TMI Blog1952 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was its Secretary. The Association refused to buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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:- Whether there are materials for the Tribunal to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,441 0 0 Cottangady estate 27,358 0 0 Umbidikhan estate 4,000 0 0 Total 36,799 0 0 The last figure of ₹ 4,000 is an estimate only, as no figures were available with the Appellate Assistant Commissioner. On appeal to the Tribunal, it was argued that in a business of this type an assessee is not 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 fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice offered for it was attractive. He purchased from a lady Mrs. Emily Hall, three estates known as Chandramalai, Cottangady and Coombrakudi situated in Cochin State by a sale deed, dated 11th February, 1943. On 26th February, 1943, he purchased an estate known as Cothakudi coffee estate from Mrs. Emily Hall. This property was situated in British India. The cost price of these four estates came to ₹ 2,50,000. He purchased another estate known as Umbidikhan estate in partnership with another person for a sum of ₹ 75,000 but no conveyance was executed 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 dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were not effected and the order for machinery was cancelled in a short time and the estates were sold out. These and similar circumstances should have been taken into account by the Tribunal and its conclusion of fact on these materials should have been formulated in the reference. It would be unsatisfactory and unfair, both to the revenue authority and to the assessee, if we content ourselves with giving a simple answer in the negative or affirmative to the first question referred to us. The materials which would enable us to come to a conclusion 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a planter in South India. He owned, in addition to the estates now under consideration, Sivalogam estate in Travancore State purchased in 1929 and sold in August 1942; Kailasam estate sold in 1938; Aruna Group of estates purchased in 1936 jointly with Sir James Doak and sold in March, 1949; Umbidikhan estate purchased in October, 1942, and sold in March, 1943. 3. All the estates were being managed by agents. Sivalogam estate was managed for him by Messrs. Harrisons and Crossfield Limited, since 1929. The assessee himself was originally a planter in South India 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 Planter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till 11th February, 1943, in respect of the three estates in Cochin State and 26th February, 1943, of the Cotacooly estate in British India, which was more than a week after the assessee had already agreed to sell these four estates to Mr. P.S. George of Quilon or to his nominee and had received an advance of ₹ 27,500 on 3rd February, 1943. 6. After receiving the advance, the assessee by a letter, dated 8th February, 1943 (annexed hereto as Annexure D and forming part of the case), to Harrisons and Crossfield informed. I have now come to final terms regarding 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 heret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along was to sell the estate at a profit; that the modus operandi in the purchase and sale of Cottangady estate was similar to that adopted by the assessee in the Umbidikhan estate which also he purchased in October, 1942, for ₹ 75,000 in partnership with one Mr. H.S. Cameron, an employee of the Southern India Plantation Agency, Limited, and sold it in March, 1943 for ₹ 1.05 lakhs at a profit of ₹ 30,000 and the sale deed was executed directly between the original owner, Mr. Mayer, and the ultimate purchaser, the Southern Plantations, Limited, Calicut; 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e additions were reduced to the following amounts:- Sivalogam estate ₹ 5,441 Cottangady group of estates 27,358 Umbidikhan estate 4,000 The assessee did not dispute the correctness of these figures. But she contended before the Tribunal that in a business of this nature an assessee was not bound to value his closing stock as the assessee was not a trader engaged in buying and selling. The Tribunal negatived this contention for the reason that it would result in an absurd position holding:- No correct profit or loss in any year can be ascertained if the proposition put forward by the learned lawyer were to be adopted. An illustration would clearly bring out the unworkability of the suggestion. If the owner of an estate has been able to raise a particular quantity 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, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexure I(1) to I(5) forming part of the case] shows that the income from the estate had been computed by them on mercantile basis. The statement classifies the receipts as under:- lb. Rs. A. P. For account sales 46,264 29,493 12 2 Estate sales 1,067 454 9 10 Valuation 1,646 lb. ... ... ... ... Valued at Re. 0-11-0 per lb. 1,646 1,131 15 6 Total 48,978 31,080 5 6 The above account rendered by the managing agents for the Sivalogam estate was by inclusion of the unsold stock. In these circumstances, there is reason to think that the accounts maintained by the managing agents for the said estates were kept on the mercantile basis. As their Lordships have already held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinued by his widow--it should be easier to refer to him as the assessee in the rest of this judgment. The assessee was a planter in South India. He acquired estates where rubber, tea, coffee and cardomom were raised. We need not concern ourselves in this case with the Kailasam estate which the assessee owned and which he sold in 1938; nor with the Aruna group of estates which the assessee purchased in 1936 jointly with Sir James Doak ; the assessee's interest in the Aruna group of estates appears to have been sold in March, 1949. The assessee purchased the Sivalogam estate in Travancore State in 1929; he sold that in August, 1942. That estate was managed by the agents Messrs. Harrisons and Crossfield all through. Though the assessee was originally a planter himself, for a period of about 12 years, i.e., between 1930, and January, 1942, he was employed as a Labour Officer in Burmah Shell Company. After retiring from the service of the Burmah Shell Company in January, 1942, he obtained employment as the agency