TMI Blog1978 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was incorporated was to enter into transactions relating to land and properties. The assessee purchased several villages, including lands at Chincholi and Dindoshi Villages, and before the taxing authorities and the Tribunal it was stated that the object for which the assessee-company was formed was to have a model dairy, a model settlement and a model engineering college established thereon for the convenience of the middle class people. A couple of letters were produced on behalf of the assessee with a view to support the contention that such were the objects with which these lands were purchased. From the Sindhi Estate Account and other statements filed on behalf of the assessee before the ITO, he came to the conclusion that in pursuance of the objects for which, it was formed, the assessee-company purchased several lands, developed them and regularly sold them for profit and those purchases and sales constituted business transactions. During the accounting years relevant for the assessment year 1949-50 (accounting year ending July 31, 1948), 1950-51 (accounting year ending July 31, 1949) and 1952-53 (accounting year ending July 31, 1951), the assessee effected the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by s. 54 of the Transfer of Property Act were registered, during all the three accounting years, the sales were not complete and no profits were made. While dealing with this contention, the ITO took the view that in view of the close relationship that had existed between the directors of the assessee-company and those of Govindram Brothers Private Ltd., who had purchased some of the lands, the sale deeds were not executed. However, the purchasers had constructed their buildings on the lands purchased by them from the assessee and claimed depreciation in their own assessments in respect of those lands. The assessee also treated those transactions as full sales and had transferred the profits arising therefrom to its reserve fund. The ITO observed that after having treated those transactions as sales by making corresponding entries in the account books, it did not lie in the mouth of the assessee to contend that the position as indicated by the account books did not really represent the correct position. In the balance-sheet of the assessee-company as at July 31, 1949, which was duly audited on January 28, 1954, the following entries relating to the transactions of sale of lands are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respective assessments. In the further appeals before the Tribunal, the assessee did not raise any dispute either as regards the figure of profits in respect of each one of the transactions or in regard to the validity of the reopening of the assessments under s. 34. Only the following two contentions were urged before the Tribunal : " (i) Although the agreements for sale of land were entered into during the accounting years, still the concerned sale deeds were not executed and registered during the accounting years and hence there were no sales as contemplated by s. 54 of the Transfer of Property Act, and hence no profits were made, and (ii) even assuming that profit was made, it was a capital receipt not chargeable to tax because those lands were not purchased with the object of sale but the sales were forced on it on account of the policy of the Government to utilise waste lands either for agricultural or industrial purposes. " Both the contentions were rejected by the Tribunal and in its order the Tribunal observed that the assessee was not concerned with the buyer and as to when the title to the land sold passed on to the buyer. The Tribunal was really concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in the year 1945. Particulars of these purchases are given in the annexures annexed to the supplementary statement of case. These annexures show that the aggregate area of 4,195 acres of land that was purchased was from six villages, viz., Chincholi, Dindoshi, Ghodbunder, Mira, Bhayander and Shimpoli. As stated in this annexure, the lands in Chincholi village admeasure 154 acres, out of which 92 acres were in the physical possession of the assessee. Lands in Dindoshi village admeasure 347 acres 32 1/2 gunthas and out of this, 140 acres were in the physical possession of the assessee-company. The total area of land purchased from Godbunder, Mira and Bhayander village admeasures 3,689 acres 33 1/2 gunthas, out of which 5 acres, 23 acres and 68 acres of land from each one of the said villages were, respectively, in the physical possession of the assessee-company. In Shimpoli village 3 acres 31 1/2 gunthas of land were purchased and the whole of it was in the physical possession of the assessee-company. By effecting these purchases only Khoti rights in the said villages were purchased by the assessee. In the annex. " X " to the supplementary statement of case details are given in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the various objects with which the assessee-company was incorporated, it was authorised to invest its capital in the purchase of land and simply because by reason of a particular policy of the Government the assessee-company had to effect sales of waste lands to concerns which wanted them for industrial or housing purposes, it cannot be said that any profit made in these transactions or any one of them can be regarded as revenue receipts. In short, his submission was that the profits that have been received by the assessee by reason of these transactions are in the nature of capital receipts in the hands of the assessee. Secondly, he submitted that the profits did not accrue to the assessee-company in the three assessment years in which the same are taxed by the taxing authorities and the Tribunal. He submitted that in respect of the sale of a piece of land profit would only accrue when a conveyance is executed and that in none of the relevant accounting years for the assessment years 1949-50, 1950-51 and 1952-53 was a conveyance executed by the assessee-company, but the taxing authorities and the Tribunal were not justified in treating the surplus amount received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich such entry was made. The question whether profits made on sale of land by the company, which is