http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 24  

PETITIONER: G.     VENKATASWAMI NAIDU & CO.

       Vs.

RESPONDENT: THE COMM1SSIONER OF INCOME-TAX

DATE OF JUDGMENT: 24/11/1958

BENCH: GAJENDRAGADKAR, P.B. BENCH: GAJENDRAGADKAR, P.B. AIYYAR, T.L. VENKATARAMA SARKAR, A.K.

CITATION:  1959 AIR  359            1959 SCR  Supl. (1) 646  CITATOR INFO :  F          1959 SC1252  (7,9,14,15)  RF         1961 SC1062  (7)  R          1962 SC1141  (6)  R          1962 SC1267  (14)  R          1965 SC1898  (9)  R          1968 SC 683  (9)  F          1968 SC 788  (5,7)  F          1968 SC 811  (3)  R          1969 SC 460  (6)  RF         1969 SC1053  (4)  R          1970 SC1560  (9)  R          1971 SC 794  (12)  RF         1975 SC2106  (11,16)  R          1976 SC2150  (3,7,10)  RF         1986 SC1695  (21)

ACT: Income Tax-Income from isolated transactions--" Adventure in the nature of trade "-Business income-Indian Income Tax Act, 1922 (XI Of 1922), SS. 2(4), 10. Reference  to  High  Court-Transaction, whether  or  not  an adventure  in the nature of trade-Mixed question of law  and fact-Indian-Income-tax Act,1922 (XI of 1922),s.66(1)

HEADNOTE: The appellant, who was a firm acting as managing agents of a limited  company (the Mills), purchased four plots  of  land adjoining the Mills on various dates between 1941 and  1942, and  about  five years later sold them to the  Mills,  as  a result. of which the appellant realised a sum of Rs.  43,887 in  excess of the purchase price, For the  assessment  year. 1948-49  the  Income tax Officer treated the amount  as  the income.  of  the appellant ’and assessed  it  to  income-tax under  head  ’business’,  on the ground that  there  was  no evidence  to show that the appellant had purchased the  said lands  for agricultural purposes or that they were  acquired as  an investment, and, that since the lands: were  adjacent to the Mills the appellant must have- purchased them  solely with  a view to sell them to the Mills; with.  profit.   ’He considered that the transaction’ had---;ill the elements  of a  business transaction’ and was thus an adventure  in  the,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 24  

natural of ’trade within s. 2(4)of the Indian Income-tax Act 7 The Appellate, Tribunal rejected the explanation given  by the  appellate  ’regarding" the object with  which   it  had purchased the plots of land agreed 641 with  the  view  taken by the Income-tax  Officer.   At  the instance of the appellant the Tribunal referred to the  High Court  the  question: " whether there was material  for  the assessment  of the sum of.  Rs. 43 87 being  the  difference between  the  purchase and sale price of the four  plots  of land  as income from all adventure in the nature  of  trade. The High Court held that’ the transaction in question was an adventure  in  the  nature of trade and  so  the  income-tax authorities  were justified in taxing the amount  under  the head ’business’ for the relevant year.  On appeal by special leave  to  the  Supreme Court, it was  contend  ed  for  the appellant that on the facts and circumstances of the case it was  erroneous  in  law to hold  that  the  transaction  ill question  was an adventure in the nature of trade.   On  the other  hand,  it  was  urged for  the  respondent  that  the question as raised before the High Court was one of fact not liable to be challenged under s. 66(1) of the Act. Held,  (1) that the expression " adventure in the nature  of trade " in sub-s. (4) Of S. 2 of the Indian Income-tax  Act, 1922,  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  a question  as  to  whether  a transaction is  or  is  not  an adventure  in  the nature of trade, before arriving  at  its final  conclusion  on facts, has to address  itself  to  the legal  requirements associated with the concept of trade  or business.  Such a question is one of mixed law and fact  and the   decision   of  the  tribunal  thereon   is   open   to consideration under s. 66(1) of the Act. Meenakshi  Mills,  Madurai v.  Commissioner  of  Income-tax, Madras, [1956] S.C.R. 691 and Oriental Investment Co.,  Ltd. v.  Commissioner  of Income-tax, Bombay, [1958]  S.C.R.  49, relied on. Edwards v. Bairstow [1956] A.C. 14, considered and held  not inconsistent with the above said decisions. 2)   that in the circumstances of this case it would be more appropriate  to frame the question in this from: "  whether, on  the  facts  and circumstances proved in  the  case,  the inference  that the transaction in question is an  adventure in the nature of trade is in law justified." Held,  further, that even an isolated transaction  might  be regarded  as an adventure in the nature of trade  within  S. 2(4)  Of  the  Act, if it is characterised by  some  of  the essential features that make up trade or business. Though  judicial decisions which deal with the character  of transactions  alleged  to be in the nature of trade  do  not purport  to  lay  down any general or  universal  test,  the presence  of  all  the  relevant  circumstances,   mentioned by..them my 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; it is the total effect of all the  relevant factors and circumstances that  determine  the distinctive character of the transactions 648 If  a  person invests money in land intending  to  hold  it, enjoys  its  income for some time, and then sells  it  at  a profit,then it is a case of capital accretion and not profit derived from an adventure in the nature of trade.  But where a  purchase  has been made solely and exclusively  with  the intention  to  resell at a profit and the purchaser  had  no

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 24  

intention  of holding the property for himself or  otherwise enjoying  or using it, there would be a  strong  presumption that the transaction is an adventure in the nature of trade; but this may be rebutted by the other facts or circumstances of the case. The  Californian Copper Syndicate (Limited and  Reduced)  v. Harris (Surveyor of Taxes), (1904) 5 Tax Cas. 159; T. Beynon JUDGMENT: lnland Revenue v. Livingston, (1926) 11 Tax Cas. 538; Martin v.  Lowry, (1926) 11 Tax Cas 297; Rutledge v.  Commissioners of  Inland Revenue, (1929) 14 Tax Cas. 490;  Balgownie  Land Trust,  Ltd. v. The Commissioners of Inland Revenue,  (1929) 14 Tax Cas. 684; F. A. Lindsay, A. E. Woodward and W. Hiscox v.  Commissioners of Inland Revenue, (1932) 18 Tax  Cas.  43 and Cayzer, Irvine and Co., Ltd. v. Commissioners of  Inland Revenue, (1942) 24 Tax Cas. 491, considered. Commissioners  of Inland Revenue v. Reinhold, (1953) 34  Tax Cas.  389, distinguished and considered as not  laying  down any general proposition of law. In  the  present  case, the circumstances  showed  that  the appellant whose ordinary business was not to make investment in  lands  had  purchased the plots of land  with  the  sole intention of selling them to the Mills at a profit and  this intention raised a strong presumption that the purchase  and the  subsequent  sale  were an adventure in  the  nature  of trade; and, it was held that in the absence of any rebutting evidence,  the  Income-tax  authorities  were  justified  in taxing the amount in question as income from business.

& Civil APPELLATE JURISDICTION: Civil Appeal No. 709 of 1957. Appeal  by special leave from the judgment and  order  dated April  18, 1955, of the Madras High Court in  Case  Referred No. 25 of 1952. A.   V.  Viswanatha  Sastri  and M. S. K.  Sastri,  for  the appellant. "M.   C. Setalvad, Attorney-General for India, R,  Ganapathy Iyer, R. H. Dhebar and D.  Gupta, for the respondent. 1958.  November.24. The Judgment of the Court was  delivered by                     649 GAJENDRAGADKAR,  J.-The  appellant  is  a  firm  acting   as managing agents of the Janardana Mills Ltd., Coimbatore.  It purchased four contiguous plots of land admeasuring 5  acres 26 cents under four sale deeds executed on October 25, 1941, November  15,  1941, June 29, 1942, and November  19,  1942, respectively  for a total consideration of  Rs.  8,712-15-6. After  about  five years these properties were sold  by  the appellant in two lots to the Janardana Mills Ltd.  The first lot  was  sold  on  September 1, 1947,  and  the  second  on November 10, 1947, the total consideration for the two sales being  Rs.  52,600.   These  two  sales  realised  for   the appellant  a sum of Rs.43,887-0-6 in excess of the  purchase price. The Income-tax Officer treated the said amount of Rs. 43,887 as the income of the appellant for the assessment year 1948- 49, and assessed it to income-tax under the head "  business ". The officer held that there was no evidence to show  that the appellant had purchased the said lands for  agricultural purposes or that it had acquired them as an investment.   He also found that, since the lands were adjacent to the Janar- dana  Mills, the appellant must have purchased  them  solely

