TMI Blog1960 (3) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay, which was one of two such mills in the whole of India manufacturing filature silk, was acquired from the Chhoi Silk Mills Ltd., Bombay, in whose compound it was situated, by a syndicate of four consisting of: Mangoomal Atma Singh, who owned 3 annas share. Brijilal Narandas, who owned another 3 annas share. S. Huie, who owned one anna share and Dewan Bahadur A.M. Murugappa Chettiar, who owned an 8 annas share. This mill so purchased was named Jaya Spun Silk Mills . The purchase price was ₹ 2,62,500. Some incidental expenses were incurred in connection with the purchase. On December 7, 1943, Huie sold out his share; on January 27, 1944, Brijilal Narandas did likewise and on June 23, 1944, Mangoornal Atma Singh divested himself of his interest in the concern, the net result being that Dewan Bahadur Murugappa got the entire mill under his control for ₹ 2,88,750 besides some incidental expenses. The finances for this transaction were found by Dewan Bahadur Murugappa from his monies kept in Murugappa and Sons (Travancore) Ltd. and Murugappa and Sons, Madras, but the actual purchase of the mill was made in the name of Vellayan, no reasons for this being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onged to his father and that he was entitled to sell the same and that he was in management on his behalf. It may also be stated that Vellayan himself had become a director of the assessee company on November 6, 1943, and managed the mills till he went away to Rangoon in the end of 1945. 5. The assessee company was in correspondence from June, 1944, till the end of the year with American business interests with a view to importing additional machinery for the purpose of developing the Jaya Spun Silk Mills at Bombay, for improving the working of the mills and for the purpose of preparing and spinning noil yarn from spun silk waste. 6. Murugappa worked the mills from the date of their purchase to September 1, 1944, when they were sold to the assessee company and the assessee worked them from September 1, 1944, to February 28, 1946. Meanwhile, in or about July, 1945, the Mysore Spun Silk Mills Ltd., Chennapatna, Mysore, negotiated for the purchase of the mills, these negotiations ranging during the greater part of October, 1945. On December 17 of that year, an agreement was entered into between the parties by which the mills and certain stores were agreed to be Sold to the Mysor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has applied the provisions of section 10(2)(vii) and since the sale price of the mills was in excess of the written down value, he computed as profits under section 10(2)(vii) the surplus to the extent of ₹ 85,791 which is equal to the total depreciation that had been allowed during the three previous assessment years 1945-46 to 1947-48. Next, he took the surplus of ₹ 3,41,586 shown above as profit derived from the business and included both these sums in the assessment of the company for the year 1947-48, the accounting year for which ended on January 31, 1946. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner. 7. On appeal before the Tribunal, it was contended that the sum of ₹ 85,791 worked out by the Income-tax Officer to be the profit under section 10(2)(vii) and representing as it does the difference between the written down value and the original cost of the mills was not income from business and, therefore, not liable to be taxed. The arguments in support of this stand were: (1) that the entire plant and machinery was sold as a going concern as a result of the cessation of the business by the assessee company; (2) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, that the income was not either of a capital or casual nature and that section 4(3)(vii) had no application. (11) On these facts, the two questions that arise are: (1) Whether, on the facts and in the circumstances of the case, the sum of ₹ 3,41,586 being the excess realised on the sale of Jaya Spun Silk Mill plant and machinery constitutes income from business and so was assessable to tax? (2) Whether, on the facts and in the circumstances of the case, the sum of ₹ 85,791 being the difference between the cost price and the written down value of the Jaya Spun Silk Mill plant and machinery is assessable to income-tax under the provisions of section 10(2)(vii) of the Act? R. Venkataraman, for the assessee C. S. Rama Rao Sahib and S. Ranganathan, for the Commissioner JUDGMENT The judgment of the court was delivered by RAJAGOPALAN J.--The assessee was a public limited liability company. When the company was formed with a share capital of ₹ 6 lakhs, the objectives of the company as set out in clause 5 of the memorandum of association were to manufacture abrasives and steel products. The late Dewan Bahadur A.M. Murugappa Chettiar and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Mills. These mills Murugappa sold to the assessee company for ₹ 4.25 lakhs. It should be remembered that Murugappa himself had spent ₹ 2,88,750 for acquiring the mills. Vellayan, who as we have pointed out, was also a director of the assessee company, continued to be in charge of the silk mills at Bombay. Negotiations for the sale of the silk mills to the assessee company commenced, as we pointed out earlier, even in April, 1944, though the transaction was completed only in September, 1944. From June, 1944, the assessee company took steps to improve the silk mills after completing the purchase, and some correspondence was entered into with American business interests for the import of additional machinery. The assessee company worked the silk mills from September, 1944, to February, 1946. The profits the assessee company made from September 1, 1944, to December 31, 1944, amounted to ₹ 51,449. In 1945, the assessee company realised a profit of a little over ₹ 2,50,000. During the two months of 1946 the profits realised amounted only to ₹ 1,734. By about July, 1945, the Mysore Spun Silk Mills Ltd., opened negotiations for the purchase of the J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings of the departmental authorities and the