VENKATADRI J. - In these two references, the common questions that arise for our determination are : (1) Whether the surplus realisations of 5,150 and 7,038 dollars on the sale of properties were revenue receipts assessable under the Indian Income tax Act; and (2) Whether the sums of Rs. 9,778 and Rs. 9,676 can be held to be interest receipts and as such part of the income of the assessees headquarters businesse ?
The assessee, in Tax Case No. 154/62, is a Hindu undivided family, and in Tax Case No. 3/62 is an individual member deriving income from property, money-lending business at headquarters at Devakottach. Up to the year April 13, 1957, the business at Kampar, Tappah and at other places in Malaya was run as a partnership firm with the assessee and five others as partners. This firm carried on business in money-lending and also in the purchase and sale of real properties. After April 13, 1957, this firm was dissolved and the assessee got one-sixth share in the assets of the firm, being lands, house properties and rubber estates. During the year under reference, viz., the year ending with April 13, 1957 (assessment year 1958-59), the money-lending transactions in the foreign places were entered in the books maintained at Kampar. The lands, house properties and rubber estates which the assessee got on dissolution of the firm were kept separately in the books maintained at Tappah. The assessee in each case sold three pieces of properties which had been taken over from the firm on its dissolution. The original cost price of these properties were not known. The assessee in Tax Case No. 3 of 1962 worked out a net surplus of 5,150 dollars, and the assessee in Tax Case No. 154 of 1962 worked out a surplus of 7,038 dollars, after deducting a certain sum as bonus relating to the sale of these properties.
Similarly, in the adayam account at the headquarters of each of the assessee, a sum of Rs. 9,778 and Rs. 9,676, respectively, had been credited as interest in the profit and loss account. In the books at Tappah and Penang, the above sums were debited as interest in the profit and loss account. At the time of filing of the returns the entries in each case were reversed in the adjustment statement accompanying the profit and loss account. The assessees contended that the sums of 5,150 and 7,038 dollars, the surplus sale proceeds of immovable properties, were in the nature of capital receipt and the credit entries of interest of Rs. 9,778 and Rs. 9,676 were not income of the money-lending business at the headquarters. But the Income-tax Officer in computing the income for the assessment year in question, added the above-said sums treating it as revenue receipts and income for the year.
The assessees appealed to the Appellate Assistant Commissioner. On the question of capital receipts, he observed that the lands, house properties and rubber estates at Tappah were held by the assessees as investments and the Income tax Officer had not found that the assessees were dealers in these properties, that, in fact, the prioritize sold were those which came to the assessees share from the firm and that though the profit on such sale was assessed in the hands of the firm in the preceding years, the Income-tax Officer overlooked the point that the firm was not carrying on business in properties at these places. In the end, the Appellate Assistant Commissioner held that the excess realisations were not revenue receipts. In regard to the sums of Rs. 9,778 and Rs. 9676, he held that the substance of the transactions amounted to paying interest to oneself, and that there was no diversion of any borrowed money for investments abroad. He therefore deleted these sums as income.
The department carried the matter in appeal. The Appellate Tribunal allowed the departmental appeal. Regarding the taxability of the inter-branch interest of Rs. 9,778 and Rs. 9,676, the Tribunal observed that while charging interest on the brances, the assessee, in each case, had treated the brances as different entities for that purpose, that he could not therefore turn round and say that he was paying interest to himself and that the Income tax Officer acted rightly in treating the interest receipt as part of the income. As regards the taxablility of profit, the Tribunal held that the division of the assets between the different places of business was only arbitrary, that in fact there was only one business in Malaya, that the properties in question were part of the stock-in trade of such business and that therefore the profits realised from the sales of those properties were taxable. Thus, the order of the Appellate Assistant Commissioner on both the points was reversed and the amounts restored to assessment by the Income tax Officer.
In T.C. NO. 3 of 1962, the assessee filed an application to the Appellate Tribunal to refer the questions of law set out already to this court, and the Tribunal has stated the case and referred it to this court. But, in T.C No. 154 of 1962, inasmuch as the application filed by the assessees was rejected by the Tribunal, this court directed the Tribunal to state a case and refer it to this court for determination. Thus, the two references are before us for determination.
