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Petitioner: MAYFAIR ESTATES (PRIVATE) LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, CALCUTTAHonorable Justice P. B. MUKHARJI
1968 P T D 807
1968 P T D 807
[Calcutta (India)]
Before P. B. Mukharji and Niyogi, JJ
MAYFAIR ESTATES (PRIVATE) LTD.
Versus
COMMISSIONER OF INCOME‑TAX, CALCUTTA
Income‑tax Reference No. 11 of 1947, decided on 14th August 1961.
Business‑----Adventure in the nature of trade‑Profits from sale of land ‑ Whether assessable as business income ‑ Guiding principles‑‑Income‑tax Act, 1922, Ss. 2(4) do 10.
The assessee‑company purchased a block of buildings in, 1935 and sold away, one of diem at a pro it of Rs. 1,328 in 1939. This amount was assessed to tax as business income. In 1942 it sold some other properties also at a total profit of Rs. 1,00,673 and the income‑tax authorities again treated this as business income. The assessee contended that it was not income from business but accretion of capital. The memorandum of association of the company showed that the object fur which the company was formed was "to traffic in land and house and other property" and "generally to deal in traffic by way, of sale, exchange or otherwise with land and house property." The sale proceeds were not used for discharging the loan which had been raised over the properties or re‑invested. On the other hand, there was nothing to show that the assessee had purchased any other property and the bulk of the property was not sold but only rented and the memorandum showed that letting out properties on rent was also one of the objects of the company:
Held, that oh a construction of the memorandum of associa tion of the company and, on the facts and circumstances of the case, sale of land and house property was the ordinary trading activity of the company and the profit of Rs. 1,00,673 earned by the company was liable to assessment under the head "business".
If a real estate company sells a portion of its properties to make a profit in a rising market it cannot be said that these profits were not part of their trading, when they are justified by their memorandum of association, simply because they had made no corresponding purchases of properties also at the same time or contemporaneously.
Attorney‑General v. London County Council (1900) 4 Tax Cas. 265 ; Commissioners of Inland Revenue v. Hyndland Invest ment Co. Ltd. (1929) 14 Tax Cas. 694; Commissioner of Inland Revenue v. Reinhold (1953) 34 Tax Cas, 389; ‑Commissioner of Inland Revenue v. Toll Property Co. Ltd. (1952) 34 Tac Cas. 13; Emro Investments Ltd. v. Aller (H. M. Inspector of Taxes) 35 Tax Cas. 305; Glasgow Heritable Trust Ltd. v. Commissioners of Inland Revenue (1953) 35 Tax Cas. 196; Granville Building Co. Ltd. v. Oxby (H. M. Inspector of Taxest (1954) 35 Tax Cas. 245; James Hobson & Sons Ltd. v. Newall (1957) 37 Tax Cas. 609; Mitchell Bros. v. Tamlinson (1957) 37 Tax Cas. 224, Salisbury House Estate Ltd. v. Fry (1930) 15 Tax Cas. 266; Saroj Kamar Mazumdar v. Commissioner of Income‑tax (1959) 37 I T R 242 ; United Commercial Bank Ltd. v. Commissioner of in income‑tax (1957) 3: I T R 688 and G. Venkataswami Naidu & Co. v. Com missioner of Income‑tax (1959) 35 I T R 594 ref.
STATEMENT OF CASE
In compliance with the directions of the High Court in Income‑tax Case No. I I of 1947, we submit herewith an agreed statement of the case and refer the following question of law
"Whether on a true construction of the memorandum of the association of the company as well as the facts and circumstances of the case the sum of Rs. 1,00,673 was liable to assessment under section 10 of the Act as income under the head 'business'?"
2. The facts are stated in so far as they are relevant to the matter at issue. The assessee is a private limited company incorporated in 1935. The objects for which the company is established, inter alia, are
"to traffic in land and house and other property and generally to deal in traffic by way of sale, lease, exchange or otherwise with land and house property " ,
"to turn to account any land, house or other property acquired by or in which the company is interested and in particular by preparing building sites and by constructing, reconstructing altering, improving houses and disposing of the same."
