9911796707
TMI Blog1952 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... on) in Travancore. The management of the estate was given to Harrisons and Crossfield Company, Limited, in 1929. After sometime, Capt. Alexander was employed by the Burmah Shell Company. He left the company in 1942 and became the agency manager at Coonoor of a big company called South India Plantation Agency, Limited. This company acted as agents and secretaries of various tea and coffee estates in South India. He also became the Secretary of the South India Planters' Association for a short period. In our about August, 1942, he sold his Sivalogam estate for a sum of ₹ 4,46,000. The profit made on this sale was taxed by the Income- tax Officer. The Appellate Assistant Commissioner, on a consideration of all the facts, held that the excess amount received by him over the purchase price was by way of capital appreciation and was not a taxable income. 3. In November 1942, Capt. Alexander purchased an estate known as Cottangady estate for a sum of ₹ 2,50,000. In the sale deed the sale was to be given effect from previous July and in March, 1943, he sold it for ₹ 5,50,000. This property was offered to the South India Planters' Association while Capt. Alexander ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal held that it was difficult to accept the applicant's contention that the intention of Capt. Alexander was to keep the property by improving it, and came to the conclusion that the idea at that time in his mind was to purchase the property with the money which he had already got by the sale of Sivalogam estate and sell it at a profit. In the circumstances, the Tribunal upheld the orders of the Income-tax Officer as confirmed by the Appellate Assistant Commissioner. The first question suggested by the applicant for reference to the Honourable High Court is dependent on the above facts. The Commissioner of Income-tax in his reply has stated that the finding of the Tribunal was essentially a finding of fact but the only question that could be referred to the High Court was the following question:- "Whether there was any material upon which the Tribunal could find that the deceased assessee had purchased the Sivalogam estate with the intention of making a profit by reselling it." We think that a question of law does arise from the order of the Tribunal. We, therefore, refer the following question to the Honourable High Court for their Lordships' opinion:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bound to bring into account the value of his closing stock either at cost price or at selling price or at any other price, that such considerations regarding the value of closing stock apply to traders and businessmen only, who buy and sell but who do not raise produce, and do not apply to people who raise produce for the purpose of sale. The Tribunal did not accept the argument of the appellant and held that the addition made by the Appellate Assistant Commissioner was quite in order. No question was raised before the Tribunal as to the quantum of the addition. The Commissioner of Income-tax in his reply has suggested the following question on this point:- "Whether in the circumstances of the case for the proper ascertainment of the profits and gains in respect of raising and selling coffee, tea and other produce, the value of the produce which remained in hand unsold at the end of the year of account should be considered?" We think that a question of law does arise and we refer the following question to the Honourable High Court:- "Whether in the circumstances of the case for the proper ascertainment of the profits and gains in respect of raising and selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted in his favour. The assessee sold the three estates situated in Cochin on 19th April, 1943, for ₹ 3,96,000. He sold the coffee estate situated in British India on the same date for ₹ 1,54,000. All these four estates had been purchased by him, as stated already, for two and a half lakhs of rupees, about two months before he sold them. The Umbidikhan estate was also sold immediately after the purchase for ₹ 1,05,000. The excess of the sale price over the cost of acquisition in respect of the Umbidikhan estate has been treated as taxable profits of the assessee during the year of account and this is not disputed before us by the assessee. With reference to the excess of three lakhs of rupees realised in respect of the sales of the four estates on 19th April, 1943, the contention of the assessee is that this sum of ₹ 3,00,000 is a capital accretion and not a business profit and that it was a casual and non-recurring receipt which was not liable to income-tax. The answer to this contention depends upon the question whether the activities of the assessee in connection with the purchase and sale of these estates amounted to a business in the sense in which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion one way or the other have not all been assembled by the Tribunal in the order of reference and we direct the Tribunal to make a fuller and ampler statement of the case after hearing the assessee and the Commissioner of Income-tax and in the light of any information or material that might