The judgement of the court was delivered by
RAMACHANDRA IYER, OFFG. C.J. - The following question has been referred to us for our opinion :
'Whether on the facts and in the circumstances of the case there was material for the finding of the Tribunal that the sum of 6,136 dollars constituted income assessable to tax ?'
The assessee was originally a member of a Hindu undivided family which carried on money-lending business at Batupahat in Federated Malay States. In the course of this business properties used to the purchased by the family in lieu of outstanding due. They undoubtedly formed part of the stock-in-trade of the business. The family also earned profits by buying and selling immovable properties. In such cases properties used to be purchased for cash. It can, therefore, be said that the family did business in buying and selling properties in addition to their principal business of money-lending. All such properties were recorded in the books of the money-lending business with separate folio for each property in which the working expenses and the income therefrom were also entered. When properties were sold, profits and losses resulting from such sales were included in the profit and loss account of the business. On 7th November, 1940, there was a disruption of the family and in the partition that followed the business was allotted to the assessee as a going concern. According to the assessee he discontinued thereafter the business of buying and selling properties and confined his activities only to the money-lending portion thereof. The Federated Malay States were occupied by the Japanese between the years 1942 and 1945. The business was then in charge of the assessees agent, but normal communication between the agent and the principal was not possible, and it appears that the agent on his own responsibility had made purchases of three properties during that period, and sold these three items and one other item which had been purchased for cash by the family; but it cannot be concluded from that circumstance that the assessee was having a business of buying and selling immovable properties, as the purchase and sales were made without the knowledge of the assessee. Indeed the Income-tax Officer himself has treated the business of the assessee during the year of account as confined to money-lending. During the year ending 12th April, 1951, corresponding to the assessment year 1951-52, the assessee sold seven items of properties, the first three of which were sold for 4,273 dollars; these were admittedly properties which the assessee obtained in the course of his money-lending business. The other four items were those purchased for cash by the Hindu undivided family during its existence, presumably for sale. The profits in respect of these four items during the year of account amounted to 6,136 dollars. The assessee submitted that he was liable to pay income-tax on the profits of 4,273 dollars but that he was not so liable in regard to the profit of 6,136 dollars as the latter represented only a capital receipt. The income-tax Officer did not accept that contention; he discounted the assessees story on the ground that it was difficult to believe that the assessee would have thought of investing the surplus funds in Malaya except for the purchase of the business. On appeal the Appellate Assistant Commissioner was of the opinion that the properties in question having been received by the assessee at a partition of the family they would constitute his capital and not stock-in-trade. He, therefore, deleted the assessment in relation to 6,136 dollars. The Tribunal took a contrary view on appeal by the department. The Tribunal held that the erstwhile family was a dealer in properties which business it carried on as an integral part of its money-lending business and that such business was handed over to the assessee as a going concern at the time of the petition and that the property which formed part of the stock-in-trade of the business of the family (relating to purchase and sale of properties) would continue its character as stock-in-trade even in the hands of the assessee and any profits realised by sale thereof would be revenue.
There can be no doubt that after the partition the assessee did not do any business in buying and selling properties. The solitary instance where the agent of the assessee sold a certain item cannot be attributed to any authority on the part of the assessee to do business thereby. The property obtained at the partition by the assessee was, therefore, 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 business did 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 assessee 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. The attempt of Mr. Ranganathan, on behalf of the department, was to show that the assessee still carried on the business of purchasing and selling properties. Apart from the few instances of purchase and sale during the time of the Japanese occupation of the territory to which we have made reference earlier, there was no case since 1940 in which the assessee purchased properties for purposes of sale. On the other hand, the properties in question which were originally purchased for cash and which he obtained on petition were retained by him till he sold them in the year of account. There is nothing in the treatment of the properties in the books of account to show that they were blended with the money-lending assets. The mere circumstance that the income from the properties was entered in the account books of the money-lending business and even included for the purpose of assessment cannot mean that the properties were treated as stock-in-trade of such business. There are no materials on the record to show that the assessee carried on any business in the purchase and sale of properties after 1940. The Tribunal thought that if the property was stock-in-trade in the business of the Hindu undivided family, it would continue in that character in the hands of the assessee even though according to the assessee he had discontinued the business of purchase and sale of properties. We are unable to agree. A stock-in-trade presupposes the existence of a business and if the assessee has no business of buying and selling properties, there can be no stock-in-trade. The properties should, therefore, be regarded as the capital asset of the assessee and the profits derived during the year of account by the sale thereof cannot be brought to tax. We answer the question referred to us in the negative and in favour of the assessee who will be entitled to his costs. Advocates fee Rs. 250.
Question answered in the negative.