"to manage land, buildings and other property situate as aforesaid whether belonging to the company or not, and to collect rents and income and to supply to tenants and occupiers and others, refreshments; attendance, messengers, light; waiting rooms, reading rooms, meeting rooms, lavatories, laundry conveniences, electric conveniences, stables and other advantages."
"to acquire by purchase, lease, exchange or otherwise, lands, buildings . and either to retain the same for the purpose of the company's business or to turn the same to account as may seem expedient."
The assessee will produce the memorandum and articles of association at the time of the hearing in the High Court. In the year 1935, the company purchased, in one block, certain build ings and a substantial portion of the purchase. money was found by raising a loan on the security of these properties in Mayfair Road. In 1939, the company sold away one of the properties and again, in 1942, some two other properties. The difference of Rs. 1,328 between the purchase price and sale price for the first case was assessed to income‑tax for the assessment year 1940‑41. On the sale made in 1942, for Rs. 2,40,000, a surplus of Rs. 1,00,673 was made after deducting the cost price, law charges, brokerage, etc., all aggregating to Rs. 1,39,317. The Income‑tax OIt1Cer brought this surplus to tax.
3. The assessee appealed to the Appellate Assistant Commis sioner, who wrote as follows:
"I find however that this appellant made an appeal against the 1940‑41 assessment on a similar ground. The appellant sold 19, Raja Santosh Road, and after deducting the cost price plus other expenses there was a balance of Rs. 1,328 which the Income‑tax Officer included in the assessable income of that year (1940‑41) as‑a business profit. The appellant ultimately went on appeal to the Tribunal and the Tribunal held that this was a part of the activities of the company itself and as such the amount was taxable. On this ruling of the Tribunal I must hold that this Rs. 1,00,673 has been rightly assessed as a business income and the appeal, is dismissed. I pass this order under section 31(3) (a)."
4. The assessee then appealed to the Appellate Tribunal and contended that the Appellate Assistant Commissioner, had erred in deciding on the strength. of the previous ruling of the Tribunal as, under the circumstances. by which the sales have been effected. the income should have been held as a casual receipt or a capital gain. In the course of the arguments it was contended that the assessee was not a dealer in property or houses and that; in any event, there was no adventure in the nature of trade and that the excess realised was only a casual realisation by way of windfall: The Tribunal held for reasons stated in their order, which is Annexure "A" hereto forming part of the case, that the transactions constitute an adventure in the nature, of trade and that the profits realised thereon were rightly brought to tax.
Dr. R. B. Pal and N. C. Talukdar for the Assessee.
B. L. Pal for the Commissioner.
JUDGMENT
P. B. MUKHARJI, J.‑The following reference under sec tion 66(2) of the Income‑tax Act was' directed by this Court upon the Tribunal for a decision of the question:
"Whether on a true construction of the memorandum of association of the company as well as the facts and circum stances of the case the sum of Rs. 1,00,673 was liable to assessment under section 10 of the Act as income under the head 'business'?"
This was at the instance of the assessee, a private limited company by the name Mayfair Estates Ltd., Calcutta, incorporat ed in 1935.
The facts as found in the statement of case may be briefly stated : In the year 1935, being the year of incorporation, the assessee‑company‑purchased in one block certain buildings and a substantial portion of the purchase money was found by raising a loan on the security of these properties in Mayfair Road, Calcutta.' Within for years of the incorporation, the company sold away in 1939 one of the properties and again, within a period of three years therefrom, the company sold four other properties in 1942. The difference of Rs. 1,328 between the purchase price and the sale price for the first sale in 1939 was assessed to income‑tax for the year 1940‑41. The sale of the properties in 1942 produced an income of Rs. 2,40,000 and a surplus of Rs. ,03,673.was made after deducting the cost price, low charges, brokerage etc., all aggregating to Rs. 1,39,327. The Income tax Officer brought this surplus to tax.
The four properties that were sold in 1949 were Nos. 3 and 5, Mayfair Road, and Nos., 1 and 1/1 Old Ballygunge Road.
