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D.L.F. Housing and Construction (P.) Ltd. Vs. Commissioner of Income-tax Delhi (Central) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 34 of 1972 and 14 of 1973
Judge
Reported in(1982)29CTR(Del)199; [1983]141ITR806(Delhi)
Acts Income Tax Act, 1922 - Sections 2(1) and 12B; Income Tax (Amendment) Act, 1961 - Sections 2(1), (4), (4A), (6) and (6C), 4(3), 6, 9, 12, 16(3), 16(3), 20, 143(3) and 256
AppellantD.L.F. Housing and Construction (P.) Ltd.
RespondentCommissioner of Income-tax Delhi (Central)
Cases ReferredAssam v. Sindhurani Chaudhurani
Excerpt:
(i) direct taxation - interpretation - section 2 (1) of income tax act, 1961 - assessed engaged in development of property - compensation awarded on acquisition of agricultural land of assessed - agricultural operation continued till acquisition - compensation awarded to assessed cannot be treated as profit of assessed's business. (ii) agricultural income - sections 2 (1) and 4 (3) (viii) of income tax act, 1961 - compensation awarded to assessed on acquisition of agricultural land - land purchased by assessed to develop it as housing colony - investment made by assessed in such land capital investment - compensation derived from such land does not come within agricultural income. (iii) repair charged - section 9 of income tax act, 1961 - amount spent on repair of residence used by.....jain, j.1. both the above-mentioned references under s. 256 of the i.t. act, 1961 (in short 'the act'), have been made by the income-tax appellate tribunal (in short 'the tribunal'), and they involve common question of law. in i.t.r.no. 34/72 which pertains to the assessment year 1961-62, the delhi bench (c) of the tribunal has referred the following questions of law as arising out of the appellate order dated march 5, 1970, for decision : '(i) whether, on the facts and in the circumstances of the case, the surplus of rs. 1,65,600 realised by the acquisition of the lands in question by the government is assessable to tax as the profits of the assessed's business (ii) whether, on the facts and in the circumstances of the case, the surplus of rs. 1,65,600 arising as a result of the.....
Judgment:

Jain, J.

1. Both the above-mentioned references under s. 256 of the I.T. Act, 1961 (in short 'the Act'), have been made by the Income-tax Appellate Tribunal (in short 'the Tribunal'), and they involve common question of law. In I.T.R.No. 34/72 which pertains to the assessment year 1961-62, the Delhi Bench (C) of the Tribunal has referred the following questions of law as arising out of the appellate order dated March 5, 1970, for decision :

'(i) Whether, on the facts and in the circumstances of the case, the surplus of Rs. 1,65,600 realised by the acquisition of the lands in question by the Government is assessable to tax as the profits of the assessed's business

(ii) Whether, on the facts and in the circumstances of the case, the surplus of Rs. 1,65,600 arising as a result of the acquisition of the land in question constitutes agricultural income exempt under section 4(3)(viii) read with section 2(1) of the Indian Income-tax Act, 1922

(iii) Whether, on the facts and in the circumstances of the case, the assessment framed under section 143(3) of the Act of 1961, is without jurisdiction and unsustainable and should, thereforee, be annulled

(iv) Whether, on the fact and in the circumstances of the case, one half of the property situated at No. 16, Aurangzeb Road, New Delhi, has been rightly held to be assessable under the head 'property' and

(v) Whether, if the answer to question No. (iv) is in the negative, the claim for repairs has been rightly restricted to Rs. 2,500 and that for depreciation to Rs. 42,000 ?'

2. In I.T.R. No. 14/73, which relates to the assessment year 1962-63, Delhi Bench (A) of the Tribunal has referred the following questions of law for the decision of this court :

'(i) Whether, on the facts and in the circumstances of the case, income from one-half of the property situated at No. 16, Aurangzeb Road, New Delhi, has been rightly held to be assessable under the head 'Property' and consequent restriction of depreciation and repair expenses is justified

(ii) Whether, on the facts and in the circumstances of the case, it was legally desirable and proper for the Tribunal to have taken, in this case, on the same facts and circumstances, a view different from the one taken for the assessment year 1961-62 regarding the surplus receipt of Rs. 47,085 our of a compensation of Rs. 1,00,000 on acquisition part of the same agricultural land by the Government

(iii) Whether, on the facts and in the circumstances of the case, the aforesaid surplus of 47,085 from acquisition of agricultural land was exempt from tax as agricultural income within the meaning of section 2(1) of the Income-tax Act, 1961 ?'

3. The facts germane to dispose of these references succinctly are that the assessed M/s. D.L.F. Housing & Construction (P.) Ltd., was carrying on the business of colonisation, i.e., it used to purchase lands, mostly agricultural, situate in the villages situated in the Union Territory of Delhi, and contiguous to Delhi City, develop them and sell them as residential/commercial plots. The profits on such transactions used to be returned and assessed as business profits. In 1950 the assessed started purchasing lands in village Basai Darapur and Tatarpur and developed them into a colony called Rajouri Gardens comprising of 1,503 bighas of land. This colony was duly developed and laid out by about 1956. Subsequently, they purchased more lands measuring about 300 bighas and odd during the period October 26, 1956 to April 20, 1957, at village Basai Darapur from various people at a total cost of Rs. 11,67,841. Pursuant to a notification dated September 3, 1957, issued by the Chief Commissioner, Delhi, under s. 4 of the Land Acquisition Act, the Delhi Administration acquired nearly 300 bighas of land out of the aforesaid land for a public purpose, namely, the execution of the interim general plan for Greater Delhi. The declaration under s. 6 of the Land Acquisition Act was issued on August 24, 1959, and under an award made by the Land Acquisition Collector an amount of Rs. 7,90,548 was paid as compensation to the assessed during the accounting year ending September 30, 1960. After adjusting the cost of the said land an amount of Rs. 1,65,660 was shown as net profit as a result of acquisition. The computation of the net profit shown in the books of account for the relevant pervious year is not under dispute. However, while submitting the return the assessed claimed that the said amount of Rs. 1,65,660 should be excluded while computing its income from business inasmuch as the same represented capital receipt/profit by sale of agricultural land and, as such, it was not assessable to income-tax.