authorised by its memorandum of association to deal in land, is a revenue or capital receipt is a mixed question of law and fact. The distinction between capital accretion and income has been explained by Rowlatt J. in the case of Thew v. South West Africa Company Ltd. [1924] 9 TC 141. The learned judge said that for the purpose of ascertaining whether profits made upon a sale of an article are taxable profits, the question to be asked is: " Is the article acquired for the purpose of trade ? " If it is, the profit arising from its sale must be brought into revenue account and that the profit is chargeable as capital gains if the sale is of a capital asset, and as a business profit if the sale is in the course of business or the transaction constitutes an adventure in the nature of trade : " It is quite a well settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit ...... assessable to incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of an adventure in the nature of trade. Before us, on either side a large number of cases were cited with a view to support the rival contentions. The question whether a particular receipt is a capital or revenue receipt is to be determined having regard to all the facts and circumstances of the case. The object clause of the assessee-company is very comprehensive and it empowers the company to engage in a variety of business and undertakings. What we have to consider in the present case is whether purchasing and dealing in land is one of the primary objects with which the company was incorporated. It is unnecessary for the present case to set out extensively all the relevant objects ; reference to a few of them would suffice. Amongst the objects for which the company was established are : (a) To take over and acquire by sale or otherwise the lands and estates at Ghodbunder, Mira and Bhayander held by the Estate Investment Company, a private registered firm with its head office in the town of Bombay. (b) To build, purchase, reclaim, charter, take on lease or sub-lease or exchange, hire or otherwise acquire, equip, maintain, improve and repair, lands, plantations, buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company... " In view of these objects, it is not controverted before us that even if the objects for which the company was incorporated are very extensive, purchase or sale of lands or dealing in land was at least one of its primary objects for which it was incorporated. " It is quite a well settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the I.T. Act, 1842, assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere allotted to the beneficiaries under the trust and were, at the date of the appeal, still mainly held by those beneficiaries or their representatives. Shortly, after its incorporation the company made a substantial purchase of other property with funds acquired by borrowing on the security of the original estate. The company received rents and paid a regular dividend on its capital. The company sold no property until 1921. In 1921, 1924, 1926 and 1927 parts of the original estate were sold and in 1925 the whole of the additional property. The company was assessed for the year 1926-27 in Case I, Schedule D, in respect of profits from sales of lands. In an appeal preferred by the company, the General Commissioners held that the profits from the sales were the profits of a trade or business and that the company was liable to assessment. In an appeal by the company, their Lordships held that the company was carrying on a trade and was assessable under Case I, Schedule D. In Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179, the Supreme Court held that even a single venture may be regarded as in the nature of trade or business. When a person acquired land with a view to selling it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion was that the purchase was made with the intention of a resale at a profit when a suitable opportunity arose. Notwithstanding that it was only a single transaction, having regard to the purpose of the formation of the company, it was the inevitable conclusion that the transaction was an adventure in the nature of trade. In Mayfair Estates P. Ltd. v. CIT [1963] 48 ITR 217, the Calcutta High Court pointed out that if May Fair Estates Company sells a portion of its properties to make a profit in a rising market it cannot be said that these profits were not part of their trading, when they are justified by their memorandum of association, simply because they had made no corresponding purchases of properties also at the same time or contemporaneously. The Calcutta High Court in this case followed the guiding principle laid down by the Supreme Court in the case of G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 at page 609 as under : "...it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with the properties and rights of all kinds has no decisive bearing on the question whether the profits arising therefrom were capital accretion or revenue. The question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a whole or in plots, decisive. Profit motive in entering into a transaction is also not decisive. The incidental sale of uneconomical or inconvenient plots of land could not convert what was essentially an investment into a business transaction in real estate. (See CIT v. P. K. N. Co. Ltd. [1966] 60 ITR 65 (SC)). In that case the primary object of the company was to take over the assets of the firm, to carry on the business of planters and to earn profits by the sale of rubber ; the acquisition of the estates was not for the purpose of carrying on business in real estate. The question whether a solitary transaction of purchase and sale of land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the excess was profit assessable to tax, on the following grounds: (i) that the payment of Rs. 32,748 came out of a loan from a company (which finding was not borne out by the books of that company) ; (ii) that the appellant could not have paid the balance of the purchase price of the plot and had no means to construct a house ; (iii) that the site itself fetched no income, thus showing that the appellant's venture could not be an investment but only an excursion into the realm of trade. On special appeal to the Supreme Court, the Supreme Court by majority