S. Ramachandra Iyer, O.C.J.
1. The following questions have been referred to us for our decision:
(1) Whether the determination of the profits on the sale of lands at Rs. 66,000 and its inclusion and assessment under the head business is lawful and correct?
(2) Whether on the material on record the Appellate Tribunal could reasonably come to a finding that the sum of Rs. 30,000 was an income from undisclosed sources?
2. These questions arise in proceedings relating to the assessment of one Abubucker Sait for the year 1948-49 the year of account being the corresponding financial year. The assessee owns a coffee plantation at Yercaud and he also grows oranges and gallnut on other lands. The income from the former source is received through the India Coffee Board. That from the latter directly. In one year, the income by the sale of oranges and gallnuts is said to have approximated Rs. 3,000. The assessee says that he maintains no accounts. He did not file any return of income for the year 1948-49 within the prescribed time. After a number of reminders from the Department he submitted on 7th March, 1952 a 'nil return' for that year. The assessee was then called upon by the Income-tax Officer, to file his wealth statements: the response was a mere statement that he had no accounts and that he had given over his properties to his wife and children. His bank account, however, told a different tale: there were large deposits during course of the year. On 30th September, 1947, he withdrew a sum of Rs. 1,00,000 and he took this entire sum to Pakistan presumably to secrete it in that country. He himself admitted on one occasion that he deposited a sum of Rs. 58,500 out of that sum in the Central Bank at Karachi and spent the rest on charities. With an assessee of that kind, whose strong point was neither strict regard for truth nor, even consistency, the Department was hard put to ascertain whether he had received any assessable income during the year of account. There was, however, one source of information available from which it was evident that the assessee's income could not be attributed purely to an agricultural source; namely the current account he had with his bank. We shall refer to the relevant entries therein presently.
3. The assessee purchased on 9th August, 1945, for a sum of Rs. 35,500 an extent of nine acres of land in Kichilipalayam village adjoining Salem Town. The purchase was made through a broker, Abdul A?ee7. The rental income from this property was not, however, much. It was stated to be on an average Rs. 500 per annum. At any rate evidence shows that the income from this property could never have exceeded Rs. 700 to Rs. 750 per annum. Some years later, in the year 1953 the lands were converted into house-sites. But that was long after the assessee had parted with them. On 30th April, 1947, the assessee sold the lands to one Narayana Pillai who was for sometime the Vice-Chairman of Salem Municipality. The consideration recited in the sale deed was Rs. 50,000. Out of that sum, the assessee claimed that he had paid Rs. 7,500 to the broker and by way of rebate to the tenants. There was every reason to suspect whether the true price received by the assessee had been set out in the document. In the course of assessment for the year 1947-48 the assessee made a statement on 14th February, 1952, that he had received a sum of Rs. 40,000 sometime earlier than 30th April, 1947 and that the balance of Rs. 10,000 was received on that date from Narayana Pillai in respect of the sale price. This he evidently did to explain certain deposits in his bank account during the year of account relative to the assessment year then in question, namely, 1947-48. A scrutiny of the bank pass book in the following year (which was made) with respect to the assessment in question showed that other amounts must have been received by the assessee as part of the sale price for the same lands. There was an entry of Rs. 57,500 on 10th May, 1947 in the name of Narayana Pillai in the pass book. There was a further entry two days thereafter of a sum of Rs. 10,000 which the assessee himself admitted as having been received from the purchaser. Thus it appeared from the entries in the bank pass book and on the admissions made by the assessee that he had received a sum of Rs. 1,07,500 as price from Narayana Pillai for the lands. The assessee's explanation that what he received was only Rs. 50,000 was neither cogent nor believable. Neither the Officers of the Department nor the Tribunal accepted the assessee's explanation. Before us however, Mr. M.S. Venkatarama Iyer, learned Counsel for the assessee contended that when the assessee stated before the Income-tax Officer on 14th February, 1952, that he had received a sum of Rs. 50,000 from Narayana Pillar the statement was only partially true. According to learned Counsel that amount was subsequently withdrawn from the bank and paid over to Narayana Pillai who later paid the same amount back again on 10th and 12th May, 1947. This explanation is too fanciful and thin to be accepted. We are of opinion that there were ample materials to justify the conclusion arrived at by the Tribunal and the Department that the true price obtained by the assessee by the sale of the agricultural lands at Kichilipalayam was Rs. 1,07,500. The Income-tax Officer allowed a sum of Rs. 6,000 as having been spent for brokerage and other incidental charges: it is not contended that anything higher should be allowed. The result is that the. assessee made a profit of Rs. 66,000 in the purchase and sale of agricultural lands.
