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PETITIONER: KARAM CHAND THAPAR & BROS. (P) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, (CENTRAL)CALCUTTA

DATE OF JUDGMENT: 20/02/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. GROVER, A.N. RAMASWAMI, V. GROVER, A.N.

CITATION:  1969 AIR 1241            1969 SCR  (3) 796  1969 SCC  (1) 616

ACT: Income  Tax-Single transaction of sale resulting in  profit- When  such profit should be deemed to be revenue  liable  to tax-income-tax  Act (11 of 1922), s. 24(1) and  (2)-Sale  in one   accounting  year  and  settlement  of  price  in   the succeeding year-Sale resulting in cessation of business  and in loss-Assessment proceedings for the latter year--lf  loss an allowable deduction under s. 24(1).

HEADNOTE: The  assessee-company was carrying on the business  of  coal mining  and  of a Dry Ice Factory, in  addition  to  various other kinds of business.  It obtained a prospecting licence, and  after prospecting for coal sold it within a short  time of its acquisition and thereby earned profits in the accoun- ting years 1948-49 and 1949-50.  It sold the Ice Factory  in 1948.   Though  the  purchaser took possession  of  the  ice factory  in 1948, the price was finally settled in  December 1949.  By that sale the assessee-company suffered a loss. The  assessee claimed (1) that the ’profits were gains of  a capital nature and hence not liable to tax; and (2) that the loss  was deductible from its income in the assessment  year 1950-51. (1)  The  department, Tribunal and High Court held that  the profits  from  the sale of colliery were in  the  nature  of revenue and were liable to tax under the Income Tax Act,  in the two corresponding assessment years, namely, 1949-50  and 1950-51; and (2)  It  was held that loss in the ice  factory  transaction was  suffered in the accounting year 1948-49 and  assessee’s claim could be sustained only under s. 24(2), of the  Income tax  Act, 1922, but that the subsection was not  applicable, because,   the   business  ceased  completely   before   the commencement  of  the  following  accounting  year   1949-50 (assessment year 1950-51). In appeal to this Court, HELD : (1) Where a person disposes of a part or the whole of his  assets  the general ’rule is that the  mere  change  or

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realization  of an investment does not attract liability  to income tax, but, where such a realisation is an act which in itself  is a trading transaction, profit earned by  sale  or conversion  is taxable.  In determining whether the gain  is realization of a mere enhancement of value (capital gain) or is again made in an operation of business in carrying out  a scheme  for profit-making (revenue) no uniform rule  can  be evolved.  Though a transaction is an isolated one, it may be intimately related to the normal business of the  tax-payer. in such a case, the profit arising from the transaction will be out of the tax payer’s business and will be assessable as business profits. [799 C-D.  F) 800 B-C] Prospecting of coal was a part of the mining business  which the assessee was carrying on.  Therefore, the transaction of prospecting, developing and selling the colliery was one  in the nature of business.                             797 Hence,  the profit arising from the sale, though it  was  an isolated  transaction,  was  in the nature  of  revenue  and liable to tax. [801 F-H] Janki  Ram  Bahadur Ram v. Commissioner  of  Income-tax,  57 I.T.R. 21, 25(S.C.), followed. Commissioner  of Taxes v. Melbourne Trust Ltd.  [1914]  A.C. 1001, 1010 (P.C.), Californian Copper Syndicate (Limited and Reduced)  V.  Harris (Surveyor of Taxes) 5  T.C.  159,  166, Imperial  Tobacco  Co. v. Kelly, 25 T.C. 292, Beynon  &  Co. Ltd.  v. Ogg (Surveyor of Taxes) 7 T.C. 125  and  Gloucester Railway  Carriage  and Wagon Co. Ltd.  v.  Commissioners  of inland Revenue, 12 T.C. 720, referred to. (2)  By s. 24(1) the loss or profits or gains suffered under any  head in any year was liable to be set off in that  year against  the income, profits or gains under any other  head; but  by  S. 24(2) where the loss suffered in  any  business, profession  or  vocation could not be wholly set  off  under sub-s. (1) the loss not so set off has to be carried forward to  the following year and set off against the  profits  and gains of the same business in the subsequent year.  L802  F- G] In  the  present case, loss was suffered in  the  accounting year  1949-50 when the price was settled and not in  1948-49 when  the  sale took place.  Therefore, under s.  24(1)  the loss  was  allowable  against the  business  income  of  the assessee  for  the  accounting year  1949-50,  that  is,  in proceedings for the assessment year 1950-51. [803 A-B]

