TMI Blog1975 (8) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... be stated : One Bretagne, a marine engineer, initially purchased a concrete floating dry dock which was then lying at the Cocanada Port in Andhra Pradesh for Rs. 1,18,000, some time in 1948, from one Mr. Parledis, who in turn had bought it from the Admiralty from Trincomalee. He made attempts either at disposing it of or working it but these attempts proved futile. He found it costly to maintain this dry dock and later, some time in November, 1950, he contacted one Mr. Swadi who was also working with him for some time in Ford Motor Company of India and held discussion with him of forming a partnership or a company with a view to work the concrete floating dry dock for carrying out repairs of small ships at Kandla. It appears that one more person by name Dara Cama also joined them and certain discussions between the three took place in a meeting held on 26th November, 1950. The discussions and the decisions that were taken during this meeting were recorded in a minute bearing that date. From the record of the proceeding of that meeting as reduced to writing in the said minute it appears that the three persons agreed to form themselves into a partnership " for the purpose of running ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dock into the water and in the end he stated that he hoped to make a formal application for the berth and for land space for a temporary workshop in the beginning of the New Year. Again by his letter dated January 3, 1951, Swadi informed Simpson that he had addressed a letter to the Development Commissioner, Kandla, for allotment of a mooring berth and land for a workshop on shore and requested Simpson to use his good offices " and have the decision taken quickly so that we can start at Kandla as early as possible, perhaps about July-August this year ". As already stated, Swadi had by his letter dated January 3, 1951, requested the Development Commissioner, Kandla, for allotment of mooring berth and the land for workshop on shore and he expressed the hope that upon allotment of a suitable berth for setting up a repair organisation and some land for the shore workshop his firm would be in a position to effect ship repairs much more cheaply than at Bombay and that his firm would arrange for expert staff and effect the repairs expeditiously. It appears that Simpson informed Swadi that the decision in the matter was to be taken by Mr. Mitter, Conservator of Kandla Port, and since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecites that Bretagne was the sole and absolute owner of a reinforced concrete dock lying in a basin off the Barge Canal at Cocanada, that Bretagne was desirous of running and operating the said dock for doing the work of inspection, repair and overhaul of ships with the help of necessary workshops to be erected on the shore at any major port in India, Pakistan, Burma, Ceylon and Malaya, that Bretagne proposed to the other three parties to join him in partnership for furthering his object of establishing the said dock along with suitable workshops on land as a business for inspection, repair and overhaul of ships at a suitable port in India, Pakistan, Burma, Ceylon and Malaya, and then it proceeds to record the terms and conditions on which the parties agreed to operate the aforesaid business in partnership with one another. Clause 3 of the deed indicates what the business of the partnership was going to be and it states, the business shall be to (a) acquire, own, construct, buy, sell and otherwise dispose of floating dry docks and workshops on land, workshop and other machinery and river and sea craft, (b) to inspect, repair and overhaul ships and other floating craft, machinery, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e foregoing clauses Nos. 7 and 8 and such monies as may have been paid by the FIRST PARTY in terms of clause 8 above. or in such proportions as may be admissible under provisions of the foregoing clause No. 5. (d) Fourthly, the balance left over, shall be divided equally between the FIRST PARTY on the one hand and the SECOND, THIRD and FOURTH parties, or in accordance with the provisions of the foregoing clause No. 5." Under clause 16 it has been provided that all the preliminary work of promotion of the objects of the company as delineated in clause 3(a) of the deed shall be handled by the partners, Chablani and Swadi, in consultation with each other and their decision shall be binding on all the four partners provided that in all important matters of policy Chablani and Swadi shall consult Bretagne and Cama and on such occasions the decision of the majority shall prevail. It appears that the efforts to get a mooring berth and land space for the workshop on the shore near Kandla did not materialise. On Mitter's return from Europe some time in May, 1951, Swadi saw him at the former's request which is clear from the letter dated May 11, 1951, written by Swadi to Mitter where h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dry dock and finally in January, 1953, the Port authorities acquired the same for a sum of Rs. 3,80,000. As a result of the aforesaid sale of the dry dock in the balance-sheet of the firm a sum of Rs. 75,870 was shown as profit in the purchase and sale of this dock after taking into account the expenditure of Rs. 45,139 which