SRINIVASAN J. - A registered firm of the vilasam of 'P. K. N.' was carrying on money-lending business at several places in India as well as in Malaya. In the year 1937, the partners of the firm incorporated a private limited company under the name of 'P. K. N. Company Ltd.' This company is the assessee. We shall refer in due course to the memorandum and articles of association of the company. To this company were transferred all the properties of the erstwhile partners of the firm, such properties as were situated in the district of Muar in Malaya. These properties consisted of several rubber and coconut plantations, houses and vacant sites. The process of this transfer which was item by item went on till 1940. The total value of the purchases came roughly to 16 1/2 lakhs of dollars. In the year of account ending 31st March, 1941, the company also purchased an estate known as Lee Rubber Estate for 2,62,655 dollars. This property is said to have adjoined the other rubber estates owned by the firm and subsequently transferred to the company. It also purchased a small house property for 5,000 dollars on 7th July, 1941. We may state even here that after 1941 the company did not purchase any other items of property.
The share capital of the company was 6,60,000 dollars. It was treated as fully paid up and shares were allotted to the various partners of the firm who became the shareholders of the company. The balance of the purchase consideration was retained as a liability of the company to be discharged in due course.
After the integration of the Pudukottai State (the company having apparently been treated as resident in that State) the company was assessed to income-tax in India for the assessment year 1949-50 and onwards. In respect of the assessment for the assessment year 1950-51, the question arose whether the company was or was not carrying on any business in the purchase and sale of properties. With reference to that assessment, the Tribunal came to the conclusion that the properties referred to above from out of which certain sales had taken place, the profits from which had been included for assessment in that assessment year, constituted only the companys investments, being its capital and that the company was not carrying on any business in the purchase and sale of properties.
For the assessment year 1951-52, the Income-tax Officer brought into assessment for tax the sum of 1,41,326 dollars realised by the assessee company by the sale of some of the properties. He thought that there were no good grounds for selling any of the properties. He thought that there were no good grounds for selling any of the properties 'especially when they were proving themselves to be good investments and yielding a fabulous income' and that the real reason was 'the making of maximum profits by their sale in a market which was extensively favourable in accordance with the scheme of business and profit-making as laid down in the memorandum of association.' There was an appeal to the Appellate Assistant Commissioner, the assessee claiming that it was only a land-owning company formed to hold the properties and realise income therefrom and that there had been no subsequent purchases and that the sale was only of non-remunerative and uneconomic properties which had to be got rid of. It was also urged that the Tribunals decision in the previous assessment year was the correct one which should have been followed by the Income-tax Officer. The appeal was, however, dismissed, the Appellate Assistant Commissioner taking the view that the memorandum and articles of association was not confined to the purchase of the properties of the 'P. K. N.' firm only but was general and that the continuous operations of sales in the absence of any compelling necessity to sell indicated either a business in such purchase and sale of properties or an adventure in the nature of trade. His further view was that in relation to the previous assessment year 1950-51, the full facts were not available to the Tribunal.
The further appeal to the Tribunal also failed, the conclusion of the Tribunal being 'For the aforesaid reasons, we hold that the properties acquired were in the course of a business of dealing in properties and not as investment pure and simple.'
Under section 66(2) of the Act, the following question stands referred for the determination of this court :
'Whether, on the facts and circumstances of the case, the surplus of 1,41,326 dollars realised by the assessee company by the sale of some of its estates and properties held by it in Malaya was income chargeable to tax under the Indian Income-tax Act ?'
The point for our consideration is, in other words, whether the company engaged itself in the business of purchase and sale of properties by the company were nothing more than what would be incidental to an owner of property realising part of his investment in the normal course of the enjoyment of his property.
Before we proceed to consider the arguments that have been addressed, we think it necessary to emphasise one or two special features. The company acquired the properties of the 'P. K. N.' firm situated in the district of Muar. The extent of these properties is said to have been about 3,000 acres consisting, as we said, of rubber plantations, coconut topes, vacant sites and houses. The rubber plantation purchased from the Lee Rubber Company in 1941 adjoined the rubber estates purchased from the 'P. K. N.' firm. The subsequent operations of sale between 1940 and 1950 did not include any part of this Lee Rubber Estate. It also appears that during these years several of the house properties were destroyed by fire. The 3,000 acres purchased from the 'P. K. N.' firm did not form a compact block. The communist disturbances and difficulties of management attendant upon the Japanese occupation are said to have been the reasons for disposing of outlying parts of the estates. That statement of fact has not been controverted by the department. In all its operations during the course of these ten years, only about 700 acres out of the properties acquired from the 'P. K. N.' firm were sold away, so that the company continues to be possessed of over 2,000 acres originally purchased from the 'P. K. N.' firm and the entirety of the Lee Rubber Estate purchased from the Lee Rubber Co., no part of which was disposed of. What is of some importance is that the company did not acquire any properties after 1941.
