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TMI Blog1965 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and that the effect of all the facts and circumstances of the case did not justify a conclusion that an adventure in the nature of trade was carried on. At the instance of the Commissioner of Income-tax, the Tribunal has made this reference under section 66(1) of the Indian Income-tax Act, 1922, of the question whether the surplus realised by the assessee from the sale of the plots is assessable. This really turns on whether this sum represents capital accretion or capital profits from trade or business or a venture in the nature of trade in land. Eventually, on a question like that our opinion will necessarily depend on the view we may take on the cumulative effect of all the facts and circumstances found by the Tribunal. The findings of fact arrived at by the Tribunal are conclusive and are not open to review under the limited jurisdiction of this court on a reference, except on a misdirection in law in the process of arriving at them or on the ground that there was no evidence on which they could be reached. The conclusion drawn on proved facts or facts found on evidence is a different matter and that may raise a question of law or a mixed question of law and fact. To the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, among other things, included a number of house properties in the City of Madras, building sites and agricultural lands. Article 4 sets out as many as thirteen objects of the company of which the following have a bearing : " 4 ... (a) To acquire and undertake the said properties and the rights and liabilities of the parties hereto of the first part in connection therewith. (b)(i) To purchase for investment or resale, to reclaim or otherwise to acquire and to traffic in land and house and any other property movable and immovable and to create, sell and deal in ground rents of any nature or description whatsoever and to purchase, take on lease or otherwise acquire forests and plantations and rights of ferry and to make advance on the security of land or house or other property or any interest therein and generally to deal in, traffic by way of sale, lease, exchange or otherwise, with land and house property, forests and forest and agricultural produce, any other property whether movable or immovable and to encourage trade and traffic therein. (ii) to develop the resources of and turn to account the land, buildings, forests, plantations and rights for the time being of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses showed that, in the year immediately preceding the accounting year, the assessee had received a like surplus of Rs. 16,357 on sale of agricultural land. On the expenditure side were shown various amounts paid towards maintenance of properties, repairs and upkeep of buildings, salaries and wages, rates and taxes, farm maintenance and interest paid on loans. The revenue of the company, as seen from the said statement, was mostly from the properties, a small part from farm, livestock and surplus on sale of agricultural lands. The net profit of the year was arrived at and payment of a dividend of 1.5 per cent. was proposed. From the balance-sheet appended to the statement of the case, we find that the authorised capital of the company is rupees twenty-four lakhs made up of 2,400 equity shares of Rs. 1,000 each and allotted as fully paid up pursuant to an agreement without payments being received in cash. The fixed assets of the company consisted, in the main, of the property transferred by the joint family to the assessee. The other assets in the form of building materials and farm produce, deposits and advances to directors are but a small fraction compared to the main fixed asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of cases is difficult to define, and each case should be considered according to its facts, posed the question for his determination (at page 166) : "Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making ?" If a person or a company buys and sells lands or securities as a business to make profit and, by dealing in such investments as a business, makes a gain, that is not a case of mere realisation of assets or conversion of one form of asset into another but will clearly fall within the net of tax. That was such a case. There a company was formed for the purpose of acquiring and reselling mining property and, after acquiring and working various properties, it resold the whole to a second company receiving payment in the shape of fully paid up shares of the second company. The difference between the purchase price and the value of the shares for which the properties were exchanged was held to be profit assessable to income-tax. But it is not the actual decision in that case which is as important as what appears to us to be the correct line of enquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a sense out of capital ; but, as we have explained above, the law has established a distinction between the profit that arises when property has been committed to a trade or 'an adventure or concern in the nature of trade' as part of its merchantable stock and is then realised in the course of trading operations and the profit that arises from a realisation of property not so committed. The one is taxable income, the other not. The one is regarded as a detachable surplus arising from a source of income which is one of the sources listed by the tax code, namely, the trade, adventure or concern ; the other has no source unless it be the mere fact of realisation, and is spoken of as 'an accretion to capital'. The conception causes no difficulty in the case of profits from ordinary trading ; but it is evident that it requires the drawing of a very fine line when it has to be applied to the case of the isolated transaction which may be on the one hand the product of a trading venture or, on the other hand, a mere change of investment." The Commission went on to enquire whether there was any general rule that could advantageously be propounded as a simple test that would separate ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances, in the absence of direct evidence of the seller's intentions, and even, if necessary, in the face of his own evidence. " In