The judgment of the Court was delievered by
SRINIVASAN J. - The assessee is a Hindu undivided family, resident of the former Pudukottai State. It was carrying on money-lending business in Malacca from 1930 onwards. It has purchased properties in Malacca and one of such purchases was an estate called Sungai Bahru Ulu Estate on the 25th March, 1937, for 23,852 dollars. Between 1931 and 1941 it had purchased twelve properties, two of which were sold in 1940 and one in 1941. Thereafter, there were no purchases or sales. Sungai Bahru Ulu Estate, which had been bought for cash, was sold in 1951, and it resulted in a profit of 22,802 dollars. This profit was brought to tax by the Income-tax Officer in the assessment of the assessee for the assessment year 1952-53. The contention that it was a capital accretion was repelled, the Income-tax Officer observing :
'It is not disputed that the assessee has been doing money-lending business also at this place. The mere fact that this property was purchased for cash will not alter the character of the profit on sale of properties as business profits. The assessee is a Nattukottai Chettiar who has been carrying on business abroad and it is an ordinary incidence of business of Nattukottai Chettiars overseas, the acquire properties in the course of their business at cheap rates and to dispose them of at profit when the market is favourable. The purchase and sale of properties form a business transaction and the profit on sale will therefore be treated as business income and assessed.'
In appeal, the Appellate Assistant Commissioner noticed that the Hindu undivided family stopped its money-lending business in 1940. He stated, 'during the course of the existence of this business, the appellant acquired certain properties from the debtors in discharge of their debts. Those properties represent the appellants stock-in-trade. The property in question was however purchased in 1937 for cash available from his money lending business. This purchase of property for cash in the above set up will represent the stock-in-trade. trade of the appellants money-lending business, as the surplus cash available in money-lending business was diverted in acquiring this property. Because the property was purchased for cash, it will not affect its real character. This property representing the stock-in-trade was sold in the year of account at a profit of 22,802 dollars. This profit is therefore clearly assessable in the hands of the appellant.'
When the matter came to be heard by the Appellant Tribunal, the Tribunal thought that the claim that the acquisition of this property was in the nature of a capital acquisition was not examined by the Income-tax Officer in the light of further claim that the family had ceased to carry on money-lending business after 1940. The case was therefore remanded to the Income-tax Officer and the Appellate Tribunal directed the Income-tax Officer to investigate the matter not only from the angle set out above but also to examine 'whether the assessee was dealing in properties as an adjunct to the money-lending business, as an independent business or whether the transaction constituted a venture by himself and try to support the assessment if he can.'
The Income-tax Officer submitted a remand report. He stated therein that he found that the business in properties was the adjunct of the money-lending business and gave certain reasons therefor. He conceded that though in 1941 there were certain advances in the money-lending business, in any event, from 1942 onwards, there were no fresh advances. The assessee however continued to collect the interest on the old outstandings till 1945. He stated finally that the money-lending business came to a 'standstill' in 1945. It would also appear that in 1951 the assessee received interest on outstandings to the extent of Rs. 3,250. This, it is stated, was realised by a receiver appointed by court in a litigation between the two brothers who formed the Hindu undivided family.
At the further hearing of the appeal after the remand, the Tribunal chose to attach no importance to the contention that the purchase of the property was for cash and not in lieu of any money-lending debt. It stated that the transactions relating to the properties acquired in whatsoever manner by the assessee were all dealt with in the money-lending business. Having settled this point to its satisfaction, the Tribunal went on to say that the source of acquisition of some properties was irrelevant, and it concluded that the assessment had been correctly made.
On the application of the assessee, the Tribunal submitted the following two questions for the determination of this court :
'(1) Whether, on the facts and circumstances of the case, the Sungai Bahru Ulu Estate constituted the stock-in-trade of any business of the assessee ?
(2) Whether, on the facts and circumstances of the case, the sum of 22,802 dollars being the profit on sale of Sungai Bahru Ulu estate is not a capital accretion but income liable to be assessed to tax ?'
In the statement of the case, in important detail is mentioned, the effect of which has not been considered by the Tribunal. The property was purchased for cash in 1937 for 23,852 dollars. Up to the date of its sale in 1951, the assessee had expected by way of capital expenditure a sum of as much as 11,734 dollars so that the value of the estate was 35,586 dollars. The profit arising in this transaction was accordingly its sale value of 58,388 dollars minus its cost to the assessee on the date of sale of 35,586 dollars.
