1965 (10) TMI 7 - HC - Income Tax

Sale of land in separate plots - 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 - not incldible as profits or gains of business

Issues Involved:
1. Nature of the surplus from the sale of land-whether it is capital accretion or capital profits from trade or business or a venture in the nature of trade.
2. Determination of whether the transaction is a realization of capital investment or an adventure in the nature of trade.
3. Relevance of the company's memorandum and articles of association in determining the nature of the transaction.

Issue-wise Detailed Analysis:

1. Nature of the Surplus from the Sale of Land:
The primary issue was whether the surplus of Rs. 27,568 from the sale of certain plots of land by the assessee, a private limited company, constituted capital accretion or capital profits from trade or business or a venture in the nature of trade. The Tribunal found no evidence of the assessee's intention to deal in properties and concluded that the transactions did not amount to an adventure in the nature of trade. The court emphasized that the findings of fact by the Tribunal are conclusive unless there is a misdirection in law or no evidence to support them.

2. Determination of Whether the Transaction is a Realization of Capital Investment or an Adventure in the Nature of Trade:
The court referred to several precedents to determine the character of the income. It cited the principle from *Californian Copper Syndicate v. Harris* which asks whether the gain was a mere enhancement of value by realizing a security or a gain made in an operation of business. The court noted that the word "business" includes trade, commerce, or any adventure in the nature of trade or commerce, and that trade is a broader concept than an adventure in the nature of trade. The court further elaborated that a transaction to be an adventure in the nature of trade should have elements of trade and should be a plunge into the waters of trade.

The court also mentioned the Royal Commission's "badges of trade" which include factors like the subject-matter of the realization, the length of the period of ownership, the frequency of similar transactions, supplementary work on the property, the circumstances of the realization, and the motive. The court concluded that no single criterion could determine whether a transaction is an adventure in the nature of trade, but the cumulative effect of all facts and circumstances should be considered.

3. Relevance of the Company's Memorandum and Articles of Association:
The court examined whether the objects and powers of the company as stated in its memorandum and articles of association were determinative of the nature of the transaction. It cited cases like *Scottish Investment Trust Co. v. Forbes* and *Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer* to illustrate that while the objects and powers are relevant, they are not conclusive. The intrinsic nature and character of the transaction itself, in light of the objects and powers and surrounding circumstances, should be examined.

Conclusion:
The court found that the company, formed for family reasons, held the properties transferred to it for over ten years, maintained them, and realized income primarily through letting out the properties. The sales of land were not frequent, and the surplus from the sale of land was consistent with the realization of a capital investment rather than a trading activity. The court concluded that the transactions did not constitute trade or an adventure in the nature of trade, and the surplus was not taxable as business income.

Judgment:
The court answered the question in favor of the assessee, stating that the surplus from the sale of land did not result from any trade or business in land carried on by the assessee or from any transaction that could be described as an adventure in the nature of trade. The assessee was awarded costs with counsel's fee of Rs. 250.

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