our view, while these considerations may not be exhaustive, they are quite useful in arriving at a conclusion on the nature of the income which lies at or near the borderline separating the taxable and the non-taxable. In Leeming v. Jones it was stated that in order to attract tax liability under Case 1 of Schedule D, corresponding to section 2(4) of the Indian Income-tax Act, 1922, one at least of four conditions must be present, namely, (1) the existence of an organisation, or (2) activities which led to the maturing of the assets to be sold, or (3) the existence of special skill, opportunities, in connection with the article dealt with, or (4) the fact that the nature of the asset itself should lend itself to commercial transactions. This case on that aspect was referred to without dissent, apparently with approval by Viscount Simonds in the well known case of Edwards (H.M. Inspector of Taxes) v. Bairstow Harrison. The Exche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it could have been disposed of otherwise than as a trade transaction. " While formulating these guides as helpful, it was recognised that the question, whether a particular transaction is an adventure in the nature of trade, depends on its character and surrounding circumstances and no single criterion can be formulated. We may also note with interest, as the court did in West Coast Parts Co. Ltd. v. M.N.R. that the word " adventure " is defined in the Shorter Oxford Dictionary as a " pecuniary venture " and " a speculation " and the word " venture " is in turn defined as meaning " a commercial enterprise in which there is a considerable risk of loss as well as a chance of gain. " In J. P. Harrison (Watford) Ltd. v. Griffiths the House of Lords was not prepared, it would appear, to accept a proposition that the essence of a trading transaction is that its object is to make a profit. Lord Denning, in this case, which related to what is known as a " dividend-stripping " transaction, in dealing with an approach as to what detail did the transaction lack to prevent it being an adventure in the nature of trade observed at page 299 : " To this I would reply by asking another questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andum of association to vary its investments and generally to sell or exchange any of its assets. The company sold certain securities and derived profits and the question for opinion was whether the net gain made by the company by realising investments at larger prices than were paid for them fell to be reckoned among the profits and gains of the company for assessment to tax. The Lord President of the Scottish Court of Exchequer, answering the question in the affirmative, gave his reasons : "...this is an investment company, and the memorandum makes it plain that its profits are to be derived from various operations relating to the investments. The third head of the memorandum professes to state the objects of the company, and in head (6) of this enumeration occur the words 'to vary the investments of the company, and generally to sell, exchange, or otherwise dispose of, deal with, or turn to account any of the assets of the company.' It is true that the doing of any of these things might be incidentally necessary in the conduct of the business of any company. It is also true that this memorandum states in the latter heads of the same article several things which are less prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time parts of lands so obtained and applied the proceeds for payment of dividends and in reduction of capital. The King's Bench Division held that the proceeds of sales of the lands were not profits or gains derived by the company from carrying on a trade or dealing in land. The Master of the Rolls put the question for his decision as, " Do the Hudson's Bay Company carry on a trade in buying and selling land by which they have made a profit ? " In answering that question, the fact that it was a company formed by Royal charter was given weight ; and the reasoning for the opinion is to be found in the following observations at page 437 : "...a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This company is not a company incorporated under the Cornpanies' Acts or the Companies' Clauses Act for the purpose of dealing in land, but it is a Corporation by Royal Charter and has, therefore, all the powers of an individual except so far as the Charter expressly limits them. It would be different if a landowner, an individual, entered into the business of buying and developing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rand v. Alberni Land Company, which has been pressed before us for the assessee, had to do with a family company. Certain properties were held in trust for various persons who were interested in them either as owners, joint owners or as trustees. The company was formed with the main object of acquiring, managing and developing with a view to the ultimate sale of those lands. The share capital was fixed at a nominal amount solely to facilitate division among the beneficiaries and was not determined by reference to the value of the lands acquired. All the ordinary shares were allotted in consideration of the conveyance of the lands to the company and these shares were continuously held by the original allottees or their representatives. Working capital was provided by the issue to ordinary shareholders of preference shares for cash. Later the company created and allotted to persons, other than the ordinary shareholders, deferred shares in return for service which enhanced the value of the lands. The memorandum of association, inter alia, took power to purchase certain lands, to manage and develop them and turn them to account, to sell, lease or mortgage or otherwise deal with the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... private landowners were enabled, under the peculiar circumstances of their divided title, to properly realise the capital of the property which they held in the lands in question, and that it is not income or the proceeds of trade....." Commissioner of Taxes v. Melbourne Trust Ltd. was quoted for the revenue, but Rowlatt J. distinguished it on the ground that this was not a case of liquidating or realising the old assets, the fourth company starting on a