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PETITIONER: JANKI RAM BAHADUR RAM

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CALCUTTA

DATE OF JUDGMENT: 31/03/1965

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M.

CITATION:  1965 AIR 1898            1965 SCR  (3) 604  CITATOR INFO :  RF         1966 SC1256  (4)  R          1969 SC1241  (7)  R          1975 SC2106  (14)  D          1976 SC2105  (3,12)  RF         1986 SC1695  (31)

ACT: Indian Income-tax Act, 1922 (11 of 1922), s. 10--Purchase of a different business--Sale-Profit--If taxable.

HEADNOTE: The assessee who was dealing in iron scrap and hardware  had purchased a jute press and sold it at a profit. The  Income- tax Officer brought to tax in the hands of the assessee, the profit  arising  out of this sale.  The  Appellate  Tribunal modified  the  order and reduced the total  income.  At  the instance  of  assessee  the Tribunal referred  to  the  High Court,  the  question, whether the surplus received  by  the assessee as a result of the sale of the jute press arose out of  an adventure in the nature of trade and was,  therefore, liable  to  tax.  The High Court answered  the  question  in affirmative. In appeal; HELD:  The  question  must  be  answered  in  the  negative. Granting that the assessee made a profitable bargain when he purchased  the  property  and  granting  further  that   the assessee  had,  when he purchased it, a desire to  sell  the property, if a favourable offer was forthcoming, these could not  without other circumstances, justify an inference  that the assessee intended by purchasing the property to start  a venture in the nature of trade. [609H-610A] A  profit motive in entering a transact on is no   decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at a profit. [608F] Purchase  of  the property by the assessee was  an  isolated transaction  not  related to the business of  the  assessee. [608G] Case law referred to.

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JUDGMENT: CIVIL  APPELLATE  JURISDICTION:   Civil Appeal  No.  308  of 1964.     Appeal  by  special leave from the  judgment  and  order dated  September  10,  1962 of the Calcutta  High  Court  in Income-tax Reference No. 115 of 1957.     A.V. Viswanatha Sastri, B. Sen Gupta and P.K. Ghosh, for the appellant. N.D. Karkhanis and R.N. Sachthey, for the respondent. The Judgment of the Court was delivered by Shah,  J.   The appellant is a Hindu  undivided  family  and carries  on  business  as  a  dealer  in  "iron   scrap  and hardware". Messrs Hoare Miller and Company Ltd.--hereinafter called  ’the  Company’  --were owners  of  a  jute  pressing factory  installed  on  a piece of  land  belonging  to  the Company. Adjacent to that land were two pieces of land:  one was  leasehold,  and  the other held by  the  Company  as  a licensee from the Government of West 604 605 Bengal.  On January 21, 1941 the Company leased out  to  one Ramnath Bajoria the jute pressing factory together with  the machinery standing on the land owned by the Company for  ten months  commencing  from January 10, 1941.  Ramnath  Bajoria failed  to vacate and deliver up possession of the  premises demised to him, after the expiry of the period of the lease, and the Company instituted a suit in ejectment against him.     By  an  agreement dated October 31, 1942  the  appellant agreed  to  purchase all the rights of the  Company  in  the factory  and the appurtenant premises for Rs.  2,45,000.  On November  14,  1942 the Company delivered to  the  appellant possession  of  the  property agreed to be  sold,  save  and except  the  factory  demised under  the  lease  to  Ramnath Bajoria and the machinery included in the lease. On February 26, 1943 the Company executed a conveyance in favour of  the appellant   conveying  the  factory  and   the   appurtenant premises. On June 12, 1943 the appellant agreed to sell to one  Ranada Prasad Saha the property purchased  from the Company for Rs. 4,73,364/3/6 free from all encumbrances. On August 10.  1943 the  appellant  was substituted as a plaintiff in  the  suit filed  by the Company against Ramnath Bajoria, and  obtained possession of the factory premises. By a deed of  conveyance dated  September 30, 1943 the appellant conveyed  to  Ranada Prasad  Saha  the factory and the appurtenant  premises  and delivered possession thereof. In the deed of conveyance  the property  sold  was described in three  separate  Schedules. Schedule  I, Press House, office, residential buildings  and three warehouses on land owned by the Company: Schedule 11 ; leasehold land together with a  warehouse known as  Kalibari godown:   Schedule   II1;  two warehouses on  land  held  as licensee by the Company from the Government of West Bengal. The Income-tax Officer. District Ii(1), CAlcutta. brought to tax  in  the hands of the appellant Rs. 2,24,864  bring  the profit  arising  out of the sale of the property  to  Ranada Prasad  Saha.  The Income-tax Appellate  Tribunal  partially modified  the  order  and reduced the total  income  by  Rs. 7,000.  The  Tribunal then drew up a statement of  case  and referred  the  following  question  to  the  High  Court  of Judicature at Calcutta:               "Whether on the facts and in the circumstances               of the case, the Tribunal was right in holding               that  the surplus of Rs. 2,35,211 received  by               the  assessee as a result of the sale  of  the               jute press referred to in the Appellate  order               arose  out  of an adventure in the  nature  of