The memorandum of association of the company contains a multitude of objects, as many as 29 being set out therein. We may indicate a few as they would be relevant for the determination of the question whether the company did engage itself in the business of purchase and sale of properties. These objects included the business of banking, business as merchants, commission agents, estate agents, etc., making of advances on properties, both moveable and immoveable and on produce; discounting and otherwise dealings in negotiable securities or documents; all kinds of trust agency carrying out business; to carry on business of planters, cultivators, dealings in rubber, coconuts, coffee, etc., to plant, rubber, coconuts, tea, etc., to purchase or otherwise acquire and to sell, exchange and deal with properties and rights of all kinds; to sell, mortgage, manage, improve, develop or otherwise deal with all or any part of the properties of the company; and numerous other activities of a like character. The department no doubt placed particular emphasis on clauses 2, 15 and 16. Clause 2 relates to the carrying on of business as land and house estate agents. Clause 15 specifically empowered the company to purchase and to sell, turn to account, dispose of and deal with property and rights of all kinds and in particular, mortgages, debentures, produce, concessions, contracts, bonds, policies...... choses-in-action of all kinds. Clause 16 empowered the company to sell, mortgage, manage, improve, cultivate, develop, dispose of, turn to account or otherwise deal with all or any of the properties of the company. These were relied upon by the department to indicate that the company had the power and its actions in selling the property must be related to this power and must necessarily lead to the inference that the company did a business in selling of properties.
Turning to the articles of association, a document which neither the department nor the Tribunal seems to have considered, we find certain features therein which cannot be ignored in deciding the question before us. The membership of the company was restricted to the members of the P. K. N. family, who are listed out in article 2 of the articles of association. No outsider can become a member of the company and, in the event of any member seeking to transfer his shares, he had to sell it to the company at a fair value fixed under the articles of association. Such shares were to be allotted only to the remaining members of the company. The company was, however, at liberty to sell it to any person if it was unable to effect a sale to any member of the P. K. N. family. But such outsider was not entitled to vote at any meeting of the shareholders. These features would appear to indicate very strongly that the formation of the company itself with such restrictions was intended for the purpose of conserving the property of the P. K. N. family and to avoid the difficulties of management by a partnership. No doubt, this feature by itself may not directly and immediately lead to the conclusion as to the nature of the business which was done by the company. But it certainly does indicate that if the object of the members of the P. K. N. family was to conserve the family properties and to provide for their proper and efficient management, that would be somewhat inconsistent with the view that the company was formed only for the purpose of selling away all these properties item by item.
Indeed, we may say that practically the only argument that was advanced before us on behalf of the department was that there is a company with one of its declared objects being the purchase and sale of properties. It has sold properties. Why should it not then be held that such sales were in the exercise of its declared object and that it had embarked upon a business of dealing in properties It is also pointed out that during the several preceding years, there had been several sales which yielded 'profit'. The continuity of transactions of these sales is one of the features relied on by the department. The department no doubt has no answer when it is pointed out that the company did not acquire any properties whatsoever after 1941 and what it sold was a comparatively small part of its assets. Mr. Rama Rao Sahib, appearing for the department, asks us to infer that the object of the company must have been only to sell all these properties from the circumstances that the patties, that is, the P. K. N. family, who are the shareholders of the company, are not residents in Malaya. It was further argued that there was no pressure upon the company necessitating these sales. For the assessee, Mr. Viswanatha Aiyar claims that there have been only two purchases of a large extent and that there would have been repeated purchases if the company had really embarked on a business of dealing in properties. He contended that in at least four of the preceding 12 years, there were no sales at all and that the major part of the assets originally acquired by the company continued to remain with it. It claimed that the company, though it had a multitude of objects in its view when it was started and armed itself with a variety of powers enabling it to carry on business of different kinds, was really engaged only in the business of planters and that the sales which were rendered necessary for reasons which have already been indicated, viz., the disposal of unremunerative properties, disposal of vacant sites, houses which were not necessary, outlying properties which were inconvenient of management, could not justify the conclusion that the company was engaged in the business of dealing in properties. He also pointed out that during the last seven years the company has been spending year after year large amounts in the upkeep, maintenance and improvement of the plantations and equally deriving a large income.
