The judgment of the court was delivered by
RAMASWAMI J.--These appeals are brought by special leave
from the judgment of the High Court of Andhra Pradesh dated 23rd July, 1964, in
Referred Case No. 42 of 1962.
The assessment years involved in these appeals are 1358
F., 1953-54 and 1954-55, the relevant accounting periods being the years ending
30th September, 1948, 30th September, 1952, and 30th September, 1953,
respectively. The assessee firm, Khan Bahadur Ahmed Alladin and Sons
(hereinafter referred to as "the assessee-firm"), consists of three
partners, Khan Bahadur Ahmed Alladin, and his two sons, Khan Saheb Dost Mohammed
Alladin and Noor Mohammed Alladin. The assessee-firm purchased the Brengun
Factory and the properties attached to it consisting of 403 acres of land, 14
factory buildings, about one hundred residential quarters and railway sidings,
furniture, etc., in addition to the stores, from the Government of India. The
price of the Brengun Factory and the properties together with the furniture,
etc., was fixed at Rs. 27 lakhs while the price of the stores was fixed at Rs. 8
lakhs. During the relevant accounting years, the assessee-firm sold a part of
the stores for Rs. 9,53,918 O.S. and 46 acres of land, 14 factory buildings,
furniture, railway siding, etc., for Rs. 26,48,215 O.S. It was not disputed that
the excess over the price realised for the resale of stores was Rs. 2,26,484
O.S. and for the resale of part of the factory land, building, etc. was Rs.
10,46,834 O.S. It was admitted by the assessee-firm before the Appellate
Tribunal that the surplus realised by the resale of stores was not a capital
accretion but an adventure in the nature of trade. With regard to the factory it
was argued that it was an investment and not an adventure in the nature of trade
and as such the excess amount realised represented a realisation of capital
asset. The contention of the assessee-firm was rejected by the Income-tax
Officer, by the Appellate Assistant Commissioner and by the Appellate Tribunal
in appeal. The view taken by the Appellate Tribunal was that the assessee-firm
had planned a well calculated scheme of profit making, that it had the intention
of exploiting the properties which it had purchased to its advantage, that the
transactions in question constitute an adventure in the nature of trade, and any
surplus which it got by sale of the portions of the properties was liable to
tax. At the instance of the assessee-firm, the Appellate Tribunal stated a case
to the High Court on the following question of law :
"Whether the purchase of the site and buildings known
as 'Brengun Factory' was in the course of a profit-making scheme or an adventure
in the nature of trade ?"
By its judgment dated 23rd July, 1964, the High Court
answered the question against the assessee-firm.
On behalf of the appellant, Mr. Sukumar Mitra argued that
the assessee-firm along with Abdullah Alladin, brother of Khan Bahadur Ahmed
Alladin had been carrying on business as a partnership firm under the name of
Khan Bahadur Ahmed Alladin and Company (hereinafter referred to as "Alladin
and Co."). It has substantial interest in various joint stock companies,
and was the managing agent of several joint stock companies, and possessed
considerable financial resources. The assessee-firm acquired the Brengun Factory
with the intention of starting a bicycle factory or some other industry as an
investment, but not with the intention of resale. The argument was stressed that
the purchase and sale of land and buildings was not in the line of business of
the assessee-firm. It was stated that the purchase was an isolated transaction
and even after the sales, a major portion of the factory remained with the
assessee-firm. It was contended that the assessee-firm had not developed the
land or parcelled it out with the view to sell it to purchasers as a residential
area, and make a profit. The submission made on behalf of the appellant was that
the transaction of purchase was in the nature of investment and was not an
adventure in the nature of trade and the sales represented the realisations of
capital asset.