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             trade  and was therefore rightly  assessed  to               tax?" The  High  Court answered the question in  the  affirmative. With special leave granted by this Court, the appellant  has appealed to this Court. L/P(N)4SCI-12 606     At  the material time, capital gains were  not  taxable, and  the only question failing to be determined  is  whether profit  made  by the appellant by sale of  the  property  to Ranada  Prasad  Saha was taxabIe under s. 10 of  the  Indian Income-tax  Act.  The  Tribunal found  the  following  facts proved: The  appellant  was carrying on business in iron  scrap  and hardware  and  never carried on any business in jute  or  in pressing jute. At the material time when the purchase of the Jute Press was made, the appellant had, because of  abnormal conditions  prevailing in the town of Calcutta,  closed  its business in iron scrap and hardware. The appellant purchased the jute press and the premises appurtenant thereto  subject to  litigation pending in the High Court,  effected  certain repairs and kept the factory in running condition, but  made no  attempt  to start or organise the business  of  pressing jute, and his plea that he was not able to secure labour for working  the  press was not true. Soon after he  bought  the factory, the appellant received an offer from Ranada  Prasad Saha  to  buy the factory and he  immediately  accepted  the offer to sell it to him.     These  facts in the view of the Tribunal indicated  that the   appellant  purchased  the  jute  press,   subject   to litigation,  with the sole object of reselling at profit  at the earliest opportunity, and therefore the transaction  was in  the  nature  of  a  trading  venture.  The  High   Court substantially agreed with this view.     Section  10  of the Indian Income-tax  Act,  1922  makes profits  and  gains  of  business,  profession  or  vocation carried on by an assessee taxable. The expression "business" is defined in s. 2(4) as inclusive of "any trade,  commerce, or manufacture or any adventure or concern in the nature  of trade,  commerce or manufacture". It is common  ground  that the  transaction  of purchase and sale of  the  factory  and appurtenant  premises was an isolated venture. To  reiterate the  sequence  of material events: the appellant  agreed  to purchase the Jute Press from the Company on October 31, 1942 subject to litigation pending in the High Court of Calcutta: possession  of  the  property except  the  premises  in  the occupation  of the tenant was obtained on November 14,  1942 and the sale deed was obtained on February 26, 1943: on June 12,  1943 the appellant agreed to sell the press  to  Ranada Prasad   Saha:  on  August  10,  1943  the   appellant   was substituted  as plaintiff in the suit flied by  the  Company against  Ramnath Bajoria, and after obtaining possession  of the demised premises the appellant executed on September 30, 1943  a  sale  deed conveying  the  property  and  delivered possession  to Ranada Prasad Saha. Do these facts  make  out the case that the transaction was an adventure in the nature of trade?     It  is  for  the revenue to establish  that  the  profit earned  in a transaction is within the taxing provision  and is on that account liable to be taxed as income. The  nature of the transaction must 607 be  determined  on  a consideration of  all  the  facts  and circumstances  which  are  brought on   the  record  of  the income-tax  authorities.  It has consistently been  held  by

