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Commissioner of Income-tax Vs. National Properties Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 57 of 1971
Judge
Reported in[1978]113ITR793(Cal)
ActsIncome Tax Act, 1922 - Section 10
AppellantCommissioner of Income-tax
RespondentNational Properties Ltd.
Appellant AdvocateSuhas Sen and ;Ajit Sengupta, Adv.
Respondent AdvocateNone
Cases ReferredJanki Ram Bahadur Ram v. Commissioner of Income
Excerpt:
- .....of the property in ultadanga road, calcutta, was taxable under section 10 as an adventure in the nature oftrade for the assessment year 1960-61 '11. at the hearing no one appeard on behalf of the assessee, mr. ajit sengupta, learned counsel for the revenue, cited several decisions and on the strength of the same contended that in the admitted facts and circumstances of the instant case it should be held that the transaction involved was an adventure in the nature of trade and, therefore, the surplus arising out of such transaction would be taxable as profit under section 10 of the said act. the facts on which mr. sengupta laid particular emphasis were :(a) that the purchase and sale of property was within the lawful and permitted object of the assessee under its memorandum of.....
Judgment:

Sen, J.

1. The facts found and/or admitted in this reference under Section 66(1) of the Indian. Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, West Bengal I, Calcutta, are as follows :

Messrs. National Properties Ltd., Calcutta, the assessee, is a limited company incorporated in 1937. The assessment year involved is 1960-61, the relevant previous year being the year ended on the 30th June, 1959.

2. On the 14th August, 1946, the assessee purchased 5/9ths share of an undivided garden house on the Ultadanga Main Road, Calcutta, with trees and tanks covering a total area of 30 bighas of land. Thereafter, in a partition suit filed by the assessee against the other co-owners, partition was effected under a decree passed by the 6th Subordinate Judge, 24-Parganas, and exact demarcation of the share allotted to the assessee was made. The assessee obtained about 17 bighas of land situated at 83, 84 and 86/2, Ultadanga Main Road, Calcutta. The cost of the property was Rs. 1,06,335 and with the expenses incurred in connection with the purchase added, the total came to a figure of Rs. 1,10,805. This value of the property was shown in the balance-sheet of the assessee up to the previous year ending on the 30th June, 1958.

3. On the 27th August, 1958, the land was acquired on behalf of the Calcutta Improvement Trust and an award of Rs. 7,00,822 was made in favour of the assessee by way of compensation.

4. The assessee contended in its assessment that the value of the said property on the 1st April, 1954, on the basis of an engineer's report was Rs. 7,63,780 and, taking into question the cost of transfer and the value awarded, the assessee had suffered a capital loss of Rs. 64,158 in the transaction. The difference in value between the cost of purchase by the assessee and the amount of compensation did not arise from an adventure in the nature of trade.

5. The Income-tax Officer found that the property was purchased by the assessee with borrowed capital and that the property was not an income-yielding asset. 'It was further found that purchase, development and sale of immovable properties fell within the assessee's usual objects of business as mentioned in several clauses of its memorandum of association. It was further found as a fact that the acquisition by the Calcutta Improvement Trust of the property was initiated by sanctioning the original alignment affecting the said property on the 8th December, 1938. Thereafter, survey was undertaken and a report submitted on the 25th May, 1946. The Income-tax Officer came to the conclusion that when the property was purchased on the 14th August, 1946, the assessee was aware of the alignment and the subsequent survey and, therefore, entered into the transaction with the definite and sole object of making'a profit out of the deal when the acquisition would take place. The Income-tax Officer rejected the contentions of the assessee and held that the surplus arising in its hands consequent to the acquisition was liable to be taxed as profit under Section 10 of the Indian Income-tax, 1922.

6. Being aggrieved by this decision the assessee preferred an appeal before the Appellate Assistant Commissioner, who followed a decision of the Tribunal on a similar question in respect of the earlier assessment year 1958-59, and held that the said surplus could not be assessed under Section 10 of the Act but that the same would be liable to capital gains tax.

7. The revenue preferred an appeal from this decision of the Appellate Assistant Commissioner. It was urged before the Tribunal on behalf of the revenue that the property was purchased by taking a loan; that there was no income-yield from the property; that the property admittedly formed a part of the alignment sanctioned as far back as 1938 and, therefore, it should be held that the assessee purchased the said property as a business venture. On behalf of the assessee the order of the Tribunal for the earlier assessment year was relied on.

8. The Tribunal considered the respective submissions of the parties and, inter alia, found as follows :

(a) Since its incorporation the assessee had never sold any property.

(b) Only in two cases the properties of the assessee had been acquired.