4. The question then for consideration is whether that profit is assessable to tax. At one stage the assessee claimed that the profit made by the purchase and sale of the lands was only agricultural income and could not be the subject-matter of any tax. This, however, is not the view pressed before us by the learned Counsel for the assessee. The Department held, a view which was affirmed by the Tribunal, that the purchase and sale of agricultural lands was an adventure in the nature of trade on the part of the assessee and that the profit therefrom should be brought to tax. The Income-tax Officer has referred to a number of circumstances which induced him to come to the conclusion that what the assessee did when he purchased the agricultural lands was an adventure in the nature of trade. The Appellate Assistant Commissioner also referred to those circumstances when he affirmed the finding of the Income-tax Officer. It does not however appear from the order of the Tribunal (whether they at all considered the question) whether the transactions by the assessee amounted in law to an adventure in the nature of trade. In paragraph 7 of the Statement of the Case the Tribunal has set out the contentions raised by the assessee to show that there was no adventure in the nature of trade so as to attract the tax liability in respect of profit made in the transaction. In paragraph 8 of the Statement the Tribunal has stated their reasons for upholding the order of the Department as those contained in paragraph 4 of its order on appeal. But it does not appear from paragraph 4 that the Tribunal at all considered any of the circumstances to support the conclusion that the assessee's act was an adventure in the nature of trade. The Tribunal had merely considered the first aspect of the question that we have referred to, namely, whether at all there was a profit by reason of the sale of the lands. A mere answer in the affirmative to the question without a finding that the profit was attributable to an adventure in the nature of trade will not be sufficient to justify the assessment. The omission on the part of the Tribunal to consider the real question in the case is a matter to be regretted: but there is little doubt that they must have considered the matter and come to the conclusion that the transaction amounted to an adventure in the nature of trade. But whatever that may be having regard to the questions referred to us, it is our duty to answer them.
5. In coming to the conclusion that the profits made by the assessee were referable to an adventure in the nature of trade, the Department relied on the following circumstances:
(i) even at the inception the assessee must have entertained the idea of selling the lands as the evidence of the broker and his letter to the assessee dated 28th October, 1945, within two months of the date of the purchase would show;
(2) the income received from the property being low when compared with the income received by the assessee from other properties it was not likely that he would have purchased the lands as an investment;
(3) that the property had a potential value as house - sites on account of its situation and subsequent events showed that it did have a value as building sites;
(4) the assessee himself had indulged in the business of trade during the years 1943 and 1944 when he purchased gold and silver and sold them and also did forward transactions in silver.
(1) Taking the first of the circumstances referred to above there is no doubt that the Department was labouring under the misapprehension when it held that there was evidence to show that at the time of the purchase the assessee entertained the idea of purchasing the property with a commercial object in view. The department relies on a letter dated 28th October, 1945, written by the broker, Abdul Azeez to the assessee. A copy of this letter has been furnished to us by Mr. Ranganathan who appears for the Department. The letter is mainly concerned with the prospect of securing a lessee who would pay a sum of Rs. 750 per annum by way of rent. The broker says that while he was negotiating for the lease of the land, a gentleman came to him and enquired whether the property would be sold and in case it was to be sold he would offer a price which would leave a profit of Rs. 5,000 to Rs. 10,000 to which he (the broker) countered stating that if the intending purchaser was willing to offer Rs. 50,000 he would write to the owner, namely, the assessee and that the offerer replied that he did not want the property for anything more than Rs. 40,000. The letter concludes 'If you have any idea of selling the property, please write to me. If not you need not write.' This letter, while it may show that the broker was anxious to negotiate for a sale cannot show that the assessee entertained any such idea on the date of his purchase or even on the date of the letter, namely, 28th October, 1945. Reliance is then placed on the evidence of the broker Abdul Azeez before the Income-tax Officer. The broker gave evidence on two dates: On the first occasion (which was on 5th October, 1950) he did not speak anything about the assessee entertaining an idea of selling the land at the time of his purchase. But on the second occasion he, stated so. But this statement by the broker before the Income-tax Officer was made behind the back of the assessee. The broker's evidence has been found by the Department itself to be untrustworthy. The Appellate Assistant Commissioner was alive to these infirmities as he stated that there were other materials besides the evidence of the broker to justify the conclusion of the Income-tax Officer. There is therefore nothing to show that the assessee had an idea of selling the property even at the time of its purchase.