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 24  

with  a view to sell them to the said mills with  a  profit. That  is why, though the transaction was in the nature of  a solitary  transaction,  it  was held that  it  had  all  the elements of a business transaction and was thus an adventure in the nature of trade. Against this order of assessment the appellant preferred  an appeal   to  the  Appellate  Assistant  Commissioner.    The appellate  authority upheld the appellant’s contention  that the  amount in question was not assessable as it  cannot  be hold  to be income or profit resulting from a  profit-making scheme, and set aside the order under appeal. The  respondent challenged the correctness of this order  by taking  an  appeal  against it to  the  Incometax  Appellate Tribunal.   The tribunal agreed with the view taken  by  the Income-tax Officer and held that the amount in question  was not  a capital accretion but a gain made in an adventure  in the nature of business 82 650 in  carrying  out a scheme of profit-making.   The  tribunal rejected  the explanations given by the appellant as to  why it  had purchased the properties and held that the  purchase had  been made by the appellant solely with a view  to  sell the said properties at profit to the Janardana Mills. At the instance of the appellant the tribunal then  referred to the High Court of Madras the question suggested by it  in these words: " whether there was material for the assessment of  the sum of Rs. 43,887 being the difference  between  the purchase and sale price of the four plots of land as  income from an adventure in the nature of trade ". This  reference  was  heard by  Rajagopalan  and  Rajagopala Ayyangar,  JJ., and the question referred has been  answered against  the  appellant.  The High Court has held  that  the transaction  in question was an adventure in the  nature  of trade  and  so the respondent was justified  in  taxing  the amount  in  question  under the head " business  "  for  the relevant  year.   The  application for  leave  made  by  the appellant  was  rejected by the High Court.   Thereupon  the appellant applied for, and obtained, special leave to appeal to this Court.  That is how the appeal has been admitted  in this  Court ; and the only question which it raises for  our decision is whether the High Court was right in holding that the  transaction in question was an adventure in the  nature of trade. We may at this stage brie y indicate the material facts  and circumstances found by the tribunal and the inference  drawn by  it  in  regard to the character of  the  transaction  in question.  The appellant purchased the four plots under four different  -sale deeds.  The first purchase was for Rs.  521 and  it covered a piece of land admeasuring 281  cents;  the second  purchase related to 2 acres 791 cents and the  price paid was Rs. 1,250; while the third and the fourth purchases were  for  Rs. 1,942 and Rs. 5,000 and they covered  28  1/4 cents  and 1 acre and 90 cents respectively.   The  property purchased under the first sale deed was sold on November 10, 1947,  for Rs. 2,825 whereas the three remaining  properties were sold on September 1, 1947,                     651 for  Rs.  49,775,  the purchaser in  both  cases  being  the Janardana  Mills  Ltd.  The purchase of the  first  item  of property  by the appellant had been made in the name of  Mr. V.  G. Raja, assistant manager of the Janardana Mills  Ltd., who  is the son-in-law Of G. Venkataswami Naidu, one of  the partners  of  the  appellant  firm.   Naturally  when   this property was sold to the mills the document was executed  by

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 24  

the  ostensible owner V. G. Raja.  It is not  disputed  that the  purchase in the name of V. G. Raja was benami  for  the appellant.   All the plots which were thus purchased by  the appellant  piecemeal  are  contiguous and  they  adjoin  the mills.  On the plot purchased on June 29, 1942, there  stood a  house of six rooms which fetched an annual rent of  about Rs. 100; and after deduction of taxes, it left a net  income of  Rs. 80 per year to the appellant.  The other  plots  are vacant  sites and they brought no income to  the  appellant. During  the  time that the appellant was  in  possession  of these  plots it made no effort to put up any  structures  on them or to cultivate them; and so it was clear that the only object  with which the appellant had purchased  these  plots was to sell them to the mills at a profit.  It was, however, urged  by the appellant that the properties had been  bought as  an investment.  This plea was rejected by the  tribunal. The tribunal likewise rejected the appellant’s case that  it had  purchased  the  plots for building  tenements  for  the labourers working in the Janardana Mills.  Alternatively  it was urged by the appellant that the Janardana Mills  decided to  purchase  the  plots  because’ an  award  passed  by  an industrial  tribunal in June 1947 had recommended  that  the mills should provide tenements for its labourers.  Thus  the appellant’s   case  was  that  it  had  not  purchased   the properties  with  a view to sell them to the mills  and  the mills  in  fact would not have purchased them  but  for  the recommendation made by the award which made it necessary for the mills to purchase the adjoining plots for the purpose of building tenements for its employees.  The tribunal was  not impressed even by this plea; and so it ultimately held  that the  plots  had been purchased by the appellant  wholly  and solely, 652 with  the idea of selling them at profit to the mills.   The tribunal  thought that since the appellant was the  managing agent  of  the mills it was in a position to  influence  the decision of the mills to purchase the properties from it and that  was  the sole basis for its initial  purchase  of  the plots.    On  these  findings  the  tribunal   reached   the conclusion  that  the sum of Rs. 43,887 was  not  a  capital accretion but was a gain made in the adventure in the nature of  business  in carrying out the scheme  of  profit-making. The appellant contends that, on the facts and  circumstances found  in the cage, it is erroneous in law to hold that  the transaction  in  question is an adventure in the  nature  of trade. There  is  no doubt that the jurisdiction conferred  on  the High Court by s. 66(1) is limited to entertaining references involving  questions  of  law.   If  the  point  raised   on reference relates to the construction of a document of title or  to the interpretation of the relevant provisions of  the statute,  it is a pure question of law; and in dealing  with it,  though the High Court may have due regard for the  view taken by the tribunal, its decision would not be fettered by the said view.  It is free to adopt such construction of the document  or  the statute as appears to it  reasonable.   In some  cases, the point sought to be raised on reference  may turn  out to be a pure question of fact; and if that be  so, the  finding  of  fact  recorded by  the  tribunal  must  be regarded  as conclusive in proceedings under s. 66(1).   If, however,  such  a finding of fact is based on  an  inference drawn  from primary evidentiary facts proved. in  the  case, its  correctness  or  validity  is  open  to  challenge   in reference proceedings within narrow limits.  The assessee or the revenue can contend that the inference has been drawn on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 24  

considering   inadmissible  evidence  or   after   excluding admissible and relevant evidence; and, if the High Court  is satisfied  that  the  inference is the  result  of  improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion.  It may also be open to the party to challenge a conclusion of fact drawn by the  tribunal on the ground that it is not supported by  any legal evidence; or that the impugned conclusion drawn                     653 from  the relevant facts is not rationally possible; and  if such  a plea is established, the court may consider  whether the  conclusion in question is not perverse and should  not, therefore,  be set aside.  It is within these narrow  limits that the conclusions of fact recorded by the tribunal can be challenged  under s. 66(1).  Such conclusions can  never  be challenged   on  the  ground,,,  that  they  are  based   on misappreciation of evidence.  There is yet a third class  of cases  in  which  the assessee or the revenue  may  seek  to challenge  the correctness of the conclusion reached by  the tribunal on the ground that it is a conclusion on a question of mixed law and fact.  Such a conclusion is no doubt  based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal  principles. The  need  to apply the relevant legal principles  tends  to confer  upon the final conclusion its character of  a  legal conclusion and that is why it is regarded as a conclusion on a question of mixed law and fact.  In dealing with  findings on  questions of mixed law and fact the High Court would  no doubt  have  to accept the findings of the tribunal  on  the primary questions of fact; but it is open to the High  Court to  examine  whether the tribunal had applied  the  relevant legal  principles correctly or not; and in that  sense,  the scope  of enquiry and the extent of the jurisdiction of  the High  Court  in dealing with such points is the same  as  in dealing with pure points of law. This question has been exhaustively considered by this Court in  Meenakshi Mills, Madurai v. Commissioner of  Income-tax, Madras (1).  In this case the appellate tribunal had come to the  conclusion that certain sales entered in the  books  of the   appellant   company   in   the   names   of    certain intermediaries, firms and companies, were fictitious and the profits ostensibly earned by them were in fact earned by the appellant  which  had  itself sold the  goods  to  the  real purchasers  and  received the prices.  On this  finding  the tribunal  had  ordered that the profits received  from  such sales should be added to the amount shown as profits in  the appellant’s books and should be taxed.  The appellant 654 applied  for a reference to the tribunal under s. 66(1)  and the High Court of Madras under s. 66(2), but his application was  rejected.  Then it came to this Court by special  leave under  Art.  136  and it was urged on its  behalf  that  the tribunal  had  erred in law in holding that  the  firms  and companies   described   as  the  intermediaries   were   its benamidars  and that its application -for  reference  should have  been  allowed.  This plea was rejected by  this  Court because it was held that the question of benami is purely  a question of fact and not a mixed question of law and fact as it does not involve the application of any legal  principles for  its determination.  In dealing with the argument  urged by  the appellant, this Court has fully considered the  true legal  position  in  regard to the limitation  of  the  High Court’s  jurisdiction  in entertaining references  under  s. 66(1) in the light of several judicial decisions bearing  on the point.  The ultimate decision of the Court on this  part

