1. The assessee is a private limited company, which carried on the business of producing films and distributing the same. The memorandum and articles of association of the assessee-company permitted the company to carry on several other business of film production and distribution. Clause 16 of the articles of association enabled the company to acquire by purchase, hire, lease, exchange or otherwise, lands, buildings and hereditaments of any tenure or description and any estates or interest therein or any right over or connected with land and either to retain the same for the purpose of the company's business or to turn the same to account by selling, conveying, assigning or letting on lease. The assessee purchased on September 29, 1950 a plot of land measuring 198 grounds, equivalent to 10 acres and 89 cents, situate in the villages of Virugambakkam and Saligramam, for a sum of Rs. 1,00,000 from one Sanjeevi Naidu. At the time of the purchase of the said land, there was a built-up studio along with machinery, which was known as Shirdi studios, on that land, After the purchase of the said land, buildings and machinery, the assessee produced pictures therein. On October 13, 1963, the assessee applied to the Director of Town Planning, Madras, for the sanction of a layout for 40 plots in a portion of the land purchased. the sanction was accorded on August 3, 1964, by the Commissioner, Panchayat Union Villivakkam. According to the sanction, sales of land could be effected only after laying out streets, sewers, etc. On November 27, 1969, the company passed a resolution to the effect that the land which was plotted out and the land behind the studio were to the effect that the land which was plotted out and the land behind the studio were to be sold for discharging the debts of the company. The balance-sheet of the company as on April 12, 1969, showed that there were secured loans to the extent of Rs. 2.41 lakes including picture advances. The land in question was included in the fixed assets under the head 'Land and Buildings'. On December 12, 1969, the assessee entered into an agreement of sale in respect of 4.40 acres of land with one City Lands Corporation which was a firm of three partners. According to the terms of the agreement, the entire 4.40 acres of land, which had been plotted out had to be sold for an aggregate price of Rs. 1,90,000. As per the said agreement, the land which had been plotted out had been plotted out had sold to the nominees of the City Lands Corporation. The land which remained with the assessee after the said sales was 6.47 acres.
2. During the assessment year 1970-71 an extent of 12 1/2 grounds had been sold. The assessee claimed that the sale of vacant sites during that year was in the course of its business or an adventure in the nature of a trade. the ITO took the view that the cost price, represented capital gains and brought to tax a sum of Rs. 28,608 as long-term capital gains. The assessee appealed to the AAC who took the view that though originally the land formed part of the capital assets, the assessee converted the capital asset into stock in trade and that, therefore, it was assessable as income from an adventure in the nature of trade and not as capital gains. The Revenue took the matter in appeal to the tribunal, Before the Tribunal, the revenue contended that the land of 198 grounds, together with the studio and the machinery was purchased as far back as 1950 and had been kept by the assessee for 13 years, that is, till 1963, as capital asset with no intention at all to sell the same at any time. But getting permission from the town planning authority of the sanction of a lay out and developing the land into laid out plots was only with a view to realise the best price possible for the land in question and that will not amount to a conversion of the capital asset into a stock-in-trade. The Revenue placed reliance in support of its submission on a decision of this court in CIT v. Kasturi Estates : 62ITR578(Mad) and further contended that the surplus sale proceeds of the land during the accounting year referable to assessment year should be taxed only as capital gains and not as profits from any adventure in the nature of a trade. The assessee, on the other hand, contended that the showing of the land as a fixed asset in the balance sheet did not necessarily result in the presumption that the assessee was treating the same as an investment or as a capital asset, that on the assessee getting approval for plotting out lands in 1963, it should be deemed that the assessee had undertaken a business deal and that, therefore, the sale of plots should be treated as one in the course of an adventure in the nature of a trade. The Tribunal, after referring to certain guidelines for determining the question whether the transaction is an adventure in the nature of a trade or not, ultimately answered the question in favour of the Revenue holding that the assessee, which was carrying on the business of film production, had purchased the land containing the studio fully equipped, that thereafter