While the Tribunal came to the conclusion that the properties acquired were in the course of a business of dealing in properties and not as investment pure and simple, the alternative ground that it was an adventure in the nature of a business appears to have been taken by the department. We have, therefore, to see whether in effecting sales of a part of the properties which the company purchased from the 'P. K. N.' firm, the company had to start with the object of dealing in these properties or, in any event, embarked on these transactions of sales as an adventure in the nature of business.
It is true that clause 15 of the memorandum of association did authorise the company to purchase or otherwise acquire and to sell, turn to account, dispose of and deal with property and rights of all kinds. The memorandum accordingly gave power to the company to purchase and sell properties. It was only one of such numerous powers with which the company armed itself. As we have stated, the company started with the object of engaging itself in a variety of businesses. To the extent to which the company did purchase and sell some of the items of properties, the activity of the company was no doubt authorised by the relevant clause of the memorandum. That as far as we can see cannot be held to be determinative or final on the question whether, in the particular circumstances of this case, the course of transactions assumed the character of a business in dealing with properties. Indeed, the Supreme Court laid down in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, that the circumstances whether a transaction is or is not within the companys powers has no bearing on the nature of the transaction or on the question whether the profits arising therefrom are capital accretions or revenue income. Nor can it be said that the acts available in the present case disclose a commercialised activity on the part of the company in so far as its transactions in the sale of the properties are concerned. We have stated that the company acquired two large blocks of properties and the background of the formation of the company, the limitation upon the members who could be admitted to the company and other attendant features clearly suggested an intention of conserving the properties of a particular family. It has been found also that some of the houses properties were destroyed by fire and that the vacant sites and outlying properties were sold, the reasons advanced by the assessee being communist disturbances and difficulty of management of outlying bits of the estate. The officers below and even the Tribunal did not altogether deny that these reasons could have existed. In evaluating these grounds, they have not adverted to the circumstance that the Lee Rubber Estate, which formed a compact block was not interfered with, that is to say, no part of it was disposed of but only portions of the properties acquired from the P. K. N. family, which apparently was a sprawling estate, were dealt with. Except for the circumstances that small portions were so disposed of over a number of years, we are not able to find evidence of a systematic commercial activity which can be related to any dealing in properties. An owner of property, it is well recognised, can sell portions of his estate. It is undoubtedly one of the modes of enjoyment of his own property. Merely because a person owns a large estate and chooses to sell portions of it year after year, it cannot immediately lead to the conclusion that he was so doing pursuit of a business of dealing in properties. The disposal of a capital asset under such circumstances can but be equivocal in its nature and it is only special features that can stamp such an activity with the character of a business of dealing in properties. What then is business, is what we have to enquire.
It was observed in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax thus :
'Whether a particular activity amounts to any trade, commerce or manufacture of any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand it has been pointed out by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Co., that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is'.
Referring to the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., their Lordships said :
'This court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles.'
