VEERASWAMI, J. - The assessee, which is a private limited company, received in the accounting year, ended June 30, 1958, corresponding to the assessment year 1959-60, a surplus of Rs. 27,568 on sale of certain plots of land. This sum was charged to income-tax on the view that the sales constituted a venture in the nature of trade. On appeal, the tax was sustained on the ground that the transaction formed part of the business of the company. A further appeal by the assessee to the Income-tax Appellate Tribunal was however successful. The Tribunal found that there was no evidence of any intention on the part of the assessee to deal in properties and that the effect of all the facts and circumstances of the case did not justify a conclusion that an adventure in the nature of trade was carried on. At the instance of the Commissioner of Income-tax, the Tribunal has made this reference under section 66(1) of the Indian Income-tax Act, 1922, of the question whether the surplus realised by the assessee from the sale of the plots is assessable. This really turns on whether this sum represents capital accretion or capital profits from trade or business or a venture in the nature of trade and land.
Eventually, on a questions like that our opinion will necessarily depend on the view we may take on the cumulative effect of all the facts and circumstances found by the Tribunal. The findings of fact arrived at by the Tribunal are conclusive and are not open to review under the limited jurisdiction of this court on a reference, except on a misdirection in law in the process of arriving at them or on the ground that there was no evidence on which they could be reached. The conclusion drawn on proved facts or facts found on evidence is a different matter and that may raise a question of law or a mixed question of law and fact. To the latter category belongs the question whether a certain receipt is realisation of capital assets or revenue from trade or business or from a transaction viewed as an adventure in the nature of trade : G. Venkataswami Naidu & Co. v. Commissioner of Income-tax and Janki Ram Bahadur Ram v. Commissioner of Income-tax.
Numerous decisions have been cited before us on both sides at the Bar on the question we are called upon to answer. While we cannot justifiably say that they are of no assistance whatsoever, we have, at the same time, to observe that practically none of them lays down any principle of general application or capable of application to other sets of facts and circumstances. Nevertheless, we shall presently refer to some of them and make our own observations in the present context and in the light of the judicial approach made to the problem in those decided cases. Before we do so, we shall concisely state the facts in the present case.
As we said, the assessee is a private limited company formed in January 1948. The memorandum and articles of association has a preamble which shows that it is what may be called a family company. The joint family consisted of Kasturi Srinivasan and Kasturi Gopalan, sons of the late Kasturiranga Ayyangar, and other members. The members of this family, as seen from the preamble, came to a family arrangement as a result of which, the parties, described in the memorandum and articles of association as of the second part, came to exclusively own the entire assets of the family valued at Rs. 25 lakhs. The preamble went on to recite :
'And whereas the parties hereto of the second part for the purpose of dealing in the said properties and for the better efficiency in management and improvement of the said properties are desirous of forming a partnership or joint stock company the partners or members whereof will be subject to the regulations following and having for its assets, inter alia, the said properties described in the schedule hereto.'
The rest of the preamble referred to the settlement of the interest and the quantum of the share of each of the members of the second part in the said properties. Thus, the assets of the joint family became the assets of the company and the shareholding of each member of the second part was proportionate to his or her right in the assets of the Hindu undivided family. These assets, among other things, included a number of house properties in the City of Madras, building sites and agricultural lands. Article 4 sets out as many as thirteen objects of the company of which the following have a bearing :
(a) To acquire and undertake the said properties and the rights and liabilities of the parties hereto of the first part in connection therewith.
(b) (i) To purchase for investment or resale, to reclaim or otherwise to acquire and to traffic in land and house and any other property movable and immovable and to create, sell and deal in ground rents of any nature or description whatsoever and to purchase, take on lease or otherwise acquire forests and plantations and rights of ferry and to make advance on the security of land or house or other property or any interest therein and generally to deal in, traffic by way of sale, lease, exchange or otherwise, with land and house property, forests and forest and agricultural produce, any other property whether movable or immovable and to encourage trade and traffic therein.
(ii) to develop the resources of and turn to account the land, buildings, forests, plantations and rights for the time being of the Company in such manner as the company may think fit and by promoting immigration and establishing towns, markets, villages and settlements....
(c) To sell, let, exchange, lease or otherwise transfer the undertaking and property of the company or any part thereof for such consideration as the company may think fit and in particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of this company.'