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  1594  and 1595 of 1968. Appeals from the judgment and order dated August 29, 1963 of the  Calcutta High Court in Income Tax Reference No.  38  of 1960. Sachin  Chaudhuri, T. A. Ramachandran and D. N.  Gupta,  the appellant (in both the appeals). D. Narsaraju, S. K. Aiyar, R. N. Sachthey and B. D. Sharma for  the respondent (in both the appeals). The Judgment of the Court was delivered by Shah, J. In respect of assessment years 1949-50 and  1950-51 the  Income-tax  Appellate Tribunal referred five  questions to  the High Court of Calcutta under s. 66(1) of the  Indian Income-tax  Act, 1922.  Three of those questions  which  are canvassed in these appeals need be set out :                          Assessment year 1949-50               "(1)   Whether  on  the  facts  and   in   the

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             circumstances  of  the case, the  sum  of  Rs.               51,550/- was A profit in the nature of revenue               and  therefore liable to tax under the  Indian               Income-tax Act ?"                          Assessment year 1950-51               "(3)   Whether,  on  the  facts  and  in   the               circumstances  of  the case, the  sum  of  Rs.               8,756/- was a profit               798               in  the nature of revenue ’and was subject  to               tax under the Indian Income-tax Act ?               (4)   Whether,   on  the  facts  and  in   the               circumstances  of  the case, the loss  of  Rs.               34,891/- was allowable as a deduction  against               the  business income of the assessee  for  the               assessment year 1950-51?" The  appellant--a  limited Company  incorporated  under  the Indian Companies Act, 1913--carries on business as  managing agents,  dealers  in shares and stocks,  stores and  spare parts  of  machinery  and  acts  as  insurance  agents   and manufacturers of carbon dioxide.  It also works certain coal mines.  The Company obtained a prospecting licence from  the State of Korea for the Chirimiri Colliery in 1944 and  after prospecting for coal sold the colliery, and thereby earned a profit  of  Rs. 51,550 in the account year 1948-49  and  Rs. 8,756  in the account year 1949-50.  The Income-tax  Officer brought the profits arising out of the sale of the  colliery to  tax  as business profits.  The order  was  confirmed  in appeal  by  the  Appellate Assistant  Commissioner  and  the Income-tax Appellate Tribunal. The  Company  conducted a Dry Ice Factory  at  Lahore.   The factory  was  sold in September 1948  to  the  Indo-Pakistan Corporation  Ltd.   The purchaser took over the  factory  on October  1,  1948,  but the price  was  finally  settled  in December, 1949.  By the sale the Company suffered a loss  of Rs.  34,891.  The Company claimed to deduct this  loss  from its income assessable to tax in the assessment year 1950-51. The Income-tax Officer disallowed, the claim.  The Appellate Assistant  Commissioner  agreed  with  that  view,  and  the Tribunal confirmed the order.               In  answering  questions (1) &  (3)  the  High               Court observed               "The   Chirimiri  Colliery  was   sold   after               prospecting  and  proving coal.  The  sale  in               such  ’a  case  was  a  part  of  the  trading               activities of the assessee- and such  activity               could be gathered from the surrounding circum-               stances  as also from the manner in  which  it               was  sold, that is, within a very  short  time               after  its acquisition and after it  was  made               fit for obtaining a reasonably higher price at               the sale........ The profit thus acquired can-               not be treated as a capital asset."               In  answering  question  (4)  the  High  Court               observed               "The  loss  of  Rs. 34,891  sustained  by  the               assessee after the sale of Dry Ice Factory  at               Lahore in September 1948 cannot be treated  as               a  loss of the business of sale,  inasmuch  as               the Tribunal found as a fact that the loss not               having occurred in the relevant accounting                                    799               year,  was  referable to  the  transaction  of               business  during a period when  the  business               completely  ceased before the commencement  of

