction resulting in a capital gain. The only dispute was, what was the cost of the land as on 1-1-1964.

Further, our attention was invited by the learned representative to the assessments made by the same ITO for the assessment years 1976-77, 1977-78 and 1978-79, where the assessee has been treated to be an investment company by describing it as such. Even during the accounting period, the assessee had not indulged in any business activity. The learned representative has, in this connection, referred us to the dicta laid down by the Supreme Court and the various High Courts in the following casesCIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC), Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC), Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC), G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC), Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC), CIT v.Radheshyam R. Morarka [1981] 127 ITR 111 (Bom.) and Ch. Atchaiah v. CIT 1984 19 Taxman 265 (AP).

13. It was submitted by the learned representative for the assessee that in all these cases, the Supreme Court and the learned Judges of the various High Courts had held that a stray transaction here and there for the realisation of a capital assets did not make the transaction as a business activity. Reference was also made to the Tribunal's decision in J.D. & Co. (P.) Ltd. v. ITO [IT Appeal Nos. 3350 to 3356 (Bom). of 1980, dated 14-1-1982], wherein a similar decision has been taken. In the circumstances it was submitted that the decision on the part of the lower authorities to treat these receipts as resulting from a business transaction and, hence, taxing it under Section 28 of the Act should be vacated. It was the assessee's case that the compensation in respect of the land at Oshiwara and Parel and the sale proceeds received from Oshiwara Land Development Corporation (P.) Ltd., was a capital receipt not liable to be treated as income from business. It was submitted that the net receipt from all these three items could at best have been assessed to capital gains tax.

14. On behalf of the revenue, the learned departmental representative has proceeded to refer to the Supreme Court decision in the case of Sole Trustee, Loka Shikshana Trust v. CJT [1975] 101 1TR 234. It was submitted that the intention of the assessee was to exploit the rights of the assessee in the various assets taken over from the parent company. Therefore, this was a case of business activity and, hence, the income was properly taxed under the head 'Profits and gains of business or profession'.

15. We have carefully considered the facts and circumstances of the case and the arguments on either side. The assessee has been incorporated as a company with effect from 11-6-1975. We are told that the main object of the company was the efficient management of the assets of one branch of the family. It took over the assets and liabilities pertaining to that branch of the family by the agreement dated 1-11-1975. The assets included a large plot of land at Oshiwara and some land at Pare]. Out of these lands, 723 acres of land at Oshiwara were agreed to be sold by an agreement dated 25-1-1964 by Byramjee Jeejeebhoy (P.) Ltd., i.e., the parent company, which held the entire shares in the assessee-company too. New Swastik Land Development Corporation, a partnership firm, 12 years prior to the incorporation of the assessee-company. The Government of Maharashtra had sought to acquire 181 acres of land out of the aforesaid 723 acres, that too several years prior to the incorporation of the assessee-company. As regards the land at Parel, this was acquired by the Bombay Municipal Corporation by a resolution dated 20-6-1964. During the accounting period, the assessee received compensation from the Government of Maharashtra and the sale proceeds from the Oshiwara Land Development Corporation Ltd., who were the successors to New Swastik Land Development Corporation and from the Bombay Municipal Corporation. A net sum of Rs. 82,91,400 remained after deducting, therefrom the cost of the land at Oshiwara being Rs. 17,630 and the land, building and the legal expenses pertaining to the Parel land amounting to Rs. 87,561 incurred by the parent company.

16. The question is whether this amount represented the assessee's income from 'business'.? It is the assessee's case that it was not carrying on any business, the income from which could be taxed under Section 28. As stated earlier, reliance is placed on the orders of the ITO for the first three assessment years after the incorporation of the assessee-company, i.e., the assessment years 1976-77, 1977-78 and 1978-79, where the assessee has been treated as an investment company by the ITO as also by the Tribunal for the assessment year 1976-77, in respect of which an appeal was taken up before the Tribunal by the departmental authorities on some other issues. Reliance is placed on voluminous case law to the effect that the receipts of the nature of the amounts received by the assessee during the accounting period were not business income.

