RAMASWAMI, - (1.) THE Judgment of the court was delivered by
(2.) IN this case. the appellant (hereinafter called the assessee) was assessed for the assessment year 1956-57 on a total income of Rs. 8,400.00. The INcome Tax Officer later on came to know that the assessee's income from the .sale of estates had escaped assessment. The INcome Tax Officer took action under Section 34(1) (a) of the INcome Tax Act, 1922 (hereinafter called the Act) for the assessment year 1956-57 oil 13/08/1959. Under an agreement, dated 18/05/1955, a company called Mundakyam Valley Rubber Co. Ltd., sold and delivered an estate called Kuttikal Estate to one Mr. A. V. George. The area of the estate was 477 acres and 71 cents. Mr. A. V. George had entered into the agreement in his own name and on behalf of another company called the Kailas Rubber Co. Ltd. It was agreed that the; vendor would execute the necessary conveyance in favour of Mr. A. V. George or his nominees. On 15/08/1955, tile assessee entered into an agreement with Mr. A. V. George whereby the assessee agreed to purchase 477-71 acres forming part of Kutikal Estate for Rs. 6 lakhs. An advance of Rs. 11,000.00 was paid by the assessee. The balance of Rs. 5,89,000.00 was to he paid by the assessee on or before 25/09/1955. It was agreed that Mr. A. V. George should execute a sale-deed himself or cause it to be executed by Kailas Rubber Co. Lid. on whose behalf he was acting in favour of the assessee or his nominees. The assessee subsequently divided the area of477'71 acres into 23 plots and found purchasers for 22 of these plots. Tlie total extent of 22 plots for which he found purchasers was 373-58 acres and the total price paid by the 22purcliaserswasRs.5,18,500. A sale deed was executed by the Mundakayam Valley Rubber Co. Ltd. on 31/03/1956. It covered all the 23 plots. The 22 plots for which the assessee found purchasers were conveyed to the respective purchasers and the 23rd plot was conveyed to the assessee himself. Mr. A. V. George and the Kailas Rubber Co. Ltd. were parties to this document. The plot which the assessee had retained for himself was 104' 13 acres in extent. Its value was estimated by tlie Income Tax Officer at Rs. 2,08,000. The Income Tax Oflicer worked out the profit from the transaction of purchase and sale of land as follows : JUDGEMENT_25_2_1969Html1.htm The Income Tax Officer held that a sum of Rs. 1,25,000.00 in round figurcb represented the assessee's prolit from an adventure in the nature of trade and included this amount in his total income under Section 34(1) (a) of the Act. 28 The assessee appealed to the Appellate Assistant Commissioner who rejected the appeal. The assessee took the matter in further appeal to the Appellate tribunal which also rejected the Appeal holding that the amount of Rs. 1,25,000.00 represented profit from an adventure in the nature of trade. At the instance of the assessee the Appellate tribunal stated a case to the High court on the following question of law : "whether on the facts and in the circumstances of the case, the transactions constituted a venture in the nature of trade and the surplus of Rs. 1,25,000.00 was assessable to tax ?" By its judgment, dated 10/10/1966, the High court of Kerala answered the question in -the affirmative and against the assessee. This appeal is brought by special leave from the judgment of the High court of Kerala, dated 10/10/1966, in Income Tax Reference No. 18 of 1965. The question whether a transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and circumstances which are proved in the particular case. The answer to the question does not depend upon the application of any abstract rule or principle or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in the particular case. In California Copper Syndicate v. Harris, Lord Justice Clerk observed : "It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit........ assessable to income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business........ what is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts ; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realising a security .or is it a gain made in the operation of business in carrying out a scheme for profit making ?"
