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Petitioner: DEEP CHANDRA CO. VS Respondent: COMMISSIONER OF INCOME TAX, KANPUR
Court Name: Allahabad High Court Judge(s): M. N. Shukla, Kc. Agrawal Title: DEEP CHANDRA CO. vs COMMISSIONER OF INCOME TAX, KANPUR Case No.: Income Tax Reference No,360 of 1971 Date of Judgment:1974-12-02 Reported As: 1989 PTD 445 Result: Question answered in the negative
JUDGMENT
JUDGMENT ' K.C. AGRAWAL, J.--Thc assessee, Deep Chandra & 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 All Khan, who was another big Zamindar of Muzaffarnagar, entered into an agreement to sell his Zamindari property comprised in Khewat 4/1 of Mohammad Rustam Ali Khan, village Yusufpur, Pargana and Tahsil Muzaffarnagar with Deep Chandra. Sajjad All 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. ' 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
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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: (1) Sale proceeds of the year ending 31-3-1957 31,085 (2) Sale proceeds of the year ending on 31-3-1958 27,685 (3) Sale proceeds of the year ending on 31-3-1959 30-714 (4) Sale proceeds of the year ending on 31-3-1960 65,035 ' The assessee firm reimbursed its total litigation expenses, cost of the land, cost of acquisition of tenancy rights fr.Om 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: ' Surplus realisation shown in the year ending 31-3-1961 19,896 ' Surplus realisation shown in the year ending 31-3-1962 28,692 ' Surplus realisation shown in the year ending 31-3-1963 64,184 ' Surplus income thus shown was in four assessment years, that is 196061,1961-62, 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 assessm ent years 1960-61, 1961-62, 1962-63, 1963-64?" ' The assessm ents in the instant case with respect to some assessment years have been made under the provisions of the Indian Income Tax Act, 1922, while assessments of some other years have been made under the Income Tax Act, 1961. But, as there is no difference between these two Acts so far as the controversy in question is concerned, we therefore, propose to refer to the provisions of the Indian Income Tax Act, 1922, alone for the purpose of finding out a solution to the problem. Section 10 of the said Act makes profits and gains of business, profession or vocation liable to taxation under the head-business". The word "business" has been defined in this Act in section 2 (4) as: "'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."
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' The object and purpose of including an "adventure" in the definition of trade is to rope in receipts from adventure to tax as receipts from trade proper. This expression "adventure" has not been defined in the Act.To make an attempt to give an exact and precise meaning, or to find set form of words in which it can be prescribed or statement of ingredients be detailed is a difficult or rather impossible task. It is this difficulty which led the Supreme Court to observe in several cases which came up for decision before it that there was no general principle which could be laid down in this respect. The first decision of the Supreme Court which may be noticed in this connection is Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [19511 20 I T R 451 (SC). In this case the Supreme Courts clearly indicated that no general principle could be laid down which could be applicable to all cases and that each case would have to be decided with reference to the facts arising in that case. The next important case is G. Venkataswami Naidu & Co.v. Commissioner of Income Tax [19591 35 I T R 594 (SC), Expressing an opinion to the same effect the Supreme Court observed (pages 609, 610): "As we have already observed 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 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 borderline that cause dificulty it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any one 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 circumstances that determines the character of the transaction........ " ' These observations of the Supreme Court require a Court to decide the question of a transaction being an adventure in the nature of trade on the basis of the total impression formed. It is not open to consider one or other circumstances alone and treat the same as decisive or conclusive. No general or absolute test can be applied to each and every case to determine the character of the transaction. In P.M. Mohammad Meerakhan v. Commissioner of Income Tax [1969] 73 1 T R 735, 738, 739 (SC) the Supreme Court was again required to decide the same controversy, and while enunciating the law, it observed: "The question whether a transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and circumstances which are proved in the particular case. The answer to the question does not depend upon the application of any abstract rule or principle or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in the particular case." ' Although it is correct that it is not possible to formulate a single criterion, yet there are, however, certain tests which can be cualled out from the various decisions and may prove helpful in determining the nature of a transaction. In Meerakhan's case 119691 73 I T R 735 (SC) the Supreme Court has mentioned those factors at page 739 of the said report in the following words; "For instance, if a transaction is related to the business which is normally carried on by the assessee, though not directly a part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and is sub-divided, altered, treated or repaired and sold or is converted into a different commodity and then sold. The magnitude of the transaction of purchase, the nature of the commodity, the subsequent dealings of the assessee, the nature of the orgnisation employed by the assessee and the manner of disposal may he such that the transaction may be stamped with the character of a trading nature."