Article 6 days that the assets specified in the schedule to the memorandum and articles shall belong to and become the property of the company and, having regard to the obligations imposed on the company, they shall be taken to be of the value of Rs. 24,00,000 and the shares to which the parties of the second part are to be entitled shall be deemed to be full paid up by means of the assets so brought in. Article 9 is to the effect that the business in respect of these assets shall be deemed to have been carried on as from the date of the incorporation of the company and the parties of the first part would be allowed all payments made and expenses incurred and should account for all moneys and benefits received by them in relation to such business as from that date. The memorandum and articles further makes provisions for increase and reduction of capital, modification of rights, calls on shares, transfer, transmission or forfeiture of shares, general meetings and procedure, voting rights, directors, chairman of board of directors, their borrowing powers, payment of dividends and various other matters including winding up. No member would be entitled to transfer any share except in accordance with the provisions specially made in the behalf in the memorandum and articles. The schedule to the memorandum and articles sets out particulars of 51 items of properties, all immovable, most of which situate in the City of Madras and the bulk of which consists of buildings and grounds as also pieces and parcels of land at various parts of the city.
In the year of account, the assessee parceled into plots one of such pieces of lands in the city, incurred expenses for laying roads, corporation survey, centage, filling up and other matters and sold thirty grounds. The transaction resulted in surplus of Rs. 27,568 which the assessee credited under its profits and loss account. The statement of receipts and expenses showed that, in the year immediately preceding the accounting year, the assessee had received a like surplus of Rs. 16,357 on sale of agricultural land. On the expenditure side were shown various amounts paid towards maintenance of properties, repairs and upkeep of buildings, salaries and wages, rates and taxes, farm maintenance and interest paid on loans. The revenue of the company, as seen from the said statement, was mostly from the properties, a small part from farm, livestock and surplus on sale of agricultural lands. The net profit of the year was arrived at and payment of a dividend of 1.5 per cent. was proposed. From the balance-sheet appended to the statement of the case, we find that the authorised capital of the company is rupees twenty-four lakhs made up of 2,400 equity shares of Rs. 1,000 each and allotted as fully paid up pursuant to an agreement without payments being received in cash. The fixed assets of the company consisted, in main, of the property transferred by the joint family to the assessee. The other assets in the form of building materials and farm produce, deposits and advances to directors are but a small fraction compared to the main fixed assets. The balance-sheet also shows that the company has taken loans and advances by deposit of title deeds relating to house property. The important feature noticed from the statement of receipts and expenses for the accounting year ended June 30, 1958, is that while revenue from property was Rs. 2,43,755, the other revenue from farm was Rs. 15,751.31 nP., from livestock, Rs. 25,300.12 nP., and from surplus on sale of agricultural lands, Rs. 27,568. The revenue from property was evidently in the form of rents received by letting out buildings and lands. During that year some additions to buildings and agricultural lands were also made. The Income-tax Officer, after noting that the assessee owns certain properties, a farm and also agricultural lands, worked out the income for the assessment year under the head of 'property' at Rs. 1,49,259 and under the head of 'business' at Rs. 20,019. The business income was arrived at by including the surplus of Rs. 27,568 resulting from the sale of lands and allowing reduction of certain expenditure and loss. The reason for the inclusion of the surplus in the chargeable income is, as stated by the Income-tax Officer :
'.... the company developed a portion of its lands by laying out housing plots, making roads, etc., and has disposed of nearly 30 grounds of land to various parties by parcelling it into housing plots. The way the transactions have been conducted clearly indicates a business. I would, therefore, include this profit as a venture in the nature of trade.'
The Appellate Assistant Commissioner went a step further, relied on the objects of the company to traffic in land and house and any other property and the acts of laying roads, parcelling the plot, etc., as being in furtherance of that object to earn the maximum profit out of it and concluded that the transaction formed part of the business of the company. The Tribunal, as we mentioned, was prepared to accept neither of those views but held that the profits were not taxable.
The proper approach to determine the character of the income is by asking, as Lord Justice Clerk did in Californian Copper Syndicate v. Harris, whether what was done was not merely a realisation or change of investment but an act done in what was truly the carrying on or carrying out of a business. The learned Lord Justice, after pointing out that the line separating the two classes of cases is difficult to define, and each case should be considered according to its facts, posed the question for his determination (at page 166) :
'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-makin ?'
If a person or a company buys and sells lands or securities as a business to make profit and, by dealing in such investments as a business, makes a gain, that is not a case of mere realisation of assets or conversion of one form of asset into another but will clearly fall within the net tax. That was such a case. There a company was formed for the purpose of acquiring and reselling mining property and, after acquiring and working various properties, it resold the whole to a second company receiving payment in the shape of fully paid up shares of the second company. The difference between the purchase price and the value of the shares for which the properties were exchanged was held to be profit assessable to income-tax. But it is not the actual decision in that case which is as important as what appears to us to be the correct line of enquiry indicated therein.
