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TMI Blog1961 (9) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... firm incorporated on December 4, 1937, a private limited company under the name and style of P.K.N. Company Limited, the assessee in the reference, hereinafter referred to as the company under the Pudukottai Companies Regulation (Regulation V), 1929. The following are some of the objects for which the company was formed:...... (ii) To carry on business as merchants, commission agents, financiers, concessionaires, mill-owners, land and house estate agents and owners, financial, commercial agents and to undertake and carry on and execute all kinds of financial, commercial business (except the issuing of policies of assurance on human life) which may seem to be capable of being conveniently carried on in connection with any of these objects or calculated directly or indirectly, to enhance the value of or facilitate the realisation of, or render profitable, any of the company's property or rights...... (xv) To purchase or otherwise acquire and to sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with property and rights of all kinds, and in particular, mortgages, debentures, produce, concessions, options, contracts, patents, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... ... 31-3-40 67,213 7,917 3,366 349 31-3-41 2,62,655 10,188 3,259 250 31-3-42 5,000 51,891 15,041 ... 31-3-43 4,400* 4,400* ... 30,600 31-3-44 ... 3,331 1,881 ... 31-3-45 500* 2,67,610 2,32,751 ... 31-3-48 ... 17,500 7,500 ... 31-12-48 ... 1,88,145 37,220 525 31-12-49 ... 1,20,734 43,333 550 31-12-50 1,000 3,26,362 1,40,899 180 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... Not available. 31-12-48 19,27,399 ... 42,914 19,70,313 31-12-49 114,29,778 ... 71,196 15,00,974 31-12-50 4,99,792 ... ... 4.99,792 12. The published annual accounts of the limited company form part of the case. They are not printed but copies thereof are undertaken by the assessee to be produced by the assessee before their Lordships at the time of the hearing. 13. The former State of Pudukottai integrated with the State of Madras in 1948; accordingly only from the assessment year 1949-50 onwards, the assessee was assessed to income-tax in India, which was None on the aforesaid profits and losses under business for that year. Such an assessment against the assessment year 1950-51 was, however, appealed against to the Appellate Assistant Commissioner and eventually to the Tribunal. The Tribunal agreed with the assessee that the assessee was not carrying on any business in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment company formed to hold the properties for their income; (b) the outside purchases were only two and the motive underlying the purchase of the large acreage of Lee Estates was its contiguity and convenient enjoyment; (c) the sales before I948 were out of the non-remunerative and uneconomic properties of those otherwise out of the way and inconvenient to manage; (d) the Tribunal's decision in annexure E aforesaid applied for the year too. 16. The Appellate Assistant Commissioner held that the Tribunal's order, annxure E aforesaid, could not govern the matter as the full facts had not been placed at that time and following the decision in Rellim Ltd. v. Vise [1952] 22 I.T.R. (Eng. Cas.) 51 dismissed the appeal holding that the assessee's operations of purchase, improvement and sale of the properties constituted operations of a business nature or in the alternative of a venture in the nature of trade for the following reasons: (a) the objects clause did not restrict the purchase to the P.K.N. Firm aforesaid, but was general; (b) the sales were continuous from the beginning and from year to year at peak prices and for fabulous profits; (c) there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn as Lee Rubber Estate for 2,62,655 dollars. This property is said to have adjoined the other rubber estates owned by the firm and subsequently transferred to the company. It also purchased a small house property for 5,000 dollars on 7th July, 1941. We may state even here that after 1941 the company did not purchase any other items of property. The share capital of the company was 6,60,000 dollars. It was treated as fully paid up and shares were allotted to the various partners of the firm who became the shareholders of the company. The balance of the purchase consideration was retained as a liability of the company to be discharged in due course. After the integration of the Pudukottai State (the company having apparently been treated as resident in that State) the company was assessed to income-tax in India for the assessment year 1949-50 and onwards. In respect of the assessment for the assessment year 1950- 51, the question arose whether the company was or was not carrying on any business in the purchase and sale of properties. With reference to that assessment, the Tribunal came to the conclusion that the properties referred to above from out of which certain sales had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any by the sale of some of its estates and properties held by it in Malaya was income chargeable to tax under the Indian Income-tax Act? The point for our consideration is, in other words, whether the company engaged itself in the business of purchase and sale of properties or whether the transactions which involved the sale of properties by the company were nothing more than what would be incidental to an owner of property realising part of his investment in the normal course of the enjoyment of his property. Before we proceed to consider the arguments that have been addressed, we think it necessary to emphasise one or two special features. The company acquired the properties of the P.K.N. firm situated in the district of Muar. The extent of these properties is said to have been about 3,000 acres consisting, as we said, of rubber plantations, coconut topes, vacant sites and houses. The rubber plantation purchased from the Lee Rubber Company in 1941 adjoined the rubber estates purchased from the P.K.N. firm. The subsequent operations of sale between 1940 and 1950 did not include any part of this Lee Rubber Estate. It also appears that during these years several of the ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of all kinds. Clause 16 empowered the company to sell, mortgage, manage, improve, cultivate, develop, dispose of, turn to account or otherwise deal with all or any of the properties of the company. These were relied upon by the department to indicate that the company had the power and its actions in selling the property must be related to this power and must necessarily lead to the inference that the company did a business in selling of properties. Turning to the articles of association, a document which neither the department nor the Tribunal seems to have considered, we find certain features therein which cannot be ignored in deciding the question before us. The membership of the company was restricted to the members of the P.K.N. family, who are listed out in article 2 of the articles of association. No outsider can become a member of the company and, in the event of any member seeking to transfer his shares, he had to sell it to the company at a fair value fixed under the articles of association. Such shares were to be allotted only