(1) The cases of the two assessees are consolidated in this reference under Section 66 (2) of the Income-tax Act 1922. The reference turns on the character of the receipt by each of them of a sum of Rs. 19672, which represents the gain over the cost of a third share in a leasehold interest in what is called Thombai estate in Malaya acquired by the Government of that country on 31-12-1954. This amount was brought to tax on the view of the Revenue, with whom the tribunal concurred, that it was a revenue receipt. The question referred to us is:
'whether on the facts and in the circumstances of the case, there was no material to support the finding of the tribunal that the sum of Rs. 19675 constituted a revenue receipt assessable to income-tax?'
A Preshyterian Church of England in Malaya had a 999 years lease from the Sultan of Johore Baru in Thomboi estate and from the church. Chidambaram Chettiar and his divided brother purchased the lease hold interest for a consideration of 30900 dollars on 25-6-1940, of which the assessee's father contributed one third. They jointly worked the rubber estate and derived income which was considerable at the beginning, but due to enemy occupation between 1942 and 1945, when the estate was damaged, the income dwindled to practically nothing in most of the following years. In 1940, the income was 1382 dollars and in the next year 2012 dollars and during the enemy occupation there was no income. During two of the following years there was nil income and in fact, the estate incurred expenses in excess of the income. Until 30-4-1950, Chidambaram Chettiar and his five sons constituted a Hindu undivided family, but on that date there was a partition, and as a result, the business at Johore Baru run in the name of SM ST was converted into a partnership consisting of the erstwhile members of the joint family with effect from 1-5-195-.
This firm owned a number of estates including Thombai estate, and it is not in controversy that this firm not only did money lending business but also was engaged in trade of purchase and sale of lands. For the year 1951-52, a consolidated profit and loss account was drawn for the accounting period ended 31-12-1950, and the income upto 30-4-1950 was attributed to the family and the balance to the firm. The firm for that year showed a profit for the whole period, which included profits made out of sale of two items of immovable properties, and also claimed to deduct the losses incurred in respect of a sale of a certain other immovable properly. On 18-4-1952, the account of the firm was credited, and the two assessees before us were debited with the proportionate cost of one-third share in the estate. It was explained that this was done because this asset was set apart for a charity to be performed in India. But, in spite of the division by book entries, the estate continued to be worked out jointly by the shares as usual, and the income divided between them inter, se. As we mentioned, the Government of Malaya took over the estate and paid compensation therefor, and the amount that was included in the chargeable income of each of the assessees was derived from the compensation so paid.
(2) The Income-tax Officer considered that this asset was never considered as an investment, but was treated from 1940 as part of the stock-in-trade. He attached no significance to the book entries in April 1952 transferring in effect this asset from the firm to the two assessees. The Appellate Assistance Commissioner concurred with him. On appeal, the Tribunal declined to interfere. Their approach was contained in the following sentence in respect of the assessee's contention that the was only an accretion to capital:
'We cannot accept this view. There is no evidence to show that this was held as an investment. The nature and condition of the Estate as also the returns from the estate could not make it a source of investment'.
It then dealt with the book entries of April 1952 and was apparently not inclined to take them to be of any value, because the assessees, as it looked at the facts, must have known that the Government was going to acquire the asset and that they anticipated and look advantage of it to make a profit. The tribunal did not, as far as we can see from its order, recorded a finding as to how this asset was precisely treated subsequent to the division between Chidambaram Chettiar and his five sons in April 1950 until it was acquired by the Government. But, in the statement of the case, it seems to have added to its order, for, it said that the acquisition of the lease in 1940 was a part of the stock-in-trace of the firm whose business included dealings in real properties and that independent of this, it was not possible to say that the acquisition and the subsequent alienation of the less constituted an adventure in the nature of a trade. We are of the view that the approach made by the tribunal to the problem is not correct. When a transaction relates to a land, there is no presumption as to whether it is in the nature of capital investment or is a stock-in-trade. When the Tribunal said that 'There is no evidence to show that this was held as an investment', it is apparent that in the absence of evidence it was prepared to assume that the asset was a stock-in-trade. Instead, the Tribunal should have asked itself the question: 'What material was there to regard the asset as a capital investment or as a stock-in-trade?'. In other words, the character of the asset should be judged not from any pre-conceived supposition, but on the facts and circumstances pertaining to it.
We are also unable to agree with the tribunal in respect of its further observation that the nature and condition of the estate as also the returns from the estate could not make it a source of investment. The nature of the estate here is a lease hold interest in a rubber estate. It is common knowledge that when land or an interest in land is concerned, it is ordinarily the subject matter of investment unlike a commercial commodity like goods. It is true that land may be the subject-matter of purchase and sale in a trading sense. But, there should be clear evidence to stamp the transaction with such character. We do not precisely follow what the Tribunal had in mind when it referred to the condition of the estate as bearing on its character as a revenue asset. We see from the statement of the case no indication as to any condition relating to the asset except that soon after its acquisition, it yielded substantial income for two successive years; but later on, on account of enemy occupation and consequent damage to it, its income was reduced to a negligible figure. We fail to see how this can at all bear upon the character of the asset. The returns from the estate in the circumstances cannot be a guide to determine its character. It is true enough that an investor makes an investment with a view to get adequate income but this need not necessarily be so. But, in this case, the negligible income derived subsequent to 1942, is explained and it does not assist in deciding the character of the asset.