The word 'business' is defined by section 2(4) of the Income-tax Act, 1922, as including, inter alia, trade, commerce, or any adventure or concern in the nature of trade or commerce. 'Trade', in the context of the definition, is a wider concept than an adventure in the nature of trade. An adventure in the nature of trend cannot, therefore, by itself be described as trade, but should obviously imply in itself some at least of the elements of trade. A transaction to be an adventure in the nature of trade should be a plunge in the waters of trade : G. Venkataswami Naidu & Co. v. Commissioner of Income-tax. But what is trad It is a word so familiar to us. Everyone knows what it means but no one has defined it or attempted to define it. The reason perhaps is that it is incapable of a precise definition. Its identification, however, presents no difficulty except in borderline cases. Where we are concerned with a gain made out of purchase and sale of lands, whether it is an accretion to capital or capital profits may depend on particular facts and circumstances. The transaction itself should be looked at to see if it is essentially of a commercial character. A purchase and sale of land may be of that character but not necessarily so. If a person is systematically engaged in a series of transactions of purchase and sale of lands with a view to make profits out of them, that may indicate that he is occupied in a trading activity. But it is well settled that ownership of land by itself is not a trade. And so a person may purchase property, hold and enjoy it, derive income from it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, wile buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them. Sales of land, in those circumstances, as we are inclined to think, are no more than a realisation of capital or conversion of one form of it into another. As the Royal Commission on 'The Taxation of Profits and Income' said in its final report in 1955 (page 37) :
'All profits that arise from the untilisation of property are made in a sense out of capital; but, as we have explained above, the law has established a distinction between the profit that arises when property has been committed to a trade or an adventure or concern in the nature of trade as part of its merchantable stock and is then realised in the course of trading operations and the profit that arises from a realisation of property not so committed. The one is taxable income, the other not. The one is regarded as a detachable surplus arising from a source of income which is one of the sources listed by the tax code, namely, the trade, adventure or concern; the other has no source unless it be the mere fact of realisation, and is spoken of as an accretion to capital. The conception causes no difficulty in the case of profits from ordinary trading; but it is evident that it requires the drawing of a very fine line when it has to be applied to the case of the isolated transactions which may be on the one hand the product of a trading venture or, on the other hand, a mere change of investment.'
The Commission went on to enquire whether there was any general rule that could advantageously be propounded as a simple test that would separate taxable case from the non-taxable one but concluded that it was not possible in the circumstances to formulate any such rule, and finding, however, that the general line of enquiry which has been favoured by appeal commissioners and encouraged by the courts is to see whether a transaction that is said to have given rise to taxable profit bears any of the 'badges of trade', summarised what they regarded as the major relevant circumstance that bear upon the identification of these 'badges of trade' :
'(1) The subject-matter of the realisation. - While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does.
(2) The length of the period of ownership. - Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule.
(3) The frequency or number of similar transactions by the same person. - If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date, a presumption arises that there has been dealing in respect of each.
(4) Supplementary work on or in connection with the property realised. - If the property is worked up in any way during the ownership so as to bring it into more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For, when there is an organised effort to obtain profit, there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.
(5) The circumstances that were responsible for the realisation. - There may be some explanation, such a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase.
(6) Motive. - There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances, in the absence of direct evidence of the sellers intentions, and even, if necessary, in the face of his own evidence.'
In our view, while these considerations may not be exhaustive, they are quite useful in arriving at a conclusion on the nature of the income which lies at or near the borderline separating the taxable and the non-taxable. In Leeming v. Jones it was stated that in order to attract tax liability under Case 1 of Schedule D, corresponding to section 2(4) of the Indian Income-tax Act, 1922, one at least of four conditions must be present, namely, (1) the existence of an organisation, or (2) activities which led to the maturing of the assets to be sold, or (3) the existence of special skill, opportunities, in connection with the article dealt with, or (4) the fact that the nature of the asset itself should lend itself to commercial transactions. This case on that aspect was referred to without dissent, apparently with approval by Viscount Simonds in the well known case of Edwards (H. M. Inspector of Taxes) v. Bairstow & Harrison. The Exchequer Court of Canada in West Coast Parts Co. Ltd. v. Minister of National Revenue noted an argument which referred to the usual badges of trade as (1) presence of organisation set up for the purpose of trade, (2) multiplicity of transactions, (3) prior association of the business, and (4) existence of a scheme, system, business or operation and, after pointing out that 'trade' is not the same thing as 'an adventure in the nature of trade', and that a single transaction may well be the latter without being the former, provided it is essentially commercial, and that the absence of one or all of the usual badges of trade does not negative the existence of an adventure in the nature of trade, mentioned certain guides as helpful in the identification of the dividing line. These guides would appear to have been taken from M. N. R. v. Taylor and they are :
'On the negative side :
(i) The singleness or isolation of a transaction cannot be test of whether it was an adventure in the nature of trade..... it is the nature of the transaction, not its singleness or isolation that is to be determined.
(ii) It is not essential to a transaction being an adventure in the nature of trade that an organisation be set up to carry it into effect.
