SRINIVASAN J. - At a partition of a Nattukottai Chettiar undivided family carrying of money-lending business at Kuala Lumpur in 1947, the sub-family, which is the assessee, was allotted for its share of the family properties 34 items of real property. Certain items of money-lending transactions and some outstandings were also allotted to the assessee. It is not in dispute that the items of 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.
During the account years relevant to the assessment years 1948-49, 1950-51 and 1952-53, the assessee sub-family sold some of the 34 items referred to above and some other properties which it had acquired in the course of its own money-lending transactions. Treating all these items of properties on the same footing, viz., as stock-in-trade of the assessees money-lending business, the Income-tax Officer brought to tax the profits on the sales of these items during the above : said assessment years. In appeal, the Appellate Assistant Commissioner set aside these assessments, taking the view that those items of real property, which fell to the share of the assessee at the family partition, formed capital assets in its hands. The department appealed to the Tribunal. The Tribunal set aside the order of the Appellate Assistant Commissioner and restored the assessments. The Tribunal took the view that capital might also take the shape of stock-in-trade and that as these items of properties formed the stock-in-trade of the larger family and the divided members of that family continued to carry on the money lending business, those assets became the stock-in-trade of the business of the divided members.
On the refusal of the Tribunal to state a case for the decision of this court, an application was made to this court under section 66(2) of the Indian Income-tax Act. In the order directing the Tribunal to state a case, this court observed :
'There does not appear to have been at any stage any examination of the accounts of the assessee for the purpose of determining the manner in which the assessee treated whose immoveable properties - whether as capital of the family or as the stock-in-trade of the money-lending business which the assessee says he started a few months after that partition in August, 1947. In submitting the statement of the case the Tribunal will examine the accounts produced by the assessee and submit its finding in relation to the matters found in these accounts. It will also examine whether the business of the assessee was in continuation of the previous business or whether it was new business in money-lending started after partition and, if it is the latter, whether the assessee ever made the immoveable properties part of the stock-in-trade of that business.
In pursuance of the direction of this court, the Tribunal has submitted the statement of the case framing the question below for the determination of this court :
'Whether, in the facts and circumstances of the case, the Tribunal had materials before it to sustain the finding that the profits from the sale of the immoveable properties of the assessee in the relevant account years were income liable to be assessed under the Indian Income-tax Act ?'
It will be noticed from the directions given by this court in its order under section 66(2) of the Act that the Tribunal was directed to consider whether the assessee family took over the business of the larger family of whether it commenced and ran a new business in money-lending. It was also pointed out that in case it was business started afresh by the assessee, the Tribunal had to examine the accounts and the mode of the treatment of the properties in question and arrive at a conclusion whether the assessee treated these items of properties as the stock-in-trade of the money-lending business. It was implicit in the order of this court that the mere circumstance that the larger family had acquired these properties sin the course of its money-lending transactions did not for that reason only impress upon these properties the character of stock-in-trade of a money-lending business commenced after the partition and conducted by the assessee. It was indicated that at the stage when the assessee obtained these properties on partition, they had to be treated as capital asset in his hands, unless it should be established that these properties were taken over by the assessee at the partition as part and parcel of a money-lending business which was also allotted to the assessee. The distinction between the two classes of cases was outlined sufficiently to enable the Tribunal to make a proper approach to the question and to examine the accounts from that point of view.
Unfortunately, the Tribunal has completely failed to grasp the significance of the observations of this court. It stated in paragraph 18 of the statement of the case :
'A few months prior to the disruption of the larger Hindu undivided family, the assessee opened its own books of account at Kuala Lumpur on the 8th November, 1946, presumably in anticipation of the division of the family, which must have been under contemplation at about that time....... The manner in which the books have been opened, in our opinion, by itself would go a long way, it is humbly submitted, to establish that even at the time of the opening of the books it was the unmistakable intention of the assessee to start only a money-lending business in its own vilasam at Kuala Lumpur after the partition of the family which was impending at that time..........
Paragraph 21. - For the foregoing reasons, we have to humbly hold that it was the new money-lending business that the assessee started at Kaula Lumpur with the opening of its books as aforesaid, that it was the new business as an off-shoot of a similar business that the larger family had carried on before eat the same place, Kuala Lumpur.'
