9911796707
TMI Blog1969 (8) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in shares and agricultural lands. The subject-matter of this reference consists of two parcels of land, one being survey No. 150/2 and the other parcel consisting of survey Nos. 140/1-1 and 140/2 of village Kochrab on the outskirts of Ahmedabad city. Survey No. 150/2 admeasures 10,890 sq. yds. and survey Nos. 140/1-1 and 140/2 together 21,751 1/2 sq. yds. The assessee purchased these two plots by two different sale deeds dated respectively, 6th February, 1945 and 9th February, 1946, for a consideration of Rs. 10,285-10-6 and Rs. 79,335-1-0, respectively. At this price the rate of purchase per sq. yard works to 151 annas per sq. yd. and Rs. 3-11-3 per sq. yd., respectively. Having purchased these two plots in 1945 and in 1946 the assessee kept them with him for about 21 years to 3 years and agreed to sell them in one lot on 5th October, 1948. It must be stated here that the assessee had also purchased in the same village survey No. 148 on 7th April, 1942, and this field was also included in the agreement of sale, dated 5th October, 1948. The agreement stipulated for payment in one case by the end of November, 1949, and in the other case by the end of May, 1949. The rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee from his agricultural capital investment and was exempt from taxation. In support of the assessee's case he also filed an affidavit by the purchaser of these plots, one T. C. Patel, admitting that the plots were purchased at the price mentioned in the sale deeds, that the lands which T. C. Patel purchased were situated in the new town brought into existence at Ahmedabad in which subsequently costly buildings were constructed. He also admitted that after he purchased the land the prices of these lands rose high. The present assessment proceedings were considerably protracted because of a remand and we may now state the facts pertaining to the several orders passed by the different authorities. The Income-tax Officer did not accept the assessee's contentions and by an order passed on the 15th February, 1955, held that the sole intention of the assessee at the time of purchasing these lands was to sell them at a substantial profit when the price of land went up and that in any case the extra amounts which he had realised on the sale of these plots could not be called capital receipt in view of the fact that it was an adventure in the nature of trade. He held the exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assistant Commissioner for proper verification of facts, they decided to send the case back to the Appellate Assistant Commissioner. They held : " In the circumstances, we vacate the order passed by the Appellate Assistant Commissioner and restore the case on his file. He will give a reasonable opportunity to both the parties to adduce such evidence as they might like and then decide the question de novo according to law. Thus the first proceedings for assessment of the assessee for the year 1949-50 ended. In the second investigation it appears that the Appellate Assistant Commissioner gave an opportunity to both the sides to adduce evidence and the Appellate Assistant Commissioner gave the Income-tax Officer an opportunity to cross-examine the assessee who had filed an affidavit. Both the affidavit and the cross-examination are on the record and we shall presently refer to them. The Appellate Assistant Commissioner has given certain findings which are of importance for the purposes of this reference. He first of all held that : " The Income-tax Officer had also checked the appellant's books and was satisfied that no moneys had been borrowed in order to pay for the cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be considerably higher than the price of farm land-presumably at the time of the purchase. For these reasons the Tribunal concluded : " We think that the Appellate Assistant Commissioner has given valid reasons for coming to the decision that the land was purchased by the assessee with the primary purpose of doing a venture in the nature of trade. " In the arguments before us counsel on behalf of the assessee has controverted each one of these findings and the reasons given for the same and has contended that the orders of the income-tax authorities as well as of the Tribunal are not based upon any evidence or material which can be accepted. He has pointed out that such reasons as these authorities have given are no more than mere surmises and conjectures and do not amount to legal evidence. Thus, the findings are not based upon any evidence. We will deal with the individual contentions advanced against each of the reasons given by the Tribunal and the tax authorities when we consider each of these reasons separately. It is now settled law that the nature of a transaction like this must be determined on a consideration of the totality of circumstances and that all the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1949-50 under section 34 of the Indian Income-tax Act, 1922, in respect of the sale of survey No. 148. It was also produced before this court as an annexure to an affidavit filed in this court in support of an application under section 66(2). Since this affidavit does not form part of the record and was not before the income-tax authorities or the Tribunal when they passed their respective orders, we do not think that simply because it was filed along with an application under section 66(2) before this court we would be entitled to look at it. Strong objection was taken on behalf of the assessee by Mr. Kolah, though it must be said in fairness to the assessee that Mr. Kolah also argued that even if it was taken on record he was in a position to show that the facts stated therein were correct and in no way detracted from the assessee's case in present proceedings. However, since in our view the affidavit cannot be looked at by us because it is not part of the record, we do not propose to consider those contentions of Mr. Kolah. When the assessee purchased these lands he got the entries in the cultivation registers maintained by the revenue department changed. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, moreover, we do not think that the income was so low as to indicate that the assessee could not think of investing his moneys in the lands. It has to be remembered that the agricultural income was free of tax and for a person like the assessee who had a large income, the income-tax saved would itself come to a sizeable amount. All these considerations as well as the important consideration that he being in management of large lands he could conveniently add these further acquisitions to his capital may have weighed with him. Moreover, no enquiry seems to have been made from the assessee as to how this low income was received. The smallness of the income may be due to several factors adverse climatic condition, want of rainfall and possible leakage of produce by those employed by the assessee to carry on the agricultural operations. It cannot necessarily be attributed to the fact that the price paid was excessively high. If at all the question of the quantum of the income can be relevant, it can be relevant only in so far as it impinges upon the question whether a proper price was paid for the land. But in this respect it seems to us that this finding of both the Appellate Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee purchased the two pieces of land in question on 6th February, 1945, and 9th February, 1946, and the purchases on these dates, as shown in the statement, show that the rate of land per square yard was Rs. 4-4-7 on 14th February, 1945, and Rs. 7-8-0 on 29th May, 1946. In other words, the price at which the assessee purchased the land was far below the land value at that time. Here again the positive material directly bearing on the question of the price paid was ignored. We are really surprised that without any reference to the assessee's statement, to his affidavit and to the report of the inspector, the Appellate Assistant Commissioner and the Tribunal should have ventured the conclusion that the price paid for the land was considerably higher than the price of farm land at the time of the purchase. The inspector's report was made on the 17th June, 1957, and the assessee was thereafter called and questioned by the Appellate Assistant Commissioner (vide annexure "G") and though he was asked various questions pertaining to the purchase of these lands and his knowledge that the Gujarat University was going to be established, no question was put to him suggesting that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the record, but that, on the other hand, whatever material there is indicates the contrary. The correspondence with the assessee makes this clear. In reply to question No. 4 in the Income-tax Officer's letter dated 4th December, 1954, the assessee in his letter dated 14th December, 1954, had categorically stated : " No moneys have been borrowed for the purpose of purchasing the land. " When he was cross-examined by the Appellate Assistant Commissioner on 4th March, 1958, after the remand also no question was put to him that he had purchased these lands on borrowed money. But apart from this the assessee has produced his balance-sheets and profit and loss accounts for the years 1942 to 1949 (vide annexure "K"). All these accounts support the case of the assessee. The assessee does not maintain any personal account of his own since he is the sole proprietor of the business and it appears from his accounts that his personal expenses as well as his business expenses were all entered in one and the same account. For the account year ended 31st December, 1943, the assessee's account showed a net profit of Rs. 14,80,999 in round figures. For the account year ended 31st December, 1944, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid on that account. It was one general composite account and though no doubt interest was paid upon the liabilities, that was merely incidental to the general business and cannot be attributed to the purchase of these minor pieces of land. Even in the account year with which we are concerned the purchase of these plots for Rs. 89,620 was only a fraction of the total immovable properties purchased by the assessee which amounted to over Rs. 4 lakhs and the total investment in shares and securities which he had made was over Rs. 7 lakhs. In his affidavit dated September 29, 1956, in paragraph 5(h) the assessee averred : " ... it may be noted that the annual turnover of the deponent's business ranges between Rs. 40 lakhs and Rs. 70 lakhs per annum. It is obligatory for a man of the deponent's commitments to have a minimum cash balance from say Rs. 4 lakhs to Rs. 5 lakhs looking to his very large turnover and extensive activities." When his business is so large the payment of some interest for the business is inevitable, reasonable and understandable. It is difficult, therefore, to jump to the conclusion as the Appellate Assistant Commissioner and the Tribunal seem to have done that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst order that : " The decision to shift the university to this area was known to the appellant before he had bought the land. He had done so knowing full well that the price would go up tremendously in the near future. It is accordingly impossible to escape the conclusion that re-sale was one of the motives which prompted the appellant to buy the land. The point to be considered is whether it was the sole motive." Counsel urged that it was a matter of common knowledge by the. year 1943 that