(iii).... the fact that a transaction is totally different in nature from any of the other activities of the taxpayer and that he has never entered upon a transaction of that kind before or since does not, of itself, take it out of the category of being an adventure in the nature of trade.
(iv) The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax, for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even without any intention of making a profit on the sale of the purchased commodity.'
'On the positive side :
(i)... if a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do, such a dealing is a trading adventure.
(ii) The nature and quantity of the subject-matter of the transaction may exclude the possibility that its sale was the realization of an investment or otherwise of a capital nature or that it could have been disposed of otherwise than as a trade transaction.'
While formulating these 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. We may also note with interest, as the court did in West Coast Parts Co. Ltd. v. M. N. R. that the word 'adventure' is defined in the Shorter Oxford Dictionary as a 'Pecuniary venture' and 'a speculation' and the word 'venture' is in turn defined as meaning 'a commercial enterprise in which there is a considerable risk of loss as well as a chance of gain.' In J. P. Harrison (Watford) Ltd. v. Griffiths the House of Lords was not prepared, it would appear, to accept a proposition that the essence of a trading transaction is that its object is to make a profit. Lord Denning, in this case, which related to what is known as a 'dividend-stripping' transaction, in dealing with an approach as to what detail did the transaction lack to prevent it being an adventure in the nature of trade observed at page 299 :
To this I would reply by asking another question : What detail must it have to render it an adventure in the nature of trade What are the characteristics of such an adventure For unless you first define what detail it must have, you cannot say what detail it lacks. Parliament did not vouchsafe an answer. It did not define a trade. And I do not know that any judge has attempted it. Try as you will, the word trade is one those common English words which do not lend themselves readily to definition, but which all of us think we understand well enough. We can recognise a trade when we see it, and also an adventure in the nature of trade. But we are hard pressed to define it. Donovan L. J. gave an apt illustration. Is a monkey a human being or an animal in the nature of a human being It has a head, a body, two legs and two arms. What detail does it lack Or, nearer still, take a gang of burglars. Are they engaged in trade or an adventure in the nature of trad They have an organisation. They spend money on equipment. They acquire goods by their effort. They sell the goods. They make a profit. What detail is lacking their adventure You may say it lacks legality, but it has been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the question : if it is not a trade, what is it It is burglary, and that is all there is to say about it. So, here, it is dividend-stripping and nothing else.'
No doubt the majority view of the House of Lords in that case was that the transaction was of a commercial character and an adventure in the nature of trade. But that does not affect the force of the observations of Lord Denning as to the concepts of trade and adventure in the nature of trade. Numerical application of this or that particular test to establish the nature of the transaction in the context may not, therefore, be satisfactory. The solution is rather 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 weighed. That this is the true position may be evident from some of the cases which we shall immediately refer to.
Scottish Investment Trust Co. v. Forbes was a case of an investment trust company taking power in its memorandum of association to vary its investments and generally to sell or exchange any of its assets. The company sold certain securities and derived profits and the question for opinion was whether the net gain made by the company by realising investments at larger prices than were paid for them fell to be reckoned among the profits and gains of the company for assessment to tax. The Lord President of the Scottish Court of Exchequer, answering the question in the affirmative, gave his reasons :
'... this is an investment company, and the memorandum makes it plain that its profits are to be derived from various operations relating to the investments. The third head of the memorandum professes to state the objects of the company, and in head (6) of this enumeration occur the words to vary the investments of the company, and generally to sell, exchange, or otherwise dispose of, deal with, or turn to account any of the assets of the company.
It is true that the doing of any of these things might be incidentally necessary in the conduct of the business of any company. It is also true that this memorandum states in the latter heads of the same article several things which are less properly described as objects of a company than as incidental acts of administration. But from the structure of the memorandum it appears that varying the investments and turning them to account are not contemplated merely as proceedings incidentally necessary, for they take their place among what are the essential features of the business. In my view such speculations are among the appointed means of this companys gains.... My view of this company is, therefore, that its position in the present question is entirely distinguished from that of a private individual or an ordinary trader.'
It may be seen that notwithstanding the fact that this was a case of an investment company, the decision rested on the structure of its memorandum, particularly one of its objects, and the character of the transaction was viewed in that light. We have already referred to Californian Copper Syndicate v. Harris. A learned judge of the Exchequer Court of Canada in Regal Heights Ltd. v. Minister of National Revenue referred to this case as a locus classicus and observed that recourse is had to it by Bench or Bar in a fashion somewhat reminiscent of a devout Muslims dutiful pilgrimage to Mecca. This is because Californian Copper Syndicate v. Harris appears to be the earliest case from which could be extracted anything like a general proposition which we referred to earlier as giving, in our opinion, a correct approach to a problem related to the character of a gain made from realisation of a capital asset. We do not however attach importance to the element of profit, though it is undoubtedly a relevant matter to be taken into account. The real question in each case, as pointed out by Lord Justice Clerk, is whether the transaction in question 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. The learned Lord Justice said that the simplest case is that 'of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business and thereby seeking to make profits.'