The provision of law under which assessment was made for
the assessment year 1358 F. was section 31(3) of the Hyderabad Income-tax Act
(hereinafter referred to as the "Hyderabad Act"), which corresponds to
section 23(3) of the Indian Income-tax Act, 1922 (hereinafter referred to as the
"Indian Act"). The assessments for the subsequent years were made
under the Indian Act. The charging section under the Hyderabad Act is section 3,
which corresponds to section 4 of the Indian Act. The word "business"
is defined in section 3(1) of the Hyderabad Act which is identical with the
language of section 2(4) of the Indian Act. Section 8 of the Hyderabad Act
states :
"Save as otherwise provided by this Act, the
following heads of income, profits and gains shall be chargeable to income-tax
in the manner hereinafter appearing, namely : . . .
(iv) Profits and gains of business, profession or
vocation."
It corresponds to section 6 of the Indian Act.
The question whether profit in a transaction is a capital
accretion or has arisen out of an adventure in the nature of trade is a mixed
question of law and fact. In G. Venkataswami Naidu and Co. v. Commissioner of
Income-tax it was pointed out by this court that the expression "in the
nature of trade" in sub-section (4) of section 2 of the Indian Act
postulates the existence of certain elements in the adventure which, in law,
would invest it with the character of trade or business : and that a Tribunal,
while considering the question whether a transaction is or is not an adventure
in the nature of trade, before arriving at its conclusion on the facts, has to
address itself to the legal requirements associated with the concept of trade
and business. In other words, in reaching the conclusion that the transaction is
an adventure in the nature of trade, the Appellate Tribunal has to find the
primary evidentiary facts and then apply the legal principle involved in the
statutory expression "adventure in the nature of trade" used by
section 2(4) of the Indian Act. A question of this description is a mixed
question of law and fact and the decision of the Appellate Tribunal thereon is
open to challenge under section 66(1) of the Indian Act.
The question whether the 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, principle or
formula but must depend upon the total impression and effect of all the relevant
facts and circumstances established in the particular case. In Californian
Copper Syndicate v. Harris, Lord Justice Clerk observed :
"It is quite a well settled principle in dealing with
questions of assessment of income-tax that where the owner of an ordinary
investment chooses to realise it, and obtains a greater price for it than he
originally acquired it at, the enhanced price is not profit . . . assessable to
income-tax. But it is equally well established that enhanced values obtained
from realisation or conversion of securities may be so assessable where what is
done is not merely a realisation or change of investment, but an act done in
what is truly the carrying on, or carrying out, of a business . . . What is the
line which separates the two classes of cases may be difficult to define, and
each case must be considered according to its facts ; the question to be
determined being--Is the sum of gain that has been made a mere enhancement of
value by realising a security or is it a gain made in the operation of business
in carrying out a scheme for profit making ?"
But in judging the character of such transactions several
factors have been treated as significant in decided cases. For instance, if a
transaction is related to the business which is normally carried on by the
assessee, though not directly 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 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 organisation employed by
the assessee and the manner of disposal may be such that the transaction may be
stamped with the character of a trading venture. In Martin v. Lowry the assessee
purchased a large quantity of aeroplane linen and sold it in different lots, and
for the purpose of selling it started an advertising campaign, rented offices,
engaged an advertising manager, a linen expert and a staff of clerks, maintained
account books normally used by a trader, and passed receipts and payment in
connection with the linen through a separate banking account. It was held that
the assessee carried on an adventure in the nature of trade and so the profit
was liable to be taxed. The same view was taken in Rutledge v. Commissioners of
Inland Revenue in regard to an assessee who purchased very cheaply a vast
quantity of toilet paper and within a short time thereafter sold the whole
consignment at a considerable profit. Similarly, in Commissioners of Inland
Revenue v. Fraser, the assessee, a woodcutter, bought for resale, whisky in
bond, in three lots. He sold it later on at considerable profit. The assessee
had never dealt in whisky before, he had no special knowledge of the trade, he
did not take delivery of the whisky nor did he have it blended and advertised.