be placed before it. The answer to the second question depends upon whether the accounts of the assessee had been kept on a cash basis or on a mercantile accountancy system. It cannot be contended that the assessee, in producing coffee, tea or rubber on his estates, did not carry on a business or that the profits derived from the operations carried on by the assessee did not constitute (business) profits, though by reason of a portion of the income being derived from agriculture, that portion might be exempt from tax. The Tribunal has not adverted to the system of accounting adopted by the assessee. If the system adopted by him is a mercantile accountancy system, then the value of the produce which remained on hand unsold at the end of the year of account would have to be taken into account as the value of the closing stock. If the system of accounting is on a cash basis then it is only the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and after some years he was employed as a Labour Officer in the Burmah Shell Company for about 12 years and he retired from this position in January, 1942, receiving a sum of ₹ 34,195 from his Provident Fund accounts. After retirement, he went to Coonoor and became the agency manager of South India Plantations Agency, Limited, Coonoor. This company acts as agents and secretaries of various tea and coffee estates in South India. He occupied this post till February, 1943, when he joined the directorship of the said company where the remained till October, 1943. He was also the Secretary of the Southern India Planters' Association for about three months. He left for England in January, 1944, where he died in July, 1946. 4. In August, 1942, he sold Sivalogam estate for ₹ 4,46,000. In September, 1942, the assessee started negotiations for the purchase of Cottangady group consisting of four estates: Cotacooly coffee estate measuring 191 acres in Palghat taluk in South India, Coombacooly, Chandramalai and Cottangady estates measuring 798 acres situate in Cochin State. These estates were first offered to the Southern India Planters' Association at a time when the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the sale of Cottangady and so I will not go in for this proposed extension myself." Similarly, by a letter of the same date (8th February, 1943) (annexed hereto as Annexure E and forming part of the case) to Davidson and Co., he informed them that as Cottangady was being sold, he would like to cancel the order for a Sirocco Drier. The report of Messrs. Davidson &Co., Ltd. dated 12th February, 1943 (annexed hereto as Annexure F and forming part of the case) confirms that the estate has now been sold to an Indian purchaser. 7. On 13th February, 1943, the assessee entered into a written agreement (annexed hereto as Annexure G and forming part of the case) with the said Mr. George to sell the four groups of estates for ₹ 5,50,000. As the assessee had already received the sum of ₹ 27,500 as advance on 3rd February, 1943, the balance of ₹ 5,22,500 was to be paid before 31st March, 1943. The assessee was required, vide Clause 7 of the agreement, to make out a good and clear title to the premises to the satisfaction of the purchasers' solicitors on or before the 15th day of March, 1943; otherwise, the advance payment of ₹ 27,500 will become refund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; that the assessee by virtue of his position as Agency Manager of the South India Plantation Agency, Limited, Coonoor, and Secretary of the South India Planters' Association was fully conversant with the values of estates and he had utilised this knowledge in buying and selling Umbidikhan and Cottangady estates at large profits; that the sale deed in respect of the Cottangady estate was not executed till 11th February, 1943, which was more than a week after he had agreed to sell this estate and had received an advance of ₹ 27,500 from Mr. P.S. George; that as the sale was to be made to a company, the assessee was obliged to have his own title perfected before he could transfer it; that improvements were also contemplated by the original owners and the assessee, beyond obtaining estimates, had not expended any substantial amount thereon which indicated that the object was merely to make the estate more attractive for resale. 11. The Tribunal held that almost simultaneously with the negotiations for the purchase of the estate and its improvement, negotiations for its sale were also being carried on by the assessee. The letters written to Harrisons and Crossfield and David ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantity of produce at a cost of ₹ 20,000 and if he has been able to sell 70 per cent. of his produce before the close of his accounting year at ₹ 18,000 according to the proposition put before us, he has made a loss of ₹ 2,000 during that particular accounting year, whereas he has sold 70 per cent. of his produce which cost him ₹ 14,000 at a price of ₹ 18,000 and has thus made a profit of ₹ 4,000. The difference between the so-called loss of ₹ 2,000 and the profit of ₹ 4,000 which is the correct result, i.e., ₹ 6,000, is the cost price of the 30 per cent. produce remaining unsold at the end of the accounting year. The learned lawyer for the appellant errs in his belief that such principles, as are normally applicable to unsold stocks of a business, are not to be applied to estates which grow produce and do not buy it. In our opinion, it makes no difference so far as the principle goes whether a businessman buys what he sells or grows what he intends selling." The additions made by the Appellate Assistant Commissioner were, therefore, upheld by the Tribunal. 