Hudsons Bay Co. v. Stevens involved a company established by a charter which surrendered to the Crown certain territories and rights of Government in exchange, among other things, for a certain share in certain lands in the territory. The company sold from time to time parts of lands so obtained and applied the proceeds for payment of dividends and in reduction of capital. The Kings Bench Division held that the proceeds of sales of the lands were not profits or gains derived by the company from carrying on a trade or dealing in land. The Master of the Rolls put the question for his decision as, 'Do the Hudsons Bay Company carry on a trade in buying and selling land by which they have made a profit ?' In answering that question, the fact that it was a company formed by Royal charter was given weight; and the reasoning for the opinion is to be found in the following observations at page 437 :
'... a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This company is not a company incorporated under the Companies Acts or the Companies Clauses Act for the purpose of dealing in land, but it is a Corporation by Royal Charter and has, therefore, all the powers of an individual except so far as the Charter expressly limits them. It would be different if a landowner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader.'
In Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer, the company itself was formed for the purpose of acquiring certain estates and developing them by planting and cultivating rubber trees. The memorandum of association provided for power to sell the property and such a sale was also visualised in the prospectus issued at the inception of the company. The company purchased two estates, but, as the original capital was insufficient to develop them, the whole undertaking was sold to a second company for a consideration which, in the main, consisted of shares in the second company. This consideration was in excess of the capital extended. By the time the property was sold, a considerable acreage had been planted but no rubber had yet been produced and sold. It was held that the profit on the sale was not a profit assessable to tax and was an appreciation of the capital. The facts of this case were thus more or less similar to those in Californian Copper Syndicate v. Harris. But that case was distinguished on the ground that there the company was formed in order to acquire certain mining fields, not with a view to work them for the benefit of the company, but solely for the purpose of reselling the same at a profit. The transaction in Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer was considered to be not a trading transaction but as a single transaction which brought the syndicate to an end. The prospectus was relied on to show that it was in the discretion of the shareholders to decide whether to sell the estate as a going concern or to be held and worked by the company. It may be noticed that the fact that the objects of the company, as set forth in its memorandum of association, included acquisition by purchase and selling or otherwise disposing of a going concern, in whole or in part of the business undertaking and property of the company, was not considered to make any difference to the character of the transaction there in question. The court in that case thought that it was not a deal in land but a case of investment and realising profits. Virtually, it was thought, the transaction was a winding up realisation. C. H. Rand v. Alberni Land Company, which has been pressed before us for the assessee, had to do with a family company. Certain properties were held in trust for various persons who were interested in them either as owners, joint owners or as trustees. The company was formed with the main object of acquiring, managing and developing with a view to the ultimate sale of the lands. The share capital was fixed at a nominal amount solely to facilitate division among the beneficiaries and was not determined by reference to the value of the lands acquired. All the ordinary shares were allotted in consideration of the conveyance of the lands to the company and these shares were continuously held by the original allottees or their representatives. Working capital was provided by the issue to ordinary shareholders of preference shares for cash. Later the company created and allotted to persons, other than the ordinary shareholders, deferred shares in return for service which enhanced the value of the lands. The memorandum of association, inter alia, took power to purchase certain lands, to manage and develop the and turn them to account, to sell, lease or mortgage or otherwise deal with the lands as the company thought fit. Rowlatt J. held that the surplus arising from the sale by the company of portions of the lands was not the profits of a trade or business, and that the function of the company was merely to realise the capital value of the respective interests in the land under the trust. The learned judge asked himself the question whether the company have really only realised some property held as capital by those who became its shareholders, namely, the people held as capital by those who became its shareholders, namely, the people entitled under the trust, or who started or founded the trust, or whether it had got to the point of embarking in a trade or business of which these receipts were the resulting profits. The learned urge observed at page 638 :
'It appears that these lands in the island of Vancouver, which must have been of considerable extent and value, were the subject of a trust in which there were many beneficiaries, and the land fell to be divided into many shares, including some infants, ............. But, at any rate, it was a situation in which it was extremely difficult to see how the land could profitably or advisedly be sold at the moment, and therefore this company was started and the company took these lands for shares at the pro forma price of Pound 4,800 which was the capital of the company. It has been agreed on both sides that that figure bore no sort of relation to the value of the land. It was not really a buying of the land for that, but the lands passed into the control of the company, who were to liquidate it and turn it into money to the best advantage, and that the figure was taken as the capital of the company, as being easily divisible by the divisors which were necessary to work out the trust.'