The first question for consideration is whether, in computing for purposes of income tax, the profits derived from the sales of these properties ought or ought not to be taken into account. This question ultimately depends upon the nature of the business carried on by the assesses and of the receipts in respect of which the assessments in question were made. The facts are very simple. The assessee in each case was one of the sim partners of O.B.M.O.M. SP. Firm which was carrying on money lending business and in purchasing and selling real properties in Malaya. The partnership was dissolved just two years prior to the assessment in question. At the time of the dissolution of the partnership, one sixth share both in money lending business as well as lands, house properties and rubber gardens were allotted to each of the assessees. After the dissolution of the firm, the assesses started their own money lending business. With regard to the immovable properties, they held them as their own properties, waiting for an opportune time to sell them. They were maintaining separate accounts in respect of the income from these properties. They finally sold the real estate and converted them into cash. In the course of the transactions, they realised profits. Now the question is whether these profits are in the nature of revenue receipts. They did not sell the properties in the course of their trade or business of purchasing or selling lands, which of course they were doing previously in the erstwhile partnership. They had not invested these moneys either in the money lending business or treated the sale proceeds of these assets as stock in trade of their money lending business. When these properties were allotted to them at the time of the dissolution of the partnership, they treated them as their own assets. They are private possessions of private individuals which they may sell when they have no longer any use for them or when they were no longer interested to hold them. Land owning is not a trade. They dealt with their properties by virtue of the absolute ownership. There has been no trade in the buying or selling of real properties. There is no evidence that they carried on business of purchasing or selling real properties which they carried on business of purchasing or selling real properties, they were not sold in the course of any trade or business. To use the phrase of Lord Phillimore in Doughty v. Commissioner of Taxes, these are capital sales and not sales producing income. The test as observed by Lord Justice Clerk in Californian Copper Syndicate v. Harris is :
'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 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.'
Similarly, Farwell L.J. observed in Hudsons Bay Co. v. Stenven :
'It is clear, therefore, that a man who sells his land, or pictures or jewels, is not chargeable with income tax on the purchase-money or on the difference between the amount that he gave and the amount that he received for them. But if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.'
The question whether profits which can be found in the prices realised from land sold by the assessee are to be included in their profits and gains for income tax purposes would depend upon whether the profits to be found in such sales are part of the profits of a trade or concern in the nature of a trade carried on by the assessee. In the instant case, it is clear that after the dissolution of the partnership they ceased to carry on the business of buying and selling the properties, but they were carrying on separate money lending business, but they did not include the sale proceeds in their account of money lending business.
A similar question arose in Kannappa Chettiar v. Commissioner of Income-tax, where in a partition of Hindu undivided family, which carried on business in buying and selling properties and money-lending, the business was alloted to a member as a going concern, but member discontinued the business of buying and selling of properties and continued only the money-lending business, and subsequently sold one of the properties which had been purchased by the family for sale. The question was whether the amount constituted income assessable to tax. A Bench of this court, to which one of us was a party, observed (at pages 584 and 585 :
'The property obtained at the partition by the assessee was...... a capital asset. Although he got the entire business of the family as a going concern as and for his share in the family partition he was not bound to carry on that business in its entirety. It was open to him not to carry on the portion of the business which related to purchase and sale of properties; and that is what he did. Properties which were purchased for cash during the time when the joint family was carrying on business did no doubt form the stock-in-trade of the business. But the point which arises for consideration in the present case is not so much as to what the character of the property was in the hands of the undivided Hindu family but what its character was in the hands of the assess after partition. The stock-in-trade of the business relating to purchase and sale of properties did not, on the closure of such business, become automatically the stock-in-trade of the money-lending business. It would certainly be open to the department to show that by conduct or otherwise the assessee had treated even those properties as part of the stock-in-trade of the money-lending business; but this has not been done in the present case.'