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' In G. Venkataswa mi Naidu and Co.'s case [1959] 35 I T R 594 (SC) as well, the Supreme Court had enumerated various tests which may be taken into consideration in determining the character of the transaction. These factors are also more or less the same as subsequently reiterated in Meerakhan's case [1969] 73 I T R 735 (SC). ' Before we discuss the relevant facts and circumstances of the instant case for finding the true character of the transactions involved, it is necessary to refer to the controversy raised at the Bar in respect of the scope and power of the High Court under section 66 (1) of the Income Tax Act, 1922. The contention of the learned counsel for the assessee in this regard is that a question about the nature of a transaction is a mixed question of law and fact and, therefore, the High Court can examine the findings given by the Tribunal for the purpose of ascertaining whether the assessee had embarked upon a business or had simply made investments for capital gains. The counsel appearing for the revenue, however, urged that the finding that a particular transaction is an adventure in the nature of trade postulates the existence of a certain state of facts and, therefore, a finding given on this controversy is a question of fact and thus beyond the power of scrutiny given to the High Court under section 66 (1) of the Income Tax Act. ' We have considered the respective contentions of the counsel appearing for either parties and are inclined to hold that it is now settled that the question whether profit earned in a transaction has arisen out of adventure in the nature of trade is a mixed question of law and fact. An examination of the question whether a transaction is an adventure in the nature of trade involves, as it does, the application of the relevant provisions of law and an interpretation of the statutory enactment relating to the same. In every case the question which may arise is, whether an authority is justified in treating the profit in question as assessable to income tax, such a question is not one which can fall within the realm of facts exclusively. It is, therefore, not possible to accept the contention of the counsel for the revenue in this respect. The Supreme Court has exhaustively dealt with the aforesaid controversy in G. Venkataswami Naidu and Co.'s case [1959] 35 I T R 594 (SC). The ultimate decision on the said point is to be found at page 607, where the relevant observations made are in the following words: "As we have already indicated, to avoid confusion or unnecessary complications, it would be safer and more convenient to describe the question about the character of the transaction in the context as a question of mixed law and fact." ' In determining the character of a transaction generally either the question of the application of legal principles is involved or the examination of drawing of inferences from proved facts has to be looked into. In either case it will be a question which would attract the provisions of section 66 (1) of the Income Tax Act. The view taken by the Supreme Court in G. Venkataswami Naidu and Co's case [1959] 35 I.T.R. 594 (SC) has been reiterated in Saroj Kumar Mazumdar v Commissioner of Income Tax [1959] 37 I.T.R.242 (SC) and Janki Ram Bahadur Ram v. Commissioner of Income Tax (1965) 57 I.T.R. 21 (SC). The submission of counsel for the revenue., therefore, is not correct that the determination of the question relating to the character of the transaction is a question of fact and is beyond the power of investigation given to the High Court under section 66 (1) of the income Tax Act. He had also cited some authorities on the said controversy. We do not think it necessary to discuss those cases in any detail for we find that most of them are Clearly distinguishable in material respects having been decided on their special facts. In a recent decision in D.S. Virani v. Commissioner of Income Tax (1973) 90 I.T.R. 255 (Guj) all the relevant case-law on the above controversy has been considered by a Division Bench of the Gujarat High Court and it has been found that the question relating to the determination of the character of a transaction as being an adventure in the nature of trade is a mixed question of law and fact. We respectfully, agree with this view of the Gujarat High Court.
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' Counsel for the revenue, however, pointed out that the form in which the question has been referred to the High Court assumes that the finding relating to the transaction being an adventure in the nature of trade is a finding of fact and, therefore, the High Court cannot go behind the question for the purpose of giving redress to the assessec. He relied upon an authority. In Karnani Properties Ltd. v. Commissioner of Income Tax (1971) 82 I T R 547 (SC) in support ol his contention. He submitted that when the question referred to the High Court speaks of "on the facts and in the circumstances of the case", it requires the High Court to decide the question referred to it on the assumption that the finding given by the Tribunal is a finding on which the High Court has to proceed and it Cannot reappraise the evidence itself for coming to a different finding. In the case cited by the counsel for the respondent the point involved was whether the receipt held by the Income Tax Officer as income from other sources should have been held to be income from business. Dealing with this controversy the Supreme Court held that the question on that controversy was related to the facts and that the High Court had to accept them as found by the Tribunal and also it should have answered the question referred to it on the basis of those facts. In the present case the question involved is altogether different. The High Court is required to find whether the Tribunal was justified in drawing legal inferences and applying legal principles to the question related to the determination of the character of the transaction. As observed earlier, such a question is necessarily a mixed question of law and fact and, therefore, there is no occasion to apply the - law laid down by the Supreme Court in Karnani Properties Ltd.'s case (1971) 82 1 T R 547 (SC). ' Counsel for the revenue is, however, also not right in suggesting that the form in which the question was referred to the High Court assumes that the impugned finding is a finding of fact. The question referred really requires a decision whether on the facts and in the circumstances proved in this case the inference that the transaction is an adventure in the nature of trade is in law justified. Reference to the relevant provisions made in the question also lends support to this conclusion. As a matter of fact, it is only with reference to certain facts that a question can be properly framed. None-the-less, the High Court can still go and examine whether there was some material to support the findings given by the Tribunal. It is undesirable that such an investigation raises a question of law falling within the scope of section 66 (1) of the Income Tax Act. In substance and in effect, the High Court has been required by the question referred to answer whether the Tribunal had applied the relevant legal principles correctly or not. We, therefore, do not find any merit in this submission of the counsel for the revenue. ' The next preliminary point which deserves to be examined at this place is related to the burden of prof which lies on a party in a controversy like the present. There are numerous cases where these questions have been considered by various Courts. In G. Vankataswami Naidu and Co.'s case (1959) 35 I T R 594 (SC); as well as in Saroj Kumar Mazumdar's case (1959) 37 I.T.R. 242 (SC) the Supreme Court had examined this question and found that the burden lay on the revenue to establish that the profit earned in a transaction was revenue realisation and not capital gain. ' We have already observed in the beginning that according to the settled view no individual or single fact has a decisive role in finding the correct nature of a transaction entered into and it is the cumulative out-come of all the facts and circumstances which has to he taken into account for the said purpose but the Supreme Court did point out some of the common factors which are relevant in this regard. Applying the aforesaid guides or factors, counsel for the assessee urged that the nature of the transaction is a very important factor for the purpose of finding out the character of the transaction. He submitted that in the present case the transactions were in regard to sale of land by the assessce . The land, according to his contention, is an item which for several centuries has been considered as an item of investment and is not like a commercial commodity which is purchased with a view to reselling it to gain profits. He submitted that there is a strong
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presumption with regard to the purchase of land, that the same is made for the purpose of investing money and the mere fact that a person or investor has a design to resell at a profit in future if occasion arises, does not destroy the character of the transaction being investment to trade or business. ' It cannot be denied that the land is not a commercial commodity. Land only is also not a trade in itself. Keeping these considerations in account the Supreme Court observed in G. Venkataswami Naidu and Co.'s case (1959) 35 I T R 594, 610 (SC): "Normally the purchase of land represents investment of money in land." ' The same view was reiterated by it in Janki Ram Bahadur Ram's case (1965) 57 I T R 21, 26 (SC) in the following words: "These are cases of commercial commodities. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade." ' Counsel for the assessee is, therefore, right that from the nature of the property involved in this case it has to be accepted normally that the purchases made by the assessee represented an investment of money in land. Counsel for the revenue, however, stressed that it is not every purchase of land which has to be considered as a case of investment. The purchase of land made for the purposes of reseling and earning profit according to him is not one where the money was spent by the purchaser for the purpose of acquiring capital gains but for the purpose of engaging in the business of sale and purchase of land; therefore, in such a case he submitted that the Court should find that the transaction is an adventure in the naturte of trade. The submission of the counsel for the revenue, however does not appear to be correct. An investment in purchasing a property is also made with a view to earning return on the sum invested. Therefore, the mere fact that a person invested money for the purpose of reselling whenever a suitable opportunity arises, does not give a sufficient ground to hold that the transaction is in the nature of trade. ' Lord Buckmaster dealing with the above controversy in Leeming v. Jones (1930) 15 TC 333, 357 (HL) observed as follows: "...An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so its realisation does not make it income." ' Dealing with the same question Lord Dunedin observed as under (page 360): "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever." ' These two observations were subsequently referred to and relied upon in the decision of the House of Lords in Commissioners of Inland Revenue v. Reinhold 119531 34 TC 389 (C Sess). ' The Supreme Court has also taken the same view in Saroj Kumar Mazumdar's case 119591 37 I T R 241 (SC) and in Janki Ram Bahadur Ram v.Commissioner of Income Tax 119651 57 I T R 21 (SC). In the latter case Shah, J. Observed as follows (page 26): "It may he emphasised from an analysis of these cases that a profit motive in entering into a trasaction is not decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may he sold at profit." ' The Supreme Court reiterated the same view in Raja Bah. Hadur Kamakhia Narain Singh v. Commissioner of Income Tax (1970) 77 I T R 233, 263 (SC) when it said: "The fact that the original purchase was made with the intention to resell if an enhanced price would be obtained is by itself not enough " ' We, therefore, do not find any substance in the submission of the counsel for the revenue that simply because a purchase is made with an intention to resell in future in case its price rises, that is a ground for holding that the money spent was not by way of investment, but was a trading
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venture. A case of commercial commodity certainly Stands on a footing different from that of land. In such commercial commodity it is easier to find the purpore, as such commercial commodities are generally purchased with a view to reselling for the purpose of earning profits. ' A case, where the initial intention solely and exclusively from the stage of purchase is to buy the property and to resell it, stands on a different footing. In such a case the purchaser is not interested in investing his surplus money but in selling it at a profit whenever an occasion for the same arises. The dominant intention is to earn and make income by trading in the sale of landed property unlike the transactions of investment where a person can hold and enjoy the property as well if a really high price is not offered. But in "business" the intention predominantly is to dispose of the land without the least desire to keep and enjoy the same in possession. Counsel for the revenue strenuously urged that in the instant case as well, the partnership was constituted only with a view to acquiring the land and to selling the same, therefore, the assessee should be held to have purchased the property with the intention of resale and this activity of the assessee amounted to a venture in trade. Be that as it may, when we come to discuss the case on merits we will examine this aspect of the case with reference to the facts on the record of this case. Suffice it to say at this place, as observed by the Supreme Court in G. Venkastawami Naidu and Co's case P9591 35 I.T.R. 594…
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