4. The justification furnished by the assessed for claiming exemption of this amount as set out in a note submitted to the ITO briefly, is that the assessed was under an obligation to provide a sewer drainage system for the colony known as Rajouri Gardens which was developed by it earlier. While the assessed was able to lay internal sewers by about 1956, the problem arose of connecting them to some sewer main on Najafgarh Road. However, there were no municipal or other mains on Najafgarh Road and as the colony developed the problem for disposal of sewage became acute. As directed by the Delhi Development Planning Authority (in short the 'D.D.P.A.'), which was set up in 1955, the assessed constructed a big septic tank at the junction of the Ring Road and Najafgarh Road. By this arrangement the sullage was retained in the tank but the effluents had to be drained out. The D.D.P.A. would not permit the effluent water drain. Hence, the assessed had to find some way for the discharge of the effluent water. It was with a view to meet and solve this problem that the assessed felt obliged to purchase about 400 bighas of land at Najafgarh Road just opposite Rajouri Gardens with the specified object of having an agricultural farm for utilising the effluent water both for irrigation and manure. It was further explained that the assessed had to supplement supply of water by providing tube wills and pumps and maintained a regular staff for the farm and the agricultural produce was regularly sold in the market. A separate farm account was kept and the income was separately shown in the balance-sheet. Thus, it was averred by the assessed that the said land which covers approximately 300 bighas of land and was close to the colony called West Rajouri Gardens had been purchased with the intention of maintaining it as an agricultural farm. Hence, the difference between the amount of compensation and the cost price was claimed to be capital receipt in its hands. The assessed placed on record certain correspondence which took place between it and the Government bodies like D.D.P.A. and Superintending Engineer, Health Service, etc., in relation to the development of the said land. It was, inter alia, stressed by the assessed that the master plan for development of Delhi which included the area in question was published in September, 1956, to be followed soon after by notifications of acquisition under s. 4 of the Land Acquisition Act. Thus, it became absolutely clear to the assessed that there was no prospect whatsoever of the scheme to develop West Rajouri Gardens which was submitted by it earlier to the D.D.P.A. for approval and the question of its purchasing the agricultural land in question during the period October 26, 1956, to April 20, 1957, with the object of reselling the same in the shape of developed plots did not arise. In other words, this circumstance was sought to be pressed into service with a view to countenance the plea that a land in question had been purchased with the avowed object of maintaining an agricultural farm and for pumping out and utilising the effluent water discharged from the septic tank. This plea, however, did not find favor with the ITO who held that like the other land these lands too had been purchased by the assessed for colonisation and the mere fact that in between the date of purchase and the date of sale, i.e., acquisition, agricultural operations were carried on on the land in question would not convert the land into an investment.

5. On appeal, the AAC too rejected the stand taken by the assessed. He observed that the question whether the land was agricultural land or not and the fact that until it was sold, the land was under cultivation were not relevant so long as the income arising from it could not be described as agricultural income within the meaning of s. 2 of the Indian I.T. Act, 1922. He was of the opinion that the land had been purchased with the intention of its being developed in to a residential colony and the transaction in question could be treated as an adventure in the nature of trade and the profits there from were assessable as such. He held that it was equally irrelevant that the amount was not taxable under s. 128 of the Act as it constituted agricultural land.

6. The assessed appealed to the Tribunal and urged the same contention that were put forth before the ITO and the AAC. The Tribunal has not believed the version of the assessed that the lands in question had been acquired in order to utilise them as sewage farm to absorb the effluent water from the old colony, viz., Rajouri Gardens. It held that the purchase of these lands by the assessed was in the normal course of its business as stock-in-trade with a view to realise their value at an early date by way of sale or even in the event of their acquisition by the Government and that the profits realised by the assessed were the profits of its regular business. It was urged that having regard to the undisputed position that the lands in question being agricultural land, did not constitute capital assets as defined in s. 2(4A) of the Act, and, as such, the excess amount received by the assessed was not liable to be assessed as capital gain. However, the Tribunal considered this to be purely an academic question in view of its conclusion that the lands in question did not constitute capital asset but were the stock-in-trade of the assessed and the profit in question bore the character of income. The Tribunal eventually held that the amount of Rs. 1,65,600 which is in controversy is exempt from income-tax because it represented income from agricultural land having regard to the wide connotation of the word 'revenue' as used in s. 2(1) of the Act.

7. It may be pertinent to mention here that the other Bench, viz., Delhi Bench (A) of the Tribunal has taken a diametrically opposite view. The amount of surplus receipt involved during the assessment year 1962-63 (previous year ended on September 30, 1961), was Rs. 47,085. The learned Members of the Bench have interpreted the decision of the Supreme Court in Sevantilal Maneklal Sheth v. CIT : [1968]68ITR503(SC) , on which reliance had primarily been placed by Delhi Bench (C) in an altogether different manner. The said Bench, thereforee, rejected the appeal of the assessed with regard to this claim.

8. Question No. (i) in I.T.R. No. 34 of 1972 :

The learned counsel for the Revenue has at the outset canvassed that the finding of the Tribunal that the purchase of the lands in question by the assessed was in the normal course of business as stock-in-trade with a view to realise their value at an early date, it being purely a question of fact could not have been referred to this court. However, we do not agree inasmuch as we feel that the particular inference drawn by the Tribunal is a mixed question of law and fact and it is open to this court to go into the question whether, on the basis of primary evidentiary facts, the Tribunal has come to the correct conclusion with regard to the nature of the transactions and it being a trade venture allied to its normal business. In this context, we may simply advert to the observations of the Supreme Court in G. Venkataswami Naidu & Co. v. CIT 0065/1958 : [1959]35ITR594(SC) , to the following effect (headnote) : 'Where the point sought to be raised on a reference is a pure question of fact, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary fact proved in the case, its correctness or validity is open to challenge in reference proceedings with narrow limits. The assessed or the Revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence; and if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence; or that the impugned conclusion drawn from the relevant facts is not rationally possible; and if such a plea is established, the court may consider whether the conclusion is not perverse and should not, thereforee, be set aside. It is within these narrow limits that the conclusions of fact recorded by the Tribunal can be challenged under s. 66(1). Such conclusions can never be challenged on the ground that they are based on misappreciation of evidence.'

9. This propositions was further affirmed by the Supreme Court in CIT v. Rajastan Mines Ltd. : [1970]78ITR45(SC) . Thus, the court can look into the question whether the conclusion of fact drawn by the Tribunal is supported by any legal evidence or that the impugned conclusion drawn from the relevant facts is not rationally possible. However, if such a plea is established the court has to consider whether the conclusion in question is not perverse and should not, thereforee, be set aside. Within the narrow limits the court can look into the relevant facts having a bearing on the point in issue. Hence, this objection is not tenable.

10. The learned counsel for the Revenue has canvassed quite fervently that the purchase of the land in dispute was in the nature of a trade venture inasmuch as it had been purchased by the assessed with a view to develop it and then earn profit out of it. Admittedly, the assessed was carrying on the business of colonisation at the relevant time and it had been purchasing agricultural lands with a view to develop them, carve them out as sites for houses and commercial establishments and then sell the same on profit. Reliance, in this connection, has been placed on P.M. Mohammed Meerakhan v. CIT : [1969]73ITR735(SC) and Raja J. Rameshwar Rao v. CIT : [1961]42ITR179(SC) . In the latter case the assessed, Raja J. Rameshwar Rao, who was a jagirdar was being assessed as an individual on income from jagir and from other sources. He purchased a good deal of land from pattadars, etc., and constructed on a portion of the land so acquired a ganj and shops. The rest of the land he laid out as plots, which he sold for Rs. 75,820. In computing his assessable income, Rs. 75,820 were added as receipts from business. However, he claimed that the said amount could not be included in his assessable income. The question arose whether it was a trade venture in the sense that there was a business and profits from it. Affirming the answer given by the High Court on a reference made to it, the Supreme Court observed 42 ITR181 :

'No doubt, this was only a single venture; but even a single venture may be regarded as in the nature of trade of business. When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as be bought it but in parcels, he is dealing with land as his stock-in-trade; he is carrying on business and making a profit.'