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 24  

of  the  case  was  that  "  on  principles  established  by authorities  only  such questions as relate to  one  or  the other of the following matters can be questions of law under s. 66(1): (1) the construction of a statute or a document of title  (2)  the legal effect of the facts  found  where  the point for determination is a mixed question of law and fact; and  (3)  a  finding  of fact  unsupported  by  evidence  or unreasonable and perverse in nature ". Having regard to this legal  position this Court held that the question of  benami was  a  pure question of fact and it could not  be  agitated under s. 66(1). The point about the scope and effect of the provisions of s. 66(1)has again been considered by this Court in The Oriental Investment Co. Ltd. v. Commissioner of Income-tax, Bombay(1) This was a case on the other side of the line.  It was  held that whether the appellant’s business amounted to dealing in shares  and properties or to investment is a mixed  question of law and fact and that the legal effect of the facts found by the tribunal as a result of which the appellant could  be treated as a dealer or investor is a question of law.  As  a result of this conclusion the appeal (1)  [1958] S. C. R. 49.                     655 preferred by the appellant was allowed, the order passed  by the   High  Court  refusing  the  appellant’s  request   for reference was set aside and the case was remitted to it  for directing the tribunal to state a case, on the two questions mentioned  in the judgment.’ These two decisions  bring  out clearly  the  distinction  between  findings  of  fact   and findings of mixed questions of law and fact. What then is the nature of the question raised before us  in the  present appeal ? The tribunal and the High  Court  have found  that the transaction in question is an  adventure  in the nature of trade; and it is the correctness of this  view that is challenged in the present appeal.  The expression  " adventure  in the nature of trade" is used by the Act in  s. 2, sub-s. (4) which defines business as including any trade, commerce or manufacture, or any adventure or concern in  the nature of trade, commerce or manufacture.  Under s. 10,  tax shall  be payable by an assessee under the head profits  and gains of business, profession or vocation in respect of  the profit  or  gains of any business,  profession  or  vocation carried  on by him.  Thus the appellant would be  liable  to pay  the tax on the relevant amount if it is held  that  the transaction  which  brought  him this  amount  was  business within the meaning of s. 2, sub-s. (4) and it can be said to be  business  of the appellant if it is held that it  is  an adventure  in  the  nature of trade.   In  other  words,  in reaching the conclusion that the transaction is an adventure in  the  nature of trade, the tribunal has to  find  primary evidentiary  facts  and  then  apply  the  legal  principles involved  in  the expression " adventure in  the  nature  of trade  "  used by s. 2, sub-s. (4).  It is patent  that  the clause  " in the nature of trade " postulates the  existence of  certain  elements in the adventure which  in  law  would invest  it  with the character of a trade or  business;  and that  would make the question and its decision one of  mixed law and fact.  This view has been incidentally expressed  by this  Court in the case of Meenakshi Mills, Madurai  (1)  in repelling the appellant’s argument based on the decision  of the (1)  [1956] S. C. R. 691. 656 House  of  Lords  in  Edwards  v.  Bairstow  (1).   For  the respondent,  the  learned  Attorney-General  has,   however,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 24  

relied  on  the fact that the relevant observations  in  the case  of  Meenakshi Mills, Madurai, are obiter  and  he  has invited our attention to the decision in the case of Edwards (1)  in support of his contention that the judgment  of  the House  of  Lords  would show that  the  question  about  the character  of  the transaction was ultimately treated  as  a question  of fact.  Before we refer to the said decision  it may be relevant to observe that there are two ways in  which the  question may be approached.  Even if the conclusion  of the  tribunal  about  the character of  the  transaction  is treated as a conclusion on a question of fact, it cannot  be ignored  that, in arriving at its final conclusion on  facts proved,  the tribunal has undoubtedly to address  itself  to the legal requirements associated with the concept of  trade or  business.   Without taking into  account  such  relevant legal principles it would not be possible to decide  whether the  transaction in question is or is not in the  nature  of trade.  If that be so, the final conclusion of the  tribunal can  be  challenged on the ground that  the  relevant  legal principles have been misapplied by the tribunal in  reaching its  decision  on the point; and such a challenge  would  be open under s. 66(1) because it is a challenge on a ground of law.  The same result is achieved from another point of view and that is to treat the final conclusion as one on a  mixed question  of law and fact.  On this view the  conclusion  is not  treated  as  one on a pure question of  fact,  and  its validity  is allowed to be impeached on the ground  that  it has  been  based  on  a misapplication  of  the  true  legal principles.  It would thus be seen that whether we call the. conclusion  in  question  as  one of fact or  as  one  on  a question  of  mixed law and fact, the application  of  legal -principles  which is an essential part in the  process  of- reaching the said conclusion is undoubtedly a matter of  law and  if  there has been an error in the application  of  the said  principles  it can be challenged as an error  of  law. The difference then is merely one of form and not substance; and on the whole it is (1)  [1956] A. C. 14; 36 Tax Cas. 207. 657 more convenient to describe the question involved as a mixed question  of  law and fact.  That is the view  expressed  by this Court in the case of Meenakshi Mills, Madurai (1); and, in  our  opinion,  it avoids any confusion  of  thought  and simplifies  the  position  by  treating  such  questions  as analogous  to those falling under the category of  questions of law. Let  us then consider whether the decision of the’ House  of Lords  in the case of Edwards(2) is inconsistent  with  this view.  In this case the respondents, who were respectively a director of a leather manufacturing company and an  employee of  a  spinning firm, purchased a complete  cotton  spinning plant  in 1946 with the object of selling it as  quickly  as possible  at a profit.  They hoped to sell the plant in  one lot,  but ultimately had to dispose of it in  five  separate lots  over the period from November 1946 to  February  1948. Assessments to income-tax in respect of profits arising from this  transaction were made under Case I of Schedule  D  for the  years 1946-47 and 1947-48.  On the matter  being  taken before the Chancery Division, it was held in accordance with the  earlier decisions of the Court of Appeal in  Cooper  v. Stubbs (3) and Leeming v. Jones (4) that the finding of  the General Commissioners was a finding of fact which could  not be  challenged  in appeal.  The attention of the  court  was drawn  to the different view expressed in a  Scottish  case, Commissioners  of  Inland Revenue v. Fraser  (5)  where  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 24  

Court  of Session had held that it was at liberty  to  treat the matter as a mixed question of fact and law, and in  fact it had overruled the finding of the General Commissioners in that behalf " It does not seem to me ", observed Upjohn, J., " that in this court I am at liberty to follow the  practice of  the Scottish Court, attractive though it would be to  do so,  if  the  matter  was  res  integra  ".  However,  since apparently the finding of the General Commissioners did  not appear  to  the  court to be satisfactory,  the  matter  was remitted  to  them  with  an  intimation  that  they  should consider (2)  [1956]A.C.14;36 Tax Cas. 207 (4)  (1930) 15 Tax Cas. 333 (1)  [1956)S.C.R. 691. (3)  (1925) To Tax Cas. 29. (5)  (1942) 24 Tax Cas. 498. 83 658 the  question  whether the transaction,  being  an  isolated transaction,  there  was nevertheless an  adventure  in  the nature of trade which was assessable to tax under Case 1  of Schedule D. The Commissioners were directed to hear  further arguments on this point before stating a supplementary case. After  remand,  the Commissioners adhered to  their  earlier view  and  stated  that  they  were  of  opinion  that   the transaction was an isolated case and not taxable and so they discharged  the  assessments.  With the  statement  of  this supplementary  case,  the  matter  was  argued  before   the Chancery Division again.  Wynn-Parry, J., who delivered  the judgment on this occasion referred to the earlier  decisions of the Court of Appeal and held that " on those  authorities prima  facie the matter is concluded by the decision of  the Commissioners  that the transaction, the  subject-matter  of the  case,  was not an adventure in the nature of  trade  ". Then  the learned judge examined the question as to  whether the  decision  of  the  Commissioners  can  be  said  to  be perverse;  and held that it could not be  so  characterised. In  the result the appeal was dismissed.  The question  then reached  the  Court of Appeal but the result was  the  same. The Court of Appeal observed that the earlier decisions were binding on it no less than the Court of First Instance ; and so  it held that the conclusion of the Commissioners  was  a finding of fact which the court cannot disturb.  However, it is  apparent  from the discussion that took place  when  the court granted leave to. the Crown to take the matter to  the House  of Lords that the court did not feel happy about  the correctness of the finding made by the General Commissioners in  the case.  That is how the matter reached the  House  of Lords. The  facts in this case were so clearly against the  finding of the Commissioners that Viscount Simonds made it clear  at the  outset  that  in  his opinion, "  what.  ever  test  is adopted,  that is, whether the finding that the  transaction was  not  an  adventure  in the nature of  trade  is  to  be regarded  as a pure finding of fact or as the  determination of  the question of law or of mixed law and fact,  the  same result would be reached in this 659 case.  The determination cannot stand.  This appeal must  be allowed  and the assessments must be confirmed".  It  is  in the  light of this emphatic statement that the rest  of  the judgment  of  Viscount  Simonds  must  be  considered.    He referred to the divergence of views expressed in English and Scottish  decisions and his conclusion was that " if and  so far  as  there is any,, divergence between the  English  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 24  