In the case on hand, except for the circumstance that there were sales spread over a number of years, which activity is capable of a perfectly rational explanation, no evidence is available of anything that would suggest that in selling these properties the company did so as a dealer in properties. What all is evident is that as and when opportunity arose and as necessity dictated, the company disposed of some of the properties. During the period of the past 12 years, the company actually went on with what appears to have been its principal and major activity, viz., that of planters. For instance, during the year ended 31st March, 1948, the company expended on the estates a sum of rupees three and a half lakhs and derived from the sale and stock of rubber receipts to the extent of rupees five and a quarter lakhs. In the next year, the estate expenditure came to Rs. 3,31,000 and odd and ended on 31st December, 1950, the estate expenditure, including salaries, etc., came to rupees five and a quarter lakhs, while the receipts by way of rubber sales and stock came to rupees sixteen and a half lakhs. In the three years we have referred to, the salaries to staff came to Rs. 13,451, Rs. 14,047 and Rs. 51,200. The figures indicate clearly enough that the main object of the company was to function as planters and dealer in rubber, etc., and if these figures are any guide, they do indicate that this activity in so far as the sales of properties are concerned. In the case of a dealer in properties, one would normally expect to find special steps being taken for the purpose of bringing these properties to sale, whether by advertisement or by engagement of special staff for the purpose of securing a good price for the properties sold. No such evidence was available to the department or the Tribunal and we fail to see how a business as understood in the ordinary sense of that expression and as clearly elaborated in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, can be said to have been pursued. Though, no doubt, a single transaction may amount to an adventure in the nature of business, it is somewhat remarkable that in the present case the company did not acquire a single piece of property after 1941. It may no doubt be said that it had ample properties in its hands which it could dispose of. But if the company was really engaged in buying and selling properties, one would certainly expect to find that when some property, which was capable of being turned to account at a profit became available in the market, the company would have purchased it with a view to sell it in future. This remarkable feature taken in the light of the other attendant circumstances considerably detracts from the validity of the view taken by the department with regard to the business.
On behalf of the department, reliance was placed upon Californian Copper Syndicate v. Harris. In that case, the syndicate was formed to acquire copper and other mines and to prospect and explore and to enter into treaties, contracts and engagements with respect to the mines, mining rights, etc. After investing a part of its capital in a copper bearing field and investing a sum in the development of the field and in preliminary and head office expenses, the company sold the property to another company. Clark L. J. said :
'Although that was a sale, the price to be paid in shares, I feel compelled to hold that this company was in its inception a company endeavouring to make profit by a trade or business, and that the profitable sale of its property was not truly a substitution of one form of investment for another. It is manifest that it never did intend to work this mineral field with the capital at its disposal. Such a thing was quite impossible. Its purpose was to exploit the field, and obtain gain by inducing others to take it up on such terms as would bring substantial gain to themselves. This was that the turning of investment to account was not to be merely incidental, but was, as the Lord President put it in the case of the Scottish Investment Company, the essential feature of the business, speculation being among the appointed means of the companys gains.'
It is obvious from the above extract that it was found as a fact that the company had no intention of working the mines at all. Such a conclusion cannot possibly be drawn on the facts of the present case. In this very judgment, the learned judge opened his judgment with these words :
'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 price is not profit in the sense of Schedule D of the Income-tax Act of 1842 assessable to income-tax. But it is equally well established that 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. 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. There are many companies which in their very inception are formed for such a purpose, and in those cases it is not doubtful that, where they make a gain by realisation, the gain they make is liable to be assessed for income-tax. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - 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-making ?'
We are unable to see any application of Thew v. South West Africa Co. Ltd. to the facts of the present case. That dealt with the case of a company incorporated with the primary object of acquiring, developing and turning to account certain concessions in German South West Africa. It was understood between the company and the German Government that the colonisation of the country should be encouraged by the sale of land to the settlers. In pursuance of this object, considerable tracts were sold both to the settlers and other companies. The profit arising from these transactions was held to be liable to income-tax. It is obvious that, on the facts, the principal and probably the sole activity of the company was to dispose of the lands in the nature of trade.
Reliance was also placed by the department on Commissioners of Inland Revenue v. Korean Syndicate Ltd., where the difference between an individual and a limited company was relied upon in holding that transactions of this kind by a limited company would bear a construction different from similar transactions by an individual, for the reason that a limited company comes into existence for some particular purpose 'and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not'. We do not read these observations and other observations occurring in the body of the judgment as laying down that where dealing in properties is only one of the many objects of a company, such an object is conclusive with regard to the actual nature of the business carried on by the company. It is true that a stated object of that kind 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 stated objects in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the company.
St. Aubyn Estate Ltd. v. Strick again dealt with the case of a company which was incorporated for the purpose of developing and disposing of lands and other property acquired by purchase. The company developed the land as building sites and proceeded to sell off portions as opportunities arose. Expenditure was involved in development and in the lay-out and the developed sites were sold in plots to the applicants. Well over 400 such transactions of sale were involved and the Commissioners came to the conclusion that the company was carrying on a trade of dealing in property. Finlay J. observed :
'When one looks at the memorandum and articles, when one looks at the inception of the company, when one looks at what the company in fact did, it did in fact purchase, it did in fact develop, it did in fact sell and it did in fact make profits by selling. When one looks at all those circumstances, I think it is impossible to say that they do not constitute evidence upon which a Tribunal of fact might arrive at a conclusion that here there was a trade being carried on.'