(3.) BUT in judging the character of such transactions several factors have been treated as significant in decided cases. For instance, if a transaction related to the business which is normally carried on by the assessee, though not directly a part of it, as intention to launch upon an 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. The magnitude of the transaction of purchase, the nature of the commodity, the subsequent dealings of the assessee, the nature of the organisation employed by the assessee and the manner of disposal may be such that the transaction may be stamped with the character of a trading nature. In Martin v. Lowry the assessee purchased a large quantity of aeroplane linen and sold it in different lots, and for the purpose of selling it started an advertising campaign, rented offices, engaged an advertising manager, a linen expert and a staff of clerks, maintained account books normally used by a trader, and 29 passed receipts and payment in connection' with the linen through a separate banking account. It was held that the assessee carried on an adventure in the nature of trade and so the profit was liable to be taxed. The same view was taken in Rutledge v. Commissioners of inland Revenue in regard to an assessee who purchased very cheaply a vast quantity of toilet paper and within a short time thereafter sold the whole consignment at a considerable profit. Similarly, in Commissioner of Inland Revenue v. Fraser , the assessee, a woodcutter, bought for resale, whisky in bond, in three lots. He sold it later on at considerable profit. The assessee had never dealt in whisky before, he had no special knowledge of the trade, he did not take delivery of the whisky nor did he have it blended and advertised. Even so it was held that the transaction was an adventure in the nature of trade. Lord President Normand observed in the course of the judgment : "It is in general more easy to hold tha.t a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an advanture in the nature of trade. BUT what is a good deal more important is the nature of the transaction with reference to the commodity dealt in. The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that, that is not the only purpose for which he purchased the article of the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he doea so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realising it at a profit) but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession. BUT the purchaser of a large .quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, I can scarcely consider to be other than an adventure in a transaction in the nature of a trade ; and I can find no single fact among those stated by the Commissioners which in any way traverses that view. In my opinion, the fact that the transaction was not in the way of business (whatever it was) of the respondent in no way alters the character which almost necessarily belongs to a transaction like this." These are cases of commercial commodities but a transaction of purchase of land cannot be assumed without more to be an adventure in the nature of trade. In Leeming v. Jones, a syndicate was formed to acquire an option over a rubber estate with a view to resell it at a profit, and finding the estate too small the syndicate acquired another estate and sold the two 30 estates on profit. It was .held that the transaction was not in the nature of trade and the profit was not liable to be assessed to tax. The same view was expressed in Saroj Kumar Mazumdar v. Commissioner of Income Tax in which the assessee who carried on business of engineering works purchased land, which was under requisition by the government, negotiated a sale before the land was de-requisitioned and sold it after the land was released. But the circumstances of a particular case may lead to the conclusion that the purchase or resale of land is in the nature of trade. In Venkataswami Naidu and Co. v. Commissioner of Income Tax, the appellant firm which acted as managing agents purchased. lor a total consideration of Rs. 8,713.00, four contiguous plots of land adjacent to the place where the inills of the company managed by it were situated. The first purchase was made in October, 1941 and subsequent purchases were made in November, 194 1/06/1942 and November, 1942. As long as the appellant was in possession of the land it made no effort to cultivate it or erect any superstructu're on it but allowed the land to remain unutilised except for the rent received from the house which existed on one of the plots. The appellant sold the land to the company managed by it In two lots ill September and November, 1947, for a total consideration of Rs. 52,600.00. The question was whether the sum of Rs. 43,837.00 being the excess realised by the appeIrant by the two sales over its purchase price, was assessable to income-tax. The Appellate tribunal rejected the contention of the appellant that the properties were bought as an investment and that the plots were acquired for building tenements for the labourers of the mills but came to the conclusion that the transaction was an adventure in the nature of trade. On a reference, the High court expressed the same view. It was held by this court in appeal that the Appellate tribunal was right in inferring that the appellant knew that it would be able to sell the lands to the managed company whenever it thought it profitable so to do, that the appellant purchased the four plots of land with the sole intention of selling them to the mills at a profit and that the High court was right in holding that the transaction was an adventure in the nature of trade. Again in Raja J. Rameskuwar Rao v. Commissioner of Income-tax, Hyderabad the assessee purchased 217 acres of land from the Pattadars and on a portion of the land the assessee constructed a Ganj and shops. The rest of the land he laid out as plots which he sold for a sum of Rs. 75,820.00. In computing the assessable income the Income Tax Officer added a sum of Rs. 75,820.00 as receipt from business. The decision of the Income Tax Officer was affirmed by the appellate Commissioner and the tribunal in appeal. The High court held on a reference by the Appellate tribunal that there was evidence upon which the Appellate tribunal could have come to the conclusion that the sum of Rs. 75,820.00 was the assessee's income from business. It was held by this court on appeal that when a person acquired land with a view to selling it later after developing it, he was carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as he bought it, but in parcels, he is dealing with land as his stock-in-trade. The decision of the High court was accordingly affirmed and the appeal to this court was dismissed.;