the firm had incurred for maintaining this dock in the meantime. This sum of Rs. 75,870 was divided in the profit sharing proportion indicated in the deed of partnership. Mr. Cama, one of the partners, disclosed his share of profit in his assessment. Subsequently, the firm itself filed a return on November 5, 1957, and the delay in filing the return was explained by stating that the partners considered that this sum was a capital accretion and as such would not be taxable. The Income-tax Officer examined the transaction and after hearing the parties and recording the several statements of Bretagne and others and taking them into account he took the view that the partnership was formed only with the intention of selling the dry dock at a profit and there was at no time any intention of running this dry dock and, therefore, the surplus of the sale price over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unted to an adventure in the nature of trade has always been regarded as a mixed question of law and fact. He urged that if the entire conduct of Bretagne and his colleagues, particularly Swadi and Chablani, from the commencement till end as well as the correspondence that was exchanged between some of these partners and the authorities of Kandla Port were carefully scrutinised, it will appear clear that the real intention of these partners from the very commencement was not to work or run the dock for the purpose of carrying on the business of repairing ships in Kandla Port but was to dispose of the said dock which they had acquired from Bretagne at a profit and as such the profit that was realised represented by surplus of the sale proceeds over the purchase price minus the expenses could not be regarded as a capital accretion and the same ought to have been regarded as business profit earned by the four partners. He referred us to a decision of the Supreme Court in the case of G. Venkataswami Naidu Co. v. Commissioner of Income-tax [1959] 35 ITR 594 (SC), where, according to him, after a review of all the English case law on the subject, the Supreme Court had laid down certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the lands to the managed company whenever it thought it profitable so to do; that the appellant purchased the four plots of land with the sole intention of selling them to the mills at a profit which intention raised a strong presumption in favour of the view taken by the Tribunal and that the High Court was right in holding that the transaction in question was an adventure in the nature of trade. The Supreme Court has observed that the expression " in the nature of trade " appearing in the definition of " business " in section 2(4) of the Income-tax Act postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business and that would make the question whether a transaction is in the nature of a trade and its decision one of mixed law and fact. Mr. Joshi appearing for the revenue has relied upon the last portion of the head-note, which, according to him, summarises the principle which the Supreme Court has enunciated in determining the question at issue. The relevant portion of the head-note runs thus : " If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors have emerged on record. In the first place, it cannot be disputed that the concrete floating dry dock had been initially purchased by Bretagne, a marine engineer, in the year 1948 for a sum of Rs. 1,18,000. It also cannot be disputed that he made efforts both at disposing it of as well as working it in some port but from the correspondence it could be said that the predominant intention with which he had purchased the dry dock was to sell it if possible. On that basis he had issued letters to various persons like Chablani and others to see if a purchaser could be found out for the dry dock and it could also be said that his attempt in disposing of the dry dock continued even after he had asked Swadi and Cama to join him as partners for working the said dry dock in Kandla Port for doing business of inspection and repairs to the ships. In other words, the initial purchase of the dry dock by Bretagne could be said to have been made with both the purposes in view. It is clear that in November, 1950, a meeting took place between Bretagne, Swadi and Cama at which these three persons decided to form themselves into a partnership firm for the purpose of running and operating the concre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplation of Bretagne and the firm. Reliance was also placed by Mr. Joshi upon letter dated January 31, 1951, which Simpson had written to Bretagne where the breakdown of negotiation regarding the purchase of floating dry dock at a price of Rs. 8 lakhs was indicated by Simpson. But what Mr. Joshi emphasised was that after referring to such breakdown of negotiation Mr. Simpson went on to say that Mr. Mitter had instructed him to state that, though the Kandla Port organisation was not interested in the floating dry dock at the price quoted by Bretagne, the Kandla Port authorities were inclined to consider the purchase of that dry dock at a price near about the price which Bretagne was supposed to have quoted to M/s. Anglo-Saxon Petroleum Co. Ltd. In other words, Mr. Joshi emphasised that, though negotiation for the sale of dry dock at a price of Rs. 8 lakhs had broken down, Bretagne still