TMI Blog1958 (11) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... e said amount of Rs. 43,887 as the income of the appellant for the assessment year 1948-49, and assessed it to income-tax under the head "business". The Officer held that there was no evidence to show that the appellant had purchased the said lands for agricultural purposes or that it had acquired them as an investment. He also found that, since the lands were adjacent to the Janardana Mills, the appellant must have purchased them solely with a view to sell them to the said mills with a profit. That is why, though the transaction was in the nature of a solitary transaction, it was held that it had all the elements of a business transaction and was thus an adventure in the nature of trade. Against this order of assessment the appellant preferred an appeal to the Appellate Assistant Commissioner. The appellate authority upheld the appellant's contention that the amount in question was not assessable as it cannot be held to be income or profit resulting from a profit-making scheme, and set aside the order under appeal. The respondent challenged the correctness of this order by taking an appeal against it to the Income-tax Appellate Tribunal. The Tribunal agreed with the view tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty by the appellant had been made in the name of Mr. V. G. Raja, assistant manager of the Janardana Mills Ltd., who is the son-in-law of G. Venkataswami Naidu, one of the partners of the appellant firm. Naturally when this property was sold to the mills the document was executed by the ostensible owner V. G. Raja. It is not disputed that the purchase in the name of V. G. Raja was benami for the appellant. All the plots which were thus purchased by the appellant piecemeal are contiguous and they adjoin the mills. On the plot purchased on June 29, 1942, there stood a house of six rooms which fetched an annual rent of about Rs. 100 ; and, after deduction of taxes, it left a net income of Rs. 80 per year to the appellant. The other plots are vacant sites and they brought no income to the appellant. During the time that the appellant was in possession of these plots it made no effort to put up any structures on them or to cultivate them ; and so it was clear that the only object with which the appellant had purchased these plots was to sell them to the mills at a profit. It was, however, urged by the appellant that the properties had been bought as an investment. This plea was rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence ; and, if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence ; or that the impugned conclusion drawn from the relevant facts is not rationally possible ; and if such a plea is established, the court may consider whether the conclusion in question is not perverse and should not, therefore, be set aside. It is within these narrow limits that the conclusions of fact recorded by the Tribunal can be challenged under section 66(1). Such conclusions can never be challenged on the ground that they are based on misappreciation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination. In dealing with the argument urged by the appellant, this court has fully considered the true legal position in regard to the limitation of the High Court's jurisdiction in entertaining references under section 66(1) in the light of several judicial decisions bearing on the point. The ultimate decision of the court on this part of the case was that "on principles established by authorities only such questions as relate to one or the other of the following matters can be questions of law under section 66(1) : (1) the construction of a statute or a document of title ; (2) the legal effect of the facts found where the point for determination is a mixed question of law and fact ; and (3) a finding of fact unsupported by evidence or unreasonable and perverse in nature." Having regard to this legal position this court held that the question of benami was a pure question of fact and it could not be agitated under section 66(1). The point about the scope and effect of the provisions of section 66(1) has again been considered by this court in Oriental Investment Co. Ltd. v. Commissioner of Income-tax. This was a case on the other side of the line. It was held that whether the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enakshi Mills, in repelling the appellant's argument based on the decision of the House of Lords in Edwards v. Bairstow. For the respondent, the learned Attorney-General has, however, relied on the fact that the relevant observations in the case of Sree Meenakshi Mills are obiter and he has invited our attention to the decision in the case of Edwards in support of his contention that the judgment of the House of Lords would show that the question about the character of the transaction was ultimately treated as a question of fact. Before we refer to the said decision it may be relevant to observe that there are two ways in which the question may be approached. Even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, it cannot be ignored that, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly to address itself to the legal requirements associated with the concept of trade or business. Without taking into account such relevant legal principles it would not be possible to decide whether the transaction in question is or is not in the nature of trade. If that be so, the final conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the court was drawn to the different view expressed in a Scottish case, Commissioners of Inland Revenue v. Fraser where the Court of Session had held that it was at liberty to treat the matter as a mixed question of fact and law, and in fact it had overruled the finding of the General Commissioners in that behalf. "It does not seem to me", observed Upjohn, J., that in this court I am at liberty to follow the practice of the Scottish Court, attractive though it would be to do so, if the matter was res integra." However, since apparently the finding of the General Commissioners did not appear to the court to be satisfactory, the matter was remitted to them with an intimation that they should consider the question whether, the transaction being an isolated transaction, there was nevertheless an adventure in the nature of trade which was assessable to tax under Case I of Schedule D. The Commissioners were directed to hear further arguments on this point before stating a supplementary case. After remand, the Commissioners adhered to their earlier view and stated that they were of opinion that the transaction was an isolated case and not taxable and so they discharged the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of trade", observed Viscount Simonds, "is to say that