Scottish approach it is the former which is supported by the previous authority of this House to which reference has been made  "; but he analysed the position involved in  both  the approaches and held that the difference between them was not of  substance.  " To say that a transaction is or is not  an adventure  in  the  nature of  trade  ",  observed  Viscount Simonds,   "  is  to  say  that  it  has  or  has  not   the characteristics  which distinguish such an adventure but  it is   a  question  of  law  not  of  fact  what   are   those characteristics,  or,  in other words,  what  the  statutory language  means.  It follows that the inference can only  be regarded  as an inference of fact if it is assumed that  the Tribunal which makes it is rightly directed in law what  the characteristics  are  and that, I think, is  the  assumption that  is  made  ".  Dealing with the  merits  of  the  case, Viscount  Simonds observed that " sometimes, as in the  case as  it now comes before the Court where all the admitted  or found  facts  point one way and the inference is  the  other way,  it  can  only  be a  matter  of  conjecture  why  that inference  has been made.  In such a case it is easy  either to say that the Commissioners have made a wrong inference of fact  because they have misdirected themselves in law or  to take  a  short-cut  and  say that they  have  made  a  wrong inference  of law, and I venture to doubt whether  there  is more   than   this  in  the  divergence  between   the   two jurisdictions  which  has  so  much  agitated  the   Revenue authorities ". Lord Radcliffe substantially agreed with this view.  He also referred to the divergence of views expressed in  Scottish and English decisions and observed that  "  the true position of the Court in all these cases can be shortly stated.If  a  party to a hearing  before  the  Commissioners expresses dissatisfaction with their determination 660 as being erroneous in point of law,it is for them to state a case  and in the body of it to set out the facts  that  they have  found as well as their determination.  I do not  think that  inferences  drawn from other facts  are  incapable  of themselves  being findings of fact, although there is  value in  the  distinction between primary  facts  and  inferences drawn from them.  When -the case comes before the Court,  it is  its duty to examine the determination having  regard  to its  knowledge  of  the relevant law.  If  a  case  contains anything  ex facie which is bad in point of law  and  which’ bears upon the determination, it is obviously, erroneous  in point of law.  But, without any such misconception appearing ex  facie, it may be that the facts found are such  that  no persons acting judicially and properly instructed as to  the relevant  law  could have come to  the  determination  under appeal.In those circumstances,too, the Court must  intervene ". Lord Radcliffe remarked that the English courts had  been led to be rather overready to treat these questions as  pure questions  of  fact and added "if so I would say  with  very great  respect that I think it a pity that such  a  tendency should  persist ". Therefore, it seems to us that in  effect this  decision  is not inconsistent with the  view  we  have taken  about the character of the question raised before  us in  the  present appeal.  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. The learned Attorney-General has invited our attentionto the fact that the form in which the question referred tothe High Court  has been framed in the present case seems  to  assume that the impugned finding is a finding of fact.  It is  only

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 24  

in  regard  to  a finding of fact that  a  question  can  be properly framed as to whether there was material to  support the said finding.  We would, therefore, like to add that  it would  be  more appropriate to frame the  question  in  this form: whether, on the facts and circumstances proved in  the case, the inference that the transaction in 661 question  is an adventure in the nature of trade is  in  law justified  ?  In substance, that is the basis on  which  the question has been framed by the respondent and considered by the High Court. This  question  has  been  the  subject-matter  of   several judicial  decisions; and in dealing with it all  the  judges appear  to be agreed that no principle can be evolved  which would  govern  the  decision  of  all  cases  in  which  the character   of   the  impugned  transaction  falls   to   be considered.   When s. 2, sub-s. (4), refers to an  adventure in  the  nature  of  trade  it  clearly  suggests  that  the transaction   cannot  properly  be  regarded  as  trade   or business.   It  is allied to  transactions  that  constitute trade  or business but may not be trade or business  itself. It  is characterised by some of the essential features  that make  up trade or business but not by all of them;  and  so, even an isolated transaction can satisfy the description  of an  adventure in the nature of trade.  Sometimes it is  said that  a single plunge in the waters of trade may partake  of the character of an adventure in the nature of trade.   This statement  may  be true; but in its application  due  regard must be shown to the requirement that the single plunge must be in the waters of trade.  In other words, at least some of the  essential  features  of trade must be  present  in  the isolated  or single transaction.  On the other hand,  it  is sometimes  said that the appearance of one swallow does  not make a summer.  This may be true if, in the metaphor, summer represents  trade;  but  it  may  not  be  true  if   summer represents an adventure in the nature of trade because, when the  section refers to an adventure in the nature of  trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but  are essentially  of  such  a similar  character  that  they  are treated  as in the nature of trade.  It was  faintly  argued for  the  appellant that it would be difficult to  regard  a single  or an isolated transaction as one in the  nature  of trade because income resulting from it would inevitably lack the  characteristics attributed to it by Sir George  Loundes in  Commissioner  of I. T. v. Shaw Wallace  and  Company(1). ’Income their Lordships (1)  (1932) L. R. 59 I.A. 206. 662 think ", observed Sir George Loundes, " in this Act connotes a  periodical  monetary return coming in with some  sort  of regularity or expected regularity from definite sources Then the learned judge proceeded to observe that income has  been likened pictorially to the fruit of a tree, or the crop of a field.  It is essentially the produce of something which  is often   loosely  spoken of as capital". In our  opinion,  it would be unreasonable to apply the test involved in the  use of  this pictorial language to the decision of the  question as  to  whether a single or an isolated transaction  can  be regarded  as an adventure in the nature of trade.   In  this connection  we may, with respect, refer to the comment  made by  Lord  Wright in Raja Bahadur Kamakshya Narain  Singh  of Ramgarh v. Commissioner of I. P., Bihar and Orissa (1)  that "  it is clear that such picturesque similes cannot be  used to  limit the true character of income in general ". We  are

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 24  

inclined to think that, in dealing with the very prosaic and sometimes  complex  questions arising under  the  Income-tax Act,  use of metaphors, however poetic and picturesque,  may not  help to clarify the position but may instead  introduce an unnecessary element of confusion or doubt. 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  speak- ing,  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 border line that  cause  difficulty. If  a  person invests money in land intending  to  hold  it, enjoys  its  income for some time, and then sells  it  at  a profit,  it would be a clear case of capital  accretion  and not profit derived from an adventure in the nature of trade. Cases  of realisation of investments consisting Of  purchase and resale, though profitable, are clearly outside the doma- in of adventures in the nature of trade.  In deciding (1)  (1943) L.R. 70 I.A, 180, 193. 663 the  character  of  such transactions  several  factors  are treated  as relevant.  Was the purchaser a trader  and  were the  purchase of the commodity and its resale allied to  his usual trade or business or incidential to it ?   Affirmative answers  to  these questions may furnish relevant  data  for determining  the character of the transaction.  What is  the nature  of the commodity  purchased and resold  and  in what quantity  was  it purchased and resold ?  If  the  commodity purchased  is generally the subject-matter of trade, and  if it  is purchased in very large quantities, it would tend  to eliminate  the possibility of investment for  personal  use, possession  or  Goverment.   Did the purchaser  by  any  act subsequent  to  the  purchase improve  the  quality  of  the commodity  purchased  and  thereby  made  it  more   readily resaleable  ?  What were the incidents associated  with  the purchase  and resale ? Were they similar to  the  operations usually  associated  with  trade  or  business  ?   Are  the transactions  of purchase and sale repeated ? In  regard  to the purchase of the commodity and its subsequent  possession by  the purchaser, does the element of pride  of  possession come  into  the picture ? A person may purchase a  piece  of art,  hold  it for some time and if a  profitable  offer  is received  may sell it.  During the time that  the  purchaser had  its  possession  he  may be  able  to  claim  pride  of possession and aesthetic satisfaction ; and if such a  claim is upheld that would be a factor against the contention that the transaction is in the nature of trade.  These and  other considerations  are  set  out  and  discussed  in   judicial decisions  which  deal with the  character  of  transactions alleged to be in the nature of trade.  In considering  these decisions 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 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;  and so, though we may attempt to  derive  some assistance  from decisions bearing on this point, we  cannot seek to deduce any rule from them and mechanically apply  it to the facts before us.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 24  

