TMI Blog1990 (7) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 11,604. There is no dispute in this respect. However, in part III of its return the company had claimed exemption from tax of an amount of Rs. 3,38,000 which represented profit realised on sale of Rs. 2 National Defence Gold Bonds, 1980 (hereinafter referred to as Gold Bonds) worth 10 Kg. gold. This amount had been shown credited to profit and loss account and, therefrom transferred to "capital reserve account". It had been reflected as such in the balance sheet as on 31-3-1979. The company had claimed exemption from tax of this amount on the ground that Gold Bonds sold were not capital assets as per definition of the term given in section 2(14)(iv) of the Income-tax Act, 1961 (the Act) and the excess amount realised on sale thereof did not constitute company's income. The ITO did not accept this contention of the company. Taking note of company's conduct of selling Gold Bonds worth 20 Kg. of gold during the immediately preceding year and purchasing 20 Kg. worth gold bonds and selling 10 Kg. worth gold bonds during the year under consideration the ITO formed the opinion that the sale of 10 Kg. worth gold bonds by the company in this year was an adventure in the nature of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at current market rate of Rs. 740 per 10 grams, the preponderant amount of asset would have been found as assets of the company. He pointed out that if the Gold Bonds, as shown in the balance sheet at Rs. 5,52,000, were revalued @ Rs. 740 per 10 gms. the value thereof would come to Rs. 11,22,000. Finally he examined the source of income of the company and came to the conclusion that in the year under consideration the preponderant source of income of the company had been the trading activity undertaken by it. Having thus tested the character of the company with reference to its object, preponderant employment of assets and preponderant proportion of its income the IAC held that during the year under consideration the company had become an investment trading company and the profit of Rs. 3,38,000 made by it on sale of 10 kg. worth of gold bonds was required to be assessed as its income. He, therefore, accepted and approved the proposal of the ITO in that behalf and accordingly directed him to add the aforesaid amount to company's total income. The ITO duly complied with such directions u/s 144B. 5. The company had further claimed deduction of Rs. 7,385 being company's contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adventure in the nature of trade and proposed addition of that amount as business profits to the total income of the company. For the reasons recorded for A.Y. 1979-80, as stated in earlier part of this order, the IAC approved the proposed addition in his directions u/s 144B of the Act. The ITO, therefore, finalised the assessment at Rs. 23,60,880. The company approached the CIT(A) in appeal. 9. The company urged before the CIT(A) that the ITO was not justified in substituting the sale price of the gold bonds from Rs. 13,72,500 to Rs. 22,72,500 and in treating the excess realisation on sale of gold bonds as business profits from company's adventure in the nature of trade. The CIT(A) not only rejected these contentions of the company for the reasons mentioned by the ITO and the IAC in their orders but also further observed that the principles laid down by the Supreme Court in the cases of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 applied to the facts of the case. 10. In its appeal for A.Y. 1981-82 the assessee challenges not only the addition of Rs. 22,72,500 as business prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company successfully stood all the three tests, pointed out by the IAC in his directions u/s 144B. It was also urged that purchase of new assets or investments was a natural and sometimes necessary activity of an Investment Company and casual or occasional sale of assets or investments even with profit making motive would not necessarily make the transaction of sale as an adventure in the nature of trade. It was submitted that in the instant cases there was no frequency or repetition in sales and purchases. Mr. Patel finally urged that in the instant cases revenue could neither prove that the company had become an investment dealing company in the years under consideration nor that the transactions of purchases and sales of gold bonds were adventures in the nature of trade. In support of his arguments Mr. Patel relied upon the following cases: 1. G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC) 2. Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) 3. Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) 4. CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC) 5. D.S. Virani v. CIT [1973] 90 ITR 255 (Guj.) 6. Ramjibhai Dahyabhai v. CIT [1986] 158 ITR 540 (Guj.) 7. Pee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company as an investment company, as has rightly been pointed out by Mr. Patel, has not been disputed by the income-tax authorities. The learned IAC has pointed out that the main objects of the company stated that it would be an Investment Holding Company. He has further observed that in clause B(13) it is laid down that profit, if any, which is realised on the sale of capital will be carried over to the capital reserve account and shall not be available for distribution. As has been mentioned above the company has treated the profits on sale of its capital in that way. The treatment given to the excess realisation on sale of capital in the profit and loss