SHAH, - (1.) THE following Judgment of the court was delivered by :
(2.) A partnership styled P. K. N. was carrying on money-lending business in several towns in India and also in the Federated States of Malaya. In the course of its business the P. K. N. firm acquired rubber estates and other immovables in the Districts of Murar and Segamat in the Federated States of Malaya. On 4/12/1937 a private limited company was registered in the name of P. K. N. Company Ltd. -hereinafter called 'the Company'under the Pudukottai Company Regulation V of 1929 with its head office at Viswanathapuram, in the territories of His Highness the .Maharaja of Pudukottai. The share capital of the Company was of the face value of 6,60,000.00 Malayan dollars. Between 23/03/1939 and 8/07/1939, an area of more than 3,000.00 acres of rubber plantations, several houses and open plots of land, which were the assets of the P. K. N. firm were transferred to the Company for an aggregate consideration of 16,50,000.00 Malayan dollars. In consideration of the transfer of these properties, the Company allotted shares of the face value of 6,60,000.00 Malayan dollars to the partners of the firm of P. K. N. and the balance remained outstanding as a debt due by the Company to the firm of P. K. N. On March 14, 194] the Company purchased a rubber estate called the Lee Estate for 2,62,655 Malayan dollars. On 7/07/1941 the Company purchased for 5,000.00 Malayan dollars a house in co-ownership with another firm. in the year 1941 and 1942 some of the properties acquired from the firm of P. K. N. were sold by the Company. Between 1942 and 194.5 the territory of Malaya was under occupation by the Japanese forces, and it appears that during that period some houses belonging to the company were destroyed by fire. After 1945 some more lands admeasuring approximately 700 acres in the aggregate were sold by the Company. On 1/08/1949 the State of Pudukottai' integrated with the Province of Madras, and after the extension of the Indian Income-tax Act to that territory, the Company was assessed by the Income-tax Officer, Pudukottai as a dealer in real estate and profits amounting to 34,272 Malayan dollars and 40,613 Malayan dollars were brought to tax in the assessment years 1949-50 and 1950-51. But the Income-tax Appellate tribunal set aside the orders. The tribunal observed that the activities of the Company outside India were limited to the holding of properties, and deriving income therefrom, and that the properties did not come to the Company in the course of its 1257 money-lending business, nor could it be said that they were acquired for the purpose of resale at a profit, and that the Company "was formed in order to take over these properties and it would be far from correct to say that the properties taken over were intended to be turned into stock-in-trade", and therefore profits realised by sale of the properties were of capital nature. Before the order of the tribunal was pronounced, the Income-tax Officer assessed the Company for the assessment year 1951-52 on a total profit of 1,41,326 Malayan dollars earned from the sale of immovable properties. The Appellate Assistant Commissioner confirmed the order in appeal. On further appeal the Income-tax Appellate tribunal confirmed the order of the Appellate Assistant Commissioner observing that all the material' facts were not brought to the notice of the tribunal at the hearing of the appeals in respect of the earlier years. Thereafter pursuant to a direction of the High court of Madras under S. 66 (2) of the Income-tax Act, 1922, the tribunal referred the following question for the opinion of the High court: "Whether on the facts and circumstances of the case, the surplus of $ 1,41,326 realised by the assessee company by the sale of some of its estates and properties held by it in Malaya was income chargeable to tax under the Indian Income-tax Act ?" The High court answered the question in favour of the Company and held that the amount sought to be brought to tax was not income chargeable under the Indian Income-tax Act. With special leave, the Commissioner of Income-tax has appealed to this court. In a recent judgment Janki Ram Bahadur Ram v. Commr. of Income-tax, Calcutta, 1965) 57 ITR 21: (AIR 1965 SC 1899), it was observed by this court at p. 24 (of ITR): "It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the income-tax authorities. It has consistently been held by this court that the question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact:" R was further observed: "...... the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. If, for instance, a transaction is related to' the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon ah adventure, in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may oe stamped with the character of a trading venture: But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. * * * * that a profit motive in entering into a transaction is not decisive, for, an accretion to. capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit." The Company was apparently floated with the ob)ect of taking over the assets of the P. K. N. firing for soon after it was formed, the Company took over a substantial part of the assets of the P. K. N. firm and allotted the whole of its issued capital in part consideration thereof and for the balance the Company pledged its credit. The memorandum of association of the Company contains the following 'important clauses: "(ii) To carry on business as merchants, commission agents, financiers, concessionaires, mill owners, land and house estate agents and to undertake and carry on and execute all kinds of financial, commercial business (Except the issuing of policies of assurance on human life) which may seem to be capable of being conveniently carried on in connection with any of these objects or calculated directly or indirectly, to enhance the value of or facilitate the realisation of, or render profitable, any of the company's property or rights. (xv) To purchase or otherwise acquire and to sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with property and rights of all kinds, and in particular, mortgages, debentures, produce, concessions, options, contracts, patents, annuities, licences, stocks, shares, bonds, policies, hook debts, business concerns, undertaking, claims, privileges and choses in action of all kinds. "(xvi) To sell, mortgage, let, exchange, manage, improve, cultivate, develop, dispose of, turn to account or otherwise deal with all or any part of the properties, rights 1258 and privileges of the company upon any terms, and for any consideration "
