1970 (4) TMI 37 - HC - Income Tax

Import of plant - adventure in the nature of trade - plant could not be acquired for the purpose of investment, the machinery or plant could not be kept idle indefinitely, it had to be put to use and worked soon after its import - transaction is an adventure in the nature of trade

Issues Involved:
1. Whether the sum of Rs. 7 lakhs received from M/s. Orissa Cement Ltd. was pursuant to an adventure in the nature of trade and as such taxable under the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Nature of Transaction:
The primary issue is whether the transaction involving the sale of machinery by the assessee to Orissa Cement Ltd. constitutes "an adventure in the nature of trade" under Section 2(4) of the Indian Income-tax Act, 1922. The court examined whether the profits from this transaction could be taxed under Section 10 of the Act, which covers profits or gains from business, trade, or any adventure in the nature of trade.

2. Facts and Circumstances:
The assessee, a limited liability company, had ordered machinery from Messrs. F. L. Smidth & Co. for four cement plants, including one at Dandot, which later fell in Pakistan post-partition. The machinery for Dandot was diverted to Orissa Cement Ltd., a company promoted by the assessee and the Orissa Government. The machinery was initially supplied at the invoice price, but later revalued, resulting in an additional Rs. 7 lakhs credited to the assessee.

3. Tribunal's Findings:
The Tribunal found that:
- The original order for machinery was placed for the assessee's own use.
- The machinery was supplied at the invoice price without initial profit.
- There was no intention to sell the machinery at the time of ordering.

However, the Tribunal also noted:
- The assessee could have canceled the order post-partition but chose to import the machinery with a view to make a profit.
- The assessee's actions post-partition indicated an intention to sell the machinery for profit.

4. Legal Arguments:
The assessee argued that the transaction was not an adventure in the nature of trade, emphasizing:
- The transaction was isolated and not part of the assessee's ordinary trading activities.
- The machinery was ordered as a capital asset, not for resale.
- The sale was a separate transaction from the purchase, indicating an investment rather than a trading activity.

The revenue contended that the transaction was indeed an adventure in the nature of trade, pointing to the assessee's actions and intentions post-partition.

5. Judicial Precedents:
The court reviewed several precedents, including:
- Saroj Kumar Mazumdar v. Commissioner of Income-tax: Highlighted that isolated transactions could be considered adventures in the nature of trade if characterized by trade features.
- Janki Ram Bahadur Ram v. Commissioner of Income-tax: Distinguished between transactions involving commercial commodities and land.
- Ajax Products Ltd. v. Commissioner of Income-tax: Emphasized the importance of intention at the time of purchase.
- Leeming v. Jones: Discussed the nature of isolated transactions and the importance of intention.

6. Court's Conclusion:
The court concluded that the transaction was an adventure in the nature of trade, noting:
- The intention to sell the machinery to Orissa Cement Ltd. was evident before the despatch order.
- The transaction involved a concerted effort to secure a higher price, indicating a profit motive.
- The machinery was not acquired as an investment but for resale, given its nature and the circumstances.

7. Final Judgment:
The court answered the referred question in the affirmative, holding that the sum of Rs. 7 lakhs received from M/s. Orissa Cement Ltd. was taxable as it was pursuant to an adventure in the nature of trade. The court ruled against the assessee and in favor of the revenue, with no order as to costs.

Question answered in the affirmative.

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