(c) Admittedly, the property was purchased by the assessee on a loan but the same was repaid by increasing the share capital and that the mere fact of this loan could not convert an investment into a business adventure.

(d) The resolution framing the scheme of the Calcutta Improvement Trust was passed only in January, 1948, almost two years after the purchase of this land ; the scheme was sanctioned by the Government in 1950, i.e., after another two years. The notice of intention to acquire the property was published in August, 1954, i.e., eight years afterthe purchase.

9. On these facts, the Tribunal concluded that the assessee had not developed the property nor was there any evidence to indicate that the assessee had any intention to effect sale of the property by parcelling out the same. The property was in the possession of the assessee over a large number of years and eventually came to be acquired and it could not be said that there was even an element of certainty that the property would definitely be acquired at a future date. The Tribunal considered several decisions including a decision of the Supreme Court in the case of Janki Ram Bahadur Ram v. Commissioner of Income-tax : [1965]57ITR21(SC) . The Tribunal gathered the total impression from the facts to be that the property was held by the assessee only as an investment and that the transaction was not an adventure in the nature of trade.

10. From this order of the Tribunal the following question has been referred for determination :

' Whether, on the facts and in the circumstances of the case, the surplus realisation on the transfer of the property in Ultadanga Road, Calcutta, was taxable under Section 10 as an adventure in the nature oftrade for the assessment year 1960-61 '

11. At the hearing no one appeard on behalf of the assessee, Mr. Ajit Sengupta, learned counsel for the revenue, cited several decisions and on the strength of the same contended that in the admitted facts and circumstances of the instant case it should be held that the transaction involved was an adventure in the nature of trade and, therefore, the surplus arising out of such transaction would be taxable as profit under Section 10 of the said Act. The facts on which Mr. Sengupta laid particular emphasis were :

(a) That the purchase and sale of property was within the lawful and permitted object of the assessee under its memorandum of association.

(b) The property was purchased with borrowed capital and was not yielding income.

(c) The assessee knew at the time of the purchase that it would eventually be acquired by the Calcutta Improvment Trust.

12. The decisions cited by Mr. Sengupta may be considered at this stage in their chronological order.

13. First cited was an English decision in the case of Commissioners of Inland Revenue v. Scottish Automobile and General Insurance Company Ltd. [1931] 16 TC 381 . In this case, the assessee had sold a part of securities in which its reserve fund was invested and the sale proceeds were invested in other Government securities, A profit was realised on this sale. The question arose whether this profit was a profit made in the company's business. On such facts it was held that there was evidence upon which the Commissioner could correctly arrive at the conclusion of fact that the profit was not a profit of trading. It is not clear how this decision helps the case of the revenue.

14. Next cited was a decision of the Privy Council in the case of British South Africa Co. v. Commissioner of Income-tax [1946] 14 ITR (Supp) 17. The facts before the Judicial Committee in that case were that the assessee had acquired numerous concessions and mining rights over various territories and gave special grants of exclusive mining rights to other companies in return for fully paid up shares in the latter as also for recurring annual payments in cash for a fixed stipulated period. It was held that the amounts received by the assessee were the price paid upon a transfer of property and were not in the nature of rent or royalty or other profit arising from the property. It was further held that, as the company carried on a trade and the amounts in question were received in course of that trade, the said amounts should not be segregated from the other business earnings of the assessee. It was held that the amounts received were not capital receipts but income derived from business. The facts in this case appear to be materially different from the facts with which we are concerned and this decision, in our opinion, does not advance thematter any further.

15. Next cited was a decision of the Supreme Court in the case of G. Venkataswami Naidu & Co. v. Commissioner of Income-tax 0065/1958 : [1959]35ITR594(SC) . In this case, the facts were that the assessee-firm which was a managing agent purchased four continuous plots of land adjacent to its managed companies. The assessee never made any effort to cultivate the plots or erect any structure on the same but allowed them to remain unutilised except for realising the rent from a house already existing on one of the plots. Later, the assessee sold the plots to a company managed by it in two lots at a consideration which was higher than the price of original purchase. The question arose whether the surplus was assessable to income-tax as income arising from the business. The Tribunal came to the conclusion that the amount was not a capital accretion but a gain made in an adventure in the nature of business and was, therefore, taxable and the decision of the Tribunal was upheld by the High Court. The matter finally came up before the Supreme Court. In its judgment the Supreme Court observed as follows at pages 609, 610 :

' Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. 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 an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and re-sale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its re-sale allied to his usual trade or business or incidental to it Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and re-sold If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily re-saleable What were the incidents associated with the purchase and re-sale Were they similar to the operations usually associated with trade or business Are the transactions of purchase and sale repeated In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture ?.........Theseand other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any one of them may help the court to draw a similar inference ; 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 this connection, it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to re-sell it at a profit It is often said that a transaction of purchase followed by re-sale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true ; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole ; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of hiding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset 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 ah adventure in the nature of trade ..... the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.'