Even so it was held that the transaction was not an adventure in the nature of
trade. Lord President Normand observed in the course of the judgment :
"It is in general more easy to hold that a single
transaction entered into by an individual in the line of his own trade (although
not part and parcel of his ordinary business) is an adventure in the nature of
trade than to hold that a transaction entered into by an individual outside the
line of his own trade or occupation is an adventure in the nature of trade. But
what is a good deal more important is the nature of the transaction with
reference to the commodity dealt in. The individual who enters into a purchase
of an article or commodity may have in view the resale of it at a profit, and
yet it may be that that is not the only purpose for which he purchased the
article or the commodity, nor the only purpose to which he might turn it if
favourable opportunity of sale does not occur. In some of the cases the purchase
of a picture has been given as an illustration. An amateur may purchase a
picture with a view to its resale at a profit, and yet he may recognise at the
time or afterwards that the possession of the picture will give him aesthetic
enjoyment if he is unable ultimately, or at his chosen time, to realise it at a
profit. A man may purchase stocks and shares with a view to selling them at an
early date at a profit, but, if he does so, he is purchasing something which is
itself an investment, a potential source of revenue to him while he holds it. A
man may purchase land with a view to realising it at a profit, but it also may
yield him an income while he continues to hold it. If he continues to hold it,
there may be also a certain pride of possession. But the purchaser of a large
quantity of a commodity like whisky, greatly in excess of what could be used by
himself, his family and friends, a commodity which yields no pride of
possession, which cannot be turned to account except by a process of
realisation, I can scarcely consider to be other than an adventurer in a
transaction in the nature of a trade ; and I can find no single fact among those
stated by the Commissioners which in any way traverses that view. In my opinion,
the fact that the transaction was not in the way of the business (whatever it
was) of the respondent in no way alters the character which almost necessarily
belongs to a transaction like this.
These are cases of commercial commodities but a
transaction of purchase of land cannot be assumed without more to be an
adventure in the nature of trade. In Leeming v. Jones, a syndicate was formed to
acquire an option over a rubber estate with a view to resell it at a profit, and
finding the estate too small the syndicate acquired another estate and sold the
two estates on profit. It was held that the transaction was not in the nature of
trade and the profit was not liable to be assessed to tax. The same view was
expressed in Saroj Kumar Mazumdar v. Commissioner of Income-tax in which the
assessee who carried on business of engineering works purchased land, which was
under requisition by the Government, negotiated a sale before the land was
de-requisitioned and sold it after the land was released. Again in Commissioners
of Inland Revenue v. Reinhold, the respondent who carried on business of
warehousemen, bought four houses in January, 1945, and sold them at a profit in
December, 1947. He admitted that he had bought the property with a view to
resale and had instructed his agents to sell whenever a suitable opportunity
arose. On behalf of the Crown it was contended that the purchase and sale
constituted an adventure in the nature of trade and the profits arising
therefrom were chargeable to income-tax. It was held by the Court of Session
that the initial intention of the respondent to purchase the property with a
view to resell did not per se establish that the transaction was an adventure in
the nature of trade and the Commissioners were justified in treating the profit
as not assessable to income-tax. But the circumstances of a particular case may
lead to the conclusion that the purchase or resale of land is in the nature of
trade. In Venkataswami Naidu's case the appellant-firm which acted as managing
agents purchased, for a total consideration of Rs. 8,713, four contiguous plots
of land adjacent to the place where the mills of the company managed by it were
situated. The first purchase was made in October, 1941, and the second and
subsequent purchases were made in November, 1941, June, 1942, and November,
1942. As long as the appellant was in possession of the land it made no effort
to cultivate it or erect any superstructure on it but allowed the land to remain
unutilised except for the rent received from the house which existed on one of
the plots. The appellant sold the land to the company managed by it in two lots
in September and November, 1947, for a total consideration of Rs. 52,600. The
question was whether the sum of Rs. 43,887, being the excess realised by the
appellant by the two sales over its purchase price, was assessable to
income-tax. The Appellate Tribunal rejected the contention of the appellant that
the properties were bought as an investment and that the plots were acquired for
building tenements for the labourers of the mills but came to the conclusion
that the transaction was an adventure in the nature of trade. On a reference,
the High Court expressed the same view. It was held by this court in appeal that
the Appellate Tribunal was right in inferring that the appellant knew that it
would be able to sell the lands to the managed company whenever it thought it
profitable so to do, that the appellant purchased the four plots of land with
the sole intention of selling them to the mills at a profit and that the High
Court was right in holding that the transaction was an adventure in the nature
of trade.