Tribunal. The Income-tax Officer treated it as income from the business the assessee company carried on. He pointed out that clause 15 in the memorandum of association provided for the acquisition and sale of properties. He, therefore, treated the acquisition and sale of the silk mills as a transaction in the normal course of the business activities of the assessee company and treated the profits of the sale as an item of income of the assessee's business. He apparently overlooked the fact, that clause 15 of the memorandum of association was only ancillary to clause 5 which set out the objects, and certainly clause 5 did not provide for the company conducting any business in the purchase and sale of commercial concerns like the silk mills. The assistant Commissioner, no doubt, pointed out in paragraph 8 of his order, that business as defined in section 2(4) of the Act included an adventure in the nature of trade. But the assistant Commissioner did not record any specific finding, that the transaction of purchase and sale of the silk mills by the assessee company constituted an adventure in the nature of trade. His final conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature of the transaction of purchase and sale of the silk mills. The learned counsel for the department agreed that, since clause 15 was only ancillary to clause 5 of the memorandum of association, the purchase and sale of a going commercial concern like the silk mills, which did not constitute the company's stock-in-trade, could not be viewed as one of the normal business activities of the assessee company. The department and the Tribunal should certainly have been alive to the distinction between profits from the normal line of business activities of an assessee and a profit derived by an assessee from an adventure in the nature trade independent of his normal line of business. When we asked the learned counsel for the department whether the first question should not be redrafted to bring out that the basis of the decision was an adventure in the nature of trade, as distinct from the normal business activities of the assessee, learned counsel represented that, since the word business would take in also an adventure in the nature of trade, it was not necessary to reframe the question. We are not reframing the question, though we should observe that in normal circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal pointed out, as one of the relevant factors, that even when Murugappa purchased the mills, the Mysore company wanted to acquire these mills. The learned counsel for the assessee contended that there was really no material on record apart from the oral representation made by the departmental representative, that factually the Mysore company was in the field even when Murugappa purchased the silk mills. Independent of that feature of the case, if the possibility of the Mysore company eventually buying these silk mills was a relevant factor at all, one is left wondering why Murugappa, who knew it, should have sold the silk mills to the assessee company and let the company make a profit by further sale, instead of making the whole profit and keeping it to himself by a sale direct to the Mysore company. The learned counsel for the department contended that it must be treated as one continuous operation from the date Murugappa, as a member of the syndicate, acquired an eight annas share in the silk mills up to the date on which the assessee company sold the silk mills to the Mysore company. The learned counsel contended that that was the view taken by the Assistant Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted an adventure in the nature of trade. The existence of such an intention is neither conclusive nor decisive in proving that the purchase and the subsequent sale together constituted an adventure in the nature of trade. The proved absence of an intention to sell when a given property was purchased, and was subsequently sold, has however a much higher probative value in deciding whether the purchase and the subsequent sale together constituted and adventure in the nature of trade. If there was no intention to sell when the property was purchased, then the purchase and sale become independent transactions. Dissociation of the two transactions would be consistent only with the view that what was purchased was purchased as an investment. The purchase by itself could not constitute an adventure in the nature of trade. The sale by itself could not constitute an adventure in the nature of trade. The sale could only then mean the sale of property acquired and held as an investment. The Supreme Court pointed out in Venkataswami Naidu and Sons v. Commissioner of Income-tax*: If a person invests money in land intending to hold it, enjoys its income for some time and then sells it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in paragraph 10 of the statement of the case: ......there had been that element of careful calculation, design and organisation in carrying out e negotiation for sale with a view to realise a profit...... If, as we have pointed out above, the sale was a transaction independent of the original purchase, the subsequent sale would be quite consistent with the acquisition of the property having constituted only an investment, but what was acquired as an investment was held as an investment until it was sold. Absence of an intention to sell when the assessee company negotiated and purchased the silk mills, taken in conjunction with the other circumstances in the case, including the alteration of clause 5 in the memorandum of association, leads only to one conclusion, that the assessee company acquired the silk mills to open a new line of business, with very expectation of that lone of business being profitable, and that the purchase was really in the nature of an investment. It follows that the assessee company did not embark upon an adventure in the nature of trade either at the time of purchase or at the time of the sale. Once again we have to point out that there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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