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TMI Blog1958 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... o carry on trading in buying and selling of shares?" We shall, therefore, confine ourselves, as far as possible, to the facts relevant to those questions. 2. The assessee is a public limited company incorporated in 1937, for the purpose of carrying on business in cashew-nuts and in the extraction of oil for cashew-nuts and cashew shell. From its very inception, it was faring badly incurring losses in its cashewnuts trading from time to time. A copy of the memorandum and articles of association of the company is annexure 'A' and forms part of the case. It is not printed but copies thereof have been undertaken by the assessee to be produced before their Lordships at the time of hearing. 3. In 1942, the assessee company installed a unit for the extraction of cashew shell oil at a cost of ₹ 6,860-4-0. Description of the various components of the aforesaid unit is not available and was not furnished by the assessee even after repeated requests from the Department. 4. On page 2 of the sixth directors' annual report submitted to the shareholders on the accounts of the company for the year ended December 31, 1942, at their meeting held on September 15, 1943, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet may be compared. The latter statement negatives all claims to obsolescence..." 8. The assessee thereupon appealed to the Commissioner on 23-5-1121. The appeal was transferred to the file of the Appellate Assistant Commissioner, Trivandrum, on 6-12-1122, who, in paragraph 2 of his order reproduced below, held that as the plant in question was installed only as an experiment which was found to be unsuccessful and, therefore, dismantled, it could not be said to be obsolete for purposes of the claim in question. "(2) Old Machinery written off as obsolete--Rs. 6,860-4-0: The auditors were requested by the Deputy Commissioner to furnish the prescribed particulars regarding this asset which was claimed to have become obsolete. This, they failed to do. The Deputy Commissioner also observes that the remarks contained in the sixth annual report negatived the appellants' claim that the machinery in question (i.e., oil extraction plant ) was discarded in consequence of its having become obsolete. The appellants submit in their memo that the oil extraction unit installed in 1942 was found uneconomical in working and therefore a better and new type of plant was installed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company purchased 11,991 shares of Rajagiri Rubber Co. Ltd., between November, 1941, and February 1942, at a cost of ₹ 1,07,314-8-0. The following shares were further purchased during the year ended December 31, 1943: 20,000 Neelamalai ₹ 1,00,000 1,000 Thomcos ₹ 5,000 12. Out of the aforesaid holdings in Rajagiri Rubber Co. Ltd., 7,400 shares were sold during the year ended December 31, 1943, for ₹ 1,40,939-7-0. 13. The sixth directors' annual report aforesaid contains a reference to the policy of the directors to earn profits by sale of company's investments as follows: "...the company is happy in their experience of investing the surplus cash in a sound planting concern. The results of this are encouraging in that apart form good dividends earned on the investment, the company stands to gain considerably by the capital appreciation of these investments on their resale. The policy the company has in view is to invest such profits and also such surplus cash that may be available in similar investments, so that by this method itself, the company hopes to realise much of the capital that stands reduced." 14. The Deputy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in the memorandum or articles for the sale of shares does not make the profit earned out of such sales any the less profit or income, derived by the company. As a matter of fact, the shares were sold and a large sum accrued to the company in the shape of profits. As the learned Assistant Commissioner observes, the profits of not cease to be profits, merely because the appellants chose to treat them as capital appreciation. For the above reasons, we are unable to accept the contention of the appellants in this respect also." 19. It is submitted with respect that out of the aforesaid facts, the real question of law that may be said to arise is: "Whether there was material for the Tribunal to hold that in the purchase and sale of the shares the assessee company did business?" 20. As directed by their Lordships, both the questions set out in paragraph 1 supra are referred. G. B. Pai, P. Govindan Nair, K. V. R. Shenoi, P. K. Kurien and P. M. Alexander, for the assessee G. Rama Iyer, for the Commissioner,. JUDGMENT The judgment of the court was delivered by VAIDIALINGAM, J.