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             the accounting year. Counsel  for  the Company urges that  prospecting  for  coal under  a licence obtained from the State of Korea  was  not, part  of the business operations of the Company and that  by selling the rights in the mine, the Company disposed of  its assets and made gains of a capital nature.  In any event, it was urged, this was a single transaction and in the  absence of  evidence  that the Company carried on  the  business  of obtaining  prospecting licences and of selling the mines  if "coal  was  proved", the profit arising out of sale  of  the mine which was a capital asset acquired by that  transaction was not taxable. Where a person disposes of a part or the whole of his assets the  general rule is that the mere change or realisation  of an  investment does not attract liability to income-tax  but where  such  a realisation is an act which in  itself  is  a trading transaction, profit earned by sale or conversion  is taxable  : Commissioner of Taxes v. Melbourne Trust  Ltd.(1) The  cases  which illustrate this distinction  fall  broadly into  two  categories-those where the sales formed  part  of trading   activity,  and,  those  in  which  the   sale   or realisation  was  not  an act of trading.   As  observed  in Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) (2) the test is--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 an operation of  business in carrying out a scheme for profit-making ?" In  determining whether the gain is realization of mere  en- hancement  of  value or is a gain made in  an  operation  of business  in  carrying out a scheme  for  profit-making,  do uniform rule ran be evolved.  It was observed by this  Court in Janki Ram Bahadur Ram v. Commissioner of Income-tax(3) :               "........   no   single  fact   has   decisive               significance,  and  the  question  whether   a               transaction  is an adventure in the nature  of               trade  must depend upon the collective  effect               of  all the relevant materials brought on  the               record.  But general criteria indicating  that               certain  facts have dominant  significance  in               the  context of other facts have been  adopted               in  the  decided cases. if,  for  instance,  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.               (1)   [1914] A.C. 1001, 1010 (P.C.)               (2) 5 T.C. 159,166.                (3) 57 I.T.R. 21, 25.               800               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.   Magnitude of the transaction  of  pur-               chase, the nature of the commodity, subsequent               dealings  and  the manner of disposal  may  be               such that the transaction may be stamped  with               the character of a trading venture: . . . . " A  transaction of sale may in a given case be isolated :  in another it may be intimately related to the normal  business of the tax-payer.  In the latter class profit arising  from the  transaction will probably arise out of the  tax-payer’s business  and will be assessable as business  profits.   An instructive  case of this class is Imperial Tobacco Co.  (of

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Great  Britain and Ireland) Ltd. v. Kelly(1).  In that  case the Company carried on the business of tobacco  manufacture, for which large quantities of tobacco leaf were purchased in the  United  States, where the Company  maintained  a  large buying  Organisation.   To  finance the  purchases  and  the expenses of this Organisation the Company bought dollars  in the United Kingdom through its bankers who remitted them  to the  banking accounts of the Company in the  United  States, and it was the practice of the Company to accumulate a large holding  of  dollars  each  year  before  the  leaf   season commenced.  The Company never bought dollars for the purpose of  resale  as a speculation.  On the outbreak  of  war,  in September 1939. the appellant Company, at the request of the Treasury,  stopped all further purchases of tobacco leaf  in the  United  States, and, as a result, the  Company  had  on hand, a holding of dollars accumulated between January  and August,  1939.   On  September 30,  1939,  the  Company  was ordered  under the Defence (Finance) Regulations,  1939,  to sell its surplus dollars to the Treasury, and, owing to  the rise in the rate of exchange, the sale resulted in a  profit to the Company.  It was held by the Court of Appeal that the profit  was  liable to be included as profits of  its  trade under  Sch.   D Case 1. The tax-payer was  not  carrying  on business  in dollars, but the transactions in  dollars  were intimately  related  to  their principal  business  and  the profits  earned by sale of dollars were treated  as  profits taxable as business profits. In T. Beynon & Co. Limited V. Ogg (Surveyor of TaxeS(2)  the tax-payer  carrying on business as Coal Merchants, Ship  and Insurance  Brokers,  and as sole selling agent  for  various Colliery Companies, in which latter capacity it was part  of its duty to purchase wagons on behalf of its clients, bought a  large  number  of wagons on his  own  account  with  the intention of reselling them (1) 25 T. C. 292. (2) 7 T. C. 125.                             801 at  profit.   The  contention  of  the  tax-payer  that  the transaction  being  an isolated one, the profit was  in  the nature-of  a  capital  profit  on  the  realisation  of   an investment  was  negatived.  The profits  realised  in  this transaction  were held to result from the operation  of  the Company’s   business   and  properly   includable   in   the computation  of the Company’s profits for  assessment  under Sch.   D. In Gloucester Railway Carriage and Wagon Co.  Ltd. v.  The  Commissioners of Inland  Revenue(1)  the  tax-payer carried on the business of manufacturing wagons for sale  or hire.   The  tax-payer sold some of the  wagons  which  were formerly hired out.  The tax-payer contended that the profit realized by sale was an isolated transaction resulting in  a capital profit.  The House of Lords held that the  "business was  all one’, namely, to make profit out of wagons  and  on that  account  the profits realized by sale of  wagons  were taxable. The  Tribunal  in the present case  recorded  the  following findings :                "It  is no doubt true that this was a  single               transaction’   But   we  were  told   by   the               assessee’s counsel that the    assessee               obtained prospecting licence in the  colliery,               developed  the  colliery and  then  sold  out.               What   was  the  purpose  of   obtaining   the               prospecting  licence has not been told to  us.               The assessee was carrying on business of  coal               mining.  The prospecting of coal is a part  of