11. These observations, no doubt would appear to be quite apposite in the instant case, so far as the trading activities and the business of colonisation of the assessed are concerned, it being not disputed that the assessed had been purchasing agricultural lands from time to time, develop them and carving out plots there from for resale on profit. Even otherwise, the assessed has been showing the lands so purchased by it as stock-in-trade in its books of account and balance-sheet, etc. Thus, the view taken by the Tribunal that the lands in question would, in all probability, have been purchased with a view to develop them and resell them in the shape of plots cannot be said to be illfounded and it may not be possible to take exception to this finding having regard to the nature of the business carried on by the assessed even though its stand was that this particular area had been purchased with a view to develop an agricultural farm for discharge of the effluent water which could not contained in the septic tank which they were obliged to build for want of proper sewerage system for draining of the effluents from the colony of Rajouri Gardens which they had already developed. At any rate, the Tribunal has considered the evidence adduced by both the parties and the conclusion arrived at by it that the purchase of the lands by the assessed was in the normal course of the assessed's business with a view to develop it and realise profits there from cannot be said to be perverse, irrational or based on evidence. However, this solitary circumstance will not be decisive of the fact whether ownership of the land was in the nature of capital investment at the time of its acquisition resulting in accretion of capital, for, the proceeds of the sale represent capital in another from; or the sale was in the course of business, the profit being on revenue account. The line between 'capital sales' and 'sale producing income' was drawn by Lord Justice Clerk in Californian Copper Syndicate v. Harris [1904] 5 TC 159 (C Exchq.), in a passage which has become classical. Lord Justice Clerk said (pp. 165-166) :

'It is quite a well settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income-tax. Act of 1842 assessable to income tax. But, it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of person buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for income tax.

What is the line which separates the two classed of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by Realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit making ?'

12. Although on facts their Lordships negatived the plea raised by the assessed in the said case, the dictum laid down has been consistently followed in various judgments by the Supreme Court and the High Court in India. As observed by Shah J., as he then was, in Janki Ram Bahadur Ram v. CIT : [1965]57ITR21(SC) , the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the material brought on the record but general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. His Lordship then proceeded to observe that (pp. 25, 26) :

'If, for instance, a transaction is related to the business which is normally carried on by the assessed, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, 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....... These are cases of commercial commodities. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. A director of a company carrying on the business of warehouseman purchasing a number of houses with a view to resale, and selling them at a profit some years after the purchase : Commissioners of Inland Revenue v. Reinhold [1953] 34 TC 389 (C Sess); a person carrying on business in various line, including an engineering works, purchasing land which was under requisition by the Government, negotiating sale thereof before the land was derequisitioned, and selling it after the land was released. Saroj Kumar Mazumdar v. Commissioner of Income-tax : [1959]37ITR242(SC) ; and a syndicate formed to acquire an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit : Leeming v. Jones [1930] 15 TC 333 (HL), may not be regarded as commencing a venture in the nature of trade. These are cases in which the commodity purchased and sold is not ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture.'

13. In that case the facts were that the appellant was carrying on business in iron scrap and hardware. He never carried on any business in jute or in pressing jute. At the material time when the purchase of the jute press was made, the appellant had, because of abnormal conditions prevailing in the town of Calcutta, closed its business in iron scrap and hardware. The appellant purchased the jute press and the premises appurtenant thereto subject to litigation pending in the High Court, effected certain repairs and kept the factory in running condition, but made no attempt to start or organise the business of pressing jute, and his plea that we was not able to secure labour for working the press was not true. Soon after he bought the factory, the appellant received an offer from Ranada Prasad Saha to buy the factory and he immediately accepted the offer to sell it to him. These facts, in the view of the Tribunal, indicated that the appellant purchase the jute press, subject to litigation, with the sole object of reselling at profit at the earliest opportunity and, there, the transaction was in the nature of a trading venture. The High Court substantially agreed with this view. However, the Supreme Court did not approve of the finding of the Tribunal as confirmed by the High Court. It pointed out (p. 27) :

'It is true that the appellant had put the factory in a working condition, but had not organized a jute pressing business, had not obtained a license for working the factory, had not attempted to secure order for pressing jute, and had not employed labourers. The appellant's claim that it was not so done because the appellant could not secure labourers had not been accepted. But that is not a decisive circumstance.'

14. It further observed :

'Barring the expectation of profit and realization of profit by sale of the property, there is no evidence bearing on the intention with which the property was purchased.'

15. These observation, in our opinion, are quite apposite in the instant case inasmuch as it is beyond the pale of controversy that the assessed took no steps to develop the land in question and carve out plots as sites for houses, etc. On the contrary, the farm account of the assessed shows that substantial amounts were spent on the agricultural farm and income there from was also received. It may be that the layout plan for West Rajouri Gardens which had been submitted by the assessed earlier to the D.D.P.A. for sanction was not approved and the assessed realised that there was no prospect whatsoever of the scheme in question being sanctioned. All the same the fact remains that no step was taken towards development of the land in dispute and it retained its agricultural nature even at the time of its acquisition by the Government. This is a vital circumstance which cannot be lost sight of for determining whether profits are assessable as those arising out of a venture in the nature of a trade or it was merely appreciation of the capital investment.

'A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct by the acquirer and his dealings with the commodity'. [see CIT v. Madan Gopal Radhey Lal : [1969]73ITR652(SC) .

16. Even the fact circumstance that the entry with respect to the excess amount received by the assessed by way of compensation has been shown under the head 'Stock-in-trade' will have no effect to negative its being a capital receipt by sale of agricultural land. Agricultural income does not lose the right to exemption merely because it can be brought under one or other of the heads of income set out in s. 6 of the Act. It is nobody's case that purchase and sale of agricultural land as such was the business or one of the trading activities of the assessed. Indeed, the fact that agricultural operations were being carried on in the land in question throughout would warrant the inference that it was yielding income and, as such, it was being dealt with as a capital investment. Capital is the source of income and income is the fruit of capital. Judging from this aspect also, it is difficult to hold that the lands in question partook of the nature of stock-in-trade.

17. We may now examine the decided cases adverted to by counsel for the parties. In P.M. Mohammed Meerakhan v. CIT : [1969]73ITR735(SC) , the facts were that the appellant had agreed with one A. V. George to purchase 477.71 acres of land forming part of an estate for Rs. 6 lakhs. He paid a part of the consideration but he did not have the resources either to buy or to cultivate the estate himself. So before the payment of the full price of the land he divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers while he retained the 23rd plot measuring about 104 acres for himself. On these facts the ITO estimated the value of the latter plot and worked out the profit from the transactions holding that the same constituted an adventure in the nature of trade and were in the course of a profit-making scheme. The Supreme Court affirmed the view taken by the Revenue saying that the land was rightly treated as stock-in-trade and was valued according to the normal accountancy practice. However, their Lordships observed during the course of the judgment as follows (p. 739) :

'But in judging the character of such transactions several factors have been treated as significant in decided case. For instance, if a transaction related to the business which is normally carried on by the assessed, though not directly a part of it, and intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold or is converted into a different commodity and then sold. The magnitude of the transaction of the purchase, the nature of the commodity, the subsequent dealings of the assessed, the nature of the organisation employed by the assessed and the manner of disposal may be such that the transaction may be stamped with the character of a trading nature.'