The assessee then appealed to the Appellate Assistant Com missioner who upheld the decision of the Income‑tax Officer finding that the sum of Rs. 1,0,673 has been rightly assessed as a business income. The Appellate Assistant Commissioner further points out the‑ circumstances of the first sale by finding that the assessee made an appeal against the 1940‑41 assessment on a similar ground when the assessee sold 19, Raja Santosh Road, and when a surplus balance of Rs. 1,328 in respect thereof was assessed by the Income‑tax Officer as a business profit in 1940‑41. The assessee even at that stage appealed to the Tribunal contending that it was not a business profit but was a capital receipt but the Tribunal held that this was a part of the activities of the company itself and as such the amount was taxable. The matter ended there so far as the first sale was concerned. From the decision of the Appellate Assistant Commissioner, the assessee in the present case appealed to the Appellate Tribunal. The main contention of the assessee before the Tribunal was that the income should have been held as a casual receipt or a capital gain. It was contended by the assessee that it was not a dealer in property or houses and the sale was not an adventure in the nature of trade. The Tribunal upheld the decision of the Appellate Assistant Commissioner and dismissed the appeal of the assessee: The decision of the Tribunal holding that this sum of Rs. 1,00,673 was the net profit of the sale transaction and was a business income rests on a number of cogent considerations, namely:
(1) the objects of the company in the memorandum of association justify sale or traffic in house and other property ; (L) actual sales took place almost from the early stages of the com pany's incorporation ; (3) failure of the assessee to prove that the sale proceeds in respect of these properties were reinvested and, therefore, should be regarded as change of investments ; and (4) failure of the assessee to prove that these properties were sold to pay off a mortgage.
It was contended before the Tribunal by the assessee that the sale of the four houses was only for changing its investments. Nothing is proved or shown to establish what, if at alt, was the form of the new investment after changing the old investment in house property. It was also contended by the assessee before the Tribunal that the sale of those house properties which were purchased with money obtained by loan and mortgage was effected with a view to pay off the mortgagee who was pressing for payment. Opportunity was given to the assessee to prove that fact, but the assessee failed to produce any material to support Welt t statement. Ws have no doubt in our mind that if a limited company such as the assessee had paid off a mortgage of over Rs. 200,000 it would have at least receipts, cheques and other documents to show that such payments were made. It is also established on record that the assessee conceded that these four house properties were fetching good rent and, therefore, it could not be s id that there was any need for selling them. On behalf of the Department it was contended that the assessee took advantage of the war period to earn this large profit in 1942 by sale of these four houses in accordance with the declared object of the assessee in its memorandum of associa tion,
Dr. Pal, learned counsel for the assessee, has put forward the same contentions that were presented before the Tribunal. He contends that the receipt of this surplus is a capital receipt or a casual receipt. The reasons which he advances in support of his contention are : firstly, that this company's main business is to hold properties and to let them out on rent and earn an income from such rents and is, therefore, an assessee under section 9 of the Income‑tax Act from the source "income from property" ; secondly, his reason is that the company has not purchased any other property but only sold some. Therefore, he argues that where there are no corresponding purchases to match with the sales effected in this case it could not be said' that the sale represented ordinary trading ; and, thirdly, he submits that the assessee‑company has sold only a small portion of its properties and continues to hold as a property‑owner the larger bulk of this real estate. These are the three reasons submitted before us by Dr. Pal in support of his contention that the sum of Rs. 1,0,673 in this case is not an income under the head "business" but a capital receipt.