14. In their judgment, dated 19th March, 1951, their Lordships hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows, in view of the mercantile system adopted by the managing agents, that the income from the estates has to be computed by valuing the closing stock of unsold produce at cost price calculated by taking the proportion of the working expenses relating to the unsold stock. 15. The questions of law already referred are:- (1) Whether there are materials for the Tribunal to come to the conclusion that the sum of ₹ 3,00,000 received by Captain T.P.M. Alexander by the sale of Cottangady estate in excess of its purchase price was a revenue receipt. (2) Whether in the circumstances of the case for the proper ascertainment of the profits and gains in respect of raising and selling coffee, tea and other produce of the estate, the Tribunal was right in upholding the decision of the Appellate Assistant Commissioner in taking into consideration the value of the produce which remained in hand unsold at the end of the year of account. T. M. Krishnaswami Ayyar for M. Subbaraya Ayyar, for the assessee C. S. Rama Rao Sahib, for the Commissioner JUDGMENT The two questions that were referred to this Court were:- "(1) Whether there are materials for the Tribunal to come to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for about three months. He left India finally in January, 1944. He died in England in July, 1946. When the assessee sold the Sivalogam estate in August, 1942, he realised a sum of ₹ 4,46,000. That obviously provided the capital for his subsequent transactions. In September, 1942, the assessee started negotiations for the purchase of four estates, comprehensively referred to as the Cottangady group of estates. One of these four belonged to one Mr. Hall, and the other three to his mother Mrs. Emily Hall. These estates were first offered for sale to the Southern India Planters Association at a time when the assessee was the Secretary of that association. The association declined the offer. On 2nd September, 1942, the assessee inspected the Cottangady group of estates with a view to purchase. Again on 6th October, 1942, he inspected the estates along with Mr. Walker Leigh of Messrs. Davidson & Company. The company sold agricultural implements. The inspection of Mr. Leigh was to suggest improvements to the estate and the purchase of the necessary material including machinery. On 9th October, 1942, Mr. Leigh drew up a report which he forwarded to Harrisons and Crossfield, who, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the assessee placed an order with them for the supply of a Sirocco Drier and 44" S.A. Roller. These were two items of machinery included in the improvements suggested by Mr. Leigh in his report dated 9th October, 1942. The order itself was not put in evidence, and there was nothing to indicate on which date the order was placed with Davidson & Co. Davidson & Company would appear to have supplied the 44" S.A. Roller, because in the letter dated 8th February, 1943, the assessee asked for the erection of this plant. In the same letter the assessee cancelled his order for the Sirocco Drier. It was represented during the arguments before us that the 44" S.A. Roller cost about ₹ 9,500. As the assessee himself explained in his letter dated 8th February, 1943, he cancelled the order for the Sirocco Drier as he had already taken steps to sell the Cottangady group of estates. On 3rd February, 1943, the assessee entered into an oral agreement with Mr. P.S. George to sell the Cottangady group of estates to him for ₹ 5,50,000 and the assessee received an advance of ₹ 27,500. On 13th February, 1943, the assessee executed the written agreement of sale. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accretion. That contention was rejected by the Income-tax Officer and also on appeal by the Assistant Commissioner of Income-tax. A further appeal preferred by the assessee to the Tribunal also failed. It was subsequent to that that the first question was referred to this Court under Section 66(1) of the Indian Income-tax Act. When the matter came up for hearing first, the Court was of the opinion that the statement as drawn up by the Tribunal and submitted to the Court was defective, and the Court called upon the Tribunal to furnish a further and better statement of the case. That statement was furnished. In paragraph 11 of the further statement submitted by the Tribunal it recorded:- "The Tribunal held that almost simultaneously with the negotiations for the purchase of the estate and its improvement, negotiations for its sale were also being carried on by the assessee. The letters written to Harrisons and Crossfield and Davidson & Co., dated 8th February, 1943, suggested that the negotiations for sale were complete by that date and