manager of the South India Plantations Agency Ltd., at Coonoor. That company acted as agents and secretaries of various tea and coffee estates in South India. He occupied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, i.e., to improve the productivity of the estates on a long term plan. Though Mr. Hall and his mother Mrs. Emily Hall offered the estates for sale first to the Southern India Planters Association, they would appear to have been keen on the idea that the sale should be to a person who would keep the estates and satisfy their sentiment based on pride of ownership of a well-maintained estate. On 21st September, 1942, Mr. Smith, Director of South India Plantations Agency Ltd., of which the assessee was then the Agency Manager, wrote to Mr. Hall:- Glad that Alexander is pleased with the estate. I am sure that Mrs. Hall and you will be better pleased for the estate to be sold to a proprietor who will take the same interest in it as you have done in the past, rather than to a public company. From the extracts of correspondence supplied by the assessee during the enquiry before the Income-tax authorities and appended to the printed record made available to us, it would appear that on 13th November, 1942,--it should be remembered that the assessee took possession of the estates on 11th November, 1942,--the assessee supplied his agent Velu Menon of Cottangady with sets of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... George or his nominee. Clause 7 of that agreement required the assessee to make out a good and clear title to the properties sold, and that was apparently why the assessee had to obtain the sale deeds from the previous owners, Mr. Hall and Mrs. Emily Hall. ₹ 27,500 of the agreed purchase price, it should be remembered was paid to the assessee on 3rd February, 1943, itself. The agreement of 13th February, 1943, provided for the payment of the balance before 31st March, 1943 ; the balance was actually paid on 10th March, 1943. On 19th April, 1943, the assessee executed the sale deeds in favour of Chandramalai Estate Ltd. Thus the position was that within about three months after his purchase of the Cottangady group of estates for ₹ 2,50,000 the assessee entered into an agreement to sell the estates for ₹ 5,50,000 and within a month thereafter, i.e., by the 10th March, 1943, he received in full that ₹ 5,50,000. The Income-tax Officer treated the difference between the purchase price and the sale price in the hands of the assessee as income that accrued to the assessee during the year of account and assessed that sum to income-tax. The contention of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Cameron to the Southern Plantations Ltd., Calicut, Mr. Mayer executed the sale deed under directions of the partnership directly in favour of the Southern Plantations Ltd., Calicut. The assessee's share of the profit of ₹ 30,000 was treated as income and was assessed to income-tax. The assessee appears to have accepted that decision. It was as a receipt from business that the ₹ 3,00,000 was assessed to income-tax. That represented the profits of an isolated transaction, the purchase and sale of the Cottangady group of estates, It is well-established that if a person is engaged in the buying and selling of lands, he can be assessed to tax upon any surplus only if he is shown to have carried on a business of buying and selling lands. Business has been defined by Section 2(4) of the Indian Income-tax Act. 'Business' includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Even a single venture may amount to business, and the profits of such a single venture may by taxable as income arising from business. An isolated transaction of purchase and sale of land, even if it is not transaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - The respondents (assesses) began by getting together a capital stock sufficient (1) to buy a second-hand vessel, and (2) to convert her into a marketable drifter. They bought the vessel and caused it to be converted at their expense with the object in vies, and they successfully put her on the market. From beginning to end, these operations seem to be the same as those which characterise the trade of converting and refitting second-hand articles for sale. It may be that, in commercial practice relative to ships, this kind of business is not usually followed separately from the general business of ship-builders and shiprepairers. But, even so, I think, it is none the less 'in the nature of trade'. 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 seems to me of the very essence of trade. That test may not be conclusive in deciding the question at issue in the present case. The conduct of the assessee, Captain Alexander, particularly between the date of purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cott L.J., laid down:- Unless ex facie the single transaction is obviously commercial, the profit from it is more likely to be an accretion of capital and not a yield of income. The learned Judge qualified that statement by pointing out:- But that question is almost necessarily one of fact. That case again did not deal with an isolated transaction, but with a series of transactions with satisfied the test formulated by Rowlatt, J., in Graham v. Green**:- A person......can organize himself to do that in a commercial and mercantile way, and the profits which emerge are taxable profits, not of the transaction, but of the trade. This was quoted with approval by Scott, L.J., at page 260. Even in the case of isolated transactions, judicial research and learning both in Great Britain and India have failed to produce any test of universal application, an infallible test. It is really with reference to the facts held proved in each case that the difficult question has to be answered, whether a given transaction was an adventure in the nature of trade. The Tribunal found that Captain Alexander's intention when he purchased the Cottangady group of estates wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of ₹ 17,525 each, by withdrawing money from fixed deposits before their maturity and from a firm in which it was a partner and also by borrowing from another firm. In 1936, the assessee sold one-fourth of the gold for ₹ 13,800 and thus made a profit of ₹ 3,037, which was assessed by the Income- tax authorities as profits from business under Section 10 of the Indian Income-tax Act. After pointing out that Commissioners of Inland Revenue v. Livingstone* was not an authority for the position taken up by the assessee