18. Their Lordships then observed (p. 740) :

'A transaction of purchase of land as distinguished from cases of commercial commodities cannot be assumed without more to be an adventure in the nature of trade.'

19. Some decisions both English as well as Indian were then alluded to, of which Leeming v. Jones [1930] 15 TC 333 (HL), and Raja J. Rameshwar Rao : [1961]42ITR179(SC) are noteworthy.

20. In Leeming v. Jones a syndicate was formed to acquire an option over a rubber estate with a view to resell it at a profit and finding the estate too small the syndicate secured an option over another adjoining estate and sold the two estates at profit. It was held that the transaction was not in the nature of a trade and the profit was an accretion of the capital value. Rowlatt J. quoted the following observations (p. 340) of Lord President Lord Clyde in the case of IRC v. Livingston [1926] 11 TC 538, 542 (C Sess) :

''I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, 'in the nature of trade', is whether the operations involved in it 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.'

21. In Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer [1910] 5 TC 658 (C Exchq), the facts were somewhat similar to the one in hand. In that case a company was formed with the object of acquiring estates in Malay Peninsula and developing them by planting and cultivating rubber trees. Power was taken in the memorandum of association to sell the property and such a sale was contemplated in the prospectus issued at the inception of the company. Two estates were purchase, but for want of adequate capital, were sold to another company for consideration in the shape, mainly, of shares in the second company in excess if the capital expanded. Before the sale, however, a considerable part of the estates had been planted with rubber trees but no rubber had been produced and the first company had not reached the production stage. The company had thus not earned any income except what it got by the sale. This was claimed to be an increase of capital. However, the Surveyor of Taxes relying, inter alia, on the Californian Copper Syndicate case [1904] 5 TC 159 (C Exchq), took the contrary view. The Court of Exchequer (Scotland) held that the profit on sale was merely an appreciation of capital and not profit assessable to income-tax. Lord Salvesen observed that he was unable to distinguish the position of the company from that of a person who acquired property by way of investment and who realised it afterwards at a profit. The following observations of Lord Salvesen are pertinent to not (p. 664) :

'It is well settled that in such a case the profit is not part of the person's annual income liable to be assessed for income tax but results from an appreciation of his capital. No doubt, if it is part of his business to deal in land or investments, any profits which in course of that business he realises form part of his income; but the mere fact that a person or company has invested funds in the purchase of an estate which has subsequently appreciated and so has realised a profit on his purchase does not make that profit liable to assessment.'

22. The learned Law Lord elucidated the position further saying (p. 665) :

'No doubt power was also taken to sell any part of the undertaking and property of the company; and I assume that the promoters of the Syndicate had in view from the first that it might become expedient to do so; but I am unable to infer from this fact, taken along with the ultimate sale of the entire assets to a new company, that it was part of the trade of the Syndicate to purchase and sell lands.'

23. Salisbury House Estate Ltd. v. Fry [1930] 15 TC 266 (HL) is another English case which may be alluded to for elucidation of the correct legal position. Salisbury House was a building with 800 rooms. A company was formed for the express purpose of acquiring it and utilising it. The rooms were let unfurnished to tenants. In addition to the rents for the offices the company derived profits from its tenants in connection with the provision of lighting, cleaning, care taking and other services, and admitted that liability to income-tax. The company also retained some rooms as its offices. While the company admitted that it had to pay the tax under Sch. D on profit it might have made from the services which it rendered, it contended that income from rents could not be taxed under Sch. D. Rowlatt J. held against the company but his decision was reversed by the Court of Appeal. In further appeal to the House of Lords it was held that the rent were profits from ownership of land and assessment under Schedule A was the proper mode and they could not be treated as trade receipts of the company for purposes of Sch. D. The following extract from the speech of Lord Warrington of Clyffe is very pertinent (p. 316) :

'Assuming the memorandum of association allows it, and in this case it unquestionably does, a company is just as capable as an individual of being a landowner, and as such deriving rents and profits from its land, without thereby becoming a trader, and in my opinion it is the nature of its operations, and not its own capacity, which must determine whether it is carrying on a trade or not.'

24. The Supreme Court considered both the above-mentioned English cases in Karanpura Development Co. Ltd. v. CIT : [1962]44ITR362(SC) , and commenting on the aforesaid passage observed (p. 370) :

'..... it is clear even from this passage that the deciding factor is not ownership of land or leases but the nature of the activity of the assessed and the nature of the operations in relation to them. The objects of the company must also be kept in view to interpret the activity.'

25. The Supreme Court also considered some other decided cases including Californian Copper Syndicate [1904] 5 TC 159 (C Exchq) and made the following comments (p. 378) :

'The Californian Copper Syndicate's case illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Salisbury House Estate Ltd. v. Fry [1930] 15 TC 266 (HL) illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation.'

26. The position was then summed up as under :

'ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is 'income from property' (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader.'

27. The actual decision of the Supreme Court was, however, against the assessed because it considered Californian Syndicate's case [1904] 5 TC 159 (C Exchq) so similar in facts as to be almost decisive having regard to the facts in Karanpura Development Co. Ltd. : [1962]44ITR362(SC) . It will, however, be unnecessary to go into the details of this case.

28. CIT v. P.K.N. Co. Ltd. : [1966]60ITR65(SC) , is yet another case to which reference may be made with advantage. In that case, the respondent-company was formed primarily to take over the assets, in the Federated Malay States, of a firm. Between March and July, 1939, more than 3,000 acres of rubber plantations, several houses and open plots of lands of the aggregate value of 16,50,000 dollars, which were the assets of the firm, were transferred to the company, and in consideration thereof the partners of the firm were allotted shares of the face value of 6,60,000 dollars, the balance remaining outstanding as a debt due to the firm. On March 14, 1941, the company purchased the Lee Rubber Estate and on July 9, 1941, a house in co-ownership with another firm for 5,000 dollars, and, thereafter, no fresh acquisitions were made. Large amounts of money were spent on cultivation and development of the rubber and coconut estates and substantial income was derived there from. Year after year the company extended its planting operations. The plantations were not a compact block, and being unable to administer the far-flung estates effectively and economically, the company sold certain small plots of land in 1940 and 1941. Between the years 1942 and 1945, when Malaya was under Japanese occupation, some further plots of land were sold. There after, in 1948, 1949 and 1950, lands were sold from time to time at profit. As a result of these disposals, the total holding of the company was reduced to about 2,000 acres of rubber estate, some houses and the Lee Estate. The question arose whether the profits realised by the company during the accounting year relevant to the assessment year 1951-52, from the sale of the properties could be brought to tax. It was held (headnote) :

'On the facts, 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 sales of uneconomical or inconvenient plots of land 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 there from were capital accretion or revenue. The profits arising from the sale of the properties were not taxable income.