--In pursuance of the directions contained in the order dated 17th March, 1953, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 and 1,000 tea shares in Thomcos for ₹ 5,000. Out of the shares of Rajagiri Rubber Co. Ltd., 7,400 shares were sold during the year ended December 31, 1943, for ₹ 1,40,939-7-0. The Deputy Commissioner of Income-tax, the assessing officer, computed the profit on the said sale of 7,400 Rajagiri shares at ₹ 1,00,340-15-0 and assessed it to tax in the assessment year 1120, for which the "previous year" is the calendar year 1943. On appeal by the assessee, the Appellate Assistant Commissioner rejected the claim of the assessee that the profit from the sale of the aforesaid shares was capital in nature and that the said sales represented only stray transactions, the profit from which was not taxable. The Appellate Assistant Commissioner agreed with the assessing officer and held that the sale was in pursuance of a profit-making scheme of the company. As there were some mistakes committed by the assessing officer in calculating the actual profit from the shares, the Appellate Assistant Commissioner fixed the profits at ₹ 75,176. The assessee appealed to the Tribunal against the orders of the two officers holding this amount taxable as a revenue re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of depreciation under clause (vi), and the amount for which the machinery or plant is actually sold, or its scrap value." The question is whether the company is entitled to claim allowance for the old machinery discarded in 1943, when the new plant was installed. According to the Deputy Commissioner, the assessing officer, the company is not entitled to claim under the head of "obsolescence". It is also stated by the assessing officer that by his letter dated 25-7-1120, the auditors, who represented the company in the income- tax proceedings, were asked to furnish details regarding the old machinery discarded showing the details under items 1 to 6 mentioned in his letter. The information called for included the original cost, the depreciation allowed up to December 31, 1942, reasons for discarding the machinery and the value realised by sale of scrap value of the asset. The Deputy Commissioner further says that the auditors have not furnished all the particulars called for. He has also stated that the amount claimed as allowance is the value as per the books, and not the balance after deduction of depreciation already allowed on the machinery. In this vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law. We, therefore, accept the conclusions of the learned Assistant Commissioner in this respect." From the various orders referred to above, it will be seen that the claim of the assessee under this head was negatived on the ground that the plant was installed only as an experiment. The Appellate Tribunal rejected it on a more specific ground, namely, that the plant was installed as an experiment and it proved a failure and that it is not like the case of a plant that became obsolete by use or any other method contemplated by the provisions of law. Mr. Govindan Nair, learned counsel for the applicant, has contended that the view taken by the Appellate Tribunal is not sustainable in law. According to the learned counsel, the expression "obsolete" includes cases of unfitness from whatever cause, whether it is due to total destruction or supersession by new invention. In this case, it is not the case of the Department that the said machinery was not used for extracting oil. As it was considered to be uneconomical, a new machinery was installed in 1943. The extract quoted from the sixth annual report of the company has been misread by the Tribunal and the word &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at such a cost that a prudent man instead of continuing to use such machinery, would discard it and install more modern and more labour-saving machines. In our opinion the word obsolete is quite inapplicable to a new car which is only useless for its purposes because it has been broken to pieces in an accident and in our opinion this cannot be allowed as a deduction and we disagree with the learned judge." The test laid down by the Madras High Court in Rathan Singh v. Commissioner of Income-tax*, has been quoted with approval by a Full Bench of the Calcutta High Court in the decision reported in In the Matter of Shewdayal Jagannath Binjraj**. The learned Chief Justice, Rankin, C.J., who delivered the leading judgment observes at page 600 as follows: "The statute recognises however that machinery and plant may have to be discarded not because it has come to the end of its working 'life' but by reason that newer types of machinery or newer methods have become necessary in the face of competition. Even if it is good of its kind, obsolescence allowance comes into play in such a case..." After making these observations, the learned Chief Justice quotes with ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving revenue profit or capital appreciation especially in the absence of a provision in the memorandum of association of the applicant to carry on trading in buying and selling of shares?" The relevant facts necessary for a consideration of this question are briefly as follows: The company purchased 11,991 Rajagiri rubber shares and they purchased 20,000 shares in the Nilamalai tea and coffee estates for ₹ 1,00,000 and 1,000 shares in Thomcos for ₹ 5,000. During the year of assessment, the company sold away 7,400 Rajagiri shares for ₹ 1,40,939-7-0. According to the Deputy Commissioner the company had made a profit of ₹ 1,00,340-15-0 and that the company was bound to pay tax on the profit made on the ground that it is a revenue income. According to the assessee, these profits represented only capital appreciation of the investments on their resale. The Deputy Commissioner referred to a passage in the sixth annual report of the company which was as follows: "The policy the company has in view is to invest such profits, also such surplus cash that may be available, in similar investments, so that by this method itself, the company hopes to