17. Under Section 28, the assessee is liable to be taxed to income-tax under the head 'Profits and gains of business or profession', in respect of the profits and gains of any business or profession which was carried on by him at any time during the previous year. Patently, this is not a case of an assessee deriving income from any profession.

The question is whether the income derived by it was from any business The term 'business' has been defined under Section 2(13) of the Act to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Not much guidance is available from the definition under the Income-tax Act, to determine whether the amounts received by the assessee during the year were from any business or not. Necessarily, we have to turn to the judicial decisions of the Supreme Court and of the various High Courts to ascertain how these Courts have understood the concept of a business. In the case of IRC v. Marine Steam Turbine Co. Ltd. 12 TC 174, 'business' was defined by the King's Bench as an active occupation continuously carried on. As observed by the learned Judges of the Supreme Court in the case of Narain Swadeshi Wvg. Mills Ltd. v. CEPT [1954] 26 ITR 765, 772 to 774, business or vocation is understood to connote a very real, substantive and systematic course of activity or conduct for a set purpose. In the case of Upper India Chamber of Commerce v. CIT [1947] 15 ITR 263, the learned Judges of the Allahabad High Court have observed that business connotes activities in which a person is engaged with a set purpose. The frequency or the repetition of that activity, though at times a decisive factor, is by no means an infallible test. At the same time, as observed by their Lordships of the Privy Council in the case of CIT v. Shaw Wallace & Co. AIR 1932 PC 138 and the learned Judges of the Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265, underlying the expression 'business', is the fundamental idea of continuous exercise of an activity. In trade as well as in business, there is a continuity of operation. The activities organised on normally accepted commercial lines constitute the essence of any business. Reference may be made to another Privy Council decision in the case of CIT v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 in this connection. As further explained by the learned Judges of the Gujarat High Court in the case of CIT v.Motilal Hirabhai Spg. & Wvg. Co. Ltd. [1978] 113 ITR 173, whether a person is carrying on business in a particular commodity will depend upon the volume, frequency, continuity and regularity of the transactions, on where, ordinarily speaking, the profit motive prevails on the whole transaction and on where the assessee's activity can be said to be a sort of organised activity.

18. Thus, as explained by the Privy Council, the Supreme Court and the various High Courts, in order to say that the assessee carried on a business, there has to be some continuous activity on the part of the assessee. The assessee came into existence on 11-6-1975. Thereafter, it had not taken any steps in dealing with the lands under consideration, which could be called any organised activity whatsoever. 181 acres of land were acquired by the Government of Maharashtra in pursuance of their notification issued several years prior to the incorporation of the assessee. The land at Parel was acquired by the Bombay Municipal Corporation in pursuance of its notification of 1964. The sale proceeds of the land sold to the Oshiwara Land Development Corporation Ltd. materialised on the finalisation of the acquisition proceedings by the Government of Maharashtra for a part of the land. Thus, it cannot be said that the assessee carried on any activity whatsoever, much less a continuous activity, with reference to these lands, which could be called 'business' as explained by the various judicial authorities. The main reliance of the authorities below is on the articles and memorandum of association of the assessee. In this connection, the following observation made by the learned Judges of the Supreme Court in the case of CIT v. Dharmodayam Co. [1977] 109 1TR 527, is noteworthy : It is undisputed that the respondent-company, which was registered on January 21, 1959, under the Cochin Companies Act, has never engaged itself in any industry or in any other activity of public interest. It is notorious that the memoranda and articles of association of companies usually cover a variety of activities, only a few of which are in fact undertaken or intended to be undertaken.

That obviates the necessity for applying for amendment of the articles from time to time and helps to rule out a possible challenge on the ground that the company has acted beyond its powers in undertaking a particular form of activity. The only activity in which the respondent is engaged over the years is the conduct of kuries. . . .

