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TMI Blog1960 (3) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... , the machinery and plant of a spun silk mill at Bombay, which was one of two such mills in the whole of India manufacturing filature silk, was acquired from the Chhoi Silk Mills Ltd., Bombay, in whose compound it was situated, by a syndicate of four consisting of: Mangoomal Atma Singh, who owned 3½ annas share. Brijilal Narandas, who owned another 3½ annas share. S. Huie, who owned one anna share and Dewan Bahadur A.M. Murugappa Chettiar, who owned an 8 annas share. This mill so purchased was named "Jaya Spun Silk Mills". The purchase price was ₹ 2,62,500. Some incidental expenses were incurred in connection with the purchase. On December 7, 1943, Huie sold out his share; on January 27, 1944, Brijilal Narandas did likewise and on June 23, 1944, Mangoornal Atma Singh divested himself of his interest in the concern, the net result being that Dewan Bahadur Murugappa got the entire mill under his control for ₹ 2,88,750 besides some incidental expenses. The finances for this transaction were found by Dewan Bahadur Murugappa from his monies kept in Murugappa and Sons (Travancore) Ltd. and Murugappa and Sons, Madras, but the actual purchase of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rote a letter on September 11, 1944, to the assessee company stating that the property belonged to his father and that he was entitled to sell the same and that he was in management on his behalf. It may also be stated that Vellayan himself had become a director of the assessee company on November 6, 1943, and managed the mills till he went away to Rangoon in the end of 1945. 5. The assessee company was in correspondence from June, 1944, till the end of the year with American business interests with a view to importing additional machinery for the purpose of developing the Jaya Spun Silk Mills at Bombay, for improving the working of the mills and for the purpose of preparing and spinning noil yarn from spun silk waste. 6. Murugappa worked the mills from the date of their purchase to September 1, 1944, when they were sold to the assessee company and the assessee worked them from September 1, 1944, to February 28, 1946. Meanwhile, in or about July, 1945, the Mysore Spun Silk Mills Ltd., Chennapatna, Mysore, negotiated for the purchase of the mills, these negotiations ranging during the greater part of October, 1945. On December 17 of that year, an agreement was entered into between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness which had stopped. (4) that the profit, if at all, was only a capital profit and not a business profit; (5) that the sale by the assessee was made as a going concern; and (6) that therefore no profit was assessable under section 10(2)(vii). 8. The Tribunal found for reasons stated in paragraphs 8 and 9 of their order, a copy of which is annexure "B" and forms part of the case, that the plant and machinery had not been sold as a result of the cessation of business, that the business of the assessee was not closed, that there was no substance in the ground that in the year of account concerned the business had not been carried on by the assessee, and that, therefore, the profit of ₹ 85,791 had been correctly assessed under section 10(2)(Vii). 9. On the second part of the case, about the profits made on the sale of the mills themselves, the assessee contended: (1) that it had intended to carry on the business of spinning silk yarn and with that end in view it purchased the mills; (2) that there was no intention at the time of purchase to sell the mills at a profit; (3) that no business was intended to be carried on in the purchase and sale of this machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency, that family had a large interest in the shareholding. The Tribunal observed that Murugappa and his sons were "vitally interested" in the company. Details of the shareholding were not furnished in the record, and when we asked the learned counsel for the assessee if that information was available, he said that out of 6,000 shares, Murugappa and his sons held 1,063 shares, while their wives held another 2,855 shares. None the less, the position remained that it was a public company in which the members of the public who held shares had a substantial interest. In the rest of this judgment we shall refer to the late Dewan Bahadur Murugappa, the father, as Murugappa. In September, 1943, Murugappa along with three others purchased the Chhoi Silk Mills Ltd., at Bombay, which was engaged in the manufacture of filature silk. It was the period of the Second World War, and there was a good demand for the manufactured product for parachutes. Murugappa had an eight annas share. Soon, however, he bought out the other three members of the syndicate, and by June 1944, Murugappa became the sole owner of the silk mills. The total outlay for the purchase was ₹ 2,88,750. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company, it should be remembered, had purchased these mills for ₹ 4.25 lakhs. There were further items of capital outlay, and the capital cost of the mills to the assessee company was ₹ 4,51,164. The profit made by the sale was ₹ 3,41,586. Besides this, there was the amount of ₹ 85,791, which represented the difference between the written down value of the machinery and the original cost price at which the assessee company had acquired the silk mills. In the assessment year 1947-48, the Income-tax Officer assessed the assessee company to tax on both these items of ₹ 85,791 and ₹ 3,41,586. The appeals the assessee company successively filed before the assistant Commissioner and the Tribunal failed, and the assessment made by the Income-tax Officer was confirmed. The Tribunal referred the following questions to this court under section 66(1) of the Act: "1. Whether, on the facts and in the circumstances of the case, the sum of ₹ 3,41,586 being the excess realised on the sale of Jaya Spun Silk Mills (plant and machinery) constitutes income from business and so was assessable to tax? 2. Whether, on the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier, the Income-tax Officer certainly did not take the view, that the purchase and sale of the silk mills constituted an adventure in the nature of trade, independent of the normal business activities of the assessee company sanctioned by the memorandum of association. The Tribunal pointed out in paragraph 11 of its judgment: "There is no doubt that the business of silk mills was quite outside the assessee's usual line. "The Tribunal also recorded: "There can be no doubt that there was that element of careful calculation, design or organization present in making the profits and similarly in carrying out the negotiations for sale with a view to realise the profit thereby. This is a carefully and coolly calculated deal and the running of the mills for a short time was just to give that gloss that would attract would-be buyers." There was however no express finding, whether the Tribunal confirmed the view taken by the Income-tax officer, that it was a case of profit realised by the assessee company in the course its normal business activities, or whether it was a case of profit realised by the assessee company from 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 ..... ntion could be focussed on that aspect even in the frame of the question itself. Despite the fact that there was no express finding of the Tribunal in its order, or even a finding which could be gathered by necessary implication, that the transaction of purchase and sale of the silk mills entered into by the assessee company was an adventure in the nature of trade, we shall examine whether there was any material which could support such a finding. We should clear the ground to some extent by pointing out that we are not now concerned with the question, whether the purchase and sale of the silk mills by Murugappa constituted an adventure in the nature of trade as far as he was concerned. We are concerned only with the question, whether the purchase and sale under taken by the assessee company was an adventure in the nature of trade on which the assessee company embarked. Again to clear the ground, we can ignore the fact, that Murugappa originally made the purchase in the name of his son, Vellayan. Apart from the fact, that despite the original purchase having been in the name of Vellayan, Murugappa's title to the mills and his sloe right to sell the property to the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the vendor and the assessee company was the purchaser. No doubt Murugappa was a member of the firm, Murugappa and Sons, which had the managing agency of the assessee company. But that did not establish the identity of interests between the vendor and the vendee. We have already pointed out that the departmental authorities and the Tribunal failed to keep in view the distinction between the two sets of transactions, purchase and sale entered into murugappa, and the purchase and sale entered into by the assessee company. Whether the transaction of purchase and sale made it an adventure in the nature of trade as far as Murugappa was concerned could have no bearing on the question, whether the transaction of purchase and sale constituted an adventure in the nature of trade in the case of the assessee company. We are unable to see any real basis on the material on record for any possible finding, that either when the assessee company commenced negotiations in 1944 to purchase the silk mills or when the company purchased the silk mills in September, 1944, the intention of the company was to sell these mills and at a profits to the Mysore company. It was a well settled proposition of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the purchase by the company and the subsequent and unconnected sale should be viewed in this case. We do not think it necessary to embark again upon any extensive examination of the case law on the subject of what constitutes an adventure in the nature of trade. Such an exhaustive review was undertaken by the Supreme Court in venkataswami Naidu and Sons v. Commissioner of Income-tax [1959] 35 I.T.R. 594, 597 (S.C.), and again to some extent in Saroj Kumar Mazumdar v. Commissioner of Income-tax [1959] 37 I.T.R. 242 (S.C.). As has been repeatedly pointed out even if the purchase and sale was contemplated and provided for even at the time of the purchase, the two transactions together might lead to either the inference, that the purchase constituted an investment or that the purchase and sale together constituted an adventure in the nature of trade. It is either the one or the other with no possibility of a half way house. If however there was no intention to sell at all and the purchase and sale constituted two independent transactions, the purchase would really be consistent only with an intention to acquire and hold the property purchased as an investment. If it is an investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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