Negativing the contention of the Attorney-General for the revenue that the company had gone beyond the stage of merely realising the property and had embarked upon a business in land, the learned judge remarked (at page 638) :
'If a landowner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on the trade or business; he is only properly developing and realising his land......... I do not believe a landowner would be liable for a moment, and I do not think that the company is liable...... I think that in this case the company has done no more than provide the machinery by which the private landowners were enabled, under the peculiar circumstances of their divided title, to properly realise the capital of the property which they held in the lands in question, and that it is not income or the proceeds of trade....'
Commissioner of Taxes v. Melbourne Trust Ltd. was quoted for the revenue, but Rowlatt J. distinguished it on the ground that this was not a case of liquidating or realising the old assets, the fourth company starting on a new career of business of acquiring assets and selling them gain. Rowlatt J. considered that, in the circumstances, the company was formed for what he might call family reasons. Learned counsel for the assessee argues that in the case before us also it may well be described that the company was formed for family reasons and that the fact that the company took powers to traffic or deal in land and other properties should not detract from the real purpose of the company holding properties transferred to it and deriving income therefrom. We are inclined to think that though the facts in C. H. Rand v. Alberni Land Company Limited are not exactly similar in certain respects, they bear some resemblance; particularly the view of Rowlatt J. whether the company in that case had gone beyond realising the property and embarking on a business on land focuses attention on the proper considerations to be taken into account in deciding the point. In that case, as here, the properties were made over to the company by their owners held in trust who got, in exchange, shares in company, expended money on land, developed the same and realised surplus by sale. Viewed in the light if the objects of the company, namely, to serve family reasons by properly realising the capital of the property held in divided title, the transaction was held to be nothing more than realising old assets. The company was only regarded as a machinery to realise property held in such divided title. Balgownie Land Trust Ltd. v. Commissioner of Inland Revenue was also of family company but it was head that it was carrying on trade and was of family company it was held that it was carrying on trade and was assessable to tax. The owner of a landed estate at his death left it to trustees with a direction to realise. The trustees being unsuccessful to sell the estate on the market, formed a company with general powers to deal real property and transferred the estate to this company in exchange for shares allotted to the beneficiaries under the trust. After is incorporation, the company made substantial purchases of other properties with funds acquired by borrowing on the security of the original estate. It also received rents and paid regular dividends on its capital. It sold no property for a very long time after its incorporation. Later, however, parts of the original estate were sold in successive years and finally the whole of the additional property. The opinion of the Scottish Court, on those facts, was mainly influenced to acquired and sell property. The Lord President observed at page 692 :
'I cannot say that there is left in my mind any doubt that the company is doing precisely what is was formed to do, namely, carrying on the business of a company dealing in real estate.'
Learned counsel for the assessee referred us to this case mainly for the purpose of showing that the objects and powers of a company to acquire, to let, to improve and sell land may not in themselves be conclusive. On that matter the Lord President said (page 692) :
'The objects and powers defined in the memorandum are of the wide and general character which is appropriate to, and characteristic of, an ordinary company trading in real estate. the objects and powers are to acquire, to let, to improve, and to sell land. One is not, however, entitled to infer the circumstance that a company is professedly formed with trading purposes in view and for trading objects that the transaction in which it engages necessarily constitute a trade or business; because it does not follow from the fact that it has object and powers such as I have indicated that it actually uses them for the purpose of conducting the usual business of a company trading in real estate. But the professed objects of the company are not, for that reason, to be left out of account; on the contrary, they must be kept in view when considering the transactions in which the company is proved to have been engaged.'
It is, therefore, clear that while no conclusion can properly be based solely on the objects or powers of a company as found in its memorandum and articles, they are relevant matters which should be taken into account and kept in view in determining the character of the transaction in which the company has engaged itself. The objects and powers are there to carry on a trade or business but their existence does not ipso facto mean that they have been used. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light, of course, of the objects and powers of the company and the surrounding circumstances and facts. As the Lord President has himself observed :
'Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances.'