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this Court that the question whether profit in a transaction has  arisen out of an adventure in the nature of trade is  a mixed question of law and fact: see G. Venkataswami Naidu  & Company  v. The Commissioner of Income-tax(1) in which  case this Court held that the expression "adventure in the nature of  trade" in sub-s. (4) of s. 2 of the Act  postulates  the existence of certain elements in the adventure which in  law would invest it with the character of trade or business  and that  a  tribunal  while considering a  question  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.   See also  Saroj  Kumar Maiumdar v. Commissioner  of  Income-tax, West Bengal(2). A large number of cases were cited at the Bar in support  of the  respective  contentions  of the  Commissioner  and  the assessee.  Passages  from judgments in the  same  case  were often cited claiming support for the respective contentions. No  useful  purpose  would  be served  by  entering  upon  a detailed analysis and review of the observations made in the light of the relevant facts, for 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. 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  purchase,  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: for instance, a man who purchases a  large quantity of aeroplane linen and sells it in different  lots, and  for  the  purpose  of  selling  starts  an  advertising campaign,  rents offices, engages an advertising manager,  a linen expert and a staff of clerks, maintains account  books normally used by a trader, and passes receipts and  payments in  connection  with the linen through  a  separate  banking account:  Martin  v.  Lowry(3): a person who  carries  on  a money-lending business purchases very cheaply a   (2) [1959] Supp. 1 S.C.R. 640. (2) 37 I.T.R.  242. (3) 11 T.C. 297. 608 vast  quantity  of  toilet paper and  within  a  short  time thereafter  sells  the whole consignment at  a  considerable profit: Rutledge v. The Commissioner of Inland Revenue(1); a person even though he has no special knowledge of the  trade in  wines and spirits, purchases a large quantity of  whisky sells  it  without taking delivery of it at  a  considerable profit:   Commissioners of Inland Revenue v. Fraser(2),  may be presumed having regard to the nature of the commodity and extent   of   the  transaction  coupled   with   the   other circumstances, to be carrying on an adventure in the  nature of  trade. These are cases of commercial commodities. But  a transaction  of purchase of land cannot be  assumed  without

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more to’ be a venture in the nature of trade. A director  of a  company  carrying  on  the  business  of  ware   houseman purchasing  a  number of houses with a view to  resale,  and selling  them  at a profit some years  after  the  purchase: Commissioners  of  Inland Revenue v. Reinhold(3):  a  person carrying   on  business  in  various  lines,  including   an Engineering   Works,   purchasing  land  which   was   under requisition  by  the Government,  negotiating  sale  thereof before  the land was derequisitioned, and selling  it  after the land was released: Saroj Kumar Mazumdar v.  Commissioner of  Income-tax,  West Bengal(4); and a syndicate  formed  to acquire, an option over a rubber estate with a view to  earn profit, and finding the estate acquired too small  acquiring another  estate  and selling the two estates  at  a  profit: Leeming  v.  Jones(3) may not be regarded  as  commencing  a venture in the nature of trade. These are cases in which the commodity  purchased and sold is not Ordinarily  commercial, and the manner of dealing with the commodity does not  stamp the transaction as a trading venture.     It  may  be emphasized from an analysis of  these  cases that  a  profit  motive in entering  a  transaction  is  not decisive,  for,  an  accretion to capital  does  not  become taxable income, merely because an asset was acquired in  the expectation that it may be sold at profit.     Purchase  of  the  property  by  the  appellant  was  an isolated  transaction  not related to the  business  of  the appellant.   The  Tribunal and the High Court were,  in  our judgment, in error in holding that the right of the  Company was  not sold to the appellant in the lands in Sch.  II  and Sch. III properties. The land in Sch. II was leasehold,  and on  it was constructed a warehouse and the land in Sch.  III was  held  as a licensee and two  warehouses  were  standing thereon.  The conveyance by the Company to the appellant  is not  on  the  record, but the recitals  in  the  deed  dated September   30,  1943  definitely  indicate that the  rights of the Company without any reservation were purchased by the appellant,  and the appellant sold its entire rights in  the properties in Schs. I, (1) 14 T.C. 490. (2) 24 T.C. 498. (3) 34 T.C. 389. (4) 11 T.C.297. (5) 15 T.C.333. 609 II  and  III without any reservation. It is  true  that  the appellant  had put the factory in a working  condition,  but had not organized a jute pressing business, had not obtained a  licence  for working the factory, had  not  attempted  to secure  orders  for  pressing jute,  and  had  not  employed labourers,  The  appellant’s claim that it was not  s9  done because  the  appellant could not secure labourers  has  not been accepted. But that is not a decisive circumstance.  The factory was in the occupation of the lessee Ramnath  Bajoria and possession was  obtained  after  August  10,  1943.  But before the 10th of August an agreement of sale was  executed by  the  appellant in favour of Ranada Prasad Saha.  In  the light  of  the sequence of events, the  inference  that  the appellant  had no intention to commence doing jute  pressing business does not necessarily follow. Even if that inference be regarded as binding upon the Court it cannot be  presumed that  the  sole intention of the appellant was  to  start  a venture  in the nature of trade. Barring the expectation  of profit  and realization of profit by sale of  the  property, there is no evidence bearing on the intention with which the property was purchased.