realise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any further with this view of the Deputy Commissioner based on the provisions in the memorandum of association. The Appellate Assistant Commissioner on appeal accepted a contention on behalf of the assessee that there was a mistake committed by the Deputy Commissioner of Income-tax in calculating the profits even on the assumption that such profits are taxable. Therefore, the Appellate Assistant Commissioner re-worked the profits and held that under this head only a sum of ₹ 75,176 will be liable to tax. On the question of the said amount being liable to tax, the assessee contended that all the available liquid resources of the company were invested in Rajagiri rubber shares in 1942. The company had sustained loss during the previous years. Therefore, the directors decided to consolidate the capital position of the company and to invest the liquid cash available in good investments so as to ensure a proper and regular return. But strict control was enforced in 1942, regarding rubber and synthetic rubber was also coming into the field. Therefore, the directors thought it wiser to sell a portion of the investment covered by the rubber shares and to invest the sale proceeds on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mithunam, 1123, in Income-tax Appeal No. 79 of 1123, rejected this contention of the assessee as follows: "The next point relates to the profits from sale of shares. The learned Assistant Commissioner has carefully considered all the aspects of the matter and came to the right conclusion that it is not an allowable claim. The fact that there is no provision in the memorandum or articles for the sale of shares does not make the profit earned out of such sales any the less profit or income, derived by the company. As a matter of fact, the shares were sold and a large sum accrued to the company in the shape of profits. As the learned Assistant Commissioner observes, the profits do not cease to be profits, merely because the appellants chose to treat them as capital appreciation. For the above reasons, we are unable to accept the contention of the appellants in this respect also." It will be seen that the Appellate Tribunal was of the view that the Appellate Assistant Commissioner has carefully considered all the aspects of the matter. It will also be seen that the Appellate Tribunal is inclined to agree with the view that there is no provision in the memorandum of associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company did some business in 1943, with a view to making profits, is neither based upon the evidence, nor is it supported by the evidence on record. It is this conclusion arrived at by the Appellate Assistant Commissioner that has been characterised by the Tribunal as having been carefully considered and a right conclusion being arrived at by the Appellate Assistant Commissioner. The learned counsel for the revenue, Mr. G. Rama Iyer, strenuously contended that the points arising for decision on this question are questions of fact on which all the authorities have recorded findings against the petitioner. The question whether an assessee is doing business or not is a pure question of fact and the Appellate Assistant Commissioner has recorded a finding to the effect that the assessee was doing some business in shares in 1943. That is a finding of fact which has also been accepted by the Appellate Tribunal. Such a finding of fact cannot be challenged by the assessee in these proceedings before this court. There was material before the officers from which they could come to a conclusion that the assessee was doing business in shares. It may be that from the same set of facts two concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a result the assessee can be termed a dealer or an investor is itself a question of law." Therefore, in view of the decision of the Supreme Court quoted above, it is idle for Mr. G. Rama Iyer to contend that the question whether the assessee is a dealer or an investor in shares is a question of fact. We may also advert to this decision of the Supreme Court to show that according to their Lordships. Merely because the company has within its objects a dealing in investments in shares does not be itself give to it characteristics of a dealer in shares and that if other circumstances are proved, it may be a relevant consideration for the purpose of determining the nature of activities of an assessee. The question as to whether an isolated transaction, like the one that we have before us, can be termed a business or an adventure in the nature of trade has always agitated the minds of the courts as will be seen from the decisions that have been cited at the Bar. In Radha Debi Jalan v. Commissioner of Income-tax [1951] 20 I.T.R. 176 a Division Bench of the Calcutta High Court had to consider whether profits made by certain ladies by sale of a block of shares was a business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 184 the learned judges further observed as follows: "It is well settled now that the mere fact that a person purchases a commodity with the intention of reselling it at a profit does not by itself make the transaction of purchase and sale a trade. Such intention, however, is certainly an element to be borne in mind, but is not by itself decisive. As it has been pointed out in certain cases, a man might find some commodity going cheap and might decide to purchase it with no