(3.) BARRING acquisition of a half share in the house purchased on 7/07/1941 for 5,000.00 Malayan dollars, the purchase of asseta by the Company was in two lots. The first lot was purchased between 28/03/1989 and 8/07/1989 from the P. K.N. firm for 16,50,000.00 Malayan dollars, and the other, which was the Lee Estate was purchased on 14/03/1941 From the statements of account of the Company, it appears that large amounts of money were spent or cultivation and development of the rubber and coconut estates, ana "substantial income was derived therefrom The total area of 8,000 acres originally transferred by the P. K. N. firm on the formation of the Company was apparently not a compact block and the Company was unable to administer the far-flung estates in different. places effectively and economically, and on that account certain small plots of land were sold in 1940 and 1941. Between the years 1942 to 194B the territory of Malaya was under Japanese occupation and during that period also some plots of land Were sold. .Thereafter in 1946, 1949 and 1980 lands were sold from time to time and profits wen made. As a result of these disposals, the total holding of the Company was reduced to about 4,000.00 acres of rubber estates, besides some houses acquired from the P. K N.Arm and the Lee Estate. The following table which has been Incorporated in Pars. 8 of the statement of the case submitted by the tribunal gives in the form of a tabulated statement the acquisitions and disposals from time to time JUDGEMENT_1256_AIR(SC)_1966Html1.htm On an analysis of this table it is clear that there were no fresh acquisitions after 7/07/1941 till 1980. The two items mentioned in the year of account ending 1/03/1943 and Ma 1/03/1948 are only transfer entries. 80,600 Malayan dollars entered in the last column in the year ending 1/03/1943, it is common ground represents loss by fire and does not represent loss as a result of a sale transaction. Admittedly there were sales spread over a number of years resulting in profit to the Company. These sales were effected when opportunity arose or necessity dictated It is not. however, disputed by the Department that the primary activity of the Company was that of planters it is disclosed by the books of account maintained at the head office in India that during the year ending 31/03/1948, the Company spent on the estates about Rs. 3,50,000.00 and made realisation from the stocks of rubber exceeding Rs. 6,25,000.00. In the next year the expenditure was Rupees 3,31,000.00 and the receipts from rubber were Rs. 6,70,000.00. In the year ending 1/12/1950 the disbursements of the estates including salaries were Rs. 5,25,000.00 while the receipts by way of sales of rubber and stocks came to Rs. 16,50,000.00. These lend support to the view that the primary object of the Company was to function as planters and dealers in rubber, and that year after year the Company was extending its planting operations. It is true that some items or property purchased in the year 1989 were sola from time to time, but these were not transactions of purchase and sale of immovable properties indicating an intention on the part of the Company to treat its investment in immovable properties as an adventure in the nature of trade. The reasons which appealed to the tribunal in disagreeing with its earlier decision that the Company was carrying on busi- 1259 ness in real estate may be summarised.The Company in the year of assessment 1951-52 realised profits of 93,093.79 Malayan dollars from sale of rubber estates, 34,428 Malayan dollars from sale of house properties, 13,050 Malayan dollars from sale of jointly owned properties, and 150 Malayan dollars from sale of 'coconut topes", resulting in a net profit of 141,326.42 Malayan dollars, that the subscribed capital of the Company was 660,000.00 Malayan dollars, whereas the acquisition of properties in the first three years was more than 18,00,000.00 Malayan dollars, that for acquiring its assets the Company had of necessity to raise loans and to pay interest on those loans, and it was clear that the Company was not formed solely for the purpose of acquiring assets of P. K. N. firm, that the Company made large borrowings for the purpose of acquiring those properties and developing them ana there were continuous sale transactions practically in each year ever since 1989-40; that the contention that the company had to sell properties on account of political upheavels to the territories of Malaya could not be accepted; because no attempt was made to wind up the business and to leave the country; that after acquiring the properties, the Company incurred expenditure for developing them which indicated that the properties were purchased with a view to develop them and after developing them to sell them-development and sales going on simultaneously; and that the Company purchased a property Jointly with others for 5,000.00 Malayan dollars, and expended a large sum of money thereon and later sold it for a "handsome profit". It may be mentioned that this last statement was the result of misconception of evidence, and it was corrected by the tribunal in the statement of the case. ;