LAIK, J. - (1.) IN this reference under s. 66(1) of the IT Act, 1922 (hereinafter stated, in short, as the Act), we are required to give opinion on the question : "Whether, on the facts and in the circumstances of the case, the surplus of Rs. 1,65,906 resulting from the sale of the plot constitutes profit in an adventure in the nature of trade?"
(2.) THE facts in paragraph 2 of the agreed statement of the case are : "The assessment year is 1953-54, relevant for the calendar year 1952. The assessee was a private limited company carrying on business in share-dealing. In 1950, it purchased a plot of land at Alipore for Rs. 3,14,092, out of borrowed capital. It incurred some expenses for digging a tube-well and constructed a small shed. It wrote on 6th Nov., 1950, to the Calcutta Electric Supply Corporation to provide electricity. The company also applied for unfiltered water supply and to the telephone authorities asking for telephone connections. A firm of architects was approached for preparing plans for the building to be constructed. In 1952, the plot was sold for Rs. 4,83,617 and an excess of Rs. 1,65,906 was realised...." 3. The further facts emerging from the orders of the ITO, of the AAC and also from the order of the Tribunal (which is a judgment of affirmance of the orders of the Tribunal below) are briefly as follows : (a) One of the assessee-company's directors, Sri K.L. Jatia (shortly hereafter stated as Jatia) is the main figure in the company. The company's staff consists of only one assistant. Its establishment expenses comes to Rs. 675 only. Some of the shareholders of the company were Jatia's close relations. Jatia was connected with a number of concerns. One of such concerns is M/s Onkarmal Kanailal and Co. (shortly stated hereafter as O.K. and Co). It had on 1st Jan., 1950, a credit balance of Rs. 2,35,000 only and on 31st December of the same year, a sum of Rs. 3,47,000. The account shows that all the available money had been invested. (b) The assessee was also doing business in speculation for a number of years on a large scale. The loss in speculation in shares, in the accounting year, came to Rs. 1,26,591. The stock of shares remaining unsold, at the end of each accounting year, was being shown as investment in the balance-sheet. The profit and loss on the share-dealings was being shown directly in the balance- sheet and not in the P&L A/c. (c) The assessee was heavily indebted, particularly, after the said purchase of the land at Alipore, which was financed by borrowing. Its borrowals from O.K. and Co. were Rs. 50,000 on two occasions, in the year 1950, viz., on 6th and 9th September. The said total sum of rupees one lakh was first deposited in the Bank of Jaipur; subsequently withdrawn from it on 12th Oct., 1950; and was thereafter paid for the land. On this date, the assessee- company took Rs. 90,000 directly from O.K. and Co. to pay for the land, the total price of which was fixed at Rs. 2,57,701. On 7th and 16th Nov., 1950, the assessee had taken the sum of Rs. 1,50,000 as overdraft from the bank for repayment to O.K. and Co. On 19th July, 1952, the assessee paid O.K. and Co. Rs. 2,50,000 and utilised the balance to liquidate the bank overdraft which stood at Rs. 2,17,520. On 31st Dec., 1952, Rs. 5,37,000 together with other cash had been advanced to Jatia. (d) The area of the property purchased was about 68 cottahs (3 bighas and 8 cottahs), that is, more than one acre of land. It is in Alipore, a fashionable locality for residence at Calcutta. It is not a business area. (e) The earnest money for the property was paid by the assessee on 8th Aug., 1950. The assessee paid the earnest money for the adjoining plot which was also purchased from the same estate. The said earnest money was immediately recovered from the sale of the portion of the adjacent plot. (f) The assessee purchased the property at Rs. 3,750 per cottah on 12th Oct., 1950. It was sold through the brokers in July, 1952, in two different portions to two separate companies, namely, Ruby General Insurance Co. and Ganga Property. The sale proceeds, being the total sum of Rs. 4,83,617 (approximately Rs. 7,100 per cottah), were realised by the assessee on 18th July, 1952. Four days before this, viz., on 14th July, 1952, there is a resolution passed by the assessee- company for realisation of an average price of Rs. 6,000 per cottah of land on sale. The assessee offered the land for sale in the market. (g) The explanation for purchase given by the assessee before the ITO was for constructing a building for the use of the company but the explanation given before the AAC was for Jatia's residence. (h) The reason for sale given by the assessee before the ITO was that the land became unsuitable for construction and thereafter the project was given up. The ITO referred to cl. 9 and held that the present transaction was within the objects of the company's business. He rejected the contention that the plot had been acquired for the object of constructing building for the use of the company because there was no evidence to support it. Even relying on the assessee's contention as to the reason for sale, viz., that the assessee later found the plot "unsuitable for construction", there was no need, in the opinion of the ITO, for such a building, considering, inter alia, the facts that the land was purchased on borrowing and that as no evidence was adduced as to how the assessee could have hoped to find the funds necessary to construct the building on such an extensive land. The ITO further found that "there was no evidence to show that after the purchase of the land, some attempt was made towards the purpose of constructing building by way of either submission of plans or applying to the corporation for necessary permission, before the project was given up". Therefore, he brought the amount to tax as being income from business.
(3.) ON appeal by the assessee, the AAC, inter alia, held that the land was purchased in the ordinary course of the company's business and not as an investment. The purchase was made with a profit- making motive and, therefore, the transaction was a business venture of the assessee. He accordingly confirmed the assessment. The AAC also recorded that there was no evidence before him to show that any attempt had been made towards constructing a building on the land. He further noted : (i) that from the account it does not appear that the purchase of the land did represent any investment of any surplus fund of the assessee- company; (ii) the balance-sheet as on 31st Dec., 1950, showed assets of shares at Rs. 7,23,391 and of landed property at Rs. 3,14,094 against the capital of rupees seven lakhs only; (iii) no correspondence or any other minute books or even office notes relating to the purchase of the property are produced to show what was the real intention with which it was purchased; (iv) the assessee stated before the AAC that there was nothing in writing regarding the purchase of the property and there was no resolution also by the board of directors regarding the purchase. "All these facts", according to the AAC, "show clearly that the land at Alipore did not represent any investment of surplus funds by the assessee-company". For these reasons, the AAC, after considering the objects clauses in the memorandum, viz., cls. 5, 8, 9 and 15, and Art. 131 of the articles of association, concluded that the land was purchased in the course of day-to-day business.;