that the profits of the sale of a fourth of the quantity of gold he had purchased did not constitute assessable income, and after explaining the observations of Lord President Clyde in the above case with reference to that learned Judge's observations in the latter case of Rutledge v. Commissioners of Inland Revenue Munir, J., observed at page 225:- The essential test in my opinion in such cases is whether file purchase of metal was made not with the intention to use it nor with the intention to invest one's capital in it but with the sole object of selling it in future in order to make a profit. If the purchase is with that intention the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope. Did the evidence on record justify the finding of the Tribunal, that the purchase and sale of the Cottangady group of estates by the assessee constitute an adventure in the nature of trade. We have no hesitation in answering that question against the assessee. That it is possible for a different judicial tribunal to arrive at the opposite conclusion--and as Lawrence, L.J., pointed out in Leeming v. Jones* there is no middle course open or possible--is no justification for a court acting within the limited scope of Section 66(1), Indian Income-tax Act, to refuse to accept the finding of the Tribunal. Captain Alexander sold the Sivalogam estate in August, 1942, and was in possession of considerable funds. Judicial notice can be taken of the facts, that there was a real threat of invasion of India by the Japanese a little earlier, and that there were civil disturbances in this country in August, 1942, when the Quit India campaign against the Britishers was intensified. It was a period when planting estates changed hands and Indian purchasers came in. In one of the letters on record in this case, Davidson Co. pointed out on 12th February, 1943, that the Cottangady group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purchase of the estate and its improvement, negotiations for its sale were also being carried on by the assessee. That might nor be strictly accurate in the absence of any specific evidence as to when exactly negotiations for the sale to Mr. P.S. George were commenced. But obviously the negotiations must have: commenced sometime before 3rd February, 1943. Between 11th November, 1942, and 3rd February, 1943, Captain Alexander did not even obtain sale deeds from the previous owners, Mr. Hall and Mrs. Emily Hall. He got the sale deeds from the vendors subsequent to 3rd February, 1943, obviously only to satisfy the conditions of clause 7 of the agreement of sale dated 11th February, 1943, which Captain Alexander executed in favour of Mr. P.S. George. That condition barred the adoption of the technique of sale of the Umbidikhan estate during the same period. The sale deed in the case of the Umbidikhan estate was executed directly in favour of the vendee from Captain Alexander and his partner by the previous owner Mr. Mayer from whom Captain Alexander and his partner bought that estate. To support the contention, that the sale of the Umbidikhan estate was an irrelevant fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclude the question at issue, whether the purchase and sale of the Cottangady group of estates was an adventure in the nature of trade. But the purchase and sale of the Umbidikhan estate and the same period, though it was in partnership with another, is a relevant piece of evidence to be considered in conjunction with the other pieces of evidence on record. We feel that there was certainly sufficient evidence for the Tribunal to conclude that the transaction of the purchase and sale of the Cottangady group of estates was an adventure in the nature of trade and that the profits of that transaction in the hands of the assessee Captain Alexander constituted assessable income. The first question is answered in the affirmative and against the assessee. The facts necessary for the disposal of the second of the questions referred to us are as follows:--During the accounting year, the assessee. was in possession of three estates, the Sivalogam estate, the Cottangady group of estates and the Umbidikhan estate. Each of These three estates was managed by agents, the Sivalogam estate by Messrs. Harrisons and Crossfield, the Cottangady group of estates by Pierce Leslie Co. and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 actual receipts and disbursements that will have to be taken into account in arriving at the assessable profits during Inc year of account. It was admitted that the assessee did not maintain any separate accounts of his own for any of these three groups of estates. The income from these estates was not taxed in any year prior to 1942-43; nor apparently was there any scope for any assessment in any subsequent year; Captain Alexander parted with all the three estates before the end of March, 1943. After pointing out that the question, whether the estate accounts had been kept by the agents on a mercantile or cash basis, did not come up for consideration in any of the prior years as there was no taxable income from the estates, the Tribunal recorded in their further and better statement of the case finding:- It follows, in vies 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 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintain any accounts of his own. No doubt, an assessee has a statutory right to choose his method of accounting. But before he can claim that his assessable income should be computed on the basis of the system of accounting of his choice, he must satisfy two conditions, (1) that it was a method of accounting regularly employed and (2) that it was a method of accounting from which, in the opinion of the Income-tax Officer, the income, profits and gains could be properly deduced. If neither of these conditions was satisfied, the proviso to Section 13 gave a statutory right to the Income-tax Officer to determine the basis and manner in which the income should be computed selves whether the second of these two conditions was satisfied. The assessees did not maintain any accounts. He did not regularly adopt any method of accounting for his income from the estates. So, the provisions of the proviso to Section 13 that had to be invoked were, if no method of accounting has been regularly employed, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. No method of accounting had been employed by the assessee and the Income-tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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