new career of business of acquiring assets and selling them again. Rowlatt J. considered that, in the circumstances, the company was formed for what he might call family reasons. Learned counsel for the assessee argues that in the case before us also it may well be described that the company was formed for family reasons and that the fact that the company took powers to traffic or deal in lands and other properties should not detract from the real purpose of the company holding properties transferred to it and deriving income therefrom. We are inclined to think that though the facts in C. H. Rand v. Alberni Land Company Limited are not exactly similar in certain respects, they bear some resemblance ; particularly the view of Row ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wide and general character which is appropriate to, and characteristic of, an ordinary company trading in real estate. The objects and powers are to acquire, to let, to improve, and to sell land. One is not, however, entitled to infer from the circumstance that a company is professedly formed with trading purposes in view and for trading objects, that the transactions in which it engages necessarily constitute a trade or business ; because it does not follow from the fact that it has objects and powers such as I have indicated that it actually uses them for the purpose of conducting the usual business of a company trading in real estate. But the professed objects of the company are not, for that reason, to be left out of account ; on the contrary, they must be kept in view when considering the transactions in which the company is proved to have been engaged. " It is, therefore, clear that while no conclusion can properly be based solely on the objects or powers of a company as found in its memorandum and articles, they are relevant matters which should be taken into account and kept in view in determining the character of the transaction in which the company has engaged itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ats were vacated by tenants. The Scottish court held that there was no evidence on which the Commissioners were entitled to find that the sales effected by the company were made in the course of trade carried on by it. The Lord President (Cooper) said at page 209 : " The question is the familiar one whether a given transaction amounts to the carrying on of a trade, the profits and gains of which are taxable, or only involves the realisation of capital assets, the profit on which is not taxable. Often as that question has arisen, it is not easy to derive from the numerous decisions any rules except that the dividing line is incapable of precise definition, that the question tends to be a matter of degree, and that the decision in each case turns very largely upon the impression created by the special facts and circumstances. " The learned Lord President pointed out at page 215 : " The purpose which informed the company was to salve something from the wreck of a type of trading enterprise which when the company was formed was not 'dormant' but dead, by selling the separate flats in the only possible fashion for the benefit of the firm's creditors and of the beneficiaries on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises of the mills. While he was in possession, he did not cultivate the plots or erect any superstructure on them but they were left unutilised except for the rent received from the house that existed on one of the plots. About six years later, he sold these plots to the mills at a profit. The Tribunal had found that he had purchased the lands wholly and solely with the idea of selling them at a profit to the mills. The Supreme Court upheld the view that the transaction was an adventure in the nature of trade. While expressing that view, Gajendragadkar J. (as his Lordship then was), who spoke for the court, observed : " If a person invests money in land intending to hold it, enjoy its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader, and the purchase of the commodity and its resale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered that the company itself was formed for the purpose of conserving the family assets and that the mere circumstance that the memorandum gave power to the company to deal in properties was not conclusive of the question, and that the sales were not made in the course of an adventure in the nature of trade. They also pointed out : " The mere fact that a person owns a large estate and chooses to sell portions of it year after year, cannot lead to the conclusion that he was doing so in pursuit of a business of dealing in properties. Where dealing in properties is stated as one of the many objects of a company, that may create 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 objects stated in the memorandum but must rest on other indicia attendant upon the course of the business engaged in by the company." It is evident that in this case, the sales had to be made because of a compelling reason and not as adventures i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject-matter of realisation, which is land, is not generally or ordinarily a trading commodity unlike, for example, manufactured articles that are normally the subject-matter of trade. Land, on the other hand, is often the subject-matter of investment. When the properties were originally acquired prior to 1948, we do not know. There is nothing to show that when they were purchased, it was with an intention to resell at a profit. The property had, as we said, been held by the company for over ten years which maintained it all along and realised income. Sales of land have not been a frequent feature with the company, as far as we can see from the record. Nor were similar sales numerous. Not that we suggest that they are always essential attributes of trade. The assessee says that it sold the lands for discharging liability. Developing the land into building sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment. There is here no evidence of trade or any business carried on by the company in land. Can we then say that the sales of land in the accounting year were transactions constituting an adventure in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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