D.N.SINHA,J. - (1.) THIS is a reference under s. 66(2) of the Indian IT Act. The facts are shortly as follows : The assessee in this case is M/s Janki Ram Bahadur Ram, having the status of a HUF. It is a dealer for the last 30 or 40 years in scrap iron and hardware. It buys from the local market all kinds of scrap iron as also iron goods from auctions, railways and other companies with the sole purpose of selling the same at a profit. Admittedly, it did not deal in jute. M/s Hoare Miller & Co. Ltd. was the owner of a jute press situated at Baranagore known as the Homer Jute Press. In 1941, the press was leased out to one Ram Lal Bajoria for a period of ten months. The terms of the lease expired on the 9th Oct., 1941, but the lessee did not deliver vacant possession and M/s Miller & Co. Ltd. filed an ejectment suit. On or about the 31st Oct., 1942, while the suit was pending, the assessee agreed with M/s Hoare Miller & Co. Ltd. to purchase the said jute press together with the lands and buildings contained in three schedules annexed to the agreement, for a sum of Rs. 2,45,000 free from incumbrance but subject to the litigation pending. On 13th Nov., 1942, it was agreed that the previous payment of Rs. 2,45,000 may be appropriated by M/s Hoare Miller & Co. Ltd., although the conveyance had not yet been executed. On the 14th Nov., 1942, the possession was made over to the assessee so far as was possible. On the 26th Feb., 1943, the conveyance was executed by M/s Hoare Miller & Co. Ltd. in favour of the assessee. At this stage, it will be necessary to consider certain features of the transaction. M/s Hoare Miller & Co. Ltd. had sold the jute press at Baranagore to the assessee, known as the Homer Jute Press. The property conveyed was described in three schedules. The first schedule consisted of land and structures including office and residential quarters, consisting of a press house and cotton ginning factory and a two-storeyed brick build godown, as also certain corrugated iron-shed godown, etc. In this case, the area of the land was three bighas eight cottahs and four chatacks. The second schedule consisted of a certain leasehold property, being Government khas-mahal lands, with a corrugated iron-shed godown on steel frame. In this case, the leasehold interest was not conveyed, but merely the godown, etc., presumably for being dismantled and removed. In this case, the area of the land was II cottahs 33 chatacks and 36 sq. ft. The third schedule consisted of lands in respect of which M/s Hoare Miller & Co. Ltd. were the licensees. In this case also, there was no attempt to have the licence transferred. What was purchased was a two-storeyed corrugated iron-shed godown on steel frame. In this case, the land measured 1 bigha 5 cottahs and 5 chatacks. Presumably, therefore, the intention was to dismantle the godown, etc., and remove the same. Meanwhile, R. P. Saha, a well-known businessmen of Calcutta, came to know of this jute press, etc., known as the "Homer Jute Press" and approached M/s Hoare Miller & Co. Ltd. for buying the same. Actually, it was H. L. Roy, his manager, that did so. He was informed that the jute press had already been sold to Janki Ram Bahadur Ram who is the Karta of the said Hindu joint family. According to the evidence of Roy, he went to Janki Ram and negotiations were started for purchase. Eventually, the assessee agreed to sell the properties purchased by it as aforesaid from M/s Hoare Miller & Co. Ltd. to R. P. Saha. The agreement was executed on the 12th June, 1943, and on the 10th Aug., 1943, the assessee had its name substituted in the ejectment suit against Bajoria. On the 30th Sept., 1943, a conveyance was executed on behalf of the assessee by the members of the Hindu joint family in favour of R. P. Saha. It appears from the conveyance, a copy whereof is annexure "B" to the statement of case, that the purchase price was settled at Rs. 4,73,364-3-6, out of which Rs. 3,23,364-3-6 was settled as the consideration for the property in schedule 1. The remaining sum of Rs. 1,50,000 was the agreed price for the "joint girdars, fabricated steel C. I. roofs, bolts, nut and bolts and ceiling planks" being portions of the materials of the godowns and structures dismantled by the vendor. It has been found as a fact that the assessee had carried out some petty repairs to the buildings and had put the machinery in running condition, although it is not at all clear how he did so, since the possession was with Bajoria. In fact, nothing is said about what happened to the ejectment suit. However, it appears that R. P. Saha took possession and ran the jute press for a few months, after which Government requisitioned the same. In 1944, the property was released from requisition. During 1944-48 R. P. Saha ran the jute press, but shortly after partition, removed the entire machinery to Pakistan where they were installed at Chandpur in East Pakistan.
(2.) AS a result of this transaction, the assessee made profit of Rs. 2,24,864 during the asst. yr. 1944-45. The question is whether this is to be considered as a capital gain or as an adventure in the nature of trade, and as such assessable to income-tax. The ITO held that the assessee had purchased the jute press along with the land and buildings, as business transaction, for the sole purpose of selling them at a profit, and as such the surplus was taxable as business income. Against this order, the assessee appealed to the AAC, who upheld the same and this was confirmed in further appeal before the Tribunal. The question that has been referred to us is as follows : "Whether, on the facts and in circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,35,211 received by the assessee as a result of the sale of the jute press referred to in the appellate order arose out of an adventure in the nature of trade and was, therefore, rightly assessed to tax :" Firstly, we have to consider the definition of the word "business" in s. 2(4) of the said Act. According to that definition, it includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce and manufacture. In this case what has to be considered is whether the surplus which has been assessed to income-tax can be considered to be the outcome of an adventure in the nature of trade. The question whether the particular income is in the nature of an accrual of capital or is the outcome of an adventure in the nature of trade is one of some difficulty. It will be necessary to consider certain authorities for that purpose. The first decision is one of the Supreme Court--G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC): (1959) Suppl. 1 SCR 646. In that case, the assessee was a firm acting as managing agents of the Janardana Mills Ltd., Coimbatore. From time to time, it purchased certain plots of lands for a total consideration of Rs. 8,713 which were contigious or adjacent to the said mill. For several years these lands were left without any effort to cultivate them or erect any structures thereon. Thereafter, in 1947, the assessee sold the lands to the said mill in two lot for a total consideration of Rs. 52,600. The question was whether the sum of Rs. 43,887, being the excess realised by the assessee over the purchase price, was assessable to income- tax. The assessee contended that the plots were acquired for investment and, therefore, the increase in price was accrual of capital and not business income. This contention was, however, rejected. The Appellate Tribunal held that the assessee was in a position to influence the decision of the managed company to purchase the properties, and the plots were purchased by the assessee wholly and solely with the idea of selling them at a profit to the company. Therefore, it was not capital accretion but the outcome of an adventure in the nature of trade and was, therefore, taxable.
(3.) ON a reference, the High Court held that the transaction was an adventure in the nature of trade and that the Department was justified in taxing the amount. Thereupon, an appeal was taken to the Supreme Court. It was held on the facts that the Tribunal was right in inferring that the appellant knew that it would be possible to sell the lands to the managed company, whenever it thought it profitable so to do; that the appellant purchased four plots of lands with the sole intention of selling them to the mill at a profit, which intention raised the strong presumption in favour of the view taken by the Tribunal, and that the High Court was right in holding that the transaction in question was an adventure in the nature of trade. Gajendragadkar J. said as follows : "As we have already observed, it is impossible to evolve any formula which can be applied in determining the character of isolated transaction which come before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty." ;