1. At the instance of the assessee, the following question has been referred to this court under Section 256 of the Income-tax Act, 1961.
'Whether, on the facts and in the circumstances of the case, the surplus of Rs. 16,097 was assessable as business income ?'
2. The assessee owns a number of houses and derives income therefrom. He also runs four hotels in Salem. On February 10, 1951, he purchased a house at 6/12, Trichy Road, and sold the same on March 11, 1952. Two months thereafter, on May 15, 1952, he purchased certain items of house properties at Devendrapuram in Salem and sold the same on November 27, 1957. On September 30, 3957, he had purchased a house property at 326-867-868, Chinaakadai Street, at a cost of Rs. 15,200. After making some improvements to this building at a cost of Rs. 6,203, he leased out the same for running a hotel from May 1, 1958, to April 30, 1959. He himself ran the hotel in that premises for a short time between April 23, 1959, and June 20, 1959. The said property was ultimately sold on December 17, 1959. The assessee constructed a house in 1952 at Swarnapuri in Salem at a cost of Rs. 24,000 and the same was ultimately sold in September, 1959. In December, 1959, the assessee purchased two blocks of houses in Sivaswamipuram Extension and sold the same some time later.
3. It is in the previous year ending March 31, 1960, relevant to the assessment year 1960-61, that the assessee sold the Chinnakadai and Swarnapuri properties and realised a surplus of Rs. 16,097 over and above his cost price. The Income-tax Officer assessed the above sum as the assessee's income from his business in the purchase and sale of properties, after rejecting the contention of the assessee that the said sum represented capital gains.
4. The assessee appealed to the Appellate Assistant Commissioner. It was contended before him that the property at Swarnapuri was constructed in the financial years 1951-52 and 1952-53 by obtaining a loan from the Government, that it has been sold after seven years, that the long lapse of time indicated that the assessee had no intention initially to sell and to make a profit out of it and that, in those circumstances, the surplus cannot be treated as a business income. The Appellate Assistant Commissioner referred to the assessee's past assessments and observed that the assessee had not accounted for his income from the business properly, that he had utilised the surplus income from the business for the acquisition or construction of houses and selling them at a profit, that, in any event, the series of purchases and sales showed that the assessee carried on business in real properties and that, therefore, the surplus on the sale of the two house properties had been rightly assessed as income from business.
5. The assessee preferred an appeal to the Appellate Tribunal. Before the Tribunal it was contended that the time lag between the construction and sale of Swarnapuri property would indicate that the assessee did not have the intention to sell the property and make a profit thereof, that the house at Chinnakadai was acquired with the object of running a hotel there, that he ran the hotel business in that property for a short period and as it has proved to be uneconomical he wound up the business and sold the property and that all these facts show that he had no initial intention to sell the property at a profit. The revenue contended that the assessee had been indulging in the purchase and sale of properties since 1952 and that the intention was not the sole test in finding out the nature of the transaction. In the face of these rival contentions, the Tribunal held that the series of purchases and sales clearly indicate that the assessee carried on a continuous activity in purchase and sale of house properties, that the assessee's business profits have always been estimated, that the cost of construction and the purchase price of the houses could have come only from his business profits, that it is only by utilising his suppressed business income he had purchased the houses and that, therefore, the purchases and sales of the houses should all be treated as part of his whole business. The Tribunal also found that the facts of the case established that there are a number of transactions bearing the badge of trade and that the question of intention to make a profit will arise only in the case of an adventure in the nature of trade. In that view the Tribunal upheld the assessment of the said sum as business income.
6. The question that arises for consideration is as to whether the purchases and sales of the house properties by the assessee is only in the course of investment or whether they partake the character of business. In other words, it has to be considered as to whether the surplus realised in the assessment year by sale of house properties is a capital gain or whether it is a business income.