intention of holding it for ever but with the expectation of being able to sell it off at a profit when the commodity appreciates in value, as he expects it will. In such a case there will be no intention to trade. But if someone purchases a commodity with the sole object of turning it over and selling it at a profit, such intention or object, I conceive, will be an indication that the person is trading. Perhaps it will not be incorrect to say that if a person purchases by an isolated transaction some particular commodity merely in the hope and expectation that he may some day be able to sell it at a profit, he cannot be said to be trading..." Finally, the learned judges concluded by holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y would not arise out of a transaction which is an adventure in the nature of trade. Or a person may buy an object of art, he may have the intention of selling that object of art if the price of that object goes up, and when he sells it he may make profit. This may not be a case of capital appreciation. It may be a case of casual receipt or casual gain. Neither the one nor the other would be taxable. Therefore when we are dealing with an isolated transaction, what is essential to find is whether the transaction is an adventure in the nature of trade. A continuous business requires more activity and greater organization. A single transaction would not require the same amount of activity or the same nature or organization. But even so, we must find some features of business in the transaction we are dealing with before we can call that transaction an adventure in the nature of trade. In this particular case no question of capital appreciation can possibly arise because no part of the capital of the assessee company was invested in the purchase of these shares, and, what is even more important, these shares never formed part of the capital of the assessee company." In the case b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners held that the transaction in question was not a concern in the nature of a trade and this was accepted by the Court of Appeal and by the House of Lords. Lord Buckmaster observed in that case as follows: "An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income." Again at page 360 Lord Dunedin states: "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to not conclusion whatever." Reference may also be made to the decision in Californian Copper Syndicate v. Harris [1904] 5 Tax Cas.159. That was a case of a company formed for acquiring and reselling mining property. After acquiring and working various property, the company resold the whole property to a second company receiving payment in fully paid shares of the latter company and it was held that the difference between the purchase price and the value of the shares was a profit assessab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n... The circumstance stressed by the appellants was that the houses purchased by the respondent were bought for sale and that the respondent's agents were instructed to sell whenever a suitable opportunity arose. The Lord Advocate contended that if a person buys anything with a view to sale, that is a transaction in the nature of trade; that the purpose of the acquisition in the mind of the purchaser is all-important and conclusive; and that the nature of the thing purchased and the other surrounding circumstances do not and cannot operate so as to render the transaction other than an adventure in the nature of trade. In my opinion that argument, so formulated, is too absolute and is not supported by the judicial pronouncements on which it was sought to be based. It takes no account of a variety of circumstances which are or may be relevant to the determination of such a question. Among such features adverted to in previous cases reference may be made to such matters as these, viz., whether the article purchased, in kind and in quantity, is capable only of commercial disposal and not of retention as an investment or of use by the purchaser personally. e.g., aeroplane linen, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between a capital receipt and a revenue receipt. As is often the case, each case must be decided on its own facts and no hard and fast rule can be laid down. That is the only 'principle' that emerges on an analysis of the decisions cited at the bar. When it is claimed that an income is an income earned by carrying on a business, one has naturally to look into the definition of 'business' contained in the Act (vide section 2(4)), where it is defined as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It consists, therefore, really of two parts. The activities of a person constitute either trade, commerce or manufacture or it may be an adventure or concern not exactly amounting to trade, commerce or manufacture but may be something analogous or in the nature of a trade, commerce or manufacture. Now, then, what is trade? Trade has been explained in the Concise Oxford Dictionary as 'business, especially mechanical or mercantile, employment opposed to profession carried on as means of livelihood or profit'. The meaning of 'commerce' as given by the same Dictionary is 'exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o hold that the activity he carried on was something analogous to a trade and, therefore, the profit he made was not a capital receipt but a revenue receipt." We may also refer to another decision of the Madras High Court