took the view that where a transaction was not in the line of the business of the assessee but was an isolated or single instance of a transaction, the onus was on the department to prove that the transaction was an adventure in the nature of trade; that there was no clear evidence in support of the inference of the Appellate Tribunal that the land was purchased with the sole intention of selling it later at a profit ; that as at the time he entered into the agreement with the society the appellant was doing good business, as was shown by the large amounts on which he was assessed to tax, it was not unnatural for him to look f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, enjoy its income for some time, and then sells it at a profit, it would be a 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 outside the domain of adventure in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase; the mere circumstance that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. On the facts of the case, the Division Bench of this court held that the purchase of two plots of land by the assessee was only an investment of capital and the profits earned on resale was an accretion to capital and not profit from business or from an adventure in the nature of trade. Relying on this case, the argument of Mr. Dastoor was that there is nothing to indicate that at the time when severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isation of a capital investment or conversion of land into money, and not a venture in the nature of trade. Having regard to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along and all together facts including absence of evidence of any trading activity or speculative venture, the Tribunal was right in its conclusion that the surplus from sale of the land did not result from any trade or business in land carried on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade and the profit of Rs. 27,568 was not assessable as " profits and gains of business. " Coming to the facts of the case, we have already pointed out some of the primary objects which are relevant for the purpose of determination of the questions in issue. The company was incorporated on February 3, 1945, and, apart from taking the lands at Ghodbunder, Mira and Bhayander, which was one of the specific objects mentioned in the objects clause of the memorandum, within a few months of its incorporation it purchased khoti rights in villages, Chincholi, Dindhoshi and also purchased some lands at Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent orders in this case were passed in January, 1958, but apart from the production of these letters there is no evidence produced by the assessee before the ITO or the other taxing authorities to show that any tangible or effective steps were intended to be taken by the asessee either for a housing scheme or for the industrial school scheme. Actually, when the board of directors of the assessee-company held a meeting on February 21, 1951, they passed a resolution, inter alia, stating : " In view of the declared policy of the Government to utilise the waste lands either for agricultural or industrial or residential purpose, the directors decided to dispose of the waste lands and hence they had portioned out certain lands from these two villages (Chincholi and Dindoshi) to be disposed of to the concern who wanted them for industrial and housing purposes. In this way on 15th July, 1948, the company had parted with 28,344 1/4 sq. yards of land in survey Nos. 7 and 17 of Chincholi for Silk Manufacturers Company-Proprietors Govindram Brothers Ltd., for the sum of Rs. 1,50,000, free of future assessments, with all the premises and chawls standing on the land. Similarly, on the same day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e memorandum but that was the principal activity that was engaged in by the assessee-company during the relevant years with which we are concerned and, apart from that, hardly there was any substantial activity which was worth mentioning. The balance-sheet shows that for the earlier years there was a loss of Rs. 1840-3-2, while for the year in question, viz., the year ended July 31, 1949, there was a loss of about Rs. 28,000 to Rs. 29,000. In this balance-sheet, with a view to escape liability for income-tax, profits made in respect of sale of land was not treated as a business profit and by making direct entries it was sought to be taken away to the reserve fund. In our opinion, the taxing authorities and the Tribunal were, therefore, right in taking the view that the profits made as a result of the sale of these pieces of lands in the three accounting years, with which we are concerned, were not capital receipts but were revenue receipts and were liable and subject to tax. That takes us to the other contention of Mr. Dastoor as regards the year in which the profits can be said to have arisen and accrued. He submitted that as these transactions are in respect of sale of lands, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the taxing authorities or the Tribunal and in none of the orders passed by the taxing authorities or the Tribunal any inquiry appears to have been made as regards the date on which the price in respect of sale of land in favour of Kailashpuri Housing Society Ltd. was received. It would not be permissible to Mr. Dastoor, at the stage of reference, to urge such a factual aspect, when both before the taxing authorities and the Tribunal the question of non-receipt of price was never raised. It was, however, sought to be urged by Mr. Dastoor, relying upon a decision of this court in the case of CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499, that until a conveyance is executed by a vendor in favour of the purchaser, the purchaser cannot be regarded as the owner of the property and the vendor can be subjected to tax under the relevant provisions of the I.T. Act. This view was taken by this court having regard to the provisions of s. 9 of the Indian I.T. Act, 1922, which deals with tax in respect of income from property. It was held that though the purchaser was put into possession with all the other rights incidental thereto, yet in the absence of a registered sale de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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