TMI Blog1978 (6) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... were indebted to several parties. Two of these creditors had obtained decrees against the Mills respectively for Rs. 1,38,663 and Rs. 2,16,504. Gangadhar Baijnath and Rameshwarprasad Bagla were the judgment-creditors in the first decree, and one Krishnakant Ramakant was the judgment-creditor in the other decree. These two judgment-creditors in their turn were indebted to a third party, viz., Radheshyam Satyanarayan, a firm in which the assessee was a partner. This firm, in its turn, was indebted to a company called Amalgamated Commercial Traders Private Ltd., the extent of the debt being Rs. 3,90,310. This private limited company was the sole selling agent of a sugar refinery company and the assessee was a director in the company managed by the sugar refinery company. On 28th April, 1957, the assessee purchased the decree in favour of Gangadhar Baijnath and Rameshwarprasad Bagla for Rs. 1,04,803, i.e., at a discount of Rs. 33,860. Similarly, he also took over the decree in favour of Krishnakant Ramakant for Rs. 1,81,441, i.e., at a discount of Rs. 35,063. However, the consideration was not paid in cash. He credited the aggregate amount of consideration, viz., Rs. 2,86,244 to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had purchased the decree for less than the amounts payable by the debtor on those decrees, fully knowing that there was possibility of his realising a higher amount than the amount paid by him. If there was no possibility of his earning a higher amount than the amount paid by him, the assessee would not have bought the decrees, for, these decrees were not acquired by him for personal use or investment. This clearly shows that the assessee had the intention of making a profit out of these transactions." The matter was thereafter carried in appeal to the AAC, where it was argued on behalf of the assessee that the reduced prices at which the decrees were purchased were not calculated to operate as a means for earning profits but were intended solely to provide a safety margin or cover to ward off the possibility of loss in case the Kalyan Mills Ltd., Ahmedabad, were not able ultimately to discharge their liabilities to the fullest extent. The balance-sheets and the financial position of the said company for the years ended March 31, 1957, and March 31, 1958, were filed with the AAC and after perusing them be opined that the gloomy picture painted by the chartered accountant, who a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pressure and at the same time wanted to expedite the realisation of debts of Amalgamated Commercial Traders Private Ltd. in which he was interested. Keeping a comfortable margin by way of discount the assessee confronted Gangadhar Baijnath and Krishnakant Ramakant with a proposal which they accepted in the interest of immediate realisation of what they considered a doubtful debt. In the event the assessee's judgment was vindicated and he realised surplus. But in the circumstances of the case it could not reasonably be traced to any adventure in the nature of trade." The Tribunal observed, which appears to be the agreed and admitted position, that neither before nor afterwards the assessee had undertaken any such transaction. It then observed: " Moreover it is clear from the background of the transactions that the assessee was interested in the debtor, Kalyan Mills, and also the final creditors 'D' (Amalgamated Commercial Traders Privated Ltd.) and the motive, if it was possible to read it, was more to save embarrassment to the debtor and to ensure settlement of account for the creditor. " According to the Tribunal, there was no indicia of trade. The Tribunal found it difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom a similar venture was liable to be included in the income of the assessee under s. 10 of the Indian I.T. Act, 1922. We will, therefore, deal with the Himalayan Tiles' case [1975] 100 ITR 177 (Bom) immediately. In that case, the assessee was a private limited company. It took over two businesses as going concerns in 1956. At that time, however, the outstandings and liabilities of the concerns were not transferred to the company. In 1957, when it was under no obligation nor under any compulsion to do so, it purchased two claims of the firms whose businesses had been earlier taken over, for the aggregate amount of Rs. 57,716. In 1958-59, there was an award in regard to one of the claims, under which the assessee received a large sum of money, the surplus realised being Rs. 60,940. The court emphasised that at the time of the purchase of the actionable claims the assessee was under no obligation or compulsion to do so. In point of time, there was close proximity between the purchase of the claims and the realisation. In these circumstances, the court held that the assessee had purchased the claims with the expectation of making a profit and further that the transactions bore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction that should be had regard to. It was further observed that no set rule or principle can be laid down in reaching such a conclusion. In the matter before the Madras High Court in Rukmani Company's case [1964] 52 ITR 599, the assessee, which carried on the business of money-lending, purchased a money decree of the face value of Rs. 1,44,035, which one S, who was a customer of the assessee, had obtained against zamindar. The purchase was for the sum of Rs. 41,200 only. The assessee was able to realise the sum of Rs. 1,38,240 towards the decree from the compensation paid to the zamindar on the abolition of his zamindari; and after deducting the total outlay, the assessee made a profit of Rs. 68,880. It was observed that a money decree was not an asset which one would acquire for keeping it for his enjoyment and accordingly the intention of the assessee must have been to realise the decretal amount. On the facts it was held that the purchase of the decree was an adventure in the nature of trade or a transaction in the line of the assessee's business and the profit made was not a casual or non-recurring receipt not arising from business but was assessable as income from busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment-debtor or it may be even to harass or annoy the one or the other of them, but such a motive has been ruled out in this case. " It was held that it was a clear case of laying out money with a view to reap a profit. The ruling out of such motive and the element of laying out money in order to earn profit had been the clear findings given by the Tribunal in the case being considered by the Andhra Pradesh High Court in Jaldu Manikyala Rao v. CIT [1955] 28 ITR 220, and on these findings the High Court opined that the surplus was a receipt from business and not of a casual or non-recurring nature exempt under s. 4(3)(vii) of the Indian I.T. Act, 1922. As stated earlier, the matter was carried in appeal to the Supreme Court by special leave, and before the Supreme Court, counsel on behalf of the assessee contended that the assessee had taken an assignment of the decree at the instance of his brother and the latter's son-in-law so that the mortgaged properties purchased by them might not be put up to sale and the mortgage claim might be satisfied from the other properties. He made a grievance that the Tribunal had not come to a clear finding on this contention, and the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ltd., being the balance of the sale price and interest. This item is examined by the AAC in para . 7 of his order, where he refers to the circumstances leading the said company to discontinue its business, entailing the disposal of its fixed assets by the debenture trustees to the Deepak Textile Industries Private Ltd. As the balance-sheet shows, the entire plant and machinery, electric equipment, fire services, furniture and fixtures as also buildings on land, which constitute the totality of the fixed assets of the Kalyan Mills, were sold by the debenture-trustees to the said concern (i.e., Deepak). The balance-sheet further indicates that on the assets side is shown the loss carried forward, viz., Rs. 7,50,876. Thus, we have the picture of a company which had discontinued its principal activity, whose fixed assets had been sold by debenture-trustees obviously for payment to the debenture holders and whose assets against the actual liabilities of Rs. 9,00,000 odd, was a claim to receive the balance of the price from the purchaser. This is the position as on 31st March, 1951. We have the co-existing position that two of the creditors of the company had obtained decrees from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of profits is not equivalent to embarking upon an adventure in the nature of trade. In our opinion, even on the footing that the assessee, having a close relationship with the judgment-debtors, might have been in an advantageous position to realise the possibility of making surplus, would not advance the case of the department. As observed by us, it is not sufficient for the revenue to succeed by merely showing that the transaction was entered into having the possibility of making a profit in mind. In addition to this aspect of the matter, it must bear an indicia of trade. For such purpose the motive, the purpose of the transaction, must be decisively held to be not of the nature suggested by the Tribunal ; and unless we are in a position to do so, which we are not, we must hold that the Tribunal was not in error in arriving at the conclusion it did. This case must be distinguished from the Himalayan Tiles' case [1975] 100 ITR 177 (Bom), on the footing that since the assessee was closely involved with the judgment-debtors, the purchase of the decrees against the judgment-debtors could be explained on the footing of a motive to help them. In any case, the possible existence of su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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