The other member of the court, Lord Sands felt a difficulty because of the long tenure of the property apparently as an investment or at all event in a manner quite consistent but concurred with the opinion of the Lord President taking all the circumstances into consideration. St. Aubyn Estates Ltd. v. Strick (H. M. Inspector of Taxes) is again one relating to a family company which was incorporated with powers to develop and dispose of the lands acquired by purchase from a life tenant of certain settled estates. All the issued preference shares of the company were allotted to the life tenant and all the issued ordinary shares with some exceptions to the trustees of the settlements. The company developed a part of the land as building sites and sold portions of the estate as opportunities arose. Certain areas were laid out as desirable sites involving expenditure on development by the company and the developed sites were sold in plots to applicants. There were in all quite a number of transactions of sale of a total extent of 31 acres of land including 14 acres for building purposes. The company throughout regarded the proceeds of its sales of lands as transactions on capital account and no portion of the profits was distributed to the shareholders. The company was assessed to tax and the Kings Bench Division was not prepared to interfere on the ground that there was evidence on which the Commissioners could arrive at their conclusion of fact that the company was carrying on a trade of dealing in property. In Glasgow Heritable Trust Ltd. v. Commissioners of Inland Revenue a company was formed to acquire tenement properties previously owned by a partnership of builders. The shares of the company were mainly held by the former partners or members of their families. Sales of flats took place from time to time either to sitting tenants or when flats were vacated by tenants. The Scottish court held that there was no evidence on which the Commissioners were entitled to find that the sales effected by the company were made in the course of trade carried on by it. The Lord President (Cooper) said at page 209 :
'The question is the familiar one whether a given transaction amounts to the carrying on of a trade, the profits and gains of which are taxable, or only involves the realisation of capital assets, the profit on which is not taxable. Often as that question has arisen, it is not easy to derive from the numerous decisions any rules except that the dividing line is incapable of precise definition, that the question tends to be a matter of degree, and that the decision in each case turns very largely upon the impression created by the special facts and circumstances.'
The learned Lord President pointed out at page 215 :
'The purpose which informed the company was to salve something from the wreck of a type roof trading enterprise which when the company was formed was not dormant but deal, by selling the separate flats in the only possible fashion for the benefit of the firms creditors and of the beneficiaries on the estates of the deceased partners. On this subject, it is of little use to to cite decisions, for all of them turned on their own facts and represent different applications of the very wide general principles enunciated in the oft-quoted case of Californian Copper Syndicate v. Harris. Property owning is not a trade. Mere realisation of capital assets is not a trade....'
Edwards (H. M. Inspector of Taxes) v. Bairstow & Harrison related to purchase and sale of a cotton spinning plant, an isolated transaction, and the question was whether it was an adventure in the nature of trade. The director of a leather manufacturing company purchased a complete cotton spinning plant with the object of selling it as quickly as possible. He could not sell it in one lot but disposed of it in five separate lots over a period. It was held that the only reasonable conclusion on the evidence before the Commissioner was that the transaction was an adventure in the nature of trade. Punjab Co-operative Bank v. Commissioner of Income-tax held that the profits derived by a co-operative bank, a company, from sale of shares and securities were taxable. The Privy Council found that there was ample evidence to justify the view of the Commissioners that the purchase and sale of shares and securities by the bank were so much linked with the deposits and withdrawals of clients that they were part of the assessees business of banking, and the profits arising therefrom were assessable to income-tax. The Board observed at page 644 :
'The principle to be applied in such a case is now well settled. It was admirably stated in a Scottish case, Californian Copper Syndicate v. Harris, and the statement has been more that once approved both in the House of Lords and in the Judicial Committee.'
Edwards (Inspector of Taxes) v. Bairstow, a decision of the House of Lords, involved facts which were more or less similar to those in Edwards (H. M. Inspector of Taxes) v. Bairstow & Harrison, and it held that the gain made out of purchase of a spinning plant for quick resale and the sale later was taxable. Actually the House of Lords considered that the Commissioners took a view of the facts which could not reasonably be entertained. In G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, the facts briefly stated were these. 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 on them but they were left unutilised except for the rent received from the house that existed on one of the plots. About six yeas later, he sold these plots to the mills at a profit. The Tribunal had found that he had purchased the lands wholly and solely with the idea of selling them at a profit to the mills. The Supreme Court upheld the view that the transaction was an adventure in the nature of trade. While expressing that view, Gajendragadkar J. (as his Lordship then was), who spoke for the court, observed :
'If a person invests money in land intending to hold it, enjoy 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 trade. Cases of realization 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 quantity 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. A person may purchase a piece of art, hold it for some time and, if a profitable offer is received, sell it. During the time that the purchaser had its possession, he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld, that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of fats and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all the relevant factors and circumstances that determines the character of the transaction.'
In P. K. N. Co. Ltd. v. Commissioner of Income-tax, the partners of a firm formed a private company and transferred to it their properties in Malaya which consisted of 3,000 acres of several rubber and coconut plantations and vacant sites and houses. In the accounting year the company also purchased an adjoining rubber estate. Between 1940 and 1950, it sold about 700 acres of the estate. It was compelled to do so owing to communist disturbances and difficulty in managing them. But among the objects mentioned in the memorandum of association of the company were carrying on business as land and house estate agents, dealing in all kinds of property, disposing of, managing, cultivating and developing its properties. It spend huge amounts by way of expenses for the estates and derived a large income therefrom. The membership of the company was restricted by the articles of association to the members of a particular family who were listed out. A Division Bench of this court was of opinion that the surplus realised by the company by the sales was not taxable. The learned judges considered that the company itself was formed for the purpose of conserving the family assets and that the mere circumstances that the memorandum gave power to the company to deal in properties was not conclusive of the question, and that the sales were not made in the course of an adventure in the nature of trade. They also pointed out :
'The mere fact that a person owns a large estate and chooses to sell portions of it year after year, cannot lead to the conclusion that he was doing in pursuit of a business of dealing in properties. Where dealing in properties is stated as one of the many objects of a company, that may create an initial presumption that the course of dealing was in the nature of a business. But, nevertheless, before profits made by the company can be brought to tax, it has to be found that the company did engage itself in the business of dealing with properties. That finding cannot be rested solely on one of the many objects stated in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the company.'