While there is a clear enough finding of the Tribunal that it was a new business which was started by the assessee after the partition, there seems to be a vague suggestion in the latter part of the above extract that this business was in some manner or other connected with the earlier business carried on by the erstwhile undivided family. Except that all money-lending businesses are similar to one another, the Tribunal has not referred to any material either in the statement of the case or in its appellate order to show that any facts existed which made the latter business of the assessee part of the earlier business of the undivided family.
We may mention here that the preceding parts of the statement of the case merely set out the manner in which the accounts were opened by the assessee in November, 1946, and entities relating to the various advances which were made by the assessee in the course of its money-lending business from March, 1948, onwards. The facts set out in the earlier paragraphs of the statement of the case give no indication of any mode of treatment of the disputed items of properties on the basis of which the Tribunal expressed its conclusion in the following terms in paragraph 22 :
'It is in the aforesaid books that the impugned properties have been entered and the income therefrom from time to time utilised for the furtherance of such money-lending business also. There is only one cash books for all the activities of the assessee Kuala Lumpur, both money-lending and in properties. We have consequently to further humbly hold that the properties constitute only the stock-in-trade of such money-lending business and not the capital of the family, as contended.'
We are frankly unable to arrive at the conclusion expressed in the above terms from the facts which have been set out earlier. What the Tribunal found on examination of the accounts was merely that in the set of books opened by the assessee on 8th November, 1946, the 34 items of properties allotted to the assessee sub-family at the partition were entered to the credit of its capital account. The only circumstance which the Tribunal relies upon the reaching the conclusion is that a single account book was kept in which were entered these 34 items of properties as well as other money-lending transactions and that the income from these properties was also mingled with the income from the money-lending business. The question is whether this is sufficient to impress upon these properties the character of stock-in-trade of the money-lending business.
We are of the view that the materials available in the evidence before the Tribunal did not justify the conclusion it has reached. At the partition, the assessee sub-family allotted certain items of properties which, whatever character they might have borne in the hands of the larger family, ceased to be stock-in-trade of the money-lending business in the hands of the assessee sub-family. It was undoubtedly capital asset in its hands to start with. That the assessee sub-family commenced a new money-lending business is not in dispute. It is not every capital asset in the hands of a person who carries on money-lending business that would become stock-in-trade of that business. To hold so would be to mean that no person carrying on a money-lending business can have any capital asset whatsoever. Nor is it impossible for a person carrying on money-lending business to taken away from the stock-in-trade of that business either money or other asset bearing the character of stock-in-trade and to covert it into a capital asset. It should, therefore, follow that where the assessee had certain capital assets to start with, before the taxing authority can treat them as stock-in-trade of the money-lending business, which the assessee carries on, it has to show that clear and unmistakable evidence is available to establish that those assets came to possess that character. To illustrate the point, suppose an assessee raised funds by the sale, mortgage or otherwise of any capital asset and brought those funds into his money-lending business, that would be evidence that the treated that particular asset as part of his money-lending business. In a like manner, an asset which was part of the stock-in-trade could be converted into money and invested in the purchase of a building for the assessees residence or such other modes of disposal so as effectively to take them out of the stock-in-trade and convert them into capital asset. The Tribunal does not say that any such instances have occurred in the present case. What we find is merely that the money-lending advances are entered in the same book as these items of properties. It, however, overlooks the fact that these properties are shown as the capital of the business. The only other circumstance it purports to rely upon is that the income from these items of real property has been mingled with the income of the money-lending business. This circumstance, viz., that the income from these properties has been utilised in the furtherance of the money-lending business, cannot possibly convert the capital, from which the income arose, into stock-in-trade of the money-lending business itself.
Had the Tribunal studied the order of this court under section 66(2) with some care, it would, to our minds, have avoided the wholly erroneous and unsupportable conclusions which it has chosen to draw on non-existent material. In refreshing contrast, we may point out that the Assistant Commissioner of Income-tax approached the question from the right point of view and reached what seems to us to be the only possible conclusion in the case.
In the result we answer the question in the negative and in favour of the assessee so far as the item in dispute relate to the 34 items allotted at the partition. The assessee will be entitled to its costs. Counsels fee Rs. 250. The Tribunal will also refund the deposit of Rs. 100 in each case.
Question answered in the negative.