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TMI Blog1961 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... r Development Co. Ltd. (hereinafter referred to as the development company ) with a view to acquire a part of the land from the assessee company to be developed into a proper township and to name it as the Jalannagar. On the 22nd July, 1952, the assessee entered into an agreement with the development company to sell 1,669 bighas of land in one or more lots, at ₹ 3,000 per bigha, for the purpose of development of a residential colony. In pursuance of the said agreement, the assessee sold several plots of the land to the nominees of the said development company. The agreement of the 22nd July, 1952, forms part of the statement of the case and the terms of it will have to be referred later in detail. The relevant assessment year is 1955-56. The corresponding counting year is the calendar year ending 31st December, 1954. The company during the accounting year received ₹ 40,394 as the sale price of the plots of land sold to various purchasers nominated by the development company in pursuance of the agreement of 22nd July, 1952. The Income-tax Officer after adjusting the cost of the land at ₹ 2,667 as against the sale proceeds, assessed the balance of ₹ 38,327 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced by the Tribunal on certain observations of Satyanarayana Rao J. in the case of Sri Gajalakshmi Ginning Factory [1952] 22 I.T.R. 502, to which I shall refer later. The agreement of July 22, 1952, which forms part of the statement of the case provides that the consideration for the sale of land containing an area of 1,669 bighas 1 K. 5 L. was ₹ 5,07,750 calculated at the rate of ₹ 3,000 per bigha. The agreement was entered into between the assessee as the vendor and Jalannagar Development Co. Ltd. as the purchaser company. The purchase was to be completed within ten years from the date of the agreement and in case of the purchaser company's failure to keep the purchase within the time aforesaid, the time for completion may at the option of the vendor company be extended by one year, but in case of such extension the purchaser company will pay interest on the balance of the purchase money then outstanding at the rate of 5 per cent. per annum. Paragraph 5 of the agreement provides that the purchaser company is desirous to develop the area agreed to be purchased as aforesaid into a colony mainly for residential, industrial and commercial purpose and to sell out p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain. The question whether a particular receipt is a revenue or a capital receipt is always a mixed question of law and fact. The inference drawn from the proved facts is a question of law. No hard and fast rule can be laid down and no exhaustive list of criteria can be given which will conclusively establish that the activity of the assessee constitutes a venture in the nature of trade. The authorities have only laid down various criteria which may go to show that the particular activity of an assessee constitutes a venture in the nature of trade. Before examining the facts and the circumstances of the present case, it will be relevant to refer to some of the authorities which are relevant to the point at issue. Mr. Choudhuri, counsel for the department, has referred to the case of Mody K.H., In re [1940] 8 I.T.R. 179. In the year 1930, the assessee purchased an inam village comprising 1,330 acres for about ₹ 60,000 borrowing the whole of that amount at 7? per cent. interest. Out of the area, 266 acres were set apart for building sites and divided into 1,000 plots; 208 plots were sold in the year 1936-37 and 111 plots were again sold during the next year. He had spent som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was necessary and was in fact made for the purpose of and was an act done in normally carrying on the business of the company, then what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on, carrying out, of a business. The next case referred to is Fringford Estates Ltd. v. Commissioner of Income-tax [1951] 20 I.T.R. 385, 393. The facts of this case also are distinguishable. The assessee company was formed with the object of purchasing, clearing and improving of estates and cultivation and sale of tea, coffee, etc., in such estates. With that object in view, the company purchased a tract of land which had a large area of jungle and capable of being cleared up. The company began clearing up the jungle of trees and stocked the timber. Thereafter the company entered into an agreement with a timber merchant for clearing the rest of the jungle of all trees and for sale of the timber in the market. It was held that the profits by sale of timber were trade profits and were liable to tax. As observed in this case: Where a company or a partnership is formed for the purchase of large estates and for clearing and developing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire quantity of linen purchased by him. It was held in these circumstances that the assessee carried on a venture in the nature of a trade. This decision was affirmed by the House of Lords and the decision of the House of Lords was reported in the same volume. The next case in the same volume is Commissioner of Inland Revenue v. Livingston [1926] 11 Tax Cas. 538, 542. As observed by Lord President (Clyde) in this case, the profits of an isolated venture, such as that in which the respondents engaged, may be taxable under Schedule D provided the venture is 'in the nature of trade'. It