7. It is urged by the assessee that unless it is shown that the house properties purchased and sold by the assessee are commercial assets, the sale proceeds of the same cannot be taken to be his business income and that the assessee is not at all a dealer in houses and house properties. It is said that he is running only a hotel business and that the purchase of houses were only in the nature of investment. In this case the profit has accrued from the sale of house properties. If the house properties sold are capital assets or capital investments, the profit accrued has to be taken as an accretion of capital, for the sale proceeds represent capital in another form. But, on the other hand, if the sale of the house properties is in the course of the business, the profit accrued is on revenue account and has to be taxed as business income. If an article has been acquired for the purpose of trade then the profit arising from its sale must be brought into revenue account.
8. It is well-settled 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 assessable to income-tax as business income. It is equally well-established that the enhanced value 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. As pointed out by Lord Justice Clark in Californian Copper Syndicate (Limited and Reduced) v. Harris,  5 TC 159 :
'What is the line which separates the two classes 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 realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making ?'
9. If the transactions arc in the assessee's ordinary line of business there can be no difficulty in holding that they are in the nature of trade. Even there some transactions in the ordinary line of the assessee's business may be on capital account. The difficulty arises where the transaction is outside the assessee's usual line of business. In such a case it must depend upon the facts and circumstances of each case whether the transaction is in the nature of trade.
10. In Cooksey and Bibbey v. Rednall (H. M. Inspector of Taxes),  30 TC 514 the question arose as to whether the purchase in 1924 and the sale in 1938 of afarm jointly by a solicitor and a farmer resulting in a profit amounted to abusiness transaction and whether the profit realised is taxable as businessincome. The court found that the two persons bought the farm for theirown purposes and finding that they could not work it retained it as an investment and let it for years and years and that only when they found an increase in value of the farm they decided to sell and realise its price. On these facts the court expressed that it was impossible to hold that the transaction was in the nature of trade. In Harvey v. Caulcott (H. M. Inspector of Taxes),  33 TC 159 a builder obtained in 1927 the leasehold right of a site upon which he built a number of shops. These shops were sold at a profit to 1946 and 1948. The revenue assessed the surplus receipts as business Income, rejecting the contention of the assesses that the sales in question were all realisations on investments, not being business assets. On appeal the Commissioners upheld the said assessment. The court held that the profits arose on the realisation of investments and as such were not assessable to income-tax after taking into consideration the following facts : The intention of the builder was not to treat the properties as trading stock, and that the purchase of the property was only as an investment. Commissioners of Inland Revenue v. Reinhold,  34 TC 389 was a case where a director of a company carrying on business of warehousemen bought four houses in January, 1945, and sold them at a profit in December, 1957. He admitted that he had bought the properties with a view to resell and had instructed his agents to sell whenever a suitable opportunity arose. The revenue treated the profit resulting from the sale of the said houses as business income. It was contended by the assessee that the profit on resale was not taxable. On behalf of the revenue it was contended that the purchase and sale of the property constituted an adventure in the nature of trade and that the profits arising therefrom were chargeable to tax. The court held that the fact that the property was purchased with a view to resell did not establish that the transaction was an adventure in the nature of trade and that, therefore, there was no justification for treating the profits in question as business income.
