1971 (3) TMI 47 - HC - Income Tax

Whether on the facts and in the circumstances of the case the sum of Rs. 41, 219 which represents 25 per cent. of the net profit of the Jeypore Sugar Company and received by the assessee-company is an item of revenue receipt liable to income-tax ?

Summary

Issues Involved:

1. Whether the sum of Rs. 41,219 received by the assessee-company from Jeypore Sugar Company is a revenue receipt liable to income-tax.
2. Whether the transaction between the assessee-company and Jeypore Sugar Company amounted to an adventure in the nature of trade.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 41,219 received by the assessee-company from Jeypore Sugar Company is a revenue receipt liable to income-tax:

The core issue was whether the sum of Rs. 41,219 received by the assessee-company, representing 25% of the net profit of Jeypore Sugar Company, was a revenue receipt liable to income-tax. The assessee argued that this amount was part of the consideration for the sale of a capital asset (the sugar factory) and should be treated as capital gains. Conversely, the Income-tax Officer considered it as income from business, arguing that the transaction was an adventure in the nature of trade.

The Tribunal concluded that the assessee was not engaged in the business of erecting and selling factories but had intended to manufacture and sell sugar. The sale of the factory was a deviation to pursue more profitable ventures. The Tribunal held that the amount of Rs. 41,219 was part of the consideration for the capital asset and not a revenue receipt. The High Court upheld this view, emphasizing that the true character of the receipt, determined by the substance of the transaction, was capital in nature. The payment was part of the sale consideration and not an income receipt, thus not liable to income-tax.

2. Whether the transaction between the assessee-company and Jeypore Sugar Company amounted to an adventure in the nature of trade:

The Income-tax Officer argued that the transaction was an adventure in the nature of trade, as the assessee intended to profit from the sugar factory and had a history of starting new business lines. However, the Appellate Assistant Commissioner and the Tribunal disagreed, noting that the assessee originally intended to run the factory, which excluded the theory of the venture being a trade adventure.

The High Court examined various precedents and principles to determine the nature of the transaction. It noted that the dividing line between capital and income receipts is often thin but significant. The court emphasized that the substance and true nature of the transaction should be considered, not merely the form or name. The court found that the transaction was a sale of a capital asset, not an adventure in the nature of trade. The assessee received the book value of the assets plus a percentage of profits for two years, which was part of the sale consideration.

The High Court concluded that the transaction was not an adventure in the nature of trade. The payments received were capital receipts, not income, and thus not taxable as business profits. The court's decision was based on the substance of the transaction, the intention of the parties, and the nature of the payments. The court answered the reference in the negative, holding that the amounts in question were capital receipts not liable to income-tax.