The question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the fact and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a whole or in plots decisive. Profit motive in entering into a transaction is also not decisive.'

29. Ramnarain Sons (Pvt.) Ltd. v. CIT : [1961]41ITR534(SC) , appears to be a case in the reverse direction in the sense that the appellant-company therein has sold the shares purchased by it earlier and the same was claimed as a trading loss. The appellant-company was a dealer in shares and securities and also carried on business as managing agents of other companies. It was, however, found that the shares had been purchased in order to acquire the managing agency of a textile mill from the managing agents of the company to whom the textile mill belonged. It was held that (headnote) :

'The loss incurred by the sale of the 400 shares was, thereforee, loss of a capital nature. Neither the circumstance that the appellant-company borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by its memorandum of association to deal in shares, was of any effect. Nor could the appellant company by entering the shares of the mills in its statement of shares in which trading transactions were carried on alter the real character of the acquisition'.

30. VR. KR. S. Firm v. CIT : [1966]60ITR425(SC) , is yet another case on which reliance was placed by the counsel for the Revenue. However, we find on a perusal of the same that the properties belonging to the assessed which had been damaged during the Second World War were held to constitute its stock-in-trade and, thereforee, the compensation received by the assessed in replacement of those assets was treated in its entirety as profits liable to tax. Thus, the case is distinguishable on facts.

31. The above-mentioned authorities clearly illustrate and bring forth the relevant criteria for determining whether a particular transaction is in the nature of trade venture of it is just a capital investment a sale of which has yielded appreciated value. Profit making would normally not be an irrelevant consideration for every honest and prudent purchaser, but will not in every case make the purchase a venture in the nature of trade, and each case must depend on its own facts. The expression 'in the nature of trade' as used in s. 2(4) of the Act apparently postulates the existence of certain elements in the adventure which, in law, would invest it with the character of a trade or business and the answer to the question whether a particular transaction is in the nature of trade cannot be decided on the basis of any single test or formula. The burden of proving that a particular transaction is in the nature of trade shall be, in the case of agricultural land, on the Revenue and not on the assessed. It bears repetition that in the instant case the assessed did not take any step to develop the lands in question on the normal lines of its business with a view to parcel it out into plots as sites for houses and commercial buildings. On the contrary, it has been noticed by the Tribunal that the assessed had been expending on cultivation and a pump was also installed to pump the excess effluent across the road into the assessed's agricultural land. How ever, it was not clear as to how and when-between May, 1956, and April, 1957-this came about inasmuch as there was a mention of it only in one of the letters of the letters of the assessed written in April, 1957. The Tribunal has found it difficult to envisage that the assessed acquired about 400 bighas of land at a cost of Rs. 11 lakhs in order to use it as a sewerage farm to absorb the effluent of a colony which had not been over-populated by May, 1956. This assumption is based on the fact that the assessed did not make any protest with regard to the same. Be that as it may, the fact remains that at no stage prior to the acquisition of the land in question and even till the date of the award did the assessed make any attempt to convert or alter the character of the land and it was used for agriculture alone throughout. So, the mere circumstance that the land in question may have been purchased with a view to develop it later on and sell it at a profit in the shape of plots would be hardly enough to justify the inference that it was a trading asset or a venture in the nature of trade. Having regard to the fact that prices of lands both urban and rural in and around Delhi have been soaring sharply in the post-partition era, the appreciation of the investment even in agricultural land was bound to be there. There was nothing abnormal about it. Hence we answer this question in the negative.

32. Question No. (ii) in I.T.R. No. 34/72 and question No. (iii) in I.T.R. No. 14/73.

33. As stated above, Delhi Bench (C) of the Tribunal has taken the view that the gains arising from the sale of an estate can be properly considered as income arising from the estate. In this view of the matter, thereforee, the Bench held that the sum of Rs. 1,65,600 received by the assessed as compensation for the land acquired by the Government being agricultural income within the meaning of s. 2(1) of the Act was exempt from tax. However, Delhi Bench (B) of the Tribunal has taken the contrary view holding that the amount of Rs. 47,085 received by the assessed as compensation for the acquired land in the subsequent year did not constitute agricultural income being neither revenue nor was it derived from land, s. 4(3)(viii) agricultural income is excluded from levy of income-tax. The term 'agricultural income' has been defined in s. 2(1) as under :

'(1) 'Agricultural income' means -

'(a) any rent or revenue derived from lane which is used for agricultural purposes, and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such

(b) any income derived from such land by -

(i) agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii) ;

(c) any income derived from any building owned and occupied by the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any operation mentioned in such-clause (ii) and (iii) of clause (b) is carried on :

Provided that the building is on or in the immediate vicinity of the land, and is building which the receiver of the rent or revenue or the cultivator or the receiver of the rent-in kind by reason of his connection with land, requires as dwelling house, or as a store-house, or other out-building.'

34. On a plain reading of the section one thing emerges quite clearly that the land must be used for agricultural purposes and be either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such before any rent or revenue derived there from can be called 'agricultural income'. This condition appears to be satisfied in the instant case instant case inasmuch as it is beyond the place of controversy that the land in question was in fact under cultivation at the relevant time and also that it was assessed to land revenue, So, all that is to be seen is whether the amount of compensation received by the assessed in the instant case can be termed as 'rent' or 'revenue' as contemplated in s. 2(1) of the Act.

'What the farmers of the Act meant by the distinction between 'rent' and 'revenue' is not quite clear. Rent is defined in s. 105 of the Transfer of Property Act as 'money, share of the crops, service, or any other thing of value to be rendered periodically or on the specified occasions by the tenant to the landlord in consideration of the enjoyment of immovable property'. In other words, 'rent' 'implies' the idea of Lesser and lessee or landlord and tenant. Admittedly, that question does not arise in the instant case. So, we have to concentrate on the true meaning and import of the expression 'revenue'. This term again is not defined anywhere in the Act. In the absence of a statutory definition, the courts must take its ordinary dictionary meaning so long as it does not militate against any express provision of the statute According to the Oxford Dictionary 'revenue' is : 'the return, yield or profit of any land, property or other important source of income; that which comes to one as a return from property or possessions, specially of an extensive kind; income from any source but specially when large and not directly earned'. In Wharton's Law Lexicon the meaning assigned to the word 'revenue' is : 'income, annual profit received from lad or other funds also money at the disposal of the Crown i.e., the executive. The chief sources are : (1) Crown property, surrendered to the nation; (2) taxation-income tax, death duties; (3) certain managed enterprises, such as the post office, and lands, woods and forests and miscellaneous holdings such as shares in the Suez Canal, and other profits or fiscal prerogatives of the Crown'. Obviously, the expression 'revenue' has a wider connotation than 'rent'. It, inter alia, includes income due to the State by way of taxation, etc. However, in the context in which the expression 'revenue', has been used in s. 2(1) of the Act we are not concerned with that aspect of the matter and we may take as the first part of the definition, viz., 'income, annual profit received from land or other funds' only to be relevant for our purposes. This is evidently so because the world 'revenue' has been used as constituting the income from agriculture. In other words, the question would arise whether consideration received by an owner of an agricultural land by way of sale, exchange or for that matter acquisition by the Government can be termed as 'revenue' or 'income' derived from such land. CIT v. Shaw Wallace and Co. , is leading authority on the point which seems to have held the field so far. In that case the respondents carried on business as merchants and as agents for various companies, The two oil companies for which they had been acting as distributing agents, having combined and decided to make other distributing arrangements each terminated the respondent's agency and in 1927-28 paid them compensation for its cessation. The ITO in computing the assessable income of the respondents for the relevant years took these two receipts into account as profits or gains from the business. So, the question arose whether the amount so received which had been included in the total income of the assessed for the purposes of assessment for the relevant years was in the nature of a capital receipt and, not 'income, profits or gains' within the meaning of the Act. Sir George Lowndes who delivered the judgment of the Judicial Committee, gave the following definition of 'income' (p. 140 of AIR) :