11. The case law on this point has been exhaustively discussed in the judgment of Veeraswami J. (as he then was), speaking for the Bench, in Commissioner of Income-tax v. Kasturi Estates (P.) Ltd., : 62ITR578(Mad) In that case a Hindu family transferred all its assets to a company in exchange for allotment of shares to the members in proportion to relative interests of the members in the properties transferred. The preamble to the memorandum and articles of association of the company stated that the company was formed for the purpose of dealing in the properties transferred to it, but stated that the objects of the company included better and efficient management and improvement of the said properties. The company had also power to purchase for investment or resale and generally to deal, traffic by way of sale, lease and exchange. The company held the properties transferred, to it, maintained them and realised the income by letting them out.The company, however, did not purchase any other property, nor did itengage in a series of sales of land or other property belonging to it. It,however, plotted out the land and sold them separately as developedplots. The question arose on to whether the transactions of sale of plotswere in the nature of trade. It was held that having regard to the natureof the property, length of its ownership and holding, actual conduct of theassesses in respect of it all along and all other facts including absence ofevidence of any trading activity or speculative venture, the surplus fromsale of the land did not result from any trade or business in land carriedon by the assessee or from any transaction which may properly be described as an adventure in the nature of trade and the profits realised bythe sales of plots were not assessable as 'profits and gains of business'.After considering almost all the relevant decisions on the point the courtfelt that the following considerations are useful in arriving at a conclusion on the nature of the income :
1. The subject-matter of the realisation,
2. the length of the period of ownership,
3. the frequency or number of similar transactions by the same person,
4. supplementary work on or in connection with the property realised,
5. the circumstances that were responsible for the realisation, and
12. While formulating the above guides as helpful, it was recognised that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated and that the solution is left to the impression of one called upon to judge the character which is formed on the cumulative effect of all the facts and circumstances taken together arid weighed.
13. In G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, : 35ITR594(SC) a managing agent of a certain mill purchased plots of land adjacent to the premises of the mills. While he was in possession he did not cultivate the plots or erect any superstructure in them but kept them unutilised except for the rent received from one house which existed on one of the plots. About 6 years later he sold the plots to the mills at a profit. The Tribunal had found that the lands had been purchased wholly and solely with the object of selling them at a profit to the mills. The Supreme Court upheld the view of the Tribunal that the transaction was an adventure in the nature of trade. Gajendragadkar J. (as he then was), speaking for the Bench, observed :
'If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of business. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant such as, e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quality of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a design or purpose ; the incidents associated with the purchase and resale ; the similarity of the transaction to operations usually associated with trade or business ; the repetition of the transaction ; the element of pride of possession.'
14. In Commissioner of Income-tax v. M. S. P. Nudar Sons, : 87ITR202(Mad) this court had again to consider whether the activity of a planter of acquiring land by felling and removing the trees therein so as to facilitate cultivation of coffee, cardamom, etc., which resulted in his realising a profit, amounted to an adventure in the nature of trade. This court held that the fact that the property was purchased with a view to resell did not by itself establish that the transaction was an adventure in the nature of trade and that it is the cumulative effect of all the circumstances that have to be considered in determining its nature.
15. The question is whether the transactions of purchases and sales of house properties in this case partake the character of trade or an adventure in the nature of trade. This involves the consideration of till the facts and circumstances of the case, But the Tribunal has held that the purchase and sale of houses form part of his whole business as his profits from hotel business have gone for the purchase of the properties. This view, of course, cannot be upheld, even on the basis that the houses had been purchased out of the undisclosed profits of his admitted business. Though the assessee's usual line of business is running coffee hotels, year after year he has been purchasing house properties and selling them later on at a profit. In the year of account he had sold two houses as mentioned above. It is also seen that the assessee purchased two blocks of houses in Sivaswamipuram Extension on October 21, 1959, and sold them in the subsequent year. Thus the assessee has been indulging in purchases and sales of houses more or less as a regular business activity. It is not a stray act of purchase or sale of houses with the only intention of investing his funds. Though the intention at the time of purchase of the houses is not the only factor to be considered, still it is one of the essential factors to be considered. The consistent and repeated activity of purchase and sale of house properties year after year shows that the assessee, in addition to his carrying on hotel business, is also engaged in an activity of purchase and sale of houses with a view to earn profit therefrom. Though we are not inclined to agree with the view of the Tribunal that the purchase and sale of houses forms part of his whole business, we are inclined to hold that the assessee has been carrying on an activity as an adventure in the nature of trade in real estates, apart from his admitted business of running hotels. s the transactions amount to an adventure in the nature of trade, the income therefrom has to be assessed as business income. We have to, therefore, uphold the assessment of the surplus profits as income from business.
16. The question is, therefore, answered in the affirmative and in favour of the revenue. The assessee will pay the costs of the revenue. Counsel's fee Rs. 250.