H.N. Seth, J. - (1.) THIS is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessee in this case is Sri Kali Nath, in his capacity as an individual. The relevant assessment year is 1949-50, corresponding previous year ending on March 31, 1949.
(2.) THE facts giving rise to the present reference are that one Henry Celestine John claimed that he had 1/20th share in certain industrial properties known as John Mills property and one-fourth share in some bungalows. Other members of the family of Johns denied the claim of Celestine John, and alleged that he had no share either in industrial properties or in the bungalows. Henry Celestine John went away to England in 1911, and did not return to India thereafter. It is alleged that taking advantage of his absence, other members of the family, who were in India, created charges on properties and protracted litigation ensued. Henry Celestine John decided to sell his undivided shares and interests in the properties. As the properties got involved in litigation he experienced difficulty in finding a purchaser who was willing to pay him a decent price. The assessee. Sri Kali Nath, advocate, was in the know of the entire affairs of the Johns and with his help one Beni Madho, brother-in-law of Raj Bahadur, the brother of Kali Nath, was set up as a benamidar for purchasing the property. On August 22, 1939, Henry Celestine John executed a sale deed in favour of Beni Madho in which it was stipulated that if Beni Madho succeeded in recovering any property, then half the gross value thereof would be paid to Henry Celestine John. Subsequently, Sri Beni Madho made a declaration that the real purchaser of the property was Raj Bahadur. A litigation in respect of this property ensued. In the year 1943, a first appeal was filed by Sri Beni Madho before the Allahabad High Court. This first appeal was accepted and a preliminary decree for partition was passed. Thereafter, on 24th of August, 1946, an agreement was entered into between Sri Kali Nath and his two brothers, Madan Gopal and Raj Bahadur, stating that the John Mills property had been acquired by them in the name of Beni Madho, who was the brother-in-law of Raj Bahadur. The three brothers agreed that they would pay a sum of Rs. 12,500 to Sri Beni Madho as compensation for having lent his name and will get the deed of transfer from him in respect of the Johns Mills properties to be allotted to his share. On 27th February, 1947, Sri Bsni Madho received a sum of Rs. 12,500 and transferred the properties to Raj Bahadur. Before, however, the partition decree could be executed, the parties entered into a compromise under which the Johns paid a sum of Rs. 1,75,000 to Sri Raj Bahadur in consideration of his giving up his claim in respect of the John Mills properties. This sum of Rs. 1,75,000 was paid to Sri Raj Bahadur on 5th of July, 1948. From out of this sum Sri Raj Bahadur paid a sum of Rs. 19,462 to Sri Kali Nath as his share of money. For the assessment year 1949-50 Sri Kali Nath filed a return of his income claiming the aforesaid amount of Rs. 19,462 as capital receipt not liable to be taxed.
(3.) THE Income-tax Officer held that the entire transaction was carried on benami by Sri Kali Nath alone. In the result he held that the entire receipt of Rs, 1,75,000 was income of Sri Kali Nath. From this he deducted a sum of Rs. 35,000, the estimated cost of litigation as expenditure and taxed Rs. 2,50,000, (sic) as his income. In appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. THE assessee then filed a second appeal before the Income-tax Appellate Tribunal. THE Tribunal relied upon certain observations made by the High Court in the first appeal in which the decree for partition had been passed and held that the motive behind the entire transaction was to earn profit and that there was also a risk involved in the transaction inasmuch as there was every likelihood that the suit might not succeed. THE Tribunal also observed that ever since 1942-43 the assessee had been carrying on money-lending business. Amongst the money-lenders such transactions of purchasing properties which was involved in litigation is quite common. It, therefore, came to the conclusion that the entire transaction was in the nature of an adventure with a motive to earn profits. It was neither capital transaction, nor could it be described as a casual transaction. THE profit earned by the assessee was, therefore, liable to be taxed under Section 10 of the Act. THE Tribunal also pointed out that, under the agreement, the assessee was liable to pay 50% of the proceeds to the estate of Henry Celestine John. It held that this liability was a permissible deduction. Even though the amount had not been paid back to the successors of Henry Celestine John, still the assessee was entitled to claim this deduction. In the result the Tribunal calculated the share of Kali Nath which could be included in his total income as Rs. 33,654. THE manner in which this amount of Rs. 33,654 was worked out was as follows : JUDGEMENT_347_ITR88_1973Html1.htm The assessee felt that the Tribunal went wrong in holding that the transaction by which the assessee acquired the interest in John Mills property, which he subsequently sold, was an adventure in the nature of trade. According to him the receipt of money in lieu of his interest in the John Mills properties was merely a casual or capital receipt not liable to be taxed. He, therefore, got the following question referred to this court for opinion : " (1) Whether, in the circumstances of the case, it could be said that the transactions were in the nature of an adventure with a motive to earn profits of Rs. 33,654 and whether it is liable to be taxed under Section 10 of the Indian Income-tax Act, 1922, in the assessment year 1949-50 ? " ;