JAGADISAN J. - This reference under section 66 of the Indian Income-tax Act raises the question, whether a particular transaction of purchase and sale of a tea estate by the assessee amounts to an adventure in the nature of a trade.
The assessee, who is a member of the Nagarathar community, is a director of an incorporated company called Avra Ltd.
In February, 1947, he became divided from the other members of his undivided family, and got assets worth about four lakhs of rupees. He purchased from one V. S. P. Subramaniam Chettiar a tea estate in Ceylon called Agra Oya Estate, which consisted of 382 acres bearing mature crops and 62 acres of unplanted area. He purchased this estate for a sum of Rs. 4,50,000 on December 5, 1953. He had the services of a broker in making the purchase to whom he paid a brokerage of Rs. 1,250. Even on the date of the purchase the estate was under mortgage for a sum of Rs. 67,500 in favour of the Industrial Credit Corporation, Ceylon. Necessarily he took over this liability as part of the consideration payable. He paid in cash to the vendor a sum of Rs. 1,32,500 which he obtained by borrowing from various persons. For the balance amount of consideration, namely, Rs. 2,50,000, he executed a mortgage in favour of the vendor, Subramaniam himself. The assessee worked the estate up to September 27, 1954, and incurred a loss which he estimated in the sum of Rs. 12,606. The Agra Oya Tea Estate was sold by the assessee on September 27, 1954, for a consideration of Rs. 5,33,000 to a limited company called Agra Oya Tea Ltd. formed by third persons for the purpose of acquiring the estate. He effected this sale through two brokers to whom he paid a brokerage of Rs. 13,250. This sum of Rs. 5,30,000 was received by the assessee in the following manner : 1. The undertaking of the vendee to pay the Industrial Credit Corporation the sum of Rs. 61,250 (which was due at the time of the sale). 2. Undertaking by the vendee to discharge the mortgage in favour of Subramaniam Chettiar under which the amount due then was Rs. 2,55,625. 3. Cash Rs. 2,13,125 : Total Rs. 5,30,000. As a result of the purchase and sale of the Agra Oya Estate the profit made by the assessee was Rs. 38,742. This is not in dispute.
In the year ended June 30, 1955, the previous year for the relevant assessment year 1956-57, the Income-tax Officer assessed the aforesaid amount of Rs. 38,742 as income or profit arising out of an adventure in the nature of trade. The assessee as stated already claimed a loss of Rs. 12,612. Out of this amount the Income-tax Officer disallowed a round sum of Rs. 2,500 as expenditure not laid out or expended solely and exclusively for the purpose of the business. The balance loss of Rs. 10,112 was allowed and the result was the taxable amount was determined as Rs. 28,630 (Rs. 38,742 minus Rs. 10,112). The view of the Income-tax Officer was that the assessee did not purchase the estate as an investment but purchased and sold it as part of a business venture. The assessee went up on appeal to the Appellate Assistant Commissioner, who however confirmed the decision of the Income-tax Officer. There was a further appeal to the Income-tax Appellate Tribunal by the assessee; but that appeal also failed. At the instance of the assessee, the Tribunal has referred the following question of law under section 66 (1) of the Act : 'Whether the inference that the aforesaid transactions amounted to a venture in the nature of trade is correct in law ?'
Whether a transaction is an adventure in the nature of trade is not always a simple issue capable of easy determination. If an agriculturist purchases 1,000 bales of yarn and sells them to an advantage, it is only a trading activity. If, however, he purchases 10 acres of land and profits by the resale he can be said to have acquired only a capital accretion. But these are clear cut cases. The activities of men are so many and so diverse and human motives are so complex and disguised that it is difficult to spell out the real nature of a transaction, whether it is commercial or not. The cases on the subject are quite legion and the pursuit to evolve rules of law from them would turn out to be futile. Certain broad features however stand out quite prominently and they serve as good guides. Every venture with a profit motive, every speculation with a view to earn money, should not be dubbed as being something in the nature of trade. Even a single transaction will partake the nature of a trade if the essence of the thing is commercial. A purchase and sale with the intention to make profit is not necessarily an exclusive attribute of trade or business, so as to put the brand of income on the profit. The fact that the individual hoped and intended to make a profit will not suffice to lead to the inference that he indulged in a business venture. It is not necessary that a profit should be purely fortuitous before it can be an enhancement of capital. A design to make a profit may as much occupy the mind of an investor as the mind of one who ventures into a trade. One useful test which can be applied to determine whether a venture is or is not in the nature of trade would be whether the operations involved in it are of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business in which the venture was made (per Lord Clyde in Inland Revenue Commissioner v. Livingston. The distinguishing mark which differentiates a trading adventure from an ordinary transaction of purchase and sale ending in a profit is not the profit motive of the individual, is not the speculative instinct of the individual, is not the risk that he undertakes in the matter, but the commercial character of the venture. The question always is whether the individual plunged in the waters of trade. In Tax Case No. 24 of 1958, to which one of us was a party, the question has been considered somewhat elaborately, and it is unnecessary for us to cover the same ground over again.
We have no hesitation that the decision of the department and the Tribunal in the present case, holding that the assessee bought and sold Agra Oya Tea Estate as part of an adventure in the nature of trade, is well founded. The assessee found the money for the purchase only by borrowing. Could he have expected to keep the tea estate for himself and exploit it to derive profits for any length of time It seems to us that the answer must be clearly in the negative. Learned counsel for the assessee admits that the mortgage for Rs. 2,50,000 in favour of Subramaniam Chettiar carried interest at the rate of 9% per annum. The mortgage in favour of the Commercial Credit Corporation carried interest at the rate of about 5% per annum. There is no clear evidence as to the income of the assessee from his directorship of the Avra Ltd. or from his other properties. It is, however, conceded on behalf of the assessee that such income would only be in the region of about Rs. 30 to 35 thousand. Assuming that the newly bought estate would yield an income of Rs. 20,000 per year, the total income of the assessee would be about Rs. 55,000. Out of this he has to pay the tax and public charges, incur his ordinary household expense and also pay interest on the mortgage amounts. After making this deduction very little would be left to the assessee to discharge the principal of the mortgage loans. It must have been quite clear to the assessee that in the state of his financial circumstances he could not have hoped to discharge the mortgages and preserve the estate as an income yielding estate for himself. Having regard to the fact that the estate was purchased in December, 1953, and sold away in September, 1954, and taking into account the fact that it was impossible to conceive of the possibility of a person making an investment almost entirely with borrowed money with no expectation of an early discharge of the debt, we are of opinion that the conclusion reached by the Tribunal is correct. There is also some evidence on record to show that the bent of the assessees mind was to indulge in such activities. We find from the order of the Income-tax Officer that the assessee attempted to purchase another estate called Rathna Estate which, however, he handed over to a limited company anticipating a downward trend in the tea market and the fall in price of tea estates in general. There is enough material on record to support the finding of the Tribunal and we are unable to say that the Tribunal has misdirected itself on a point of law.
The reference is answered against the assessee who will pay the costs of the department. Counsels fee Rs. 250.