(2) The second circumstance, namely, that the income from the lands was very low and it was unlikely that the assessee would have made the purchase as an investment has, however, some force but one cannot say that, that circumstance is decisive of the question. Purchase of property in the shape of agricultural lands is ordinarily an investment. In the instant case the lands were situate very near the place of assessee's residence. A purchaser of agricultural lands does not always judge the wisdom of the transaction by the return he would get. Other considerations also prevail in the matter of such purchase, namely, the pride of possession of agricultural lands, security which is inherent in the investment of money in such property, etc. The fact that the income derived does not bear a proper proportions, to the investment cannot, therefore, be taken as conclusive on the question.
(3) The third of the circumstances relied on by the Department is the potential value of the lands having regard to its location adjoining the town area. The Appellate Assistant Commissioner referred to the fact that subsequently the lands had been converted into house-sites but that was in the year 1953. What we have to take note of is the state of mind of the assessee in the year 1945 when he made the purchase. There are no materials to show that on that date there was any scheme for converting the agricultural lands in that locality into house-sites. It cannot, therefore, be held that the assessee was aware of the potential value of the lands on their being converted into house-sites and also of the fact that by such conversion of his lands, he was likely to get a very good price for his lands.
(4) The last of the circumstances relied on by the Department is that the assessee was speculating in gold and silver two years before the date of the purchase of the lands in question. We do not see how that circumstance can help the decision of the question before us.
6. The materials on record only show that the assessee purchased the lands in the year 1945 at a price far higher than what the income from them would induce an ordinary investor to go in for that the assessee although he owned plantations had! speculated in gold and silver two years before the purchase of Kichilipalayam lands. These alone cannot, in our opinion, lead to any inference that the assessee was engaged in a concern in the nature of trade. The two circumstances could at best be regarded only as equivocal. The burden of showing that the assessee purchased the lands with the intention of realising a profit by the sale of the same at a future time is on the Department they cannot be said to have discharged that burden by reason of existence of some equivocal circumstances alone. Whether the purchase of lands by the assessee in the absence of a business by him in that or allied line, amounts to an adventure in the nature of trade has to be decided on a consideration of all the facts so as to ascertain the intention with which the assessee made the purchase. In Simon's Income-tax (2nd Vol., 2nd Edn.) at page 23 (Article 31) the learned author states
where there are one or more isolated transactions which are alleged to constitute the carrying of trade, it is necessary to determine by reviewing all the facts of the case whether the transactions, are in the nature of trade within Section 526(1) of the Income-tax Act, 1952, or whether they were merely a conversion of capital in one form into capital of another kind. The test is whether the operations involved in the transaction are of the same character and carried on in the same way as those which characterize what is admittedly trade in the line of the business in question....
It is the function of the Appellate Commissioners to decide on the facts proved or admitted before them, whether the evidence does or does not prove that there was an adventure in the nature of trade. It is a question of law, however, as to whether there was evidence to support their finding of feet. In making up their minds the Commissioners would consider such things as whether or not an organization for carrying on the adventure was built up and whether steps were taken to mature the asset in question with a view to disposing of it and whether the transaction is associated with the kind of business which the person in question carries on and the nature of the asset in question. In dealing with this, type of cases it is essential to bear in mind that either the transaction was an adventure in the nature of trade or else it was simply a sale and resale of an asset and therefore a capital transaction.
7. In Saroj Kumar Mazumdar v. Commissioner of Income-tax, West Bengal : 37ITR242(SC) , the Supreme Court clearly laid down, (if we may say so, with respect) the distinction between cases where the transaction entered by an assessee was a mere case of sale and resale of an asset or an adventure in the nature of trade: it was observed that the line of demarcation between cases of isolated transactions of purchase and sale being; ventures in the nature of trade and those which did not amount to such ventures, was very thin and that it was on the Department to prove that a particular case came within the former category. In the course of their judgment their Lordships, refer to the case reported in Commissioner of Inland Revenue v. Reinkold 34 T.C. 389, with approval where Lord Carmont discussing the nature of the evidence which would show intention to trade observed thus:
A disclosed intention not to hold what was being bought might as Lord Dunedin said provide an item of evidence when the buyer intended to trade and if the commodity purchased in the single transaction was not of a kind normally used for investment but for trading and if the commodity could not produce an annual return by retention in the hands of the purchaser then the conclusion may easily be reached that the venture was a trading one, if, however, the subject of transaction is normally used, for investment--lands, houses, stocks and shares - the inference is not so readily to be drawn from an admitted intention in regard to a single transaction to sell on the arrival of suitable pre-selected time or circumstance does not warrant the same definite conclusion as regards trading or even that the transaction is in the nature of trade. When the Lord Advocate distinguished between a man who bought any commodity in the hope of being able to sell on rise and one who determined when buying to sell) said the first was an investor and the other one who engaged in trading adventure, he did not shrink from applying this principle to a person who buys company's shares. If the buyer merely hoped that one day the shares would turn out profitable to sell he was an investor; but a buyer of the same shares-who bought at 60 and instructed there and then his broker to sell out if the shares reached 80 was. engaged in a venture in the nature of trade.
