(1.) THIS is a reference by the Commissioner of Income Tax, Madras, under Section 66(3) of the Indian Income Tax Act of 1922 for the decision by the High Court of the following question, viz., Whether the sum of Rs. 63,624 is assessable to income tax. The assessee is S. R. M. S. Subramanian Chettiar who is a Nattukottai Chetti, residing at Nemathampatti in the Ramnad District. He is a professional money-lender carrying on money-lending business at his headquarters (Nemathampatti) and also at Muar in the Federated Malay States. He is also a partner in a money-lending firm known as S. R. M. S. Firm, Meiktila in Burma. He was assessed to income-tax in the year 1930-31 on the basis of the income derived by him in the previous Tamil year Sukla. One of the items of income derived is a sum of Rs. 63,624 which is stated to be the profit derived by the assessee from the sale during the year of account of certain house properties in Rangoon. The question for determination is whether this profit is chargeable to income-tax or not.
(2.) A brief statement of the facts relating to the acquisition and sale of these properties is necessary. One M. L. R. M. A. Firm, Rangoon, had a mortgage executed in their favour in 1910 by one S. A. Seedat for a sum of Rs. 80,000. The aforesaid firm appears to have effected an equitable sub-mortgage of their rights in the original mortgage-deed to one Malladi Sathialingam. The claim under the sub-mortgage was the subject of litigation in the Privy Council in 1918, when the present assessee got an assignment in his favour of the right, title and interest of the original mortgagees (M. L. R. M. A. Firm) for a sum of Rs. 4,000 from one Singaram Chetti, who had by that time become the owner of the mortgage right by reason of his purchase in Court auction in execution of a money decree obtained against M. L. R. M. A. Firm. Subsequent to this assignment in favour of the assessee, the appeal in the Privy Council in which the present assessee got himself impleaded, was decided against Sathialingam and the result was that the equitable sub-mortgage held by Sathialingam became unenforceable on the mortgaged properties, as it was found to be invalid. The encumbrance on the original mortgage right having become nil, the assessee was in a position to file a suit in the Chief Court of Rangoon in 1923 on the mortgage deed of 1910 as the assignee of the mortgagees rights thereunder for the recovery of a sum of Rs. 1,68,3000 as the aggregate of the principal and interest due. In that suit, the transaction was found to be an English mortgage and a decree was given in favour of the assessee for the amount sued for with a direction that Seedat should pay the amount within six months from the date of the decree (19th May, 1925), and that in default of payment within the prescribed time, he should be debarred from his right to redeem the mortgage. In March, 1926 the assessee entered into a compromise with the original mortgage, whereby certain house properties in Rangoon (the subject of the mortgage) were delivered to the assessee in satisfaction of his claim under the mortgage. He retained these properties for a few years receiving the rents and profits thereof, and keeping accounts for the receipts and expenditure relating to them till October, 1929, when he sold the same for a sum of Rs. 70,000. It was found by the Income Tax Officer that the assessee had incurred a net expenditure of Rs. 6,376 for the purchase of the mortgage right and in the subsequent litigation relating to it. The difference between the sale proceeds of the properties and the outlay made by the assessee, viz., Rs. 63,624 was treated as profit derived by him in this transaction and assessed to income-tax. The legality of this assessment is questioned by the assessee.
It is contended on his behalf, that the receipt of the sum in question in the year of account did not in the course of any business conducted by him, it was an isolated venture, speculative and also casual or non-recurring in its nature. The question is, whether this income is exempt from income-tax under Section 4(3) (vii) of the Income Tax Act of 1922. By virtue of that clause, any receipts not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, are exempt from income-tax. In order to claim in the privilege of this exemption it must be shown that the receipts are not those arising from business or the exercise of a profession and that the receipts are of a casual and non-recurring nature. If in a particular case the receipts can be reasonably deemed to arise from a business or the exercise of a profession, they would be chargeable to income-tax, though casual and non-recurring in nature. Section 2, Clause 4, of the Income Tax Act, runs thus :- Business includes any trade, commerce, or manufacture or may adventure or concern in the nature of trade, commerce or manufacture. it is unnecessary to consider for the purpose of this case whether the definition given is exhaustive or not. There is no doubt that the assessee is a professional money-lender and was carrying on money-lending business in 1918, when he got an assignment of the mortgage in question for a consideration of Rs. 4,000 as stated above. The Commissioner has rightly observed that the assessees business is to handle money-lending transactions of various kinds including mortgages. As a money-lender, his ordinary business is to lay out moneys with a view to make a profit by advancing various loans secured and unsecured. Whatever he so lends out, would be the principal sum invested, and the various sums of interest stipulated for would be the contemplated profit. There can be no doubt that if the assessee had himself lent a sum of rupees under a mortgage bond, whatever profit he happens to derive in that transaction is a profit derived in his money-lending business. The effect of such a transaction is the creation of the relationship of creditor and debtor. By getting an assignment of a mortgage bond already obtained by another, the same result is achieved, as the assignee would be standing in the shoes of the assignor and could exercise the rights of the mortgagees, treating the mortgagor as his debtor. In the present case, the assessee virtually became the assignee of the mortgages rights under the mortgage bond in question, by a rather circuitous process, which however does not make his position anything different from that the