Similarly, in Murugappa Chettiar v. Commissioner of Income-tax, on a partition of Nattukottai Chettiar undivided family, the sub-family, which was the assessee, was allotted for its share of the family properties certain items of real property. Certain items of money-lending transactions and some outstandings were also allotted to the assessee. The real property so allotted had been acquired by the larger family in the course of its money-lending transactions and in the hands of that family had formed part of the stock-in-trade of the money-lending business. Subsequently, after the partition, some of the real properties allotted to the assessee were sold along with some other properties which it had acquired in the course of its own money-lending transactions. The question was whether the profits from the sale of the immovable properties of the assessee in the relevant accounting years were income liable to be assessed under the Act. The Bench, to which one of us was a party, held that it was undoubtedly capital asset before the partition but after partition it is not every capital asset in the hands of the person who carried on money-lending business that would become stock-in-trade of that business. There should be clear and unmistakable evidence to establish that these assets were utilised for the money-linding business. Mere entry of the money-lending business in the account books maintained for the immovable property would not be enough to prove that the real property allotted at the time of partition have become stock-in-trade of the money-lending business. Even if the income from the immovable property were utilised for the money-lending business, it cannot possibly convert the capital from which the income arose into stock-in-trade of the money-lending business itself, and finally it was held that the profits arising from and out of the sale of the immovable property allotted at the time of the partition would not be the income of the assessee and it is not assessable.
The facts of the instant case are more or less similar, except that the present is a case of a dissolved partnership firm. But the principles laid down in the two cases cited above are applicable this case. There is no evidence on record to show that after the dissolution of the firm, the assesses treated the rear properties allotted to them as stock-in-trade of the money-lending business. Therefore, it cannot be said that they realised profits in respect of these dealings in the course of the business of trade. To use the words of Rowlatt J. in Alabama Coal, Iron, Land and Colonization Company Ltd. v. Mylam (H. M. Inspector of Taxes) :'... merely realizing is not trading. It is no good saying it is a trade of realizing'. Therefore, we are of opinion that the Appellate Assistant Commissioner came to the right conclusion that the receipts in respect of these transactions were not in the nature of revenue receipts. Therefore, we answer the relevant question in favour of the assessee, that is, the surplus realisations are not revenue receipts assessable to income-tax.
In regard to the second question whether the sums of Rs. 9,778 and Rs. 9,676 can be held to be interest receipts and as such part of the income of the assessees headquarters business, learned counsel for the assessees contends that the entries in regard to interest as entered in their account books cannot be treated as income of the business at headquarters. The business at headquarters and Penang and the investments in Tappah all belong to the assessees. It is common among the Chettiar firms to send their own moneys to the branches for purposes of doing money-lending business. When they remit the moneys to their account books. Subsequently, as and when they receive interest earned by the branches in the moneys sent to them for the money-lending business, they make the necessary reverse entries at the time of preparing the profit and loss statements. Now the question is what is the effect of making credit entries in the interest account at the headquarters, at the time when the moneys are sent to the branche The gist of the Tribunals decision is that the effect of making a credit entry in the interest account at the headquarters would be to treat that amount as income or profits received by the assessee or treated by him as received for the purposes of the tax. But it is clear that, at the time when they make the entries in their books of account in regard to interest, it is only a notional income. A mere credit entry of the interest on the money sent or lent to their branches pending the actual receipt of the interest earned in the branches is not sufficient to charge the amount so credited as income. The credit entry is made only in expectation of receipt and the amount so credited can therefore be regarded only as an unrealised asset of the business and not as income, profit or gain of the business. Interest unrealised in fact and not treated by the assessee as realised is not income. The assessees are adopting a system of accounting known as the Chetty system. The choice or method of accounting lies with the assessees and he must show that he has followed the chosen method regularly. But it is left to the Income-tax Officer to recognise that system adopted by the assessees, and if he is not able to compute the true income, he is at liberty to adopt a method of his own. It is not a case where the head office advances moneys to the branches thereby creating a relationship of creditor and debtor. When they advance their moneys to the branches and debit interest on the moneys so advanced, it cannot be said that they are earning income from the moneys so advanced to their branches. In fact the interest has yet to be earned by the branches in the course of the money-lending business of the assessee. It was observed as early as 1887 in Dublin Corporation v. McAdam (Sunrveyor of Taxes) :
'No man, in my opinion, can trade with himself; he cannot, in my opinion, make, in what is its true sense or meaning, taxable profit by dealing with himself....'