In this connection it would be relevant to refer to  another test which is sometimes applied in determining the character of  the  transaction.   Was  the  purchase  made  with   the intention to resell it at a profit ? It is often said that a transaction of purchase followed by resale can either be  an investment or an adventure in the nature of trade.  There is no middle course and no half-way house.  This statement  may be  broadly true; and so some judicial decisions  apply  the test  of the initial intention to resell  in  distinguishing adventures  in  the  nature of trade  from  transactions  of investment.    Even   in  the  application  of   this   test distinction  will have to be made between initial  intention to  resell at a profit which is present but not dominant  or sole;  in  other  words, cases do  often  arise  ’Where  the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not  offered. The  intention to resell may in such cases be  coupled  with the  intention  to hold the property.  Cases  may,  however, arise  where the purchase has been made solely  and  exclus- ively  with  the  intention to resell at a  profit  and  the purchaser  has  no  intention of holding  the  property  for himself’or otherwise enjoying or using it.  The presence  of such  an intention is no doubt a relevant factor and  unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the  nature  of  trade.  Even so,  the  presumption  is  not conclusive;  and it is conceivable that, on considering  all the  facts  and circumstances in the case,  the  court  may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. We thus come back to the same position and that is that  the decision about the character of a transaction in the context cannot  be based solely on the application of any  abstract- rule, principle or test and 665 m  st in every case depend upon all the relevant  facts  and circumstances. Let  us  now  consider some of the decisions  to  which  our attention  was  invited.   Normally  the  purchase  of  land represents investment of money in land; but where a  company is  formed  for  the purpose inter  alia  of  acquiring  and reselling  mining property, and after acquiring and  working various  property, it resells the whole to a second  company receiving payment in fully-paid shares of latter company, it was  held in The Californian Copper Syndicate  (Limited  and Reduced)  v.  Harris  (Surveyor  of  Taxes)  (1)  that   the difference  between the purchase price and the value of  the shares  for  which the property was exchanged  is  a  profit assessable  to income-tax.  In this case Lord Justice  Clerk has  observed that "it is quite a well settled principle  in dealing with the question of assessment of Income Tax,  that where  the  owner  of an ordinary in.  vestment  chooses  to realise  it,  and  obtains a greater price for  it  than  he originally acquired it at, the enhanced price is not  profit in  the sense of Schedule D of the Income Tax Act "; and  he added  that  "  it  is equally  well  established  that  the enhanced  value obtained from realisation or  conversion  of security  may  be so assessable where what is  done  is  not merely  a realisation or a change of investment but  an  act done  in what is truly the carrying on or carrying out of  a business ". This was a clear case where the company was held to  be  carrying  on the business of purchase  and  sale  of mining property. Where  land purchased, and subsequently developed, with  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 24  

object  of  making it more readily saleable, was sold  at  a profit, the intention of the assessee was treated to be  not to hold the land as an investment, but as a trading asset in Cayzer,  Irvine  and  Co. Ltd. v.  Commissioners  of  Inland Revenue(2).    In  his  judgment,  Lord  President   Normand referred  to the large development expenditure  incurred  by the  assessee to improve the property and observed  that  it appeared to be on the whole consistent with the idea that it was  carrying on a trade in land rather than with  the  idea that (1)  (1904) 5 Tax Cas. 159. (2) (1942) 24 Tax Cas. 491. 84 666 it  was  throughout holding it as an investment only  to  be realised  if at all when it desired to meet  some  financial need.   In  repelling the plea that the  transaction  showed investment, the Lord President added that the  Commissioners " with their knowledge and experience of these matters, have come  to the conclusion that the intention was to hold  this estate  not as an investment but as a trading asset and  in, order to develop it and to market it ". It would thus appear that the conduct of the assessee in incurring a large amount of expenditure on the development of land consisting  mainly in the construction of roads and sewers was held to  justify the  inference that the transaction was an adventure in  the nature of trade, though the property purchased and sold  was land. In  the Commissioner’s of Inland Revenue v.  Livingston  (1) the assessees respondents were a ship repairer, a blacksmith and  a fish salesmen’s employee; they purchased as  a  joint venture  a cargo vessel with a view to converting it into  a steam-drifter  and  selling it. They were not  connected  in business and they had never previously bought a ship.  After the  ship was purchased, extensive repairs  and  alterations were  carried out by the orders of the respondents  and  the ship was then sold at a profit.  It was held that the profit arising  from the transaction was assessable  to  income-tax under  Case I of Schedule D. Lord President Clyde said  that in  deciding whether the profits in question  were  taxable, regard must be had to the character and circumstances of the particular  venture.   " If the venture was  one  consisting simply  in an isolated purchase of some article  against  an expected  rise in price and, a subsequent sale  ",  observed the Lord President, " it might be impossible to say that the venture  was in the nature of trade ". According to him  the test to be applied would be whether the operations  involved in  the transaction are of the same kind and carried  on  in the  same way as those which are characteristic of  ordinary trading  in  the line of business in which the  venture  was made.   If  they are, there was no reason  why  the  venture should not be (1), (1926) 11 Tax Cas. 538. 667 regarded  as in the nature of trade merely because it was  a single  venture  which took only three months  to  complete. Reference was then made to the steps taken ,by the assessees to buy a secondhand vessel and to ,convert into a marketable drifter;  and  it was stated -that the profit  made  by  the venture arose not from the mere appreciation of the  capital value  of  an  isolated  purchase for  resale  but  from the expenditure on the subject purchased of money laid out  upon it  for the purpose of making it marketable at a profit.   " That  ", said the Lord President, " was the very essence  of trade  ". It was in this connection that the Lord  President

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 24  

observed  that the appearance of a single swallow  does  not make a summer.  It would thus be noticed that this  decision was  based substantially on the ground that after  the  ship was  purchased  the assessees bestowed labour and  money  on converting  it into a marketable drifter and that  imprinted upon  the  transaction the character of trade.  It  is  true that  some  of the observations made by the  Lord  President would indicate that from the intention to resell at a profit it  would be impossible to attribute to the transaction  the character of an adventure in the nature of trade.   However, as we will presently point out, these observations have been explained  by  the Lord President  himself  subsequently  in Rutledge  v. Commissioners of Inland Revenue (1); and it  is to this case that we will now refer. In  the case of Rutledge(2) the appellant was a  moneylender who was also interested in a cinema company in 1920.   Since that time he had been interested ill various businesses.  He was in Berlin in 1920 on business connected with the  cinema company  where he was offered an opportunity  of  purchasing very  cheaply  a large quantity of paper.  He  effected  the purchase and within a short time after his return to England he   sold  the  whole  consignment  to  one  person   at   a considerable  profit.   This  profit  ’Was  held  liable  to assessment to income-tax, Schedule D, and to excess  profits duty as being profit of an adventure in the nature of trade. This assessment was the subject-matter (1)  (1929) 14 Tax Cas. 490. 668 of  an appeal before the Court of Appeal, and on  behalf  of the  appellant the observations made by the  Lord  President Clyde  in  the  case of Livingston  (1)  were  pressed  into service;  but  the Lord President did  not accept  the  plea based  on his earlier observations because he said that  the said  observations  were  intended to  show  that  a  single transaction fell far short of constituting a dealer’s trade; whereas,  in the present case, the question was whether  the transaction  was an adventure in the nature of  trade.   The Lord  President agreed that mere intention is not enough  to invest  a  transaction with the character of  trade  but  he added  that, if the purchase is made for no  purpose  except that of resale at a profit, there seems little difficulty in arriving  at the conclusion that the deal was in the  nature of trade though it may be wholly insufficient to  constitute by  itself  a trade.  Then he referred to  the  illustration which  he  had  cited  in his  earlier  decision  about  the purchase  of  a picture and observed that if a  picture  was purchased to embellish the purchaser’s own house for a time, he  might  sell it if the anticipated  appreciation  in  the value ultimately realised itself.  " In such a case ",  says the  Lord  President,  "  I pointed out  that  it  might  be impossible to affirm that the purchase and sale  constituted an  adventure  in-the nature of trade although,  again,  the crisis   of   judgment   might  turn   on   the   particular circumstances  ".  It would thus be clear  that  the  strong observations  made  by  the Lord President in  the  case  of Livingston  (1)  must  be considered in  the  light  of  the clarification  made  by him in this case.  Lord  Sands,  who agreed  with  the Lord President has  thus  observed:  "Your Lordship in the Chair has indicated that there may be  cases of  purchase  and resale at a profit where  the  transaction cannot be said to be in the nature of trade.  In particular, this may be the case where there is no definite intention of reselling  when  the  purchase is  made  ".  This  decision, therefore,  shows that where the assessee purchased  a  very large  quantity  of paper with the intention to sell  it  at