was further observed as follows: I say 'may be' because in my view regard must be had to the character the circumstances of the particular venture. If the venture was one consisting simply in an isolated purchase of some article against an expected rise in price and a subsequent sale it might be impossible to say that the venture was 'in the nature of trade'; because the only trade in the nature of which it could participate would be the trade of a dealer in such articles, and single transaction falls as far short of constituting a dealer's trade, as the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess of the capital expended. At the date of the sale a considerable acreage had been planted, but no rubber had yet been produced or sold. It was held that the profit on the sale was not a profit assessable to income-tax, but was an appreciation of capital. The next case cited by Mr. Lahiri is C.H. Rand v. Alberni Land Company Ltd. [1920] 7 Tax Cas. 629 In this case the assessee company was incorporated in 1904 with the primary object of acquiring, managing and developing with a view to ultimate sale, certain lands in British Columbia which were held in trust for various persons who were interested therein either as owners, joint owners or as trustees. Subject to an extraordinary resolution, the company had power to deal in other lands, but it had not at any time exercised that power. The company sold certain land. It was held that the surplus arising from the sale by the company of portions of the lands was not the profits of a trade or business, and that the function of the company was merely to realise the capital value of the respective interests in the land under the trust. The next case cited is Leeming v. Jones [1930] 15 Tax Cas. 333. It was held in this case that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoys its income for sometime, 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 treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject matter of trade, and if it is purchased in very lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trade. The appellant, however, is a firm and it was not a part of its ordinary business to make investment in lands. Besides, when the first purchase was made it was difficult to treat it as a matter of investment. The property was a small piece of 28? cents and it could yield no return whatever to purchaser. It is clear that this purchase was the first step taken by the appellant in execution of a well considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit. Just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resaleable is a relevant factor in determining the character of the transaction, so would his conduct prior to the purchase be relevant if it shows a design and a purpose. As and when plots adjoining the mills were available for sale, the appellant carried out his plan and consolidated his holding of the said plots. The appellant is the managing agent of the Janardana Mills and probably it was first thought that purchasing the plots in its own name and selling them to the mills may invite criticism and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement of trade, commerce or business and it cannot be said, therefore, that it is an activity in the nature of a trade. He was merely selling and did not at the time of buying start with the intention of buying and selling with a view to make profit. The intention must be that even at the time when the property was acquired it was so acquired for the purpose of sale with a view of make profit. In other words, the object of the acquirer was to deal in that commodity, if one may use that expression, as he deals with the goods in the course of an ordinary trade. In the absence of any such intention gatherable from the circumstances of the case, it is difficult, if not impossible, to 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. The above view was accepted in the case of Raja Rameshwara Rao v. Commissioner of Income-tax [1957] 32 I.T.R. 532. The intention of the assessee when the land is purchased was emphasised in this case as a test for determining the nature of the transaction. On the facts of that case, however, the High Court held that the transaction was in the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed at ten years. The advertisement and other activities with a view to secure good purchasers were carried on by the development company. The development company was a separate entity for the purposes of taxation, even though the shares in that company were held by members of the joint family. As found by the Tribunal the land was sold with a view to liquidate the bank overdraft. The counsel for the department has very strongly relied upon clause (f) of the memorandum of association of Barbari Tea Estate Ltd., which gives power to the company to acquire by purchase, lease, exchange or otherwise any buildings and hereditaments of any tenure or description situate in British India, Indian States, foreign countries or elsewhere and any estate or interest therein, any rights over or connected with the land so situate and to turn the same to account as may seem expedient and in particular by preparing building sites and by constructing, reconstructing, altering, improving, decorating, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, buildings, works and conveniences of all kinds and by consolidating or connecting or sub-dividing properties a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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