As in the case of Dharmodayam Co. (supra), so also in the case before us, may be, the articles of association or the memorandum of association permitted the assessee to carry on business activity. But the question is whether, in fact, the assessee carried on any business activity during the year The answer is patently in the negative.

19. As to the incidence of profit from these three sources, the Government of Maharashtra, Oshiwara Land Development Corporation Ltd., and the Bombay Municipal Corporation, in our opinion, the voluminous case law relied upon by the learned representative for the assessee provides adequate answer. For example, in the case of CIT v. P.K.N. Co.

Ltd. [1966] 60 ITR 65 the Supreme Court held that the primary object of the company was to 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 estates was not for the purposes of carrying on business in real estate. The incidental sale of uneconomical or inconvenient plots of lands could not convert what was essentially an investment into a business transaction in real estate. Existence of power in the memorandum of association to sell or turn into account, dispose of or deal with the properties and rights of all kinds had no decisive bearing on the question whether the profits arising therefrom were capital accretion or revenue. The profits arising from the sale of the properties were not taxable income. In the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), though the assessee had entered into a transaction of its own volition during the accounting period, the learned Judges of the Supreme Court held that the facts that the assessee made a profitable bargain when it purchased the property and that it had a desire to sell the property if a favourable offer was forthcoming could not, without other circumstances, justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade. In the case of Raja Bahadur Kamakhya Narain Singh {supra), the Supreme Court held that it is fairly clear that where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done of making profits.

Further, in the case of G. Venkataswami Naidu & Co. (supra), the Supreme Court observed that if a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions, several factors are relevant, such as, e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it ; the nature and quantity of the commodity purchased and resold ; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable ; any act prior to the purchase showing a design or purpose, the incidents associated with the purchase and resale, the similarity of the transaction to operations usually associated with trade or business ; the repetition of the transaction ; the element of pride of possession. For deciding the question before us, we have first to answer the question posed by the Supreme Court in the case of Senairam Doongarmall {supra), viz., before holding a receipt to be a profit or gains of business within Section 10 of the Act, the question to be asked was whether there was a business at all, out of which it could be said that the income arose. Where an assessee did not carry on business at all, the section could not be made applicable and any compensation for requisitions of assets that he received could not bear the character of profits of a business. The compensation received by the assessee did not partake of the character of the profits because business not having been done by the assessee, no question of profits taxable to income-tax arose. In the case of Ch. Atchaiah (supra), even where the assessee purchased land which had been notified for acquisition by the Government, the learned Judges of the Andhra Pradesh High Court held that it did not constitute an adventure in the nature of trade so as to attract income-tax on compensation received in excess of the purchase price. In our opinion, the dictum laid down by the learned Judges of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust (supra), relied upon by the learned departmental representative, has no bearing on the issues involved in this case.

20. In the light of the aforesaid discussion, in our opinion, the assessee did not carry on any business during the year. Therefore, the surplus arising to it on the transfer of these lands to the Maharashtra Government, to the Bombay Municipal Corporation and the sale proceeds from the Oshiwara Land Development Corporation were not income from business, which could be liable to tax under Section 28. As the assessee rightly admits, these are gains received on transfer of a capital asset liable to capital gains tax. In the circumstances, in our opinion, the matter requires to be restored to the file of the 1TO for ascertaining the capital gains on the transfer of these lands in accordance with law and levy the tax under the head 'Capital gains' under Section 45 of the Act. The assessee's plea for vacating the treatment of these receipts as business receipts is allowed and for the treatment of these receipts as capital gains is accepted. The matter is restored to the file of the ITO for computing the income arising out of these receipts under the head 'Capital gains'.