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 24  

profit  the transaction was treated as an adventure  in  the nature of trade.  It was held (1)  (1926) 11 Tax Cas. 538. 669 to  be  a  most  successful adventure on  the  part  of  the assessee  and having regard to the  circumstances  attending the purchase and sale it was treated as an adventure in  the nature of trade. In  T.  Beynon & Co. Ltd. v. Ogg (1) the court  was  dealing with the case of a company which was 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 a part of its duty to purchase wagons on its own account as a speculation and -subsequently to dispose of them   at  a  profit.   The  assessee  contended  that   the transaction  of purchase and sale being an isolated one  the profit was in the nature of a capital profit on the sale  of an  investment  and  should be  excluded  in  computing  its liability  to  income-tax.  The court held that  the  profit realised was made in the operation of the company’s business and  was properly included in the computation  of  company’s profits for assessment under Schedule D. It appears that, in 1914, acting as agent on behalf of two colliery , companies, the assessee had purchased two lots of wagons each of  which consisted of 250 wagons.  During the course of  negotiations the assessee, foreseeing that the cost of material and wages was  likely to increase, determined to buy a, third  lot  of 250  wagons for itself and did eventually purchase  it.   In July  1915 the assessee sold this lot and made a  profit  of pound  2,500.   The question which arose  for  decision  was whether  this sum was chargeable to incometax.   In  dealing with the argument that as an isolated transaction the profit arising  out  of it was not chargeable to tax,  Sankey,  J., observed  that  he  thought " in  most  cases  an  insolated transaction does not fall to be chargeable ". But he added " you  have to consider the transaction and you cannot lay  it down as a matter of law without regard to the  circumstances that in this case the pound, 2,500 is not chargeable ". Then the  learned  judge  considered that the  number  of  wagons purchased  was large and held that the  other  circumstances attending  the purchase and sale of the said  wagons  showed that this transaction was a (1)  (1918) 7 Tax Cas. 125. 670 transaction, and this profit was a profit " -with the result that  it made the operation of the assessee in  that  behalf its  business.  The learned judge’ however, added a word  of caution  that he did not think it desirable to lay down  any rule as to where the line ought to be drawn, and that it was not  even possible to lay down such a rule.  " But  ",  said the  learned  judge, " it is perfectly easy to  say  whether Case A or Case B falls on the one side or the other ". In  the Balgownie Land Trust, Ltd. v. The  Commissioners  of Inland  Revenue  (1) the owner of a landed  estate,  at  his death,  had left his estate to trustees with a direction  to realise.  The trustees were not successful in their  efforts to sell the estate in the market.  So they formed a  company with   general  powers  to  deal  in  real   property’   and transferred  the  estate  to this company  in  exchange  for shares  which were allotted to the beneficiaries  under  the trust and were, at the date of the appeal still mainly  held by those beneficiaries or their representatives.  Soon after its  incorporation the purchaser company made a  substantial purchase of some other property acquired by borrowing on the security of the original estate.  The company received rents

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 24  

and paid a regular dividend on its capital.  In 1921 and the following  years parts of the original estate were sold  and in 1925 the whole of the additional property was sold.  When the profits realised by the sales were taxed under  Schedule D  for  the year 1926-27, the assessee  contended  that  the transactions in question were not in the nature of trade and the  profits  arising  therefrom  cannot  be  taxed.    This contention  was  negatived  by  the  General   Commissioners whereupon  the  assessee  appealed.   Lord  President  Clyde described the problem raised by the assessee as one of.  the most  familiar problems under Case I of Schedule D  and  ob. served  that " a single plunge may be enough provided it  is shown  to the satisfaction of the Court that the  plunge  is made  in  the waters of trade; but the sale of  a  piece  of property-if  that is all that is involved in the  plunge-may easily  fall  short  of anything in  the  nature  of  trade. Transactions of sale are characteristic (1)  (1929) 14 Tax Cas. 684. 671 of  trade, but they are not necessarily distinctive  of  it; much depends on the circumstances". Then the conduct of  the assessee  after its incorporation was considered and it  was held that the purchase of the property in substance amounted to a launching forth albeit, not in a very large scale.   In the  result the finding of the Commissioners  was  confirmed and the profit, Was held liable to tax. In Martin v. Lowry (1) the House of Lords was considering  a case of a wholesale agricultural machinery merchant who  had never  had  any connection with the linen  trade  purchasing from  the  government  the whole of  its  surplus  stock  of aeroplane linen (some 44 million yards) at a fixed price per yard.   The  contract of purchase provided in detail  as  to delivery,  and  the  payment of the  price.   The  purchaser failed  in  his original attempt to sell the  whole  of  the linen  to  Belfast linen manufacturers  outright.   Then  he sought  to bring pressure on them by placing the  linen  for sale  to  the public.  It led to  an  extensive  advertising ’campaign,  renting  of  offices  and  engaging  advertising manager,  a linen expert as adviser and a staff  of  clerks. Sales then proceeded rapidly and soon the whole stocks  were disposed  of.  In all 4,279 orders were received from  1,280 purchasers.   Assessment  to income-tax and  excess  profits duty  were made upon the assessee in respect of  profits  of the  transaction.   It  was held that the  dealings  of  the assessee in linen constituted the carrying on of a trade  of which  the profits were chargeable to income-tax and  excess profits duty.  One of the points raised before the House  of Lords  was  that  the assessee did not  carry  on  trade  or business  but  only  engaged  in  a  single  adventure   not involving trading operation.  In rejecting this  contention, Viscount Cave, L. C., observed that " the Commissioners have found as a fact that he did carry on trade, and they set out in  the  Case ample material upon which they could  come  to that  conclusion ". He added that, indeed, having regard  to the  methods  adopted for the resale of the  linen,  to  the number of operations into which the assessee entered and  to the time occupied by (1)  [1926] 11 Tax Cas. 297. 672 the resale, he did not himself see how they could have  come to  any  other conclusion.  The other point  raised  in  the appeal was that the profits in question did not come  within the  description of annual profits or ,gains but we are  not concerned with that point. In  F.  A.  Lindsay,  A.  E.  Woodward  and  W.  Hiscox   v.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 24  