We are really at a loss to understand what the Tribunal meant when it states that the profit arose from a business in properties carried on as an adjunct to the money-lending business at Malacca. Where a person carries on a money-lending business and acquires properties in lieu of outstanding debts, those properties became part of the stock-in-trade of the money-lending business itself and the disposal of the properties and any consequent profits arising therefrom are transactions relevant to and forming part of money-lending business. No separate business of any description as an adjunct or independent of the money-lending business comes into existence. We understand the Tribunal to mean that these transactions form part and parcel of the money-lending business itself, and nothing more than that. The question however is whether, on the facts and in the circumstances set out, the assessee is liable to be taxed on this profit.
The premises upon which the department seems to proceed is that wherever a person is doing business, every acquisition of his, whether it be from the money-lending business itself, that is, by taking properties in lieu of outstanding debts, or whether it be by reason of outright purchase from cash reserves which he has, must be treated as the stock-in-trade of the money-lending business. Such a broad proposition cannot possibly be supported. Just as it is possible for a money-lender to put in fresh capital into his business, it is equally possible for him to take out moneys or assets which from the stock-in-trade of the money-lending business and treat it as an asset unconnected with the money-lending business. If, for instance, a person carrying on money-lending business finds that the capital put into the business is much larger than its requirement would justify, there is nothing to prevent him from taking out part of that capital and investing that capital in any other manner. Even properties acquired in the course of the money-lending business may, by reason of their subsequent treatment, cease to be part of the stock-in-trade of the money-lending business and become capital asset in the hands of the assessee. There can be no hard and fast rule for the purpose of determining the character of any item of property. It is the mode of the treatment of that property that is essential, whatever may be the nature of its origin. It is true that where an item of property has been taken in lieu of outstanding debts, the initial presumption that it is the stock-in-trade of the money-lending business can be made. It is equally true that when an item of property is purchased for cash, whether that cash comes out of the balance of the money-lending business or otherwise, that property may be made part of the stock-in-trade of the money-lending business. These features only indicate that each case has to be decided upon the peculiar features thereof and there is neither any rule of law nor presumption in such cases.
The finding that the money-lending business stopped by 1942 and that no fresh advances were made after that date is categorical. We do not however accept the very large claim that is made by the learned counsel for the assessee that when once the money-lending business was stopped, all the assets relating to that business became capital asset in the hands of the assessee. It might no doubt be said that if the business ceased, there was no need for any stock-in-trade in that business and in that sense the properties were capital in the hands of the assessee. But unless there is a clear indication that the properties were treated otherwise, the sale of those properties must, at least for the purpose of enabling the closure of the business, be treated as disposal of the stock-in-trade of that business. To that effect, undoubtedly those properties would continue to be the stock-in-trade of that business.
Of the twelve items of properties which were acquired by the assessee between 1931 and 1941, on item so purchased in 1931 and another in 1937, were the only ones which are bought outright for cash. All the remaining items were taken in purchase by foreclosure of loans. Of the two items referred to, the first item so acquired in 1931 still continues to be in the possession of the assessee, that is to say, till the assessment year in question he had been in possession and enjoyment of that property for over twenty years. The Sungai Bahru Ulu Estate acquired for cash in 1937 had been in the assessees possession and enjoyment for fourteen years before its sale, during which period the assessee had incurred capital expenditure to the extent of well over 11,000 dollars, nearly half the value for which the property had been acquired. In so far as the items which were purchased for cash are concerned, the conduct of the assessee in dealing with them is more consonant with a desire to treat the property as a capital asset in his hands rather than to treat them as items of stock-in-trade. The mere circumstance that the assessee is a Nattukottai Chettiar cannot lead to the inference that any purchase of property must have been tainted with a business or trading intent. It is well known that Nattukottai Chettiars stay in foreign territory for a considerable number of years and there is nothing illogical in their acquiring properties with a view to enjoy them. The only circumstance which the Tribunal depends upon is the fact that all these properties were entered in the money-lending books. We do not see anything significant in this feature. After all, the money-lending transactions had come to an end in 1941 and the circumstance that these properties were entered in these books cannot discredit the effect of the long possession and enjoyment after the cessation of the money-lending business. It seems to us that the material upon which the department and the Tribunal relied is wholly insufficient to lead to the conclusion that Bahru Ulu Estate was ever the stock-in-trade of the money-lending business.
We are accordingly of the view that both the questions have to be answered in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 250.