It is evident that in this case, the sales had to made because of a compelling reason and not as adventures in the nature of trade.
With this backgrouond of the case we have referred, to let us to the facts of this case. This is undoubtedly a case of a family company. The family transferred all its assets to the company in exchange for shares in proportion to their relative interests in the properties so transferred. The preamble to the memorandum and articles no doubt stated that the company was formed for the purpose of dealing in the properties transferred to it. But the preamble also stated that the objects of the company included better and efficient management and improvement of the said properties. The company undoubtedly took power consistent with that purpose to purchase for investment or resale and generally to deal, traffic by way of sale, lease and exchange. Actually, pursuant to one of its objects, it acquired and undertook the properties of the family. The other objects covered by the memorandum and articles were to develop the resources of and turn them to account, the land, buildings and rights for the time being of the company in such manner as it might think fit. The company was formed in 1948, and since then, like the family before, it has for years held the properties transferred to it, maintained them and realised the income by letting out. The company has incurred liabilities on the security of some of the properties and discharged the same out of the income derived from the properties. It has distributed or proposed to distribute dividends at a certain percentage out of the net profit. Among the properties it owns are agricultural lands and the company has sold farm produce and maintained live-stock. There is no evidence that the company purchased and property worth the name, at any rate which bears any comparison to its vast assets. Nor is there any evidence that the company has engaged in a series of sales of land or other property belonging to it. All that is evident is that it made a surplus income on sale of lands of Rs. 16,357 in the year ended June 30, 1957, and Rs. 27,568 in the year ended June 30, 1958. In the second instance, it appears, the land was sold after parceling it into house sites and developing them as such, incurring expenditure.
Can we say on those facts that the profits resulted from any trade by dealing in purchase and sale of lands carried on by the assessee Clearly, we are of opinion that we cannot. The subject-matter of realisation, which is land, is not generally or ordinarily a trading commodity unlike, for example, manufactured articles that are normally the subject-matter of trade. Land, on the other hand, is often the subject-matter of investment. When the properties were originally acquired prior to 1948, we do not know. There is nothing to show that when they were purchased, it was with an intention to resell at a profit. The property had, as we said, been held by the company for over ten years which maintained it all along and realised income. Sales of land have not been a frequent feature with the company, as far as we can see from the record. Nor were similar sales numerous. Not that we suggest that they are always essential attributes of trade. The assessee says that it sold the lands for discharging liability. Developing the land into buildings sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment. There is here to evidence of trade or any business carried on by the company in land.
Can we then say that the sales of land in the accounting year were transactions constituting an adventure in the nature of trade A great deal of stress has been laid for the revenue on the objects mentioned in the preamble to and in the body of the memorandum and articles. Undeniably, the company has the power to deal or traffic in immovable property, to purchase and sell it at a profit as a business. But the objects by themselves are not determinative of the character of the transaction, though the object should be kept in view. A sale of immovable property may possibly be a trading or commercial transaction, but need not necessarily be so. Here is a company possessed of vast immovable property including lands in different parts of the city and mofussil. It may well be described that the company is a land-owner or at least its position may be similar to it. There are not facts and circumstances present in the case which may be inconsistent with that way of looking at it, notwithstanding the objects shown in the memorandum and articles. If a land-owner developed his land, expended money on it, laid roads, converted the land into house sites and with a view to get a better price for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realisation of a capital investment or conversion of one form of asset into another. Obviously, the surplus in such a case will not be trading or business profit because the transaction is one of realisation of asset in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade. The case of the assessee can stand on no different footing, as we think, only because it is a company which has among its objects power to trade or traffic in land. There is here no evidence of a venture or venture. The transaction involved no risk or speculation; nor can it be truly said that it is a 'plunge in the waters of trade.' It is a transaction which any prudent owner of land will engage in and which is, therefore, no more than realisation of capital investment, conversion of land into money, not a venture in the nature of trade. Having regard to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along and all other facts including absence of evidence of any trading activity or speculative venture, we are of the view, therefore, that the Tribunal was right in its conclusion that the surplus from sale of the land did not result from any trade or business in land carried on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade.
We answer the question referred to us in favour of the assessee with costs. Counsels fee Rs. 250.
Question answered in favour of the assessee.