reported in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax [1955] 28 I.T.R. 405, Rajagopalan and Rajagopala Ayyangar, JJ., had to consider the liability to tax in respect of certain profits made by the assessee by a resale in 1947, of lands purchased in 1941 and 1942. In that case there were several circumstances relied upon by the Tribunal for coming to the conclusion that the transaction amounted to a business in selling of lands. Mr. Justice Rajagopalan, who delivered the leading judgment of the court, observed as follows on page 409: "The real scope of the question referred to us is, whether there was material on record on which the Tribunal could come to the consolation that the isolated transition of purchase and sale, the two being separated by an interval of more than five years, was not an investment as pleaded by the assessee, but was an adventure in the nature of trade. That question, despite the numerous cases cited before us, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax. Mr. G. Rama Iyer, learned counsel, relied very strongly on the decision of the Privy Council reported in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax [1940] 8 I.T.R. 635 and also the decision relied upon by the deputy commissioner in this case, namely, the decision of the patna High Court reported in Dalmia Cement Ltd. v. Commissioner of IncomeTax [1944] 12 I.T.R. 50. We have carefully gone through the decision in both the cases and, in our view, those decisions do not at all assist us to uphold the contention of the Revenue. Before dealing with the observations relied upon in the Privy Council case, we have to state that the Privy Council had before it a case of a company whose memorandum of association specifically authorised the company in that case to carry on business in securities. Further, in the case before the Privy Council, the finding by the Commissioner of Income-tax was that the company was purchasing and selling shares and securities as part of the company's business. It was when dealing with a company of that nature that their Lordships of the Privy Council made the following observations at page 644: "...their Lordships do not w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company did was a business in shares. See page 58. Neither the Patna case nor the decision of the Privy Council will assist the contentions of the Revenue. The decision in both the cases rested mainly on the ground that the purchase and sale of shares was one of the objects of the company before them. There was also findings by the Commissioner in the Privy Council case and the Appellate Tribunal in the Patna case that the company was doing the selling and purchase of shares as a business to further its own prospects, and there were clear findings to the effect that the profits earned were from and out of the business so carried on by the company. It may be a matter for further consideration as to whether the emphasis laid in the Privy Council and Patna cases on the objects contained in the memorandum of association can be still be supported in view of the observations of their Lordships of the Supreme Court in the decision reported in Oriental Investment Co. Ltd. v. Commissioner of Income-tax [1957] 32 I.T.R. 664 referred to earlier in this judgement. In the Supreme Court case, the Department laid particular emphasis on the fact that the company had one of its object in the memo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of trade, commerce or manufacture. The first part of this definition of a 'business' in the Excess Profits Tax Act is the same as the definition of a 'business' in section 2(4) of there Indian Income-tax Act. Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand it has been pointed out by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. [1932] I.L.R. 59 Cal. 1343, that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with set of purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of a business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade." Reference may also be made to the latest decision of the Supreme Court reported in Mazagaon Dock Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n no evidence in this case. As stated earlier, the only piece of evidence relied upon is the sixth annual report and the statements contained therein do not at all support the conclusions to be drawn in law by the Departments as to the nature of the said transaction. Apart from the sixth annual report, there is no other evidence on record and, in fact, no other circumstance has been relied upon the Appellate Assistant Commissioner of Income-tax. Further, it will not follow as a matter of law from the report that the company was carrying on business in shares. Therefore, our answer to question No. (2) is that the transaction relating to sale of shares in this case is capital appreciation and not a revenue receipt. Our answer to question No. (1), as already mentioned, is in the affirmative but subject to the directions mentioned in the earlier portion of the judgment when dealing with that question. Our answer to question No. (2) is that the transaction relating to the sale of shares in this case is not one involving revenue profit, but is only capital appreciation not liable to tax. As the assessee has succeeded substantially, he will be entitled to costs of this reference fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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