the film production was carried on in the studio right from 1950, the year of purchase; that there was no intention at any time, after the purchase, to treat the land as a stock-in-trade and to sell the same; that in the year 1963, the assessee had applied for the approval of a layout and got the approval of the authority and that when the company was involved in debts, it chose to sell the land for discharging those debts. The Tribunal also stated that in the agreement entered into with the City Lands Corporation, the assessee mentioned that the lands which were being sold were surplus lands, that the intention of the assessee was to get the best possible price for the lands and that it was only with that intention that the lands had been plotted out and sold. The Tribunal finally held that the above facts clearly indicated that the transaction was a realisation of investment and not a sale of stock-in-trade and that, therefore, the surplus sale proceeds was assessable only as capital gains. In this view, the Tribunal restored the finding of the ITO, disagreeing with the view of the AAC. Aggrieved against the order of the Tribunal, the assessee sought a reference to this court and the following question of law has been referred to :
'Whether the Tribunal was right in holding that the transaction which resulted in a surplus of Rs. 26,608.38 in the account year relevant to the assessment year 1970-71 represented only realisation of an investment and the aforesaid surplus was assessable only as capital gains ?'
3. From the facts set out above, it is clear that the assessee purchased a vacant block of land measuring 10.89 acres along with a studio building and machinery for production of films, that the assessee in fact was engaged in film production from 1950 till 1963 in the said land, that at the time of purchase the assessee had no intention to sell any portion of the land, that it was only when it got involved in considerable debts, it thought of selling the lands as laid out plots through the City Lands Corporation for the purpose of discharging the debts and after developing the land into laid-out plots. The assessee sold the land through the City Lands Corporation. In this case it cannot de disputed, and it has not been disputed by the counsel for the petitioner-assessee that the land originally formed a capital asset, which was being used for the production of films and that the normal sale of such an asset can be treated only as a sale of capital asset or as a realisation of an investment. However, Mr. K. Srinivasan, learned counsel for the assessee, would contend that the land in question did not continue as a capital asset, that it was transformed into a stock-in-trade when the assessee got the approval of the town planning authority for the layout, that the subsequent sale of the laid-out plots will indicate that it was a sale of stock-in-trade and that, therefore, the sale proceeds can be treated only as income from an adventure in the nature of trade. The question is, whether there is any substance in the said contention put forward by the learned counsel for the assessee.
4. We are not in a position to accept that the mere application for permission for the layout of the so-called surplus land and the subsequent sale of the land through the City Lands Corporation as plots would lead to an inference that there was a conversion of the capital asset into a stock-in-trade. As already pointed out, it is not disputed by the learned counsel for the assessee that till the layout was sanctioned, the land continued to be a capital asset, that till 1963 the assessee had no intention to sell that asset, that though steps were taken in the year 1963 for getting a sanction of the layout, the land was actually sold as laid-out plots only in the year 1969 for the purpose of discharging the debts of the assessee company. Thus, it is clear that the intention to sell the laid-out plots was only to discharge the debts and not for carrying on an adventure in the nature of a trade. The fact that the assessee applied for a sanction of the layout and sold the laid-out plots, instead of selling the land as a whole, will make it clear that it did so only for obtaining the best price possible and not for engaging itself in real estate trade. As a matter of fact, the sale of the laid-out plots took place not at the time when the layout was sanctioned in 1964, but at the time when the assessee was heavily involved in debts, and, therefore, the motive for the sale of the land was to discharge its debts. Hence, the total impression which we get from all the relevant facts and circumstances proved in this case is that the assessee sold that the sale was not that of a stock-in-trade and that the sale was not in the course of the carrying on of an adventure in the nature of a trade. In this view of the matter, we have to agree with the finding of the Tribunal and answer the question referred to us in the affirmative and against the assessee.
5. The reference is answered accordingly. The Revenue will have its costs. Counsel's fee Rs. 500.