COMMISSIONER OF INCOME TAX Vs. JALANNAGAR TEA ESTATE PRIVATE LIMITED

JUDGEMENT

(1.) A Hindu undivided family of Narsingdas Surajmal floated a limited company under the style of "Barbari Tea Estate Ltd." The tea gardens of Barbari Tea Estate were purchased by this limited concern from Rajmai Tea Co. Ltd. in 1944. This estate comprised of an area of 5,308 bighas. Subsequently, in the year 1950, the name of the Barbari Tea Estate Ltd. was changed into Jalannagar Tea Estate (Private) Ltd. - the present assessee. The area of the tea estate lies in the outskirts of the town of Dibrugarh in close proximity to the Assam Medical College. A part of the area was given over to the military for the purpose of constructing hospitals during the war. On the 15th April, 1950, the members of the joint family who had a large interest in the assessee company floated another limited company called the Jalannagar Development Co. Ltd. (hereinafter referred to as the "development company") with a view to acquire a part of the land from the assessee company to be developed into a proper township and to name it as the Jalannagar. On the 22nd July, 1952, the assessee entered into an agreement with the development company to sell 1,669 bighas of land in one or more lots, at Rs. 3,000 per bigha, for the purpose of development of a residential colony. In pursuance of the said agreement, the assessee sold several plots of the land to the nominees of the said development company. The agreement of the 22nd July, 1952, forms part of the statement of the case and the terms of it will have to be referred later in detail. The relevant assessment year is 1955-56. The corresponding counting year is the calendar year ending 31st December, 1954. The company during the accounting year received Rs. 40,394 as the sale price of the plots of land sold to various purchasers nominated by the development company in pursuance of the agreement of 22nd July, 1952. The Income-tax Officer after adjusting the cost of the land at Rs. 2,667 as against the sale proceeds, assessed the balance of Rs. 38,327 as taxable profits of the year on the finding that the transactions were a venture in the nature of trade. On appeal, the Appellate Assistant Commissioner reduced the assessment to Rs. 16,927 only. The assessee and the department both filed appeals to the Appellate Tribunal. The Tribunal allowed the appeal of the assessee holding that when the assessee acquired a property in 1944 it had no intention to set on foot the scheme for establishment of a colony by development of the land. There was no motive of the assessee company when it acquired the land in 1944 to deal in the land and to dispose of the land in plots. The activity of the assessee according to the Tribunal in regard to the transaction of sale did not thus amount to a venture in the nature of trade. The appeal by the department was dismissed. An application for reference to this court for opinion of certain questions of law which arose out of the order of the Tribunal was ultimately granted by this court and the following question of law has been referred to this court for opinion :

(2.) THE facts found by the Appellate Tribunal are that the assessee acquired the estate in 1944 and cultivated tea till 1950. THE idea of sale of a part of the land originated only in the year 1950. At the time when the land was purchased, the intention of the assessee company was to hold the estate for tea cultivation and manufacture. Due to the heavy mortgage subsisting on the property, the inability of the assessee to pay it off out of income became apparent to the assessee in the year 1950. THE company thought it uneconomical to keep the mortgage alive and in these circumstances the company thought of disposing of a part of the property and thereby earn profit. THE Tribunal further found that there was no motive apparent or proved from the materials on the record that at the time of the acquisition in 1944 the assessee had already the scheme in mind which it since adopted. On these findings, the Tribunal drew the inference that there was no venture in the nature of trade and the profit which resulted to the assessee from the sales is a capital receipt and not a revenue receipt. Reliance was placed by the Tribunal on certain observations of Satyanarayana Rao J. in the case of Sri Gajalakshmi Ginning Factory, to which I shall refer later.

(3.) THE next case referred to is Indra Singh and Sons Ltd. v. Commissioner of Income-tax. In this case the assessee, a private limited company, was empowered under its memorandum of association to carry on or undertake the business of banker, capitalists, promoters, financiers and concessionaires. THE assessee took over the managing agency of a company and it had large holdings in various companies. THE assessee also carried on a business of financing companies. THE question which arose for consideration was whether the profit realised by the assessee from the sale of certain shares was assessable to income-tax. THE Appellate Tribunal came to the conclusion that the assessee had been financing and promoting the business of other companies and for this purpose it had to vary its holdings from time to time, and that the assessee carried on the business of financiers which was one of the objects mentioned in the memorandum of association. On these findings, the Tribunal held that the profits realised by the assessee on the sale of the shares were taxable. As observed in this case :