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             the  coal mining business.  Therefore, in  our               opinion,   the  transaction  of   prospecting,               developing  and  selling  the  colliery  is  a               transaction  in  the  nature  of  a  business.               Therefore,  the profit arising from the  sale               is  a profit in the nature of revenue and  has               been rightly brought to tax." Our  task  would  have been lightened if  the  Tribunal  had stated  the  findings in greater detail.   Nevertheless  the Tribunal  has  found that the Company was  carrying  on  the business, of coal mining and prospecting of coal was a  part of  the  coal  mining  business  and  on  that  account  the transaction  of  prospecting,  developing  and  selling  the colliery was a transaction in the nature of a business.   On the  findings recorded by the Tribunal it follows  that  the prospecting  for,  coal  being a part  of  the  coal  mining business, the income was properly regarded as taxable.   The answer  recorded  by the High Court on questions (1)  &  (3) must be upheld. Turning to the fourth question : the sale transaction of the Dry  Ice Factory, was completed on October 1, 1948, but  the price  was  finally  settled  in  December  1949.   In   the settlement, the Company suffered a loss of Rs. 34,891.   The loss was suffered in the (1)  12 T. C. 720. 802 business transaction and the only dispute raised before  the Tribunal related to the year in which the loss was liable to be taken into account.  The Tribunal disallowed the loss  in the assessment of income for the year 1950-51.  The Tribunal held  that  the  business of the Dry  Ice  Factory  was  not carried on in the year of account April 1, 1949 to March 31, 1950,  and on that account the loss was hot admissible as  a permissible deduction in computing the taxable income of the Company  for  the assessment year 1950-51.  The  High  Court agreed  with the Tribunal.  In our judgment, the High  Court was in error in holding that the loss was not a  permissible deduction. Section 24 of the Income-tax Act, 1922, in the relevant year of assessment read as follows :               "(1)  Where  any assessee sustains a  loss  of               profits or gains in any year under any of  the               heads  mentioned  in section 6,  he  shall  be               entitled  to have the amount of the  loss  set               off against as income, profits or gains  under                             any other head in that year               Provided that               (2)   Where  any assessee sustains a  loss  of               profits or gains in any year, being a previous               year  not earlier than the previous  year  for               the assessment for the year ending on the 31st               day of March, 1940, under the head profits  of               business, profession or vocation, and the loss               cannot be wholly set off under sub-section (1)               the  portion not so set off shall  be  carried               forward  to  the following year and  set  off               against  the profits or gains, if any, of  the               assessee from the same business, profession or               vocation for that year               Provided that By sub-s. ( 1 ) the loss or profits or gains suffered  under any  head in any year was liable to be set off  against  the income, profits or gains under any other head, and by sub-s. (2)  where the loss suffered in any business, profession  or vocation could not be wholly set off under sub-s. ( 1 )  the

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loss  not  so  set  off had to be  carried  forward  to  the following year and set off against the profits and gains of the same business in the subsequent years.  The Tribunal and the High Court applied sub-s. (2) of s. 24 in computing  the taxable income of the Company for the assessment year  1950- 51.   But  in so proceeding, in our judgment, they  were  in error.  The business of Dry Ice Factory was sold in October, 1948.   We  will  assume that the Dry  Ice  Factory  was  ’a separate  business of the Company and was not a part of  the other business carried on by the Company.  But the price for which  the business was sold was settled in  December  1949. Until the price was 803 settled,  loss did not accrue or arise to the Company.   The loss  was suffered in the account year 1949-50 and could  be allowed against the income of that year under S. 24(1).  The assumption  that the loss was suffered in the previous  year i.e., 1948-49 was, in our judgment, not warranted.  The case was plainly governed by sub-s. (1) of s. 24.  The answer  to the  fourth  question  recorded by the High  Court  must  be discharged. The  answers  to questions (1) & (3) recorded  by  the  High Court  are affirmed.  Question (4) Will be answered  in  the affirmative  and in favour of the Company.  In view  of  the divided success, there will be no order as to costs in  this Court.   The  order  as  to  costs  in  the  High  Court  is maintained. V.P.S.                    Appeals allowed in part. M11 Sup.  CI/69-2 804