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TMI Blog1965 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... this reference under section 66(1) of the Indian Income-tax Act, 1922, of the question whether the surplus realised by the assessee from the sale of the plots is assessable. This really turns on whether this sum represents capital accretion or capital profits from trade or business or a venture in the nature of trade in land. Eventually, on a question like that our opinion will necessarily depend on the view we may take on the cumulative effect of all the facts and circumstances found by the Tribunal. The findings of fact arrived at by the Tribunal are conclusive and are not open to review under the limited jurisdiction of this court on a reference, except on a misdirection in law in the process of arriving at them or on the ground that there was no evidence on which they could be reached. The conclusion drawn on proved facts or facts found on evidence is a different matter and that may raise a question of law or a mixed question of law and fact. To the latter category belongs the question whether a certain receipt is realisation of a capital asset or revenue from trade or business or from a transaction viewed as an adventure in the nature of trade : G. Venkataswami Naidu & Co. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) To acquire and undertake the said properties and the rights and liabilities of the parties hereto of the first part in connection therewith. (b)(i) To purchase for investment or resale, to reclaim or otherwise to acquire and to traffic in land and house and any other property movable and immovable and to create, sell and deal in ground rents of any nature or description whatsoever and to purchase, take on lease or otherwise acquire forests and plantations and rights of ferry and to make advance on the security of land or house or other property or any interest therein and generally to deal in, traffic by way of sale, lease, exchange or otherwise, with land and house property, forests and forest and agricultural produce, any other property whether movable or immovable and to encourage trade and traffic therein. (ii) to develop the resources of and turn to account the land, buildings, forests, plantations and rights for the time being of the company in such manner as the company may think fit and by promoting immigration and establishing towns, markets, villages and settlements. (e) To sell, let, exchange, lease or otherwise transfer the undertaking and property of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, repairs and upkeep of buildings, salaries and wages, rates and taxes, farm maintenance and interest paid on loans. The revenue of the company, as seen from the said statement, was mostly from the properties, a small part from farm, livestock and surplus on sale of agricultural lands. The net profit of the year was arrived at and payment of a dividend of 1.5 per cent. was proposed. From the balance-sheet appended to the statement of the case, we find that the authorised capital of the company is rupees twenty-four lakhs made up of 2,400 equity shares of Rs. 1,000 each and allotted as fully paid up pursuant to an agreement without payments being received in cash. The fixed assets of the company consisted, in the main, of the property transferred by the joint family to the assessee. The other assets in the form of building materials and farm produce, deposits and advances to directors are but a small fraction compared to the main fixed assets. The balance-sheet also shows that the company has taken loans and advances by deposit of title deeds relating to house property. The important feature noticed from the statement of receipts and expenses for the accounting year ended June 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is it a gain made in an operation of business in carrying out a scheme for profit-making ?" If a person or a company buys and sells lands or securities as a business to make profit and, by dealing in such investments as a business, makes a gain, that is not a case of mere realisation of assets or conversion of one form of asset into another but will clearly fall within the net of tax. That was such a case. There a company was formed for the purpose of acquiring and reselling mining property and, after acquiring and working various properties, it resold the whole to a second company receiving payment in the shape of fully paid up shares of the second company. The difference between the purchase price and the value of the shares for which the properties were exchanged was held to be profit assessable to income-tax. But it is not the actual decision in that case which is as important as what appears to us to be the correct line of enquiry indicated therein. The word " business " is defined by section 2(4) of the Income-tax Act, 1922, as including, inter alia, trade, commerce, or any adventure or concern in the nature of trade or commerce. " Trade ", in the context of the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le stock and is then realised in the course of trading operations and the profit that arises from a realisation of property not so committed. The one is taxable income, the other not. The one is regarded as a detachable surplus arising from a source of income which is one of the sources listed by the tax code, namely, the trade, adventure or concern ; the other has no source unless it be the mere fact of realisation, and is spoken of as 'an accretion to capital'. The conception causes no difficulty in the case of profits from ordinary trading ; but it is evident that it requires the drawing of a very fine line when it has to be applied to the case of the isolated transaction which may be on the one hand the product of a trading venture or, on the other hand, a mere change of investment." The Commission went on to enquire whether there was any general rule that could advantageously be propounded as a simple test that would separate taxable case from the non-taxable one but concluded that it was not possible in the circumstances to formulate any such rule, and finding, however, that the general line of enquiry which has been favoured by appeal commissioners and encouraged by the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r view, while these considerations may not be exhaustive, they are quite useful in arriving at a conclusion on the nature of the income which lies at or near the borderline separating the taxable and the non-taxable. In Leeming v. Jones it was stated that in order to attract tax liability under Case 1 of Schedule D, corresponding to section 2(4) of the Indian Income-tax Act, 1922, one at least of four conditions must be present, namely, (1) the existence of an organisation, or (2) activities which led to the maturing of the assets to be sold, or (3) the existence of special skill, opportunities, in connection with the article dealt with, or (4) the fact that the nature of the asset itself should lend itself to commercial transactions. This case on that aspect was referred to without dissent, apparently with approval by Viscount Simonds in the well known case of Edwards (H.M. Inspector of Taxes) v. Bairstow & Harrison. The Exchequer Court of Canada in West Coast Parts Co. Ltd. v. Minister of National Revenue noted an argument which referred to the usual badges of trade as (1) presence of organisation set up for the purpose of trade, (2) multiplicity of transactions, (3) prior associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances and no single criterion can be formulated. We may also note with interest, as the court did in West Coast Parts Co. Ltd. v. M.N.R. that the word " adventure " is defined in the Shorter Oxford Dictionary as a " pecuniary venture " and " a speculation " and the word " venture " is in turn defined as meaning " a commercial enterprise in which there is a considerable risk of loss as well as a chance of gain. " In J. P. Harrison (Watford) Ltd. v. Griffiths the House of Lords was not prepared, it would appear, to accept a proposition that the essence of a trading transaction is that its object is to make a profit. Lord Denning, in this case, which related to what is known as a " dividend-stripping " transaction, in dealing with an approach as to what detail did the transaction lack to prevent it being an adventure in the nature of trade observed at page 299 : " To this I would reply by asking another question : What detail must it have to render it an adventure in the nature of trade ? What are the characteristics of such an adventure ? For unless you first define what detail it must have, you cannot say what detail it lacks. Parliament did not vouchsafe an answer. It did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han were paid for them fell to be reckoned among the profits and gains of the company for assessment to tax. The Lord President of the Scottish Court of Exchequer, answering the question in the affirmative, gave his reasons : "...this is an investment company, and the memorandum makes it plain that its profits are to be derived from various operations relating to the investments. The third head of the memorandum professes to state the objects of the company, and in head (6) of this enumeration occur the words 'to vary the investments of the company, and generally to sell, exchange, or otherwise dispose of, deal with, or turn to account any of the assets of the company.' It is true that the doing of any of these things might be incidentally necessary in the conduct of the business of any company. It is also true that this memorandum states in the latter heads of the same article several things which are less properly described as objects of a company than as incidental acts of administration. But from the structure of the memorandum it appears that varying the investments and turning them to account are not contemplated merely as proceedings incidentally necessary, for they take t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in land. The Master of the Rolls put the question for his decision as, " Do the Hudson's Bay Company carry on a trade in buying and selling land by which they have made a profit ? " In answering that question, the fact that it was a company formed by Royal charter was given weight ; and the reasoning for the opinion is to be found in the following observations at page 437 : "...a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This company is not a company incorporated under the Cornpanies' Acts or the Companies' Clauses Act for the purpose of dealing in land, but it is a Corporation by Royal Charter and has, therefore, all the powers of an individual except so far as the Charter expressly limits them. It would be different if a landowner, an individual, entered into the business of buying and developing and selling land ; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different ; he sells as owner, not as trader." In Tebrau (Johore) Rubber Syndicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main object of acquiring, managing and developing with a view to the ultimate sale of those lands. The share capital was fixed at a nominal amount solely to facilitate division among the beneficiaries and was not determined by reference to the value of the lands acquired. All the ordinary shares were allotted in consideration of the conveyance of the lands to the company and these shares were continuously held by the original allottees or their representatives. Working capital was provided by the issue to ordinary shareholders of preference shares for cash. Later the company created and allotted to persons, other than the ordinary shareholders, deferred shares in return for service which enhanced the value of the lands. The memorandum of association, inter alia, took power to purchase certain lands, to manage and develop them and turn them to account, to sell, lease or mortgage or otherwise deal with the lands as the company thought fit. Rowlatt J. held that the surplus arising from the sale by the company of portions of the lands was not the profits of a trade or business, and that the function of the company was merely to realise the capital value of the respective interests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. was quoted for the revenue, but Rowlatt J. distinguished it on the ground that this was not a case of liquidating or realising the old assets, the fourth company starting on a new career of business of acquiring assets and selling them again. Rowlatt J. considered that, in the circumstances, the company was formed for what he might call family reasons. Learned counsel for the assessee argues that in the case before us also it may well be described that the company was formed for family reasons and that the fact that the company took powers to traffic or deal in lands and other properties should not detract from the real purpose of the company holding properties transferred to it and deriving income therefrom. We are inclined to think that though the facts in C. H. Rand v. Alberni Land Company Limited are not exactly similar in certain respects, they bear some resemblance ; particularly the view of Rowlatt J. whether the company in that case had gone beyond realising the property and embarking on a business on land focusses attention on the proper considerations to be taken into account in deciding the point. In that case, as here, the properties were made over to the company b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edly formed with trading purposes in view and for trading objects, that the transactions in which it engages necessarily constitute a trade or business ; because it does not follow from the fact that it has objects and powers such as I have indicated that it actually uses them for the purpose of conducting the usual business of a company trading in real estate. But the professed objects of the company are not, for that reason, to be left out of account ; on the contrary, they must be kept in view when considering the transactions in which the company is proved to have been engaged. " It is, therefore, clear that while no conclusion can properly be based solely on the objects or powers of a company as found in its memorandum and articles, they are relevant matters which should be taken into account and kept in view in determining the character of the transaction in which the company has engaged itself. The objects and powers are there to carry on a trade or, business but their existence does not ipso facto mean that they have been used. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light, of course, of the objects and powers of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e familiar one whether a given transaction amounts to the carrying on of a trade, the profits and gains of which are taxable, or only involves the realisation of capital assets, the profit on which is not taxable. Often as that question has arisen, it is not easy to derive from the numerous decisions any rules except that the dividing line is incapable of precise definition, that the question tends to be a matter of degree, and that the decision in each case turns very largely upon the impression created by the special facts and circumstances. " The learned Lord President pointed out at page 215 : " The purpose which informed the company was to salve something from the wreck of a type of trading enterprise which when the company was formed was not 'dormant' but dead, by selling the separate flats in the only possible fashion for the benefit of the firm's creditors and of the beneficiaries on the estates of the deceased partners. On this subject, it is of little use to cite decisions, for all of them turned on their own facts and represent different applications of the very wide general principles enunciated in the oft-quoted case of Californian Copper Syndicate v. Harris. Propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Tribunal had found that he had purchased the lands wholly and solely with the idea of selling them at a profit to the mills. The Supreme Court upheld the view that the transaction was an adventure in the nature of trade. While expressing that view, Gajendragadkar J. (as his Lordship then was), who spoke for the court, observed : " If a person invests money in land intending to hold it, enjoy 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 domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader, and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it ; the nature and quantity of the commodity purchased and resold ; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable ; any act prior to the purchase sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of trade. They also pointed out : " The mere fact that a person owns a large estate and chooses to sell portions of it year after year, cannot lead to the conclusion that he was doing so in pursuit of a business of dealing in properties. Where dealing in properties is stated as one of the many objects of a company, that may create an initial presumption that the course of dealing was in the nature of a business. But, nevertheless, before profits made by the company can be brought to tax, it has to be found that the company did engage itself in the business of dealing with properties. That finding cannot be rested solely on one of the many objects stated in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the company." It is evident that in this case, the sales had to be made because of a compelling reason and not as adventures in the nature of trade. With this background of the cases we have referred to, let us turn to the facts of this case. This is undoubtedly a case of a family company. The family transferred all its assets to the company in exchange for shares in proportion to their relative interests in the proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to 1948, we do not know. There is nothing to show that when they were purchased, it was with an intention to resell at a profit. The property had, as we said, been held by the company for over ten years which maintained it all along and realised income. Sales of land have not been a frequent feature with the company, as far as we can see from the record. Nor were similar sales numerous. Not that we suggest that they are always essential attributes of trade. The assessee says that it sold the lands for discharging liability. Developing the land into building sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment. There is here no evidence of trade or any business carried on by the company in land. Can we then say that the sales of land in the accounting year were transactions constituting an adventure in the nature of trade ? A great deal of stress has been laid for the revenue on the objects mentioned in the preamble to and in the body of the memorandum and articles. Undeniably, the company has the power to deal or traffic in immovable property, to purchase and sell it at a profit as a business. But the obj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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