9911796707
TMI Blog1961 (10) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts that emerge from the records and the statement of the case are briefly as follows: The assessee, along with some others, purchased in the year 1937 a group of coffee estates in the Mysore State from the Tea Estates (India) Ltd. Out of this purchase, the assessee, his uncle, M.C. Pothan, and another, K.M. Cherian, got as their share of the purchase an estate known as the Devadanam Group which was valued at ₹ 35,000. In 1940, part of the estate was taken away by K.M. Cherian. Accordingly, the remaining extent of that estate was left with the assessee and his uncle, M.C. Pothan, and in this estate, the two persons were entitled in the ratio of 7 : 4. In or about the year 1943, the assessee and the above-said Pothan promoted a public limited company called the Anaparai Estates Ltd. To this estate, they sold the Devadanam Coffee Estate for a consideration of rupees six lakhs and the consideration was received by them in the shape of shares allotted to them in that company. The assessee was allotted 1,90,909 shares which at ₹ 2 each were valued at ₹ 3,81,818. The other sharer, M.C. Pothan, was allotted 1,09,091 shares valued at ₹ 2,18,181, Even at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the assessee in the; nature of a trade in which the motive must be wholly one of profit. The profit realised by the sale clearly, therefore, is a profit that has arisen in the adventure and not capital. On the application of the assessee, the following questions stand referred to us under section 66(1) of the Act: 1. Whether the assessment of 1944-45 has been validly reopened under section 34? 2. Whether the sum of ₹ 1,75,000 is assessable as profit from a venture in the former Native State of Mysore remitted into British India as it then was? In the view that we take of the transaction, it is really not necessary for us to consider the first question, though there appear to be materials which suggest that all the incidents relating to this transaction came to the knowledge of the department even in the year 1946. It is true that the department took the view that income, profits or gains chargeable to income-tax had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. But the failure to disclose appears, to have been for the reason that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hardly necessary for the department or the Tribunal to depend upon the establishment of an adventure in the nature of a trade. If any such circumstances existed, there could have been an assessment under the head of business income itself, The purchase of the property with borrowed capital is again not a clinching circumstance as the Appellate Assistant Commissioner or the Tribunal seem to have thought. Certain other features which the Tribunal has referred to in the statement of the case but has not given any consideration to in arriving at its conclusion may now be mentioned. In paragraph 4 of the statement of the case, the Tribunal records that the estate was managed by an employee who sent monthly reports of the working of the estate to each of the two owners. Both the co-owners were also visiting the estate from time to time. The working profits of the estate were utilised in liquidating the loan to the bank and the balance withdrawn by the partners from time to time. We may briefly refer to certain decisions which serve to explain what an adventure in the nature of trade is and under what circumstances an inference of such an adventure can be made. In Alexander v. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purchase on borrowed capital. This circumstance was not in the opinion of their Lordships sufficient to justify the inference that it was an adventure in the nature of trade. In Ramnarain Sons (Pt.) Ltd. v. Commissioner of Income-tax [1961] 41 ITR 534; [1961] 2 SCR 904, the question was considered whether the purchase of shares far in excess of their market value by the assessee company (which besides being a dealer in shares and securities also carried on business as managing agents), which purchase was made to facilitate the acquisition of the managing agency, was an acquisition of a capital asset or only a part of the stock-in-trade of its business in shares. The headnote reads : Neither the circumstance that the appellant company borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by its memorandum of association to deal in shares, was