account and the balance sheet fully corroborate the conduct of the company in that behalf. However, on reference to clause 160(c) in Part III on Capitalisation of the Articles of Association the learned IAC has concluded that the prohibition placed by clause B(13) of the Memorandum of Association was not total or absolute as, in his opinion, clause 160(c) of the Articles of Association gave a discretion to the Directors of the company to distribute the profits made on sale of the capital asset or investment or undistribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration from time to time. Each time, as the following discussion would show, the question whether a transaction of sale amounted to adventure in the nature of trade or not was decided on the facts of the given case. In Behari Lal Jhandu Mal's case the Lahore High Court declared the sale of certain gold in 1936, purchased by the assessee-HUF, engaged in money lending, in 1931 as an adventure in the nature of trade. Similarly the Allahabad High Court in Kalyan Mal Budhulal's case held the profits made by the cloth dealer from purchases of cotton bales and resale thereof in one lot as income from adventure in the nature of trade. But the Bombay High Court, in Bhogilal H. Patel's case held that if a person invests money in land intending to hold it, enjoy its income for sometimes and then sells it at a profit, it would be a case of capital accretion. In that case an agriculturist businessman had acquired agricultural lands and had sold the same at profits. But in a subsequent case of P.D. Ghanekar the same High Court found the transaction of purchase of the rights of a decree-holder for Rs. 1,25,000 by a Chartered Accountant who knew that the debtor was ready to settle the dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a transaction of sale, the onus was on revenue to prove that the transaction was an adventure in the nature of trade. Following that principle, the Supreme Court, in the case of Janki Ram Bahadur Ram found no adventure in the nature of trade in the case of an assessee, a dealer in iron scrap and hardware, purchasing land with Jute Press and warehouses thereon and on being faced with problems of eviction selling the same even ever running the press. Again, in the case of P.K.N. Co. Ltd. the assessee company was formed primarily to take over the assets in the Federation Malaya State of a firm. The assessee company had purchased certain assets from the firm, had developed the same and later on sold the same at profit. The Supreme Court observed that existence of power in the Memorandum of Association to sell or turn into account, dispose of or deal with the properties and rights of all kinds had no decisive bearing on the question whether the profits arising therefrom were capital accretion or revenue. The Supreme Court made the significant exposition of law by observing that the purpose or the object for which the company is incorporated may have some bearing but is not decisive, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition that the department never treated the gold bonds as stock in trade of the company. The gold bonds were always projected as investments in the balance sheets from year to year. Surplus realisation on their sales was transferred to capital reserve account and was never made available for distribution. Annual payment for their holding and retention, at one stage or the other of the relevant assessment proceedings, was treated by the department as exempt from tax u/s 10(15)(ia). The position of their sales is this that initially the company had received 25 kg. worth of gold bonds on 1-8-1977 on dissolution of the partnership firm M/s Unique Associates not as stock in trade but as capital. After a retention for about 13 months 20 kg. worth of gold bonds were sold on 31-8-1978 and the surplus taken to capital reserve account. Then 5 kg. worth of gold bonds were purchased on 15-4-1978 and 10 kg. worth of gold bonds were sold on 30-3-1979. The surplus realisation was again transferred to capital reserve account. 10 kg. worth of gold bonds were purchased on 13-4-1979 and no sales were effected in that year. It was on 11-7-1980 that the entire balance holding of 25 kg. worth of gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad sold the gold bonds to the executors of the estate of Late Ambalal Sarabhai for good consideration earning substantial profits which made accretion to its capital. It is not contended by revenue that the Executors of the Estate of late Ambalal Sarabhai and Trustees of Sarabhai Trust are separate and genuine assessable entities in revenue's records. Proximity in relationship of the persons managing those assessable entities and disposal of the gold bonds a few days prior to their date of redemption may no doubt make suspicious circumstances but such circumstances cannot be allowed to take the place of proof so as to hold the relevant transactions entered into by those entities as non-genuine, fake and bogus and that too without hearing them. For these reasons we accept both the first two grounds in the appeal for this year. 25. In ground Nos. 3 4 the company has, in effect, objected to the action of the ITO in substituting the sale price of gold bonds sold at Rs. 22,75,500 for Rs. 13,72,500 at which those were actually sold. The objection is certainly acceptable. The ITO had no such jurisdiction in this case so as to act u/s 52(2) of the Act. Gold bonds were no capital assets ..... X X X X Extracts X X X X X X X X Extracts X X X X
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