But it is contended for the department that the assessees themselves have treated the branches as different entities and made entries in regard to interest, when they advanced moneys for the purpose of doing money-lending business and that they cannot now turn round and say that they are paying interest to themselves. For this contention, learned counsel for the department relied upon the decision of the Supreme Court in Indermani Jatia v. Commissioner of Income-tax, where it was held that when the credit entries in respect of interest payments had been made according to the mercantile method of keeping accounts, it was not open to the assessee to contend that he had not received the amounts in question by way of interest during the relevant periods. The facts of the case are these : the assessee and her deceased husband are residents in British India originally her husband was carrying on business at Khurja and Aligarh in British India and at Chistian in the Indian State of Bahawalpur now part of Pakistan. The central set of accounts of the business were kept at Khurja. For the accounting year relevant to the assessment year, the interest account showed credit entries of two amounts as interest received on capital invested in the shop at Chistian. The Income-tax Officer took the view that the amounts in question represented the assessees taxable income in India and he accordingly levied tax on them. It was contended before their Lordships of the Supreme Court that the amounts were not taxable, as the assessee neither received nor could be deemed to have received the amounts and that even otherwise they could not be assessed, as the entries in respect of the interest on capital from the assessees own shop at Chistian did not imply the receipt of any income by the assessee, on the principle that no person could trade with himself and make profit out of dealings with himself. Learned counsel appearing for the assessee in that case conceded that point had not been raised by the assessee at any stage in the proceedings so far, but, according to him, it was a pure question of law and he should be allowed to argue it before them. After hearing the arguments, their Lordships observed(page 310 :
'... but the fact still remains that the appellant never raised the contention that the two entries in the interest account cannot in law show profits received by her because the appellant could not trade with herself. If the appellant wanted to rely upon this principle the point should have been urged at the earlier stage of the proceedings.'
It was also noticed by their Lordships that in the course of the proceedings before the Tribunal, the assessee admitted that here books of account were kept on mercantile basis, that the appellant as creditor had a right to enforce the payment of interest in British India and that the liability of the Chistian shop had been extinguished to the extent of the interest paid by it to the head office in British India. They further observed that the concessions made by the appellant before the Tribunal clearly showed that the sum advanced by the appellants head office in British India to her shop at Chistian was liable to pay interest and that the credit entry in respect of the two amounts had been made according to the mercantile method of keeping accounts. Thus, the point of law raised, viz., that no person can trade with himself and make profit out of dealings with himself, was left open in that case. The test to be applied in this case, as laid down in Commissioner of Income-tax v. S. M. Chitnavis would be whether any profits in the shape of interest had become due to the creditor in such a manner as to be immediately available to him in the account year so as to be capable of being received by him at his choice and pleasure. If the interest-money has become due to the assessee in the manner and in the sense that it was so completely under his control, that he, by an act of his will, could receive it in cash without greater trouble than is involved in cashing a cheque, then only it could be called 'income' such as would be liable to payment of tax, otherwise not. In the admitted circumstances of this case, the interest entered in the books of account at the time when the assesses sent moneys to their agents is not income but only a prospective interest on the moneys to their branches for the purpose of doing money-lending business through their agents is not income but only a prospective interest on the moneys placed at the disposal of the branches. That money might not be lent out at all and might not earn interest. It would not be just and equitable to treat unrealised interest, although formally credited in the books of account maintained at the head office, as income, profit or gain derived or accrued or received for the purpose of the Income-tax Act.
In the result, we answer this point also in favour of the assessee, viz., that the sums of Rs. 9,778 and Rs. 9,676 cannot be held to be interest receipts and as such part of the income of the assesses headquarters business. Counsels fee Rs. 250. One set of costs.