assessee sued upon the original mortgage bond for a pretty large amount and got such a decree as could have been passed in favour of the original mortgagees themselves. The mortgage debt due to him was determined by the decree, and instead of realising the amount directly, he took possession of the mortgaged properties in satisfaction of his claim under the mortgage bond, and after a few years, converted the same into cash by effecting a sale thereof for Rs. 70,000. That he thereby made a profit of a very large sum more or less in the nature of a windfall is a fact. Can it be said that the profit so derived by him is in respect of a transaction which is beyond the scope of the ordinary course of money-lending business carried on by him? If he becomes a mortgagee by advancing a loan on the security of immovable property any profit derived by means of such a transaction is unquestionably chargeable to income-tax as a business profit. Though at the inception, the mortgage loan was not actually advanced by the assessee, the subsequent advance of Rs. 4,000 for getting an assignment of the mortgagees rights is certainly a venture coming within the generally recognised ambit of the money-lending business and cannot be deemed to be so disconnected with the profession of a money-lender, as to take it out of the category of business carried on by the assessee. All that can be said is that the profit realised was extraordinary, in the sense, that it was beyond the usual expectations of a money-lender in respect of a normal money-lending transacting. The fact that a particular transaction in a money-lending business is speculative does not take it out of its category. Suppose an unscrupulous money-lender takes hold of an expectant heir or an inexperienced youth in an opulent family eager for handling money, and takes a promissory note or mortgage bond for twice the amount actually lent, and also stipulates for a high rate of interest. If he succeeds in realising the full amount due under such a promissory note or bond in the year of account, would not the profit made thereby which includes not only the stipulated interest but also an extraordinary profit which stood the risk of being disallowed in a Court of law if contested by the debtor, and was therefore speculative in nature, become chargeable to income tax? Though the transaction in question in this case may be said to be a special variety of money-lending business, it still partakes the essential characteristics of a money-lending transaction.
In one portion of his reference, the Income Tax Commissioner states that it is perhaps not possible to link up with his other transactions and to say that it formed a part of his ordinary business or was undertaken in the courses of that business. He states that though it is an isolated transaction it was nothing else than an adventure in the nature of trade and the profit so derived was a business profit. This observation led to a good deal of argument but in the view we have taken as set forth, it is unnecessary to discuss the cases dealing with what is called an adventure in the nature of trade. If it is simply deemed to be an adventure in the nature of trade, then we have to see, as observed by the Lord President in the case of The Balgowne Land Trust Ltd. v. The Commissioner of Inland Revenue [14 Tax Cas. 684] whether it is a single plunge and if so whether it is shown to the satisfaction of the Court that the plunge is made in the waters of trade. It is only in such a case we have to see whether such speculative ventures have been systematically carried on, and this venture is one of a series of such transactions so as to indicate a continuity in the occurrences of that kind.
In another part of the reference, the Commissioner has distinctly stated that though it is an isolated transaction speculative in character, it was not essentially different in nature from the assessees other transactions, and it cannot be said that it was not entered upon as a matter of business. We think that this observation is correct and is the proper legal inference from the proved facts. It appears that even the initial outlay of Rs. 4,000 for the purpose of getting the assignment was out of the money which the assessee had lent to or deposited in a firm at Rangoon known as S. M. A. R., Rangoon. As observed by the Income Tax Act Officer this item of investment must appear in the assessees head quarter accounts, which he however refrained from producing.
The facts of the present case bear a close resemblance to the facts of the case dealt with by the Bombay High Court in the case of Commissioner of Income Tax, Bombay v. Sir Purushothamdoss Thakurdass [2 I.T.C. 8.]. In that case, the assessee was found to be a cotton merchant. At the time of a serious crisis in the cotton market, the assessee came to be appointed under a power of attorney as an agent for the sale and disposal of all the cotton bales on behalf of the firm of Umar Sobhani. It was a venture of considerable magnitude, whereby the assessee earned a very large sum by way of commission. Though it was found to be an adventure of a casual and non-recurring nature, it was still found to be a profit connected with the business carried on by the assessee as a cotton merchant. Any receipts arising from the buying and selling from the trade or business of a cotton merchant. As regards the special kind of profit earned by way of commission, MACLEOD, C.J., states thus at page 11 :- The argument that receipt from an extraordinary transaction connected with business, such as the one in this case, which would not be likely to occur again for many years, can be placed in the same category as receipts entirely disconnected with business or the profession or vocation or occupation of the assessee which might be considered of a casual and non-recurring nature, cannot be accepted. This observation is very pertinent to the facts of the present case. (Vide also the decision of a Bench of this High Court in Board of Revenue, Madras v. R. M. A. R. M. Arunachalam Chettiyar (47 Mad. 197).
(3.) WE therefore find that the sum of Rs. 63,624 is profit derived by the assessee in the year of account in respect of a transaction connected with his money-lending business, and answer the question in the affirmative. The assessee will pay the costs of the reference to the Income Tax Commissioner Rs. 250.
Reference answered Accourdingly.;