'The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income' profits and gains' but the expansion is more a matter of words than of substance. Income, their Lordship think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.'

The aforesaid observations of the Judicial Committee draw a clear distinction between 'income' and 'capital', in that only a periodical monetary return yielded by the capital is to be treated as 'income' even though it may take varied forms, for instance, produce, of land or rent from property of interest on loan, etc. This connotation of the word 'income' is in conformity with its dictionary meaning. According to the Oxford Dictionary, it means : 'that which comes in as the periodical receipts from one's business, lands, work, investments (construed in reference to its amount and commonly expressed interms of money) annual or periodical receipts accruing to a person or a corporation'.

35. The above definition was followed in Maharajkumar Gopal Saran Narain Singh v. CIT [1953] 3 ITR 237 (PC), where the question arose whether the annual payment to the assessed for his life who had transferred his estate and his obtained in exchange, (i) convenient to pay the debts amounting to Rs. 10,26,937; (ii) a cash payment of Rs. 4,73,063; and (iii) an annual payment of Rs. 2,40,000 as a life annuity, was 'agricultural income' or not. However Lord Russell of Killowen added an important application saying (p. 242) :

'The word 'income' is not limited by the words 'profits' and gains' and anything which can properly be described as income is taxable under the Act unless expressly exempted.'

36. On the said reasoning, thereforee, the annual payment was held to be not 'agricultural income' as it was neither 'rent' nor 'revenue' derived from and, but money payable under a contract imposing a personal liability on the covenantor. However, we are not concerned with this aspect of the matter and all that can be said is that 'income' is a more generic term than profits or gains. It is a expression of elastic ambit. Still later, a Full Bench of the Patna High Court held in Jhalak Prasad Singh v. Province of Bihar : [1941]9ITR386(Patna) as follows (p. 396) :

'The world 'revenue' is section 2(1) of the Income-tax Act is used to denote income or a revenue receipt as opposed to a capital receipt and covers all income from agricultural land other than rent.'

37. This observation was made by Harris C.J., while comparing the definition of the phrase 'agricultural income' in s. 2(1) of the Act with that given in the Bihar Agricultural Income-tax Act in s. 2(a) in which the words 'any rent or income derived from land' appear instead of the words 'rent or revenue derived from land' as is the case under s. 2(1) of the Act. His Lordship further said that (p. 396) :

'No real distinction can be drawn between the expressions 'rent or revenue' and 'rent or income', and in my view it cannot be said that by the use of the words 'rent or income' the Provincial Government are taxing something more than is permissible by the definition in the Income-tax Act.'

38. Thus, according to the Full Bench, the word 'revenue' must be treated synonymous to 'income' for the purposes of the Act. Similarly in Maharaja Pratap Singh Bahadr v. Province of Bihar : [1949]17ITR202(Patna) , the Patna High Court reiterated that (p. 203) :

'Although in one Act 'income' is used and in the other, the word 'revenue' there is no real difference in the two definitions.'

39. In CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325, the Privy Council had to consider whether interest on arrears of rent payable in respect of land used for agricultural purpose was 'agricultural income' or not. Their Lordship observed that (p. 328) :

'Equally clearly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived from land.'

40. The words underlined above clearly suggest that the expression 'revenue' has been used as being equivalent to 'income'.

41. In Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC), the question for consideration was whether the salami payable under an agreement of a mining lease for a period of 999 years was 'agricultural income' or not. This is what lord Wright said (p. 519) :

'The salami has been, rightly in their Lordship' opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account.'

42. It is significant to note that their Lordship held the royalty payable under the mining lease to be 'income' treating it in substance a rent. This view was affirmed by the Supreme Court in Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani : [1957]32ITR169(SC) , in the following words (headnote) :

'Where salami is in the from of a lump sum non-recurring payment made by a prospective tenant to the landlord as a consideration for the settlement of agricultural land and parting with certain rights of the landlord in the land in favor of the prospective tenant, and is paid anterior to the constitution of relationship of landlord and tenant, it is not 'rent' within the meaning of the word used in the definition of 'agricultural income' in section 2(1)(a) of the assam Agricultural income-tax Act, 1939. It has all the characteristics of a capital payment and it is not revenue. It is thereforee, not 'agricultural income' within the meaning of that Act.'

43. We have, thereforee, to look to the substance of the matter rather than the phraseology used in s. 2(1) of the Act. In other words, 'revenue receipt' is essentially 'income' as distinguished from a 'capital receipt' is essentially 'income' as distinguished from a 'capital receipt' unless, of course, the later can be included in the former by virtue of any specific or express provision of the Act. This conclusion is further fortified by the Supreme Court in Karanpura Development Co. Ltd. : [1962]44ITR362(SC) , to the following effect (p. 368) :

'But whatever 'income' may include or mean, it is, however, clear that is does not include fixed capital or the Realizing of fixed capital by turning it into some other from of capital or money. Fixed capital is something which the owner keeps in his passion but turns to profit; circulating capital, however is turned over in the process of profit making.

Obviously, 'income' is the return on the capital which is treated as 'revenue'. In view of our answer to the first question that the agricultural land in the instant case did not constitute a trading asset or a venture in the nature of trade and that it was just a capital it will follow as a necessary corollary that the compensation received by the assessed on its acquisition by the Government cannot be looked upon as 'revenue receipt' as distinguished from a 'capital receipt'. The definition of 'agricultural income' in s. 2(1) of the Act itself speaks of rent, revenue, sale by a cultivator, or receiver of rent-in-kind of the produce raised or received by him, etc. It is conspicuously silent about the sale of the land itself, Indeed, as shall be presently seen, the sale of a capital asset including agricultural land would yield what is called 'capital gain' and not 'income' as understood in common parlance.