Cayzer, Irvine and Co. Ltd. v. Commissioners of Inland Revenue was considered a similar case, where a company purchased a landed estate. It sold certain portions of the estate and further granted to a building contractor options to build dwelling houses on parts of the estate. Between 1918 and 1937, it had granted over 1,100 feus to purchasers of such houses and to other private individuals. It was held that the company had acquired the estate as a trading asset with a view to developing and marketing it and that the profits made from the sale of land were trading profits assessable to tax. In dealing with this case, the Lord President observed :
'On the other hand, they were a company which was formed for the purpose of earning a trading profit and their activities, one might suppose, were mainly directed to that end. They had power under the objects clause of the memorandum of association to trade in land. That is not disputed; and accordingly if they did trade in land they were acting intra vires and the profits of that part of their business would be just part of the normal and contemplated trading profits of the company. Moreover, a company formed to carry on in the main a particular line of business may often and does often carry on a subordinate business or trade the profits of which are a part of the profits of the company as a whole.'
The reliance placed upon these two cases by the learned counsel for the departmental does not seem to us to be justified in its application to the peculiar facts of the present case. To our minds it is not enough merely to say that the company in the present instance engaged in a dozen transactions of sale. We have said enough to indicate that the company was promoted solely for the purpose of conserving the family assets and was engaged in the business of planters from which it derived a very large income. That some portions of the property were sold cannot immediately lead us to the conclusion that here was a business in dealing with landed property. Satisfactory reasons have been advanced as to why it was necessary that some portions of the estate should be disposed of. Those we have referred to already. Nor can the mere circumstances that the company had armed itself with the power to deal in properties lead us to ignore all the other equally, if not more important, aspects and conclude that the company was dealing in properties. All the facts and circumstances of the case incline us strongly to the view that the properties during the last several years impress such activities with the character of business.
We may nest briefly consider whether the view that was taken by the officers below that it may be treated as an adventure in the nature of a trade has any substance. The facts necessary to deal with this aspect of the matter have already been stated and do not require repetition. It would suffice for us to refer to a decision of the Supreme Court in Venkataswami Naidu and Co. v. Commissioner of Income-tax and the observations of Gajendragadkar J. in that decision. The facts of that case were that the appellant firm, which acted as managing agents, purchased four contiguous plots adjacent to the place, where the mills of the company managed by the appellant were situated. The appellant was in possession of the lands for some years but made no effort to cultivate them or to utilise them or to utilise them in any manner. Finally, the appellant sold these lands to the company managed by it at a profit. The Tribunal held that the amount was not a capital accretion but was a gain made in an adventure in the nature of business and was therefore taxable. On a reference, the High Court accepted this view of the matter. In the appeal to the Supreme Court, the question arose whether the transaction was an adventure in the nature of a trade. It is sufficient for us to extract the head-notes of this decision.
'If a person invests money in land intending to hold it, enjoys 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 and adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures of 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 and thereby make it improve the quality of the commodity purchased and thereby make it more readily resoluble; any act prior to the purchase showing a design or purpose; the incidents associated with the purchase and resale; the element of pride of possession... 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 facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
In cases where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted.'
On a careful consideration of all the fact and circumstances of the present case, we are of the view that except for an anticipated trade in properties appearing as an object in the memorandum of association, there is no evidence of any intention on the part of the assessee to deal in properties. As we have pointed out, the company armed itself with a multitude of powers relevant to a variety of business transactions and, except for carrying on the business as planters, they did not engage in any one of those other objects. Though, as their Lordships of the Supreme Court point out, even if an intention to trade existed and a presumption that the sales were in the course of adventure in the nature of a trade may be drawn, it is not a conclusive presumption. When facts and circumstances clearly show that the sales were rendered necessary for the purpose of better management of the estate as a plantation, which was the sole business in which the assessee was engaged, we may well regard any such initial presumption as satisfactorily rebutted. The total effect of all the relevant factors and circumstances clearly negative any conclusion in favour of an adventure in the nature of a trade.
In the light of the above conclusion, the question referred to us is answered in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 250.
Question answered in the negative.