that in these circumstances, it was difficult to hold that the assessee's intention at the time of the purchase of the property was to k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssable to tax. In Balgownie Land Trust Ltd. v. Commissioners of Inland Revenue* Lord President Clyde pointed out at page 691:- "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 of trade, but they are not necessarily distinctive of it; much depends on the circumstances." Where, as in this case, the purchase and resale of landed property constituted an isolated transaction, it is a matter of extreme difficulty to determine whether this was an adventure in the nature of trade. But as Lawrence, L.J., pointed out in Leeming v. Jones**:- "It seems to me 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 properly." The test formulated by Lord President Clyde in Commissioners of Inland Revenue v. Livingstone*** at page 542 was:- "I t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t then some of his conduct at least, e.g., his plans to improve the equipment of the estate and his plans to manure the soil on a long range view, was as consistent with his desire to keep the estate for himself as with a desire to make it more attractive for resale. Nor can the test suggested by Rowlatt, J., in Graham v. Greene* really help us in this case. It should be remembered that what that learned Judge had to consider in the case before him was not a case of an isolated transaction. The learned Judge observed at page 312:- ".........There is no doubt that if you set on foot an organised seeking after emoluments which are not in themselves profits, you may create, by way of a trade or an adventure or a vocation, a subject matter which does bear fruit in the shape of profits or gains. Really a different conception arises, a conception of a trade or vocation which diners in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without perhaps an abuse of language, there is some thing organic about the whole which does not exist in its separate parts." At page 313, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion then of reselling it at a profit, a sale under changed circumstances would not stamp the transaction of sale with a business character. The sale by itself would not be an adventure in the nature of trade, though the profit motive had actuated the sale. But then, the intention to resell at a profit would not by itself make a transaction of purchase and sale an adventure in the nature of trade. This was clearly laid down in Leeming v. Jones*, by Lord Buckmaster: "An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income." Viscount Dunedin made it even clearer at page 360:- "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments but per se it leads to no conclusion whatever." These principles were accepted by a Full Bench of the Rangoon High Court in Mrs. Sooniram Poddar v. Commissioner of Income-tax, Burma**. After referring to Leeming v. Jones*, Roberts, C.J., la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier at page 220 Munir, J., pointed out:- If, however, at the date of the purchase the object of the purchaser was not to bring the article in his own use but to sell it at a profit, there can hardly be any doubt that in that case the transaction would be a venture in the nature of trade." It is not really necessary for the purpose of deciding the case before us to consider whether the Rangoon view or the Lahore view, is in our opinion, the correct one. The observation of the learned Judges in each of these two cases have to be construed with reference to the facts of that case. In both cases the learned Judges held that the purchase and resale of gold were outside the scope of the normal trading activities of the assessee, which in each case was a money-lending firm. Suffice it to say Captain Alexander's position was totally different. To that we shall advert later. The learned Judge of the Lahore High Court held that the case before them fell within the scope of the rule in Rutledge v. Commissioners of Inland Revenue. Even in that case the Lord President himself observed at page 497:- "the crisis of judgment might turn on the particular circumstances." Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er had ceased to be in the service of the Burmah Shell Company; and with his connections with the South India Plantations Agency Ltd. and the Southern India Planters Association he was obviously in a better position in August. 1942, to look after his estate with his residence at Coonoor. Yet he sold the Sivalogam estate in August, 1942. His association with the South India Plantations Agency and the Southern India Planters Association gave him the means of knowing which were the estates the European owners were anxious to sell at that period. Though there was no evidence on the point, when Captain Alexander conceived the idea of leaving India, in fact he did leave India for good in January. 1944. It is against this background that the sale of the Sivalogam estate and the evidence regarding the subsequent purchase and sale of estates by Captain Alexander have to be viewed. We observed earlier that Captain Alexander's position between August, 1942, and March, 1943, was in no way analogous to that of the assessees in Mrs. Sooniram Poddar v. Commissioner of Income-tax, Burma [1939] 7 I.T.R. 470, and Behari Lal Jhandu Mal, In re [1944] 12 I.T.R. 209. He was a planter to start with. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady group of estates constituted an adventure in the nature of a trade, learned counsel for the assessee relied on Cooksey and Bibbey v. Rednall*. The facts of that case were: In 1924 Cooksey, a solicitor, and Bibbey, a farmer, purchased jointly a farm within six miles of Birmingham and let it to a tenant. Between 1920 and 1925 the firm in which Cooksey was a partner purchased and developed three housing estates, and from 1930 to 1940 Cooksey and Bibbey in partnership bought and developed live housing estate. It was admitted that these were trading transactions for income-tax purposes. In 1938 Cooksey and Bibbey sold the farm to the Birmingham Corporation and they were jointly assessed to income-tax on the profit realized. Croom Johnson, J., pointed out at page 518 that Bibbey had nothing to do with Thomas Cooksey and Company which carried out the operations referred to above between 1920 and 1925. The learned Judge observed:- "Is it any evidence that another partnership, (Thomas Cooksey and Co.) which is not this partnership, was engaged in speculation and development of land by building houses between 1920 and 1925? This assessment is raised against these two gentlemen on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states was sold in what was then British India by these agents, and the sale proceeds paid into Captain Alexander's account with a bank in British India. The return of income submitted by Captain Alexander for the year of assessment was not placed before us. But it was not disputed that he did not in the first instance include in his return any income from any of these three estates. Eventually, the assessee filed the profit and loss statements furnished to him by his agents with reference to each of these three estates. That the amount shown as profits in these statements was assessable, to tax as income was not in dispute before us. These profit and loss statements showed fairly large stocks of estate produce unsold at the end of the accounting year. Those stocks were sold in the next accounting year. The Income-tax Officer treated the sale price so realised as the value of the stock unsold on 31st March, 1943, treated it as income that accrued during the accounting year ending on 31st March, 1943, and added the sum so arrived at to the profits ad disclosed in the profit and loss statement the assessee received from his agents. No separate accounts were maintained for any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already observed, the assessee did not maintain any accounts of his own. The return he submitted is not before us; but then the income from the estates was obviously not included in the original return. The Income-tax Officer recorded that the method of accounting on which his assessment was based was mercantile. No objection appears to have been taken before the Assistant Commissioner that the mercantile basis of accounting should not have been adopted by the Income-tax Officer when the assessee himself did not adopt it. Even before the Tribunal no such specific plea appears to have been taken. In its order the Tribunal recorded:- "The argument of the learned lawyer for the (assessee) appellant seems to be that businesses of this type need not take into consideration, for the purpose of determining their income from year to year, the value of any stock remaining unsold at the close of their accounting year." That contention the Appellate Tribunal rejected. In view of the observations in the order of this Court, to which one of us was a party, and with which we entirely agree, "If the system adopted by the assessee was a mercantile accountancy system, then th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the mercantile basis. With the exercise of such a statutory right given to the Income-tax Officer, there can be no scope for any interference in the circumstances of this case at this stage. That this was not the approach to the question at issue either by the Assistant Commissioner or by the Tribunal--and it must be remembered the question was not raised in that form before themdoes not really affect the determination of that question. The Tribunal recorded that the method of accounting adopted by the agents of the assessee was mercantile. In view of what we have said above, the question whether the accounts maintained by the agents should be treated as the accounts of the assesses even when he maintained none of his own, does not arise for consideration. Even had these accounts of the agents not been produced, the Income-tax Officer would have had the right to adopt the mercantile basis of accounting for computing the income of Captain Alexander from his estates when he himself had not regularly employed any method of accounting for his income from that source. As the Tribunal observed, the correctness of the computation as finally made by the Assistant Commissioner was no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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