to the remaining members of the company. The company was, however, at liberty to sell it to any person if it was unable to effect a sale t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginally acquired by the company continued to remain with it. It claimed that the company, though it had a multitude of objects in its view when it was started and armed itself with a variety of powers enabling it to carry on business of different kinds, was really engaged only in the business of planters and that the sales which were rendered necessary for reasons which have already been indicated, viz., the disposal of unremunerative properties, disposal of vacant sites, houses which were not necessary, outlying properties which were inconvenient of management, could not justify the conclusion that the company was engaged in the business of dealing in properties. He also pointed out that during the last seven years the company has been spending year after year large amounts in the upkeep, maintenance and improvement of the plantations and equally deriving a large income. While the Tribunal came to the conclusion that the properties acquired were in the course of a business of dealing in properties and not as investment pure and simple, the alternative ground that it was an adventure in the nature of a business appears to have been taken by the department. We have, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that these reasons could have existed. In evaluating these grounds, they have not adverted to the circumstance that the Lee Rubber Estate, which formed a compact block was not interfered with, that is to say, no part of it was disposed of but only portions of the properties acquired from the P.K.N. family, which apparently was a sprawling estate, were dealt with. Except for the circumstances that small portions were so disposed of over a number of years, we are not able to find evidence of a systematic commercial activity which can be related to any dealing in properties. An owner of property, it is well recognised, can sell portions of his estate. It is undoubtedly one of the modes of enjoyment of his own property. Merely because a person owns a large estate and chooses to sell portions of it year after year, it cannot immediately lead to the conclusion that he was so doing in pursuit of a business of dealing in properties. The disposal of a capital asset under such circumstances can but be equivocal in its nature and it is only special features that can stamp such an activity with the character of a business of dealing in properties. What then is business, is what we have to enqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pees five and a quarter lakhs. In the next year, the estate expenditure came to ₹ 3,31,000 and odd and ended on 31st December, 1950, the estate expenditure, including salaries, etc., came to rupees five and a quarter lakhs, while the receipts by way of rubber sales and stock came to rupees sixteen and a half lakhs. In the three years we have referred to, the salaries to staff came to ₹ 13,451, ₹ 14,047 and ₹ 51,200. The figures indicate clearly enough that the main object of the company was to function as planters and dealer in rubber, etc., and if these figures are any guide, they do indicate that this activity increased in tempo year after year. In contradistinction, we have no evidence worth the name that would impress any indicia of a trade activity in so far as the sales of properties are concerned. In the case of a dealer in properties, one would normally expect to find special steps being taken for the purpose of bringing these properties to sale, whether by advertisement or by engagement of special staff for the purpose of securing a good price for the properties sold. No such evidence was available to the department or the Tribunal and we fail to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted means of the company's gains. It is obvious from the above extract that it was found as a fact that the company had no intention of working the mines at all. Such a conclusion cannot possibly be drawn on the facts of the present case. n this very judgment, the learned judge opened his judgment with these words: It is quite a well settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income-tax Act of 1842 assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate an initial presumption that the course of dealing was in the nature of a business. But nevertheless before profits made by the company can be brought to tax, it has to be found that the company did engage itself in the business of dealing with properties. That finding cannot be rested solely on one of the many stated objects in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the company. St. Aubyn Estate Ltd. v. Strick* again dealt with the case of a company which was incorporated for the purpose of developing and disposing of lands and other property acquired by purchase. The company developed the land as building sites and proceeded to sell off portions as opportunities arose. Expenditure was involved in development and in the lay-out and the developed sites were sold in plots to the applicants. Well over 400 such transactions of sale were involved and the Commissioners came to the conclusion that the company was carrying on a trade of dealing in property. Finlay J. observed: When one looks at the memorandum and articles, when one looks at the inception of the company, when one looks at what the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfactory reasons have been advanced as to why it was necessary that some portions of the estate should be disposed of. Those we have referred to already. Nor can the mere circumstances that the company had armed itself with the power to deal in properties lead us to ignore all the other equally, if not more important, aspects and conclude that the company was dealing in properties. All the facts and circumstances of the case incline us strongly to the view that the company did not set out with the intent of purchase and sale of properties. Nor did its mode of dealings with the properties during the last several years impress such activities with the character of business. We may nest briefly consider whether the view that was taken by the officers below that it may be treated as an adventure in the nature of a trade has any substance. The facts necessary to deal with this aspect of the matter have already been stated and do not require repetition. It would suffice for us to refer to a decision of the Supreme Court in Venkataswami Naidu and Co. v. Commissioner of Income-tax [1959] 35 I.T.R. 594; [1959] Suppl. 1 S.C.R 646 and the observations of Gajendragadkar J. in that decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. On a careful consideration of all the fact and circumstances of the present case, we are of the view that except for an anticipated trade in properties appearing as an object in the memorandum of association, there is no evidence of any intention on the part of the assessee to deal in properties. As we have pointed out, the company armed itself with a multitude of powers relevant to a variety of business transactions and, except for carrying on the business as planters, they did not engage in any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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