As we have already said, it is not possible to evolve any
legal test or formula which can be applied in determining whether a transaction
is an adventure in the nature of trade or not. The answer to the question must
necessarily depend in each case on the total impression and effect of all the
relevant factors and circumstances proved therein and which determine the
character of the transaction. What then are the material facts found in the
present case ?
Alladin and Co. was the managing agent of several joint
stock companies, viz., Hyderabad Asbestos Cement Products Limited (hereinafter
referred to as "the Asbestos Co."), Hyderabad Laminated Products
Limited (hereinafter referred to as "the Laminated Products"),
Hyderabad Allwyn Metal Works Limited (hereinafter referred to as "Allwyn
Co.") and others. Alladin and Co. started Asbestos Co. in 1946, and the
Laminated Products in 1947. The Government of Hyderabad had 50 per cent.
shareholding in both these companies. Negotiations for the purchase of Brengun
Factory situate in the outskirts of Hyderabad commenced in December, 1946. On
18th December, 1946, there took place a meeting between Khan Sahib Dost Mohammed
Alladin and Noor Mohammed Alladin on behalf of Alladin and Co., and Khan Bahadur
Obaidulla, the then Additional Financial Adviser to the Government of India. The
latter informed the two Alladin brothers that the Government of India had
decided to sell the Brengun Factory as the war had ended and it was going cheap.
It was agreed that the price of the factory building should be fixed at Rs. 27
lakhs, and of the stores at Rs. 9 lakhs. Alladin and Co. asked for six months'
time for making the payment but finally it was agreed that the price should be
paid in four equal monthly instalments commencing from 1st January, 1947. The
contract of sale was made subject to the condition that the Hyderabad Government
was no longer interested in the factory and also subject to the confirmation by
the board of directors. By its letter dated December 24, 1946, Alladin and Co.
accepted the proposal and informed the Additional Financial Adviser that the
board had agreed to purchase the Brengun Factory and the first payment would be
made on 1st or 2nd January, 1947. Not having ready cash to pay the first
instalment, the firm borrowed the sum from the State Bank and the Central Bank
pledging the shares of the partners valued at about Rs. 20 lakhs for Rs. 9
lakhs. It is significant that the assessee-firm invested very little of its own
money in the purchase of the factory and the stores. It got six months' time
from the Government of India to pay the price in instalments, and paid it by
pledging its shares with the banks, by obtaining further loans from the banks or
overdrafts, and by selling portions of the factory to the Asbestos Co. and
Laminated Products, and the Allwyn Co. The balance-sheet of the assessee-firm as
on 31st September, 1948, disclosed that the assessee-firm owed about Rs. 7 lakhs
to Government of India, though by that time it had sold properties valued over
Rs. 30 lakhs. It is a significant circumstance that on 23rd December, 1946, a
meeting of the board of directors of the Asbestos Co. was held and in that
meeting a resolution was passed that the Government should be approached in the
matter of the valuation of the site and building in the establishment of the
"Asbestos Works" in the premises of the Brengun Factory purchased by
the assessee-firm and that the managing agents be authorised to address Nawab
Medhi Nawaz Jung Bahadur in that behalf. The notice convening the meeting was
issued on the 23rd December, 1946, on which date the assessee-firm had not even
intimated their acceptance of offer made by the Government of India for the sale
of Brengun Factory. Pursua