Commissioners of Inland Revenue (1) the appellant L, a  wine merchant,  had  on  hand a large quantity  of  American  rye whisky.   He  invited  the appellants W & H  who  were  also engaged  in the wine trade to join with him in a venture  of shipping  the  whisky to the United States.  It  was  agreed that  W & H should contribute certain sums towards  expenses and   that   the  profits  should  be  shared   in   certain proportions.   The.  agreement was not reduced  to  writing. The   shipping  of  the  whisky  was  arranged  by  L   with consultation with W & H and was carried out gradually over a period of two years.  From time to time W & H met L who told them  that the whisky had been successfully shipped  to  the United  States and sold there profitably.  Subsequently  the appellants  decided to discontinue the export of whisky  and to  employ  the  monies which they had  accumulated  in  the purchase  with  a  view  to resale of  a  wine  business  in Portugal.  In respect of the profits made by the  appellants from the sale of wine an assessment was made on them jointly for  1922-23.   The  Special  Commissioners  found  that   a partnership   or   joint  venture  subsisted   between   the appellants and that the profits of the sales of whisky  were assessable to income-tax.  The Lord President Clyde rejected the appellant’s contention and observed that " the nature of the  transaction-apart from the fraudulent breaches  of  law which were inherent in it-was neither more nor less than the commercial disposal of a quantity of rye whisky ". In  point of   fact  the  disposal  was  not  effected  by  a   single transaction  but  extended over a year and more; and  so  it could  not  fall outside the sphere of trade.   This  was  a clear  case where a large number of distinctive features  of trade were associated with the transaction. (1)  (1932) 18 Tax Cas. 43. 673 The transaction of the purchase and sale of whisky was again brought   before   the  court  for  its  decision   in   the Commissioners of Inland Revenue v. Fraser (1).  In this case the  assessee,  a woodcutter, bought through  an  agent  for resale  whisky  in bond for pound 407.  Nearly  three  years thereafter the whisky was sold at a profit for pound, 1,131. This  was the assessee’s sole dealing in whisky.  He had  no special knowledge of the trade and 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 an  adventure in  the nature of trade.  It may be mentioned that when  the matter  was first taken before the Commissioners  they  took the  view that an adventure in the nature of trade  had  not been  carried on by the assessee, that merely an  investment had  been made and subsequently realised and so  the  profit was  not assessable to income-tax.  This view was,  however, reversed  by the First Division of the Court of Session  and it   was  held  that  in  coming  to  the   conclusion   the Commissioners  had misdirected themselves as to the  meaning of " being engaged in an adventure in the nature of trade ". The  Lord  President  Normand  conceded  that  it  would  be extremely  difficult  to  hold  that  a  single  transaction amounted  to a trade but he added that it may be  much  less difficult to hold that a single transaction was an adventure in  the  nature of trade.  " There was  much  discussion  ", observed the Lord President, " as to the criterion which the court  should  apply.  I doubt if it would  be  possible  to formulate  a single criterion." The  following  observations made  by  the  Lord  President in  this  connection  may  be usefully quoted: "  It  is  in  general  more easy  to  hold  that  a  single transaction entered into by an individual in the line of his

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 24  

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. (1)  (1942) 24 Tax Cas. 498. 85 674 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  after- wards  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 business  (whatever  it  was)  of  the Respondent  in  no  way alters the  character  which  almost necessarily  belongs  to  a  transaction  like  this.   Most important of all, the actual dealings of the Respondent with the  whisky  were  exactly of the kind that  take  place  in ordinary trade." These   observations   indicate  some   of   the   important considerations which are to be borne in mind in  determining the character of a single transaction.                             675 We  may now refer to the decision of the House of  Lords  in Leeming  v.  Jones (1).  In this case the  appellant  was  a member  of a syndicate of four persons formed to acquire  an option  over a rubber estate with a view to resell it  at  a profit.    The  option  was  secured  but  the  estate   was considered  too small for a resale to a company  for  public floatation.   An  option over another adjoining  estate  was accordingly  secured  and it was decided to resell  the  two estates  to a public company to be formed for  the  purpose. Another member of the syndicate undertook to arrange for the promotion  of this company.  The syndicate’s total  receipts resulting  from the transactions in respect of  the  estates amounted  to  pound 3,000 and the balance  remaining,  after deduction  of  certain  expenses, was  divided  between  the members.  The appellant was assessed to income-tax, Schedule D, in respect of his share.  The General Commissioners  held that the appellant acquired the property or interest in  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 24  

property in question with the sole object of turning it over again  at a profit and that he at no time had any  intention of holding it as an investment.  That is why they  confirmed the assessment.  After the case was heard before the  King’s Bench Division it was remitted to the General  Commissioners for  a finding as to whether there was or was not a  concern in  the nature of trade.  The Commissioners then found  that the transaction in question was not a concern in the  nature of trade and that there was no liability to assessment.   It may  be pointed out that in remitting the case for  the  re- consideration of the General Commissioners, Rowlatt, J., had observed that it was quite clear that what the Commissioners had  got  to  find was whether there was a  concern  in  the nature  of  trade and all that they had found was  that  the property  was  acquired with the sole object of  turning  it over again at a profit and without any intention of  holding it as an investment.  " That describes ", said Rowlatt,  J., "  what a man does if he buys a picture that he  sees  going cheap  at  Christie’s, because he knows that in a  month  he will sell it again at Christie’s That ", according to (1)  (1930) 15 Tax Cas. 333. 676 the  learned  judge, " is not carrying on trade " and  "  so what  the  Commissioners must do is to say, one way  or  the other, was this, I will not say carrying on a trade, but was it  a speculation or an adventure in the nature of trade  ". The  learned judge to doubt added that he did  not  indicate which  way  the finding  ought to be, but he  commended  the Commissioners  to consider what took place in the nature  of organising  the  speculation,  maturing  the  property   and disposing of the property, and when they have considered all that,  to say whether they think it was an adventure in  the nature of trade or not.  It is thus clear that Rowlatt,  J., indicated  clearly though in cautious words what he  thought was  the true nature of the transaction made.  Even  so,  on reconsideration  of the matter the Commissioners returned  a finding  in favour of the assessee.  After the  finding  was returned  Rowlatt,  J., held that he must abide by  his  own decision  in  Pearm  v. Miller (1) and  so  the  appeal  was allowed.   The matter was then taken to the Court of  Appeal where  the revised finding of the Commissioners was  treated as a finding on a question of fact not open to challenge and the point which was considered at length was whether even if the transaction was not an adventure in the nature of trade, could  the profit resulting from it be taxed under Case  VI? The Master of the Rolls Lord Hanworth traced the history  of the dispute, mentioned how Mr. Justice Rowlatt had indicated to the Commissioners what they had to consider in  determin- ing  the  question remitted to them and observed that "  Mr Justice Rowlatt, and I think this Court, might perhaps  have taken the course of saying that having regard to what he had called  attention to in this case, the particular facts,  of organising  the speculation, of maturing the  property,  and the diligence in discovering a second property to add to the first, and the disposing of the property, there ought to  be and there must be a finding that it was an adventure in  the nature  of trade; but Mr. Justice Rowlatt withheld his  hand from so doing and I think he was right, for however strongly one may feel as to the facts, the facts (1)  (1927) 11 Tax Cas. 610. 677 are  for the decision of the Commissioners ". It would  thus be  clear  that the decision of the  Commissioners  appeared both  to  Rowlatt,  J.,  and  the  Court  of  Appeal  to  be erroneous.   Even so, they refused to interfere with  it  on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 24  

the ground that it was a decision on a question of fact.  We may,  with  respect, recall that it was in  regard  to  this approach that Lord Radcliffe observed in the case of Edwards (1) that " it was a pity that such a tendency should persist to  treat the findings of the Commissioners on the  question as  to the character of the transaction as conclusive ".  In dealing  wit  the question as to whether if Case I  did  not apply  Case VI could apply, Lord Justice  Lawrence  observed that  " in the case of an isolated transaction  of  purchase and  resale  of property there is really  no  middle  course open.  It is either an adventure in the nature of trade,  or else  it is simply a case of sale and resale of property  ". The  Court  of Appeal held that if the transaction  did  not fall  in  Case.  It was difficult to see how it  could  fall under Case VI.  The discussion on this part of the case  is, however, not relevant for our purpose.  This decision of the Court of Appeal was taken before the House of Lords and  the question  debated  before the House of Lords was  about  the -application  of Case VI to the transaction.  The  House  of Lords  affirmed  the view taken by the Court of  Appeal  and held that " Case VI was inapplicable because Case VI  neces- sarily refers to the words of Schedule D, that is to say, it must  be a case of annual profits and gains and those  words again  are ruled by the first section of the Act which  says that when an Act indicates that income-tax shall be  charged for  any  year  at any rate the tax at that  rate  shall  be charged in respect of the profits and gains according to the Schedules ". Lord Buckmaster agreed with the observations of Lord  Justice  Lawrence that there can be no  middle  course open  in such cases.  Viscount Dunedin, in  concurring  with the  opinion  of  Lord Buckmaster, dealt  with  the  several arguments  urged by the Crown but the observations  made  by him  with regard to the last argument are relevant  for  our purpose.  " The last argument of the (1)  [1956] A.C. 14; 36 Tax Cas. 207. 678 counsel for the Crown ", observed Viscount Dunedin, was that there was a finding that the respondent never meant to  hold the land bought as an investment.  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 investment but  per se   it  leads  to no conclusion whatever  ".  According  to Viscount Dunedin, recourse to Case VI ignores the fact  that it  had been settled again and again that Case VI  does  not suggest  that anything that is a profit or gain falls to  be taxed. The observations made by Viscount Dunedin were considered in the  Commissioners  of Inland Revenue v. Reinhold  (1).   We ought  to add that the appellant has placed strong  reliance on  this  decision.   In this case,  the  respondent  was  a director   of   a  company  carrying  on   a   business   of ware  house men; he 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.  The profits made by him on resale  were assessed to tax.  On appeal before the General Commissioners he contended that the profit on resale was not taxable.  The Crown  urged  that the transaction was an adventure  in  the nature  of  trade and that profits  arising  therefrom  were chargeable  to Ax.  The General Commissioners being  equally divided  allowed the appeal and discharged  the  assessment. It was on these facts that the matter was then taken  before the First Division of the Court of Session and it was  urged