16. The Supreme Court held on the facts of that case that it could be rightly inferred that the assessee knew that it would be able to sell the said plots to the managed companies whenever it was thought profitable to do so. It was, therefore, held that the assessee purchased the plots with the sole intention to sell them to its managed mills at a profit and thisintention raised a strong presumption in favour of the view that the transaction was in the nature of an adventure in trade. This finding of intention not having been rebutted by other facts and circumstances, the Supreme Court held that it was an adventure in the nature of trade.

17. Next cited was a decision of the Madras High Court in the case of S. K. AR. K. AR. Somasundaram Chettiar v. Commissioner of Income-tax : [1963]47ITR336(Mad) . The facts in this case were that the assessee, an Indian, went to Ceylon on a short holiday. He purchased an extensive plantation in Ceylon for a sum of Rs. 1,10,000 in a closing down sale of the properties of a bank, by borrowing the entire amount. For the first year, the assessee worked the estate which yielded a net income of Rs. 16,485 but no part of the debt was repaid. In the next year, the property was sold for a sum of Rs. 1,50,000 and the sum borrowed was paid off by the assessee. The question arose whether the transaction was an adventure in the nature of trade or an investment. On the facts it was held that the transaction was in the nature of trade. The High Court held that in deciding whether a transaction was an adventure in the nature of trade or not the intention with which the assessee purchased the property was relevant and this intention could be gathered from the consideration of the entire circumstances and that in the facts on record there was material to come to the conclusion that the intention was to undertake a trading adventure.

18. Last cited was a decision of this court in the case of Mayfair Estates Private Ltd. v. Commissioner of Income-tax [1963] 48 ITR 217 . The facts were that the assessee-company had purchased a block of buildings in 1935 and sold one of them in 1939 at a small profit which was assessed as business income. In 1942, other properties were sold at larger profit and this time it was contended that the amount was capital gain and not business income. The memorandum of association permitted the assessee to traffic in land and other property. It was also found as a fact that the sale proceeds were not used for discharging the loan raised over the properties or for reinvestment, and the bulk of the property was only rented out. It was held on these facts that the sale of the property in this case was an ordinary trading activity of the assessee and the profit was liable to be assessed as income from business.

19. We also take note of a later decision of the Supreme Court in the case of Janki Ram Bahadur Ram v. Commissioner of Income-tax : [1965]57ITR21(SC) which was cited before the Tribunal and where the Supreme Court has again reiterated that the nature of the transaction must be determined on a consideration of all the facts and circumstances on record and that the question whether profit in a transaction has arisen out of an adventure in the nature of trade or not is a mixed question of law and fact. The Supreme Court laid down further that the profit motive in a transaction is notdecisive.

20. On a careful consideration of the facts and circumstances before us and following the principles laid down by the authorities noted above we cannot accept the contention of the party (sic) that the transaction in the instant case was an adventure in the nature of trade. The authorities below have not found in this case that it was the intention of the assessee to undertake a trading adventure. The clear finding of the Tribunal is that the assessee did not develop the property nor had any idea to effect the sale of the property by parcelling out the same. The assessee had to suffer acquisition by a public authority. This at best is a passive submission and not an active participation which is usually associated in a trading adventure.

21. The Tribunal has also found that it was uncertain even at the initial stage whether the property would be finally acquired by the Improvement Trust or not and, therefore, this anticipation of a future acquisition could not be of much relevance in determining whether the transaction was of a trading nature. The other facts found by the Tribunal are that the company, since its incorporation in 1937, had never sold any property and the loan which was obtained by the assessee in acquiring this property was repaid by increasing the share capital.

22. It is amply clear that the authorities below had sufficient material to hold that the assessee had no intention to undertake an adventure in the nature of trade when it originally purchased the land and that the property was held by the assessee only as an investment.

23. As laid down by the Supreme Court in the case of G. Venkataswami Naidu & Co. 0065/1958 : [1959]35ITR594(SC) , in such cases, any one particular fact would not be conclusive ; even the original intention of the assessee would only be a relevant factor and it is the total impression gathered from all the relevant facts and circumstances which would govern the position. This has been taken into account in the instant case by the Tribunal and it appears to us that the Tribunal has drawn a correct conclusion from the same.

24. For the reasons given above we answer the question referred to us in the negative and against the revenue. There will be no order as to costs.

Banerji, J.

25. I agree.


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