(3) The question then is: what is the material on which the conclusion reached by the Revenue as well as the tribunal as to the nature of the estate is rested. The facts relevant to this matter are these. As we said, the leasehold interest was acquired in 1940 and it may be taken it was part of the stock-in-trade prior to 1950, but when Chidambaram Chettiar and his sons became divided on 30-4-1950, and one-third share in the estate belonging to the family was allotted to the sharers, the allotment so made could no longer continue to have the character of the stock-in-trade. The asset in the hands of the assessees after that date was capital. This asset was brought into the accounts of the firm since the division. There is no evidence as to how exactly this was done. There is no material to shown separately in the ledger folio. There is again no material to show whether in the accounts of the firm this asset was treated as stock-in-trade or shown separately in the ledger folio. There is again no material to show as to how the income derived from the estate was treated by the firm except that the assessees were charged to tax on the share of the income from the estate each was entitled to. These are the only materials, as far as we can see from the record, on which the question relating to the character of the asset has to be decided.
(4) In our view they do not furnish material to justify the conclusion of the Revenue and the Tribunal that the asset was part of the stock-in-trade of the firm. The Revenue relied on the fact that the firm was trading in the purchase and sale of lands and that even before 1950 this asset was treated as part of the stock-in-trade. We are unable to see how that by itself will enable the Revenue to stamp the asset with the character of stock-in-trade. A money lender or a trader in purchase and sale of land can as well invest in land. The mere fact that he has carried on such a trade is not in itself evidence of a particular asset being a stock-in-trade. It may be that where it is the case of a person carrying on a trade or business in purchase and sale of lands, it will be more readily assumed that a particular asset is possibly a stock-in-trade. But that assumption must be based on some material at least.
(5) Once we know that the asset was capital in the hands of the assessees from 1-5-1950, and after the family got divided one should look for facts and circumstances which bear on the treatment of that asset and which should lead to the inference that by such treatment, what was a capital asset was converted into stock-in-trade. How this process will be applied cannot be generalised for, in the very nature of things, each will have to be decided on the particular facts and the conclusion must be arrived at on the cumulative effect of their evidentiary value.
(6) We have not so far touched on the book entries in the firm's books that on 18-4-1952, the asset was transferred from the firm to the assessees. This is because the Revenue as well as the Tribunal were not inclined to act upon those entries as bringing about a transfer in fact. The tribunal does not appeal to give a clear finding on this but its inclination is apparent from its order. We do not, therefore, also attach any importance to the entries not because we consider that the entries were not acted upon, but because of the factual finding of the revenue with which the Tribunal agreed in relation to that matter.
(7) There is also one other matter which we would like to advert to. The assessments in this case were in the status of individuals. But the character of the asset was judged by the Revenue as well as the Tribunal from the standpoint of its being a stock-in-trade of the firm. It may be that this manner of charging the income in the hands of the assessees may make no difference from the point of view of tax liability, but it bears on the character of the asset. If the asset belongs to her assessee as individuals, the character of the asset will have to be looked at from that standpoint, but that has not been done in this case.
(8) On the facts and in circumstances of the case, and their cumulative effect, we are of the view, as we already indicated, that there is no material to warrant the conclusion that the asset was a stock-in-trade and the income in question is chargeable to tax as a revenue receipt. We are confirmed in that view by the further fact that though the leasehold interest was acquired in 1940, it has been held by the original purchasers and subsequently by the joint family and the firm for a long number of year and they have derived income from it.
(9) It is contended for the Revenue that inasmuch as the assessees had knowledge of the anticipated acquisition by the Government of the asset from a letter of certain Solicitors dated 21-10-1952, the entries in the books of the firm transferring the asset to the assessees were made with an intention that the assessees might take advantage of it and make a profit. That was how the Tribunal also was inclined to view it in a portion of its order. But, we do not find from the orders of the income-tax Officer or the Appellate authority or the Tribunal that they regarded the transaction as an adventure in the nature of trade. In fact, in the statement of the case, the Tribunal has expressed its view that independent of the fact that the acquisition made in 1940 was treated as part of the stock-in-trade, it was not possible to say that the acquisition and the subsequent alienation of the lease constituted an adventure in the nature of a trade. Whether it is permissible for the tribunal to add to its original order while drawing up a statement of the case under Section 66, is not clear. But we will assume, without deciding, that it was. Even on that basis we are of the view that the facts do not warrant an inference that the transaction was an adventure in the nature of trade. First of all the transaction was not a sale, but an acquisition by the Government. There was here on adventure. That word implies venture which again implies a risk. There was no risk taken by the original purchasers and there is nothing to show that when they purchased, they had in view the acquisition by the Government years later. Even assuming that there was a transfer or the asset to the assessee through the book entries of the firm, there was nothing commercial about the acquisition. An adventure in the nature of trade must, as it has sometimes been pointed out, be a plunge in the waters of trade. There is no evidence of it in this case.
(10) We answer the question referred to us in favour of the assessee with costs. Counsel's fee Rs. 250.