K.C. Agrawal, J. - (1.) THE assessee, Deep Chandra and Co., is a registered partnership firm consisting of five partners, viz., Deep Chandra, Amba Prasad, Parmeshwari Dass, Hardwari Lal and Shambhu Dayal. THE partnership agreement was entered into on the 8th April, 1944. THE relevant facts are as follows : Deep Chandra was a big zamindar, who owned considerable agricultural lands in Muzaffarnagar. One Sajjad Ali Khan, who was another big zamindar of Muzaffarnagar, entered into an agreement to sell his zamindari property comprised in Khewat 4/1 of Mohd. Rustam Ali Khan, village Yusufpur, Pargana and Tahsil Muzaffarnagar with Deep Chandra. Sajjad Ali Khan subsequently refused to execute a sale deed in pursuance of the said agreement. Consequently, Deep Chandra filed a suit for specific performance of the agreement to enforce the same. THE suit was, however, dismissed by the civil'judge in April, 1943. Deep Chandra preferred an appeal against this decree of the civil judge in this court.
(2.) DURING the pendency of this appeal Deep Chandra thought that he was involving himself in a big litigation, the prosecution of which required huge expenditure and possible loss; he accordingly, in order to lessen his burden, entered into a partnership agreement with the persons named above on April 8, 1944. The partnership deed provided that the same was entered into "to share profits and losses arising out of the said land in litigation", It further defined respective shares and interests "in the fortunes of litigations and the profits and losses arising therefrom" of the various partners in the said partnership. The appeal filed in this court against the decree of the civil judge dismissing the suit for specific performance of Deep Chandra was ultimately allowed in 1949 in his favour. As the tenants were in possession he succeeded only in obtaining constructive possession of the land in 1950. Actual possession could, however, be had only in 1956. There is some dispute between the parties about the actual user of the land, possession of which was obtained by Deep Chandra between the years 1950 and 1956-But it is beyond controversy that in 1956 the assessee obtained permission from the Town Planner, U.P., Lucknow, and parcelled out the lands and sold several plots year after year. The assessee-firm realised the following amounts during the period 1956 to March 31, 1960 : JUDGEMENT_716_ITR107_1977Html1.htm The assessee firm reimbursed its total litigation expenses, cost of the land, cost of acquisition of tenancy rights from the realisation made in the first four assessment years ending on March 31, 1960, and showed a surplus of Rs. 23,553 in the assessment year 1960-61. In subsequent years as well more plots were sold and the total surplus shown in them were as follows: JUDGEMENT_716_ITR107_1977Html2.htm
(3.) SURPLUS income thus shown was in four assessment years, that is, 1960-61, 1961-62, 1962-63 and 1963-64. The Income-tax Officer held that the activity of sale of land transacted by the assessee being an adventure in the nature of trade was "business" within the meaning of that term as defined in Section 2(4) of the Indian Income-tax Act, 1922. On this view he treated the surplus realisations made by the assessee-firm as profit for the purpose of taxation under the head "business". Feeling aggrieved by the order passed by the Income-tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner concurred with the findings given by the Income-tax Officer and dismissed the appeals. The assessee then preferred four appeals before the Income-tax Tribunal challenging the assessment orders given against it with respect to the four assessment years. Before the Tribunal the assessee contended, as before the Income-tax Officer and Appellate Assistant Commissioner, that the transactions of sale and purchase of lands were not adventure in the nature of trade but investments made for capital gains. The Income-tax Tribunal did not accept the contention of the assessee and, holding in conformity with the subordinate authorities, dismissed all the four appeals by means of a consolidated order. At the instance of the assessee the Tribunal thereafter referred the following question for answer by the High Court: "Whether, on the facts and in the circumstances of the case, surpluses realised by the assessee on the sale of the land were income, profits or gains from an adventure in the nature of trade within the meaning of Section 2(4) of the Act of 1922 chargeable to tax under the head 'business' in the assessment years 1960-61, 1961-62, 1962-63 and 1963-64?" ;