The first reason of Dr. Pal can be disposed of briefly. The fact that certain items of the assessee's income are assessed under the head "property" under section 9 of the Income‑tax Act cannot determine that another item, namely, the receipt of Rs. 1,00.673 in this case, cannot be an income from another source, namely, "business" under section 10 of the Income‑tax Act. Income‑tax is one single tax charged in respect of the total income of the previous year of the assessee. Section 2(15) of the Income -tax Act defines "total income" to mean total amount of income, profits and gains referred to in ' section 4(1) of the Act and computed in the manner laid down in the Income‑tax Act. Section 6 enumerates the various heads of income, profits and gains which are chargeable to income‑tax and appears in Chapter III of the Income‑tax Act under the heading "taxable income." It is now well settled that sections 7 to 12 of the Income‑tax Act under Chapter III direct the modes in which the income‑tax is to be levied and computed. An assessee's income may come from different sources and heads and they will be computed and assessed under such different heads. The fact, therefore, that a particular source of income comes under section 9 of the Income‑tax Act cannot mean that another item could not come under a different source of income under section 10 of the Income‑tax Act. The paint, in our view, is concluded and answered by the Supreme Court in United Commercial Bank Ltd. v. Commissioner of Income Tax ((1957) 32 I T R 688) and specially the observation at pages 702 to 703. We are, therefore, unable to upheld the first reasoning of Dr. Pal. This Court holds that income tax is only one tax levied on the sum total of the income classified and computed under various heads. That it is not a collection of different takes, on each separate head of income, is a principle which is well settled both here and in England : see the observations of the House of Lords in Attorney‑General v. Lond n County Council ((1900) 4 Tax Cas. 265, 293‑294) and Salisbury House Estate Ltd. v. Fry (H. M. Inspector of Taxes) ((1930) 15 Tax Cas. 266).
Dr. Pal's next submission is based on the English decision in Glasgow Herilable Trust Ltd. v. Commissioners e f Inland Revenue ((1953) 35 Tax Cas. .196). It is a complicated case where there was more than one order for additional statements by the Court from the income tax authorities. The main use of the case which Dr. Pal made was to emphasize that property‑owning was not trade and that mere realisation of capital asset was not trade and for that purpose he relied on the observation to that effect by the Lord President Cooper at page 215 of that report. It may not be out of place to open the discussion on this point by quoting the wholesome caution of Lord President Cooper himself in that case at page 212, where the following observations were made:
"When the choice lies between concluding that a given series of transactions (a) amounted only to the realisation of capital assets or (b) involved `acts of realisation done in what is truly the carrying out or carrying on of a trade' the question must be a mixed question of fact and of law. As scores of reported decisions demonstrate, the conclusion to be drawn from the facts is often balanced upon a knife edge, and when such cases come before an Appellate Tribunal, the validity of the Commissioners' conclusions have always been examined from the standpoint of (i) enquiring whether there was evidence to support them, and (ii) of testing the correctness of the reasons, if any, given by the Commissioners for, the conclusion which they reached."
The majority decision in Glasgow Heritable Trust case came to the conclusion that there was the evidence on which the Com missioners were entitled .to find that the sales erected by the company were made in the course of a trade carried on by 'it. Lord Russell who was in the minority disagreed with the view that there was no evidence to support the Commissioners view.
Although balancing upon "a knife edge" is always a difficult task as pointed out by Lord President Cooper himself all that we need say about the case of Glasgow Heritable Trust Ltd v Com missioners of Inland Revenue is that it is distinguishable on broad grounds of fact from the present reference before us. As pointed out by Lord President Cooper at pages 213 and 214 of that report (1) there the company was formed "to hold and realise" the properties page (1) ; (2) the company's enterprise was very different Drum the enterprise of the firm whose business it took over only to salvage as much of the ruins of the partnership business as could be done. The company in that case never built or acquired any property and never developed the pro perties widen they took over. No alterations were ever made with a view to sale and the properties were never advertised for sale. Hs Lord resident points out at page 214 of the report, the company simply "nursed" the properties ; (3) the proceeds of sales were all in repayment of the heritable debts and nothing from that source had ever been distributed or treated in the accounts as profits available for dividend. In fact, Lord Car mont; who formed the it majority with Lord President Cooper in that case, clearly points out at page 217 of that report that the special Commissioners "allowed their minds to be warped by their insisting on the actings of the individuals or the partner ship which formerly dealt with properties which are not held by the company."