Before concluding, however, we may allude to Seventilal Maneklal Sheth : [1968]68ITR503(SC) , on which reliance has been placed by Delhi Bench (C) for coming to the conclusion that the compensation received by the assessed for acquisition of the land in question constituted 'revenue' within the meaning of s. 2(1) of the Act. The facts of the said case are that in 1951 the assessed, Maneklal Ujamshi, made a gift of certain shares to his wife, Bai Laxmibai, the total value of the transferred shares on the date of transfer being Rs. 69,730. On August 1, 1956, the wife sold some of those shares Realizing a capital gain of Rs. 70,860 as computed under s. 12 of the Act. The entire sale proceeds were invested by Bai Laxmibai with M/s. A. H. Bhivandiwalla & Co. in which Maneklal as well as his son, Seventilal, happened to be partners and the amount deposited by her fetched an yearly interest of Rs. 9,288. In the assessment of Maneklal of which was the profit made by Bai Laxmibai on the sale of the shares as income of Maneklal under s. 16(3)(a)(iii) of the Act. So the question before their Lordships of the Supreme Court was whether the capital gain of Rs. 70,860 on the sale of shares was income arising from assets transferred directly to the wife by the assessed and could be included in his income under s. 16(3)(a)(iii) of the Act, the said question having been answered by the High Court in the affirmative. An argument was advanced by the learned counsel for the assessed before the Supreme Court that what comes within the ambit of s. 16(3)(a)(iii) was the income from the assets, i.e., the income which the asset produces while it continues to remain in the hands of the assessed and does not include the gain which the assessed makes by selling the asset and parting with possession of it. However, this argument did not find favor with their Lordships, who observed (p. 507).

'In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the asset would arise or spring from the assets, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, to bring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessed, while in the operation of a sale, gains is produced, which is still income, but in the process the little to the asset is parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has prong up or arisen from the asset. There is hence no warrant for the argument that the capital gain is not income arising from the assets, but it is income, which arises from a source which is different from the asset itself.'

44. In view of the foregoing observations the Tribunal came to the conclusion that the gain arising from the sale of an asset can be properly considered as income arising from that asset. We are, however, of the opinion that the Tribunal has misread and misconstrued the above case. The proper approach to the solution of the question is to concentrate on the plain words of the definition of 'agricultural income' which connects in no uncertain language 'revenue' with the 'land' from which it directly springs and stray observations in a case which has no bearing upon the present question does not advance the solution of the question. It has to be borne in mind that the basic question before their Lordships was whether s. 16(3)(a)(iii) would be applicable to the capital gain which had accrued to Bai Laxmibai on sale of the shares which had been transferred to her by her husband. Naturally, thereforee, their Lordships construed the provision in the light o the word 'income' within the meaning of s. 2(6C) of the Act which includes any capital gain chargeable under s. 128 of the Act. They were not concerned with the meaning of the words 'revenue derived from land' appearing in the definition of the word 'agricultural income' in s. 2(1)(a) of the Act. Hence, their Lordships said that there was no warrant for the argument that the capital gain is not income arising from the assets but it is income arising from a source which is different from the asset itself. This position was made abundantly clear in the succeeding passage wherein their Lordships observed (p. 507) :

'The inclusion of 'capital gains' in the definition of 'income' was for the first time enacted in 1947. It is true that, at the time when section 16(3)(a)(iii) was enacted, the definition of 'income' did not include 'capital gains' but capital gains having been brought within the meaning of 'income' in section 2(6), the expression 'income' as used in section 16(3)(a)(iii) must be construed according to the amended definition of the word and would, thereforee, include capital gains. There is nothing in the context or language of section 16(3)(a)(iii) of the Act to suggest that capital gains are excluded from its scope.'

45. Surely, the aforesaid judgment of the Supreme court cannot be read or construed as implying that 'capital gains' would form part of 'income', whatever be the source of the former. As observed earlier, the tax is still on 'income, profits and gains' and not on 'capital' except to the extent included by the said definition in s. 2(6C). Capital receipts would be exempt under s. 4(3)(vii) except in respect of tax on capital gains under s. 128 as they would be, ex hypothesi, casual and nonrecurring. Needless to say that in the amended definition of 'income', which is inclusive and not exhaustive, certain artificial categories including 'capital gains' have been added to the natural connotation of 'income' without throwing any light on the general concept of the word. The definition of 'capital asset' as incorporated in s. 2(4A) specifically excludes any land from which income derived is 'agricultural income'. In other words, agricultural land would have been a capital asset but for its specific exclusion for the definition of the expression 'capital asset'. As a necessary corollary, it would follow that capital gain arising from the sale, exchange, relinquishment or transfer of agricultural land which is not capital asset as envisaged in s. 128 of the Act will not fall within the ambit of even the extended definition of 'income' in s. 2(6C) of the Act. That apart, the language of clause (iii) of s. 2(4A) draws a clear distinction between 'land' and the 'income derived there from' and on its plain reading it is crystal clear that before any land can be excluded from the purview of capital asset income derived there from must be 'agricultural income' within the meaning of s. 2(1) of the Act. So, Such land must be the source of 'agricultural income'. Surely, if the corpus is itself disposed of by way of sale or transfer, etc., it cannot be held by any stretch of reasoning that the sale proceeds would be 'income' from it. To accept this position would be to unduly extend the scope of the vital words 'revenue derived from land' appearing in s. 2(1) of the Act. In this view of the matter, thereforee, Delhi Bench (C) has evidently misconstrued and misapplied the ratio of the decision in Sevantilal Maneklal Sheth : [1968]68ITR503(SC) , and Delhi Bench (B) has correctly appreciated and interpreted the said judgment, It may, however, be noticed that reliance buy the latter on the judgment of the Andhra Pradesh High Court in Pydah Suryanarayana Murthy v. CIT : [1961]42ITR83(AP) is misplaced inasmuch as that was clearly a case of requisition under the defense of India Act and compensation was payable for use and occupation of the land and not for acquisition thereof as is the case at present. Further, it was found that the military authorities had not carried out any agricultural operations on the land and, thereforee, the compensation received for requisitioning did not fall within the definition of 'agricultural income' as appearing in s. 2(1)(a) of the Act. The analogy drawn by the Tribunal between the expression 'compensation given under an award for requisition of the requisition of the property' and the 'compensation payable under the land Acquisition Act' although by means of an award, is erroneous inasmuch as the former is a case of payment for use and occupation whereas the latter is tantamount to compulsory transfer of the property as such. In view of our finding that the land in question constituted capital investment as distinguished from a trading asset or a venture in the nature of trade, the amount of Rs. 1,65,600 cannot be held to be 'agricultural income' exempt under s. 4(3)(viii) read with s. 2(1) of the Act. Hence, our answer to these question is in the negative, as the amount in question is not income at all question no. (iii) in I.T.R. No. 34/72 :