From the foregoing observations it is clear that one of the important matters to be considered while deciding whether a transaction amounted to an adventure in the nature of trade is the nature of the article purchased. As Lord Russel points out:
Among such features adverted to in the previous cases reference may be made to such matters as those namely, whether the article purchased in kind and in quantity is capable only of commercial disposal and not of retention as an investment or of use by the purchaser personally, e.g, aeroplane linen, toilet, paper, whisky, whether the transaction is in the line or business or trade carried on by the purchaser, whether the purchaser before re-sale has caused expense to be incurred in making the commodity more readily saleable, e.g., a ship converted before re-sale into a trawler; whether the transaction is exactly of the kind that takes place in ordinary trade in which re-sale requires a number of separate disposals.
8. The property purchased by the assessee in the instant case is agricultural land which is a recognised form of investment. The circumstances to which we referred earlier do not conclusively show that the assessee had intended at the time of the purchase not to hold the property as owner but with the intention of selling the same as a business proposition. One of the essential elements in an adventure in the nature of trade is the intention to trade that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope, that when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. In the present case having regard to the fact that the property purchased was agricultural land and purchase of such lands is generally one of the recognised modes of investment of money, it cannot be inferred from such purchase that at the inception the assessee purchased the lands in question with a view to sell subsequently. The two circumstances, namely, the low return for the investment and the fact that the assessee was at one time a speculator are outweighed by the two other circumstances, namely, that he was already having nearly 300 acres of land at Yercaud, and he was having plenty of money for investment in properties. We are of opinion that on the materials on. record it cannot be said that the department had discharged the onus that lay on it to show that the venture of the assessee in making the purchase of agricultural lands was in the nature of trade so as to make the gain made thereunder an item of revenue. We answer the first question referred to us in the negative by saying that the profit of Rs. 66,000 was correctly computed but was not assessable to tax and in favour of the assessee.
9. The second question relates to the propriety of the finding arrived at by the Department and affirmed by the Tribunal that the sum of Rs. 30,000 was an income from undisclosed sources. In the bank account of the assessee there were three deposits of Rs. 40,000, Rs. 1,000 and Rs. 4,000, besides those to which we have made reference while dealing with the first question. There was no proper explanation by the assessee as to how he got those amounts. The substantial explanation attempted was that he got a sum of Rs. 15,000 every year by the sale of oranges and gallnuts produced in his gardens and this he allowed to accumulate and deposited the same on May 10, 1947. The Department has held the view which was affirmed by the Tribunal, that the annual income from the gardens by the sale of orange and gallnut could not have been Rs. 15,000: the assessee himself did not produce any account books or vouchers to prove his income. In one year he admitted that he had received an income of Rs. 3,000. That would hardly justify an accumulated profit amounting to Rs. 40,000. The two sums of Rs. 1,000 and Rs. 4,000 which were deposited into the bank on 17th March, 1958, were claimed by the assessee as the balance of the unspent money after his trip to Pakistan. At an earlier stage the assessee stated that he had spent the entire balance on charities. His evidence on this part of the case is prevaricating and unconvincing and the Tribunal had ample materials to draw the inference that his agricultural income could not have been higher than Rs. 15,000. Deducting that amount from the deposit of Rs. 45,000 referred to above Rs. 30,000 would be income from other sources. There was ample justification for the Appellate Tribunal to sustain the addition. We answer the second question in the affirmative and against the assessee. Having regard to the fact that the assessee has failed in regard to his case as to the amount of consideration for the sale and that the second question has been answered against him we consider that he should be directed to pay the costs of the Department. There will be an order accordingly. Advocate's fee Rs. 250.