21. The next ground in appeal before the Tribunal is against the order of the Commissioner (Appeals) in treating the ground rent as income from other sources instead of business income as in the past. The assessee was earning some ground rent from the lands owned by it. It was being asseessed to tax under the head 'Profits and gains of business or profession' in the past. For the year under consideration, the ITO treated it as income from other sources under Section 56 of the Act. His reason for doing so was that the income of ground rent was a fixed income, which did not involve any activity of the nature of business. He, therefore, proceeded to tax it as the assessee's income from other sources. On an appeal by the assessee, the Commissioner (Appeals) rejected the assessee's contention that the assessee being an investment company, the income earned from investment was business income. The Commissioner. (Appeals) was of the opinion that for determining the head of receipt of income, one had to be guided by the nature of the receipts. Since the ground rent was fixed income and no trading activity was involved in the same, the ITO was justified in treating it as income from other sources.

22. The assessee has filed a further appeal before the Tribunal on the ground that the Commissioner (Appeals) erred in confirming the order of the ITO in this respect. It is submitted that having regard to the facts of the case and the provisions of law and having regard to the fact that in the past, this income has always been treated as business income, the finding of the Commissioner (Appeals) was erroneous and should be set aside. On a perusal of the record, we find that for the assessment years 1976-77 and 1977-78, the income has no doubt been treated as business income. But these are merely ITO's findings not subjected to any appellate scrutiny. For the year under consideration, we have to arrive at a fresh finding on the basis of the material.

Though the assessee has filed a second appeal before us, the assessee has not disclosed any activity as such to have been carried out for the earning of this ground rent. We are not prepared to allow the assessee's appeal on this ground merely on the basis that the assessee was an investment company.

23. The next ground on which the assessee has filed the present appeal is that the Commissioner (Appeals) erred in confirming the disallowance of Rs. 9,000 under Section 40A(8) of the Act. In the assessment proceedings, the 1TO found that the assessee had paid interest of Rs. 60,000 to the directors on their unsecured loans. The assessee claimed that Section 40A(8) had no application to the facts of the case as these were transferred from borrowings made by the parent company. It was further stated that there were not deposits received from the public. The assessee relied on the Tribunal, Bombay Bench decision in the case of Michigam Engg. (P.) Ltd. [IT Appeal No. 69 (Bom.) of 1979 dated 7-2-1980]. The ITO rejected the assessee's argument and held that the amount of Rs. 9,000 i.e., 15 per cent of Rs. 60,000 had to be disallowed under Section 40A(8). In the absence of any detailed facts, the Commissioner (Appeals) rejected the assessee's appeal against this disallowance. Though the assessee has filed a further appeal before us, the assessee has failed to produce the detailed facts necessary for deciding this issue in favour of or against the assessee. In the circumstances, we are left with no alternative but to restore the matter to the ITO for bringing on record the full facts regarding the nature of the transaction, in respect of which this interest liability had accrued to the assessee and, thereafter, to decide the issue in accordance with law.

24. The last ground in the appeal is against the order of the Commissioner (Appeals) treating the loss from race horse breeding as a capital loss and not as a business loss. In the assessment proceedings, the assessee had claimed Rs. 15,000 as expenses on horse. The IAC carried forward these expenses for being set off under Section 74A(3)(b) of the Act under Section 144B. The assessee appealed against the order of the ITO in this respect before the Commissioner (Appeals).

According to the assessee before the Commissioner (Appeals), the race horse business was also a part of the business activity and did not call for a separate treatment. The Commissioner (Appeals), however, rejected the assessee's plea, as according to him a specific provision had been made under the enactment for treatment of the loss pertaining to horses. The assessee has filed a further appeal before the Tribunal on the ground that the Commissioner (Appeals) erred in treating the loss from race horse breeding as a capital loss and not as a business loss. As one of the objects of the assessee-company was to breed and deal in horses, loss incurred under the said head should have been allowed as a business loss. We have carefully considered the submissions on behalf of the assessee. Merely because in the memorandum and articles of association, the assessee had mentioned breeding and dealing in horses to be one of the business activities, the assessee is not eligible for the claim for allowance of the expenses. Further, when a specific provision has been made under the Act, viz., Section 74A and the ITO proposes to act under the same, we are unable to see what grievance the assessee could have in this respect. The assessee's appeal on this ground is rejected.


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