it has or has not the characteristics which distinguish such an adventure, but it is a question of law, not of fact, what are those characteristics, or, in other words, what the statutory language means. It follows that the inference can only be regarded as an inference of fact if it is assumed that the Tribunal which makes it is rightly directed in law what the characteristics are and that, I think, is the assumption that is made." Dealing with the merits of the case, Viscount Simonds observed that "But sometimes, as in the case as it now comes before the court where all the admitted or found facts point one way and the inference is the other way, it can only be a matter of conjecture why that inference has been made. In such a case it is easy either to say that the Commissioners have made a wrong inference of fact because they have misdirected themselves in law or to take a shortcut and say that they have made a wrong inference of law, and I venture to doubt whether there is more than this in the divergence between the two jurisdictions which has so much agitated the Revenue authorities." Lord Radcliffe substantially agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and circumstances proved in the case, the inference that the transaction in question is an adventure in the nature of trade is in law justified ? In substance, that is the basis on which the question has been framed by the respondent and considered by the High Court. This question has been the subject-matter of several judicial decisions ; and in dealing with it all the judges appear to be agreed that no principle can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. When section 2, sub-section (4) refers to an adventure in the nature of trade it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them ; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ula 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 formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoys 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 treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf-way house. This statement may be broadly true ; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole ; in other words cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is off set by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive ; and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that it appeared to be on the whole consistent with the idea that it was carrying on a trade in land rather than with the idea that it was throughout holding it as an investment only to be realised if at all when it desired to meet some financial need. In repelling the plea that the transaction showed investment, the Lord President added that the Commissioners "with their knowledge and experience of these matters, have come to the conclusion that the intention was to hold this estate not as an investment but as a trading asset and in order to develop it and to market it". It would thus appear that the conduct of the assessee in incurring a large amount of expenditure on the development of land consisting mainly in the construction of roads and sewers was held to justify the inference that the transaction was an adventure in the nature of trade, though the property purchased and sold was land. In Commissioners of Inland Revenue v. Livingston the assessees respondents were a ship repairer, a blacksmith and a fish salesmen's employee ; they purchased as a joint venture a cargo vessel with a view to converting it into a steam-drifter and selling it. They were not connected in bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utledge v. Commissioners of Inland Revenue ; and it is to this case that we will now refer. In the case of Rutledge the appellant was a money-lender who was also interested in a cinema company in 1920. Since that time he had been interested in various businesses. He was in Berlin in 1920 on business connected with the cinema company where he was offered an opportunity of purchasing very cheaply a large quantity of paper. He effected the purchase and within a short time after his return to England he sold the whole consignment to one person at a considerable profit. This profit was held liable to assessment to income-tax, Schedule D, and to excess profits duty as being profit of an adventure in the nature of trade. This assessment was the subject-matter of an appeal before the Court of Appeal, and on behalf of the appellant the observations made by the Lord President Clyde in the case of Livingston were pressed into service ; but the Lord President did not accept the plea based on his earlier observations because he said that the said observations were intended to show that a single transaction fell far short of constituting a dealer's trade ; whereas, in the present case, the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit was in the nature of a capital profit on the sale of an investment and should be excluded in computing its liability to income-tax. The court held that the profit realised was made in the operation of the company's business and was properly included in the computation of the company's profits for assessment under Schedule D. It appears that, in 1914, acting as agent on behalf of two colliery companies, the assessee had purchased two lots of wagons each of which consisted of 250 wagons. During the course of negotiations the assessee, foreseeing that the cost of material and wages was likely to increase, determined to buy a third lot of 250 wagons for itself and did eventually purchase it. In July, 1915, the assessee sold this lot and made a profit of pound 2,500. The question which arose for decision was whether this sum was chargeable to income-tax. In dealing with the argument that as an isolated transaction the profit arising out of it was not chargeable to tax, Sankey, J., observed that he thought "in most cases an isolated transaction does not fall to be chargeable". But he added "you have to consider the transaction and you cannot lay it down as a matter of law with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it ; much depends on the circumstances". Then the conduct of the assessee after its incorporation was considered and it was held that the purchase of the property in substance amounted to a launching forth albeit not in a very large scale. In the result the finding of the Commissioners was confirmed and the profit was held liable to tax. In Martin v. Lowry the House of Lords was considering a case of a wholesale agricultural machinery merchant who had never had any connection with the linen trade purchasing from the Government the whole of its surplus stock of aeroplane linen (some 44 million yards) at a fixed price per yard. The contract of purchase provided in detail as to delivery, and the payment