46. This question was not pressed by the counsel for the assessed. Question no. (iv) in I.T.R. No. 34/72 :

47. The assessed claimed an amount of Rs. 92,873.90 as repair charges of head office and house Nos. 14 and 16, Aurangazeb Road, New Delhi. However, the same were disallowed by the ITO on the short ground that the income from the said properties was being computed under s. 9 of the Act. The point was again agitated before the Assistant Commissioner in appeal who, following his earlier appellate order Appeal No. 217/1965-66, held that 1/4 the of 16. Aurangzeb Road, was used for the business of the appellant and the ITO should consider proportionate expenses under the appellant and the ITO should consider proportionate expenses under the head 'Business'. The details of the expenses on account of the repairs were examined by him and he felt that most of the expenses were incurred on renovation and reconstruction of the two properties, viz., 14 and 16, Aurangazeb Road, especially the one occupied by the managing director of the assessed. The bills indicated extensive alterations and renovations in respect of these properties and the main purpose of these renovations was to make the property fit for occupation by the managing director. Under the circumstances, he held that the expenses amounting Rs. 92,874 were correctly disallowed by the ITO as capital expenditure. However, he was of the view that only the expenses on the portion occupied for business purpose would be entitled to depreciation. Accordingly, in the absence of separate accounts for the said portions, he estimate the capital expenditure upon it at Rs. 10,000 only. The estimate was made on the assumption that the outhouses could not have been renovated at great cost.

48. The Tribunal considered the deductibility of Rs. 89,710 spent on repairs and renovations, etc., of houses Nos. 14 and 16, Aurangzeb Road, while an amount to the tune of Rs. 89,634.74 was spent on 16 Aurangzeb Road, a portion of which was admittedly occupied by the managing director of the assessed. A contention was raised on behalf of the latter that the said premises were wholly used for the purposes of the business and reliance was placed on Rohtas Industries Ltd. v. CIT : [1961]41ITR524(Patna) (Pat) and CIT v. Delhi Cloth and General Mills Co. Ltd. in this behalf. However, both the said authorities were distinguished by the Tribunal on the ground that the premises in question were being used as dwelling house by the managing director and he was paying rent for the same. So, the mere fact that the tenant was also an employee of the company was held to be insufficient to warrant the conclusion that the housing accommodation was an amenity provided to the managing director and that it was being used for the business of the assessed. However, on examining the details of the building account and the expenses incurred on repairs, etc., the Tribunal held that it would be fair and reasonable to take one-half of the building as occupied for business purpose. Thus, it came to the conclusion that the sum of Rs. 75 in respect of house No. 14 and one-half of the expenditure on house No. 16, i.e., Rs. 44,817 could not be allowed as deduction. The Tribunal further found, agreeing with the AAC that the major part of the expenses are capital in nature being for extensive alterations and renovation of the premises. At the same time, the Tribunal was of the view that the expenses on repairs, etc., incurred by the assessed should be applied in the same ration as the business portion as the dwelling house portion. On a scrutiny of the accounts, thereforee, it found that about Rs. 5,000 could be described as in the nature of repairs and, as such, was a revenue expenditure, the rest being a capital expenditure. On these premises, the Tribunal directed that the assessed was entitled to a deduction of Rs. 2,500 and to depreciation of Rs. 42,000 in round figures.

49. The learned counsel for the assessed has canvassed, with considerable force, before us that the property 16, Aurangzeb Road, is being used and is occupied for the purposes of the business of the assessed. Of course, it is admitted that its managing director is using a portion of the property as dwelling house and is paying rent for the same. A perusal of s. 9 of the Act would show that the computation of income from properly should in the normal course be under s. 9 and not under s. 20 of the Act. Since a specific head of charge is provided for income from ownership of house property, rents or other income from the ownership of house, the property cannot be brought to tax under any other head. In a way, thereforee, assessment under this head is not only proper but obligatory. It is only when a building or a portion of it or land appurtenant there to is occupied by the owner for his business, profession or vocation and the profits of the same are assessable to tax that the annual value in respect of such an event, notional rent is not allowed to the assessed in respect of the premises in computing the profits of the business, profession or vocation. However, we do not think that there is anything in the language of s. 9 of the Act to warrant an inference that the possession of the assessed as owner of the property must be actual and physical. It is enough that the assessed is in legal possession of such property, provided of course, that the same is used for the purposes of his business. So even buildings let out to the the employees of the assessed may be said to be occupied by assessed-owner for the purposes of his business as envisages in s. 9 of the Act, provided there is material to show that such occupation of the employees is incidental and subservient to the business of the assessed. This is the view taken by various High Courts. In Delhi Cloth and General Mills Co. Ltd. , the assessed-company which carried on various business owned several buildings most of which we let to different employees. The rental of the premises was fixed, it did not change with the change of the occupation and it was deducted from the wages of the employee or employees occupying the premises. A post office, some shops and stalls which, according to the assessed, were essential for the benefit of the employees also existed in the building complex. Under the circumstances, it was held by a Division Bench of the Punjab High Court (p. 155) :

'These employees are engaged in the main business of the company and their residence in the buildings in dispute is incidental to their main occupation, that is, the carrying on of the business of the company. In true perspective, these buildings are part of the business equipment of the owner, or, in other words, it is the business asset of the owner.... All this is done not because the company is trying to earn or is engaged in the business of earning rental income from the employees but for the purpose that the employees carry on efficiently the business of the company. The housing accommodation is an amenity which is provided for the purposes of the business of the company and is not de hors that business.'

50. Jamshedpur Engineering and Machine . v. CIT : [1957]32ITR41(Patna) , Rohtas Industries Ltd. : [1961]41ITR524(Patna) and CIT v. National Newsprint and Paper Mills Ltd. : [1978]114ITR388(MP) , are other decisions which are almost on identical lines. In the last-mentioned case it was observed (headnote) :

'that the dominant purpose of letting out of the accommodation was to enable the assessed to carry on its business more efficiently and smoothly and the activity of letting had a definite nexus with the business that the assessed was carrying on'.

51. In the instant case, the assessed has failed to bring on record any material to suggest that the motivation of letting a portion of 16, Aurangazeb Road, was facility of business in the sense that it was essential for a better management and control of the business. Hence, we are in complete agreement with the view taken by the Tribunal in this respect and our answer to this question is in the affirmative.

52. Question No. (v) in I.T.R No. 34/72 :

In view of our answer to the foregoing question, this question does not, on its own terms, arise.

53. Question No. (ii) in I.T.R No. 14/73 :

counsel for the parties did not address any arguments on this question. Since Delhi Bench (B) was concerned with a different assessment year, although it was subsequent to the assessment year dealt with by Delhi Bench (C), we do not think that any legal obligation was cast on the former to follow the view expressed by the latter either as a precedent or otherwise. Of course, there can be no doubt that it had persuasive value in the sense that the Bench dealing with the subsequent year should not have ordinarily departed from the view taken earlier. We have already observed that the Delhi Bench (B) has given cogent and sound reason for taking a different view of the matter. So, the question of want of any propriety or desirability does not arise.

54. To sum up, thereforee, both the above-mentioned references are disposed of in terms of the answers given to the various questions as above. Since some of the questions raised are really complicated ones, we make no order as to costs.


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