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   In the deed of conveyance dated September 30, 1943 there is  a reference to delivery of "joists, girders,  fabricated steel,  C.I. roofs, bolts, nuts, hooks and  ceiling  planks, being   portions  of  the  materials  of  the  godowns   and structures"  standing  on the land described  in  the  third schedule. It was submitted that after purchasing the factory and  the  appurtenant  premises  the  appellant   demolished "certain godowns" in Sch. III land and sold the material  as scrap.  This,  it  was  claimed, was--if  not  part  of  the business-=-a  venture similar to the normal business of  the appellant. But there is no evidence on the record as to  how many warehouses stood originally on Sch. III land. The  sale deed dated September 30, 1943 clearly states that there were two warehouses on steel-frames on the land held as  licensee by  the  Company and possession of these was  given  to  the purchaser Ranada Prasad Saha. Beside these warehouses  there were  three warehouses on the land described in Sch.  I  and one  warehouse on the land described in Sch. II. It  is  not claimed that these warehouses were insufficient for carrying on the business of jute pressing: nor is there any  evidence that the warehouse or warehouses which were demolished  were in a serviceable condition. The only fact which may be taken to  be  established is that a warehouse or  warehouses  were demolished  by the appellant and the materials were sold  as part of the property sold under the deed dated September 30. 2943.  From this circumstance, an inference that the  entire property  was purchased with intent to demolish and  dispose of as scrap cannot be raised.     Granting  that the appellant made a  profitable  bargain when  he purchased the property. and granting  further  that the appellant had when he purchased it a desire to sell  the property if a favourable offer was forthcoming. these  could not without other 610 circumstances  justify  an  inference  that  the   appellant intended  by purchasing the property to start a  venture  in the  nature  of  trade. Absence  of  advertisement  inviting offers  for purchasing the property, and absence of  brokers in  the  negotiations  for sale between  the  appellant  and Ranada  Prasad  Saha,  are circurmtances which  lead  to  no positive  inference.  There  is nothing  to  show  that  the appellant desired to convert the property to some other use. No brokers were employed for entering into a transaction  of sale. It appears that Ranada Prasad Saha on coming to  learn that  the factory was for sale approached the Company  after the sale deed was executed in favour of the appellant and he was informed that it had already been sold to the appellant. Thereafter  Saha  contacted  the  appellant  and  agreed  to purchase the property. The property  purchased was not  sudh that an inference that a venture in the nature of trade must have  been intended by the appellant in respect thereof  may be  raised. A person purchasing a jute press may  intend  to start  his  own business even if he is not already  in  that business,  or  he may let it out on  favourable  terms.  The property purchased by the appellant was capable of being let out  and it had in fact been let out by the  Company  before the date of sale in favour of the appellant. It was  capable of fetching annual income, and there is no evidence that  at the  material time it could not be reasonably let  out.   We therefore  discharge the answer given by the High  Court  in respect of the question submitted by the Tribunal and record a  negative answer. The appeal is allowed. The  Commissioner to pay the costs in this Court and the High Court. Appeal allowed. 611

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