BASI REDDY,J. -
(1.) THIS reference under S. 66(1) of the Indian IT Act, 1922, comes before us after the submission of a finding on a certain point by the Tribunal in pursuance of an order of remand made by the
Supreme Court, with direction that this Court should deal with the matter de novo. The question
that was referred to this Court by the Tribunal was :
"Whether the sum of Rs. 75,040 is a receipt not from business but only of a casual and non recurring nature exempt under S. 4(3)(vii) of the IT Act ?"
(2.) BEFORE answering this question, in the light of the finding submitted by the Tribunal, it is necessary, for a proper understanding of that finding, to set out the history of this case through its
various stages, noticing the stand taken by the assessee from time to time. The assessee (Jaldu
Manikyala Row) was a merchant doing business in timber, tiles, furniture, ironware and hardware
in partnership with others and on his own. His business activities were carried on at various places
in the Andhra area. He also owned sea going schooners and other boats jointly with others for
transporting cargo and passengers. He belonged to a family of bankers and traders and he and his
two brothers were among the foremost business men of Masulipatam.
On 29th Aug., 1941, he entered upon a new venture and purchased for a sum of Rs. 62,500 a
25/56th share in a final mortgage decree for sale from one Sarvarayudu. The concerned mortgage deed had been executed on 25th July, 1927, by Bommadevara Naganna Naidu, the then zamindar
of North West Vellar, in respect of a loan of Rs. 1,12,000 advanced by the said Sarvarayudu, his
elder brother, and the latter's wife. On a partition of the joint family, a 25/56th share in the
mortgage dues fell to the share of Sarvarayudu. In 1935, the mortgagees filed a suit for the
recovery of the mortgage money and on 24th Feb., 1936, a preliminary decree was passed in their
favour for Rs. 2,60,257 and a final decree followed on 5th Aug., 1937. It would appear that during
this period Sarvarayudu got into financial difficulties and there was pressure on him by his own
creditors, and so on 29th Aug., 1941, he assigned his share in the mortgage decree to the
assessee for a sum of Rs. 62,500 by a registered deed of transfer, under which the assessee
agreed to discharge all the debts of Sarvarayudu and to give the residue, if any, to Sarvarayudu.
According to the assessee, since he had no funds of his own, he had to borrow a sum of about Rs.
50,000 from his brother Venkata Subba Row, the latter's son in law, Nagapotha Row and other bankers and money lenders. Between the years 1941 and 1943 the assessee paid off a total sum
of Rs. 59,360 to as many as seventy six creditors of Sarvarayudu besides paying to Sarvarayudu
himself on 29th May, 1944, a sum of Rs. 640 being the balance of the consideration, and a further
sum of Rs. 4,000 representing the interest for delayed payments.
In the meantime, the assessee along with the other decree holders, had instituted proceedings for
the execution of the decree and eventually brought to sale some of the mortgaged properties.
Those properties were put to auction in eight lots and five of the lots fetched a sum of Rs. 3,45,000
and after deducting poundage of Rs. 5,550, the amount available for distribution amongst the joint
decree holders in part satisfaction was Rs. 3,39,450. (The total amount due on the decree up to
5th July, 1944, was Rs. 3,62,091). Out of this, the assessee received on 14th Aug., 1944, a sum of Rs. 1,51,540 in part payment of his share of the decree debt. This included interest of about Rs.
22,000 accrued on the assessee's share of the decree after he had purchased it. Thus, the amount realised by the assessee exceeded the price paid by him, by a sum of Rs. 89,040.
After deducting a sum of Rs. 10,000 towards the expenses for realisation and a further sum of Rs.
4,000 paid as interest to Sarvarayudu, the ITO held the assessee liable to pay income tax on the balance of Rs. 75,040 as constituting profit from an adventure in the nature of trade and brought it
to tax in the asst. year 1945 46. The question referred to this Court relates to this sum.
It would be convenient at this stage to refer to the contentions raised by the assessee before the successive authorities, and the conclusions reached by them.
(3.) THE contention of the assessee before the ITO was that the profit made from the purchase and realisation of the decree was only a casual gain from a transaction outside his line of business and
as it was not an income from an adventure in the nature of trade, it was not liable to tax. This
contention was negatived by the ITO by holding that, throughout the venture, the assessee had no
intention whatever of acquiring and possessing the mortgaged property, but his real intention was
to make a profit out of the transaction. Another contention seems to have been raised before the
ITO, although it does not appear from his order, but was adverted to in the order of the AAC while
dealing with the appeal preferred to him by the assessee from the order of the ITO. That
contention was that the assessee had taken over the decree to help his friend Sarvarayudu out of
his financial difficulties and also to oblige his brother, Venkata Subba Row, who had purchased the
equity of redemption in a part of the mortgaged property and was desirous of consolidating his
position in regard to those lands. (It may be mentioned here that out of the eight villages which
had formed the subject matter of the mortgage, the equity of redemption in two of them had been
purchased by the assessee's brother Venkata Subba Row and the equity of redemption in a third
village had been purchased by the latter's son in law, Nagapotha Row). The stand taken by the
assessee before the ITO appears to have been that his object in acquiring the decree was two
fold : (1) to help Sarvarayudu out of his financial embarrassment, and (2) to assist his own brother
Venkata Subba Row by ensuring that the execution of the decree was confined to the properties
other than those in which Venkata Subba Row was interested. The ITO did not advert to this
contention in his order and gave no finding thereon.;