the Gujarat University was to be established and that the people's education society and others had started collecting funds for the establishment of that university. It was also well known that a university would be established on lands partly within the area of Kochrab village and that the appellant (the assessee) having come to know of these facts decided to speculate in the purchase of properties with a view to earning a handsome profit by re-selling them at a higher price. So far as the assessee is concerned from the start the assessee had stated that be had purchased the lands for cultivation alone and not with a view to make any profits either by way of their development or their dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were going to be acquired for the purposes of the Gujarat University. When pressed, counsel submitted that it was a matter of wide and general knowledge and it must be held that the assessee knew what every one else knew that the Gujarat University was going to be established in the vicinity. We do not think that we can draw any such inference without the slightest material on the record. We certainly cannot presume that the assessee must have knowledge. So far as the notifications are concerned, they are of no value whatsoever in fixing knowledge on the part of the assessee that, if not his own land, at least the contiguous land, were going to be acquired for the Gujarat University. Another piece of evidence relied on is the report of the income-tax inspector. What the inspector had said may be stated in his own words : " Inquiries made go to disclose that the negotiations were started to have a separate Gujarat University in the calendar year 1935 and from the calendar year 1936, they started to raise funds for it. It was in the calendar year 1940 that a site for it was selected near Kochrab lands and they began to purchase these lands from the agriculturists who were utilizin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the calendar year 1942 onwards through the Government suggesting thereby that they were being acquired ; otherwise there would be no question of purchasing the lands through Government, but the two notifications to which we have referred clearly show that the acquisition commenced only towards the end of 1946 on and after 31st December, 1946, and not before, and therefore some of the statements in the report themselves are not accurate not to mention that they are utterly vague. But such as it is, a fair opportunity ought to have been afforded to the assessee to meet this report. Counsel on behalf of the department referred to the cross-examination of the assessee where this report was put to the assessee (vide annexure " G "), questions Nos, 32 to 35. No doubt in this cross-examination the report has been put to the assessee but we would be surprised if any assessee, much less the present assessee, could have understood and answered the contents of that report on the spur of the moment, so to say in the witness box, when it was suddenly shown to him and he was questioned about it. The assessee on his part has already averred that he had no knowledge that the Gujarat University w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Assistant Commissioner also has not relied upon the report of the income-tax inspector and rightly because it could not have been used against the assessee, though the assessee may use it as a statement or admission on behalf of the department. The next circumstance pressed for our consideration in the arguments has been that the assessee had been dealing in lands prior to the purchase of these plots. He, had purchased and sold two other plots in the preceding year and realised profit and this shows that lie was dealing in these plots or at any rate undertaking ventures in the nature of trade in regard to them. The assessee admitted in his letter of 20th December, 1954, that another plot No. 148 at Kochrab was purchased by him on 7th April, 1942, for Rs. 23,141-4-0 and that the assessee had sold that plot in the year 1948 for Rs. 4,62,325 (vide annexure "B-6"). This is one of the plots included in the agreement of sale dated 5th October, 1948, by which the plots with which we are concerned were also sold. The assessee explained that he had also purchased these plots by way of investment because he was a patidar and an agriculturist doing agriculture on an extensive scale. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital investment of the agricultural land as proved to you. " In paragraph 5(d) of his affidavit dated 29th September, 1956, the assessee gave details to support this statement. He stated that he had heavy commitments and liabilities by way of tax payments in respect of his business dealings and at the close of 1948 when he received a substantial offer for the land he parted with the same to another agriculturist, viz., Thakorlal C. Patel, who continued to carry on agricultural operations on the said lands. Then he stated "the disposal of the said lands was thus necessitated by circumstances and its proceeds were utilised to meet the assessee's obligations as per statement hereto annexed and marked "B". This statement which forms part of the record and is annexure "G" before us, has given every detail of how the money realised by the assessee in the sale of these plots was disbursed and it shows that the assessee paid in all tax liabilities of about three years and other loans and trade debts making a total of Rs. 14,53,473 in the account year ended 31st December, 1949. The accounts filed by the assessee for the years 1942 to 1949 also support the statement of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f it. See Janab Abubucker Sait's case, to which we have already referred in another connection. There is moreover absolutely nothing to show