Now if that is, the finding of fact in that case that the company was a. company only "to hold and realise properties," then the decision in Glasgow Heritable Trust follows as a matter of course that the receipt in such a case could not be said to be a trading receipt, for the company there was not trading in properties. but the facts before us are very different. It is quite impossible to hold on the facts of this case that the present assessee‑company was formed only to hold and realise properties. Not only the memorandum of association and objects but also the actual business of the assessee prove and established beyond doubt that the assessee carries on the business of trading in properties by sale.
Clause 3(1) of the objects of the company expressly confers upon the assessee‑company "to traffic is land and house and other property of any ke.iure and any interest therein," "to sell and deal in freehold and leasehold ground rents" and generally to deal in, traffic by way of sale, lease, exchange or otherwise with land and house property." Clause 3(2) of the objects in the memorandum of association also gives power to the assessee company to acquire by purchase lands; buildings, etc., and to turn the same to account as may seem expedient. Lastly, clauses 3(26) and (31) give power to the assessee‑company to sell or dispose of or otherwise deal with all or any property and rights of the company.
It follows, therefore, from the memorandum of association in this reference and on the facts of this case that this company has as its ordinary trading, activity sale of land, and house properties. What has happened in this case is the sale of four of its properties. Prima facie, therefore, this is within their ordinary declared trade activities. It is not a company as in Glasgow Heritable Trust case to "only" hold and realise properties and was not an investment company at all. The only relevant clause for investment in this memoran dum of association is clause 3(20), which gives power to the Company to invest moneys of the company not Immediately required upon such securities and in such manna as may from time to time be determined. This is an investment clause dealing only with surplus. That does not make it an investment company. In support of this construction reference may be made to Granvill Building Co. Ltd. v. Oxby (H. M. Inspector of Taxes) ((1954) 35 Tax Cas. 245), where Harman J., at page 249, after construing the words "turning to account" as not being indicative of an object of an investment at all, proceeds further to say that the only power to invest is a power to invest money not immediately required. That did not make the company an investment company either according to Harman, J.
The Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income‑tax ((1959) 35 I T R 594) has laid down the guiding principles, with the caution, at page 609:
" . . . it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the Courts in tax proceedings. It would 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 oases on the border line that cause difficulty."
The second principle which the Supreme Court laid down in the same case at page 609 is:
"The presence of all the relevant circumstances mentioned in any of them may help the Court to draw a similar inference ; but it is not a matter of merely counting the number of facts and circumstances pro and con ; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circum stances that determines the character of the transaction."
In that case the Supreme Court came to the conclusion that the transaction in question was an adventure in the nature of the trade. The property purchased and resold in that case was land. The contention there raised by the counsel for the assessee was that the four purchases made by the assessee represented nothing more than an investment and if resale had produced some pront that could not impress the transaction with the character and nature of trade. One of the facts that weighed with the supreme Court in that case in coming to the conclusion was that the assessee was a firm and that it was not a part of its business to make investment in land. Secondly, the Supreme Court in that case, on the facts, points out that a firm like the appellant was not acquiring land for the mere pride of possession and pro ceeds to observe at page 623:
"It is really not one transaction of purchase and resale. It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holding that at a convenient time it sold the lands to the Janaradana Mills in two lots."
Then again the Supreme Court at page 624 of the report comes to the conclusion:
"Thus the appellant purchased the four plots during the two years with the sole intention to sell them to the mills at a profit and this intention raises a strong presumption in favour of the view taken by the Tribunal."
The facts in this case are very much more against the ‑assessee than those of the Supreme Court. Here is a company dealing with and trafficking in real property and real estates. Not only its memorandum of objects and article of association but, also its actual conduct in selling one property within four years of its incorporation and four other properties with in three years thereafter show that this was not a company formed only to bold and realise properties or that it never built or acquired or developed any property as was said by Lord President Cooper in Glasgow Heritable Trust Ltd. nor can it be said to have been proved in this case that the proceeds of sale were used for repayment of debts as was said in Glasgow Heritable Trust case.
On behalf of the Commissioner of Income‑tax reliance has…
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