hoped to complete the sale of the dry dock if a lesser price was demanded, particularly the price which he had quoted for the purpose to M/s. Anglo-Saxon Petroleum Co. Ltd. Mr. Joshi, therefore, urged that this correspondence clearly shows that notwithstanding the discussion and the decisions that ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been formed, the business mentioned in sub-clause (a) of clause 3 must be regarded as the principal business for which the partnership had been formed, namely, to acquire, own, buy, sell and otherwise dispose of the floating dry dock. Strong reliance was also placed by Mr. Joshi upon the statement of Bretagne which was recorded by the Income-tax Officer on March 25, 1958, where he has categorically stated that though they all the three had decided to form a partnership to run the dock, subsequently " I learnt that the other three partners had no intention whatsoever to work the said dry dock or to carry on the working of the dry dock by putting in their share of capital. I also learnt that the other partners entered into partnership only with the intention of getting the dry dock sold at a profit. " Relying on the aforesaid correspondence and the several letters as well as the statement of Bretagne recorded on March 25, 1958, Mr. Joshi urged that though the record of the proceeding of the meeting held on November 26, 1950, shows that Bretagne and his colleagues joined the partnership for the purpose of running the business of inspection repairs and overhauling of ships at Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his colleagues and so far as that aspect of the matter is concerned, there can be no doubt from the record of the proceeding of a meeting that took place on November 26, 1950, that Bretagne had requested Swadi and Cama to join him in partnership and the latter had agreed to join him in partnership " for the purpose of running and operating the concrete floating dry dock belonging to Mr. Bretagne for the inspection, repair and overhaul of ships ". The record of the proceeding also shows that the said business was agreed to be carried on at Kandla where a workshop was agreed to be erected and Swadi was authorised to make efforts to obtain requisite mooring berth and land space for workshop at Kandla. The record of the proceeding also shows that it was decided that, as soon as the partnership deed was signed, the concrete floating dry dock shall be taken over by the firm at a valuation to be mutually agreed upon after the dock had been surveyed and valued by Chablani and ultimately the deed of partnership was executed on June 6, 1951, which clearly sets out two types of business that were contemplated to be done by the partners ; one was to acquire, buy, sell and otherwise dispose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree persons, viz., Swadi, Chablani and Cama under which the net surplus profit that might be realised by sale of the dock would be shared by him along with his three other partners. Bretagne had initially purchased the dry dock in 1948 for Rs. 1, 18,000 and he had made efforts for disposal of the dry dock and he had failed. He, thereafter, made efforts to effect the sale of the dry dock by using the services of Swadi and Chablani and even then these efforts did not materialise and while taking the services of either Swadi or Chablani he had agreed to pay commission to them in case a particular price was realised by either of them by the sale of the dry dock. If, therefore, the idea of Bretagne and his colleagues was merely to effect sale of the dry dock for the purpose of making profit, there was no necessity for Bretagne to enter into a partnership with these three persons under the terms whereof he should have agreed to share the net profit that might be realised by the sale of the dry dock. He could have arranged for payment of commisson to such persons whose services were requisitioned by him and by reason of whom the sale was brought about and he could have retained for himse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a lot of misunderstanding had arisen between the four partners of the firm. Further, a civil suit had been filed by Bretagne against his erstwhile colleagues and it was during the pendency of such civil litigation that was pending that Bretagne went to the Income-tax Officer on the advice of his legal adviser and volunteered to make the aforesaid statement before the Income-tax Officer in which he stated that subsequently he learnt that the other three partners had no intention whatsoever to work the said dry dock or to carry on the working of the dry dock by putting in their share of capital and that he had also learnt that the other partners had entered into partnership only with the intention of getting the dry dock sold at a profit. In the first place, this statement of Bretagne on which reliance has been placed by Mr. Joshi runs counter to the facts which obtain in the matter as evidenced by the other material, namely, the record of the proceeding of the meeting held on November 26, 1950, the partnership deed dated June 6, 1951, and the correspondence, particularly letters which were written by Swadi to Simpson, the Development Commissioner, in the matter of obtaining or s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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