of the price. The purchaser failed in his original attempt to sell the whole of the linen to Belfast linen manufacturers outright. Then he sought to bring pressure on them by placing the linen for sale to the public. It led to an extensive advertising campaign, renting of offices and engaging advertising manager, a linen expert as adviser and a staff of clerks. Sales then procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venture subsisted between the appellants and that the profits of the sales of whisky were assessable to income-tax. The Lord President Clyde rejected the appellant's contention and observed that "the nature of the transaction--apart from the fraudulent breaches of law which were inherent in it--was neither more nor less than the commercial disposal of a quantity of rye whisky". In point of fact the disposal was not effected by a single transaction but extended over a year and more ; and so it could not fall outside the sphere of trade. This was a clear case where a large number of distinctive features of trade were associated with the transaction. The transaction of the purchase and sale of whisky was again brought before the court for its decision in Commissioners of Inland Revenue v. Fraser. In this case the assessee, a woodcutter, bought through an agent for resale whisky in bond for pound 407. Nearly three years thereafter the whisky was sold at a profit for pound 1,131. This was the assessee's sole dealing in whisky. He had no special knowledge of the trade and he did not take delivery of the whisky nor did he have it blended and advertised. Even so, it was held that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession. But the purchaser of a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, I can scarcely consider to be other than an adventurer in a transaction in the nature of a trade ; and I can find no single fact among those stated by the Commissioners which in any way traverses that view. In my opinion the fact that the transaction was not in the way of the business (whatever it was) of the respondent in no way alters the character which almost necessarily belongs to a transaction like this. Most important of all, the actual dealings of the respondent with the whisky were exactly of the kind that take place in ordinary trade." These observations indicate some of the important consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it a speculation or an adventure in the nature of trade." The learned Judge no doubt added that he did not indicate which way the finding ought to be, but he commended the Commissioners to consider what took place in the nature of organising the speculation, maturing the property and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not. It is thus clear that Rowlatt, J., indicated clearly though in cautious words what he thought was the true nature of the transaction made. Even so, on reconsideration of the matter the Commissioners returned a finding in favour of the assessee. After the finding was returned Rowlatt, J., held that he must abide by his own decision in Pearn v. Miller and so the appeal was allowed. The matter was then taken to the Court of Appeal where the revised finding of the Commissioners was treated as a finding on a question of fact not open to challenge and the point which was considered at length was whether even if the transaction was not an adventure in the nature of trade, could the profit resulting from it be taxed under Case VI ? The Master of the Rolls, Lord Hanwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h says that when an Act indicates that income-tax shall be charged for any year at any rate the tax at that rate shall be charged in respect of the profits and gains according to the Schedules." Lord Buckmaster agreed with the observations of Lord Justice Lawrence, that there can be no middle course open in such cases. Viscount Dunedin, in concurring with the opinion of Lord Buckmaster, dealt with the several arguments urged by the Crown but the observations made by him with regard to the last argument are relevant for our purpose. "The last argument of the counsel for the Crown", observed Viscount Dunedin, "was that there was a finding that the respondent never meant to hold the land bought as an investment. The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investment but per se it leads to no conclusion whatever. "According to Viscount Dunedin, recourse to Case VI ignores the fact that it had been settled again and again that Case VI does not suggest that anything that is a profit or gain falls to be taxed. The observations made by Viscount Dun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his way : "I would therefore say that the Commissioners of Inland Revenue have failed to prove-and the onus is on them-the case they sought to make out." According to Lord Carmont, Lord Dunedin's observations do not suggest that the initial declaration of of intention per se leads to the conclusion that the transaction was in the nature of trade. He thought that much more was required to show that the assessee was engaged in an adventure in the nature of trade than was proved in the case before the court. Lord Russell, who concurred with this opinion, began with the observation that "prima facie the difference of opinion among the General Commissioners suggests that the case is a narrow one and that the onus on the appellants of showing that the transaction was an adventure in the nature of trade is not a light one." Lord Russell then mentioned the argument of the Lord Advocate, that if a person buys anything with a view to sale that is a transaction in the nature of trade, because 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 operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case ? The property purchased and resold is land and it must be conceded in favour of the appellant that land is generally the subject-matter of investment. It is contended by Mr. Viswanatha Sastri that the four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realised that cannot impress the transaction with the character of an adventure in the nature of trade. The appellant, however, is a firm and it was not a part of its ordinary business to make investment in lands. Besides, when the first purchase was made it is difficult to treat it as a matter of investment. The property was a small piece of 28 1/4 cents and it could yield no return whatever to the purchaser. It is clear that this purchase was the first step taken by the appellant in execution of a well-considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resaleable is a relevant factor in determining the character of the transaction, so would hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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