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 24  

on  behalf  of the Crown that the initial intention  of  the assessee clearly was to sell the property at a profit and so the  view  taken  by the  General  Commissioners  about  the character  of the transaction was erroneous.  This  argument was, however, rejected and the order of discharge passed  by the  General  Commissioners was confirmed.  When  the  Crown referred to the observations of Lord Dunedin in the case  of Leeming (2) which we have (1)  (1953) 34 Tax Cas. 389. (2)  (1930) 15 Tax Cas. 333.                     679 already cited, Lord Carmont observed that he did not wish to read the said passage out of its context and without  regard to  the  facts of the case then under  consideration.   Then Lord  Carmont  added that though the language used  by  Lord Dunedin  " may cover the purchase of houses" it " would  not cover  a situation in which a purchaser bought  a  commodity which  from G its nature can give no annual return ".  "This comment of mine ", said Lord Carmont, " is just another  way of  saying  that certain transactions show  inherently  that they  are not investments but incursions into the  realm  of trade  or adventures of that nature Then reference was  made to  the  fact  that the assessee  was  a  warehouse  company director and not a property agent or speculator and that the only purchases of property with which he was concerned  were two  separated by ten years and that the first heritage  was acquired  without  the intention to sell, which  only  arose fortuitously.  His Lordship then put his conclusion in  this way: "I would therefore say that the Commissioners of Inland Revenue  have  failed to prove and the onus is on  them  the case  they sought to make out". According to  Lord  Carmont, Lord Dunedin’s observations do not suggest that the  initial declaration of intention per se leads to the conclusion that the transaction was in the nature of trade.  He thought that much more was required to show that the assessee was engaged in  an adventure in the nature of trade than was  proved  in the case before the court.  Lord Russell, who concurred with this opinion, began with the observation that " prima  facie the  difference of opinion among the  General  Commissioners suggests that the case is a narrow one and that the onus  on the  appellants  of  showing that  the  transaction  was  an adventure in the nature of trade is not a light one".   Lord Russell  then  mentioned the argument of the  Lord  Advocate that if a person buys anything with a view to sale that is a transaction  in the nature of trade because the  purpose  of the  acquisition  in  the  mind of  the  purchaser  is  all- important  and conclusive; and that the nature of the  thing purchased and the other surrounding circumstances do not 680 and  cannot  operate so as to render the  transaction  other than an adventure in the nature of trade, and observed  that in his opinion the argument so formulated " is too  absolute and is not supported by the judicial pronouncements on which it  was  sought  to be raised ". He  then  referred  to  the variety of circumstances which are or may be relevant to the determination of such a question; and he concluded with  the observation  that  the  appellants had  not  discharged  the burden  of showing that the transaction was an adventure  in the nature of trade.  Lord Keith also took the same view and stated  that " the facts were, in his opinion,  insufficient to  establish  that this was an adventure in the  nature  of trade  ". This case was no doubt a case on the border  line; and  if we may say so with respect it was perhaps nearer  an adventure  in the nature of trade than otherwise.  It  would not  be unreasonable to suggest that, in this case,  if  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 24  

Commissioners   had  found  that  the  transaction  was   an adventure  in the nature of trade, the court would  probably not  have  interfered  with the  said  conclusion;  but  the Commissioners were equally divided and so the assessment had been  discharged by them.  It was under these  circumstances that  the point about the onus of proof became a  matter  of substance;  and,  as we have already pointed out,  all  tile learned  judges have emphasized that the onus had  not  been discharged and that no case had been made out for  reversing the  order  of  discharge  -passed  by  the   Commissioners. However that may be, it would, we think, be unsafe to  treat this  case  as  laying  down  any  general  proposition  the application  of which would assist the appellant before  us. We  would also like to add that there can be no  doubt  that Lord  Russell’s criticism against the contention  raised  by the Lord Advocate was fully justified because the contention as raised clearly overstated the significance and effect  of the  initial intention.  As we have already pointed out,  if it  is shown that, in purchasing the commodity in  question, the  assessee was actuated by the sole intention to sell  it at a profit, that no doubt is a relevant circumstance  which would raise a strong presumption that the                             681 purchase and subsequent sale are an adventure in the  nature of trade; but the said presumption is not conclusive and  it may be rebutted or offset by other relevant circumstances. What  then are the relevant facts in the present case ?  The property  purchased  and  resold  is land  and  it  must  be conceded  in favour of the appellant that land is  generally the  subject-matter of investment.  It is  contended by  Mr. Viswanatha  Sastri  that  the four  purchases  made  by  the appellant  represent nothing more than an investment and  if by  resale some profit was realised that cannot impress  the transaction with the character of an adventure in the nature of trade.  The appellant, however, is a firm and it was  not a part of its ordinary business to make investment in lands. Besides, when the first purchase was made it is difficult to treat  it  as a matter of investment.  The  property  was  a small  piece  of 28-1/4 cents and it could yield  no  return whatever  to the purchaser.  It is clear that this  purchase was the first step taken by the appellant in execution of  a well-considered  plan to acquire open plots near  the  mills and the whole basis for the plan was to sell the said  lands to  the  mills  at a profit., Just as  the  conduct  of  the purchaser  subsequent  to  the purchase of  a  commodity  in improving  or  converting it so as to make it  more  readily resaleable is a relevant factor in determining the character of  the  transaction,  so would his  conduct  prior  to  the purchase be relevant if it shows a design and a purpose.  As and when plots adjoining the mills were available for  sale, the  appellant  carried out his plan  and  consolidated  his holding  of the said plots.  The appellant is  the  managing agent  of  the  Janardana Mills and probably  it  was  first thought  that  purchasing  the plots in  its  own  name  and selling  them to the mills may invite criticism and  so  the first purchase was made by the appellant in the name of  its benamidar V. G. Raja.  Apparently the appellant changed  its mind  and  took the subsequent sale deeds in its  own  name. The  conduct  of  the appellant in  regard  to  these  plots subsequent to their 86 682 purchase  clearly  shows  that  it  was  not  interested  in obtaining  any  return from them.  No  doubt  the  appellant sought  to explain-its purpose on the ground that it  wanted

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 24 of 24  

to  build tenements for the employees of the mills;  but  it had  taken  no  steps in that behalf for the  whole  of  the period  during which the plots remained in  its  possession. Besides,  it would not be easy to  assume in the case  of  a firm  like  the appellant that the acquisition of  the  open plots   could  involve  any  pride  of  possession  to   the purchaser.  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 holdings that at a convenient time  it sold the lands to the Janardana Mills in two  lots. When  the tribunal found that, as the managing agent of  the mills,  the  appellant was in a position  to  influence  the mills  to  purchase  its  properties  its  view  cannot   be challenged  as  unreasonable.   If  the  property  had  been purchased  by  the appellant as a matter  of  investment  it would  have tried either to cultivate the land, or to  build on  it; but the appellant did neither and just  allowed  the property to remain unutilised except for the net rent of Rs. 80 per annum which it received from the house on one of  the plots.   The reason given by the appellant for the  purchase of  the  properties by the mills has been  rejected  by  the tribunal; and so when the mills purchased the properties  it is  not  shown that the sale was occasioned by  any  special necessity at the time.  In the circumstances of the case the tribunal was obviously right in inferring that the appellant knew  that it would be able to sell the lands to  the  mills whenever  it  thought  it profitable so  to  do.   Thus  the appellant purchased the four plots during 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.  In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts  the presumption arising from the initial  intention; on the other hand, most of them corroborate                             683 the  said  presumption.  We must, therefore, hold  that  the High  Court was right in taking the view that, on the  facts and  circumstances proved in this case, the  transaction  in question is an adventure in the nature of trade. The  result is the appeal fails and must be  dismissed  with costs.                                     Appeal dismissed.