that the assessee was aware of the potential value of these plots. We have thus examined the circumstances attendant upon the transaction sought to be taxed in some detail, in order to show that the several weighty considerations which appear upon the record were not taken into account at all by the Tribunal who disposed of the entire matter in one paragraph (paragraph 2) of their order. The five reasons given by the Tribunal in that paragraph cannot be sustained upon the material before us and having regard to all the circumstances, they are based purely upon surmise or conjecture. Even after taking into account the five reasons stated in paragraph 2 the final conclusion to which the Tribunal came was only that : " We think that the Appellate Assistant Commissioner has given valid reasons for coming to the decision that the land was purchased by the assessee with the primary purpose of doing a venture in the nature of trade. " The use of the words "primary purpose" suggests clearly that the Tribunal felt that that was an important purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be drawn, but such a case is quite different from the case of a person purchasing the property with the dominant intention of using it himself or enjoying it himself but, at the same time, expecting at some future date, if it goes up in value, he may take advantage of the rise in the price. All the circumstances referred to by the Tribunal in coming to the conclusion that the assessee had entered into an adventure in the nature of trade are circumstances which show perhaps that the assessee expected to make profit out of the land but they do Dot show that he intended to do business with the land or to enter into an adventure in the nature of trade. The distinction was pointedly brought out in the decision of the English Court of Appeal in Commissioners of Inland Revenue v. Reinhold at page 393, as follows : The Lord Advocate suggested in the present case that the admission of the respondent, that he had bought for ultimate sale and instructed that sale whenever a suitable, opportunity occurred, was as plain an intention of trade as was shown by the terms of a company memorandum. But the mere setting up of a company points to a trading intention because of its implied continui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is the cases on the borderline that cause difficulty. If a person invests money in land intending to hold it, enjoys its in ome 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 our opinion the present case clearly falls within the principle laid down in the said case. The other point upon which in our opinion the Tribunal was in error in law was that, in judging the question as to what was the intention of the assessee, it failed to note that the important consideration is what was the intention at the commencement of the transaction, that is to say, at the date of the purchase, and that, though the intention subsequently formed may be taken into account it is the intention at the inception that is crucial. This was pointed out in Janab Abubucker Sait's case which we have already referred to. At page 46, the Madras High Court pointed out that : " One of the essential elements in an adventure in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been given any attention in the orders of the Appellate Assistant Commissioner and the Tribunal. The third error which appears also in the orders of the Appellate Assistant Commissioner and the Tribunal is that they failed to take into account the nature of the property which was the subject of the dealings in the present case, namely, the land-an agricultural land. We have already referred in this respect to a decision in Reinhold's case, which shows that land "is normally used for investment". The following passage in the judgment of Lord Russell at page 394 brings out the point with great emphasis : " The Lord Advocate contended that if a person buys anything with a view to sale, that is, a transaction in the nature of trade; that the purpose of the acquisition in the mind of the purchaser is all important and conclusive; and that the nature of the thing purchased and the other surrounding circumstances do not and cannot operate so as to render the transaction other than an adventure in the nature of trade. In my opinion that argument, so formulated, is too absolute and is not supported by the judicial pronouncements on which it was sought to be based. It takes no account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed further plots out of the spare capital belonging to him. During the whole time that he was in possession of these plots from 1945 to 1949 the assessee did not evince any intention to deal with them by way of business. He has, not altered the nature of the land while it was in his possession. During the time that he was in possession several offers were made to him which he declined, expressly stating that, he was holding on to the land because it was meant for cultivation and there is nothing to counter those letters. At the time of sale he has given reasons why he sold them, which reasons, upon the evidence, are amply supported and there is nothing to indicate to the contrary. He was indebted and wanted to wipe off his liabilities and therefore he selected these blots for disposal out of his total property. They were at the time favourably placed to bring him a large price and therefore he decided to sell them. There is no evidence whatever to support the conclusion that he purchased these plots with a view to an adventure in the nature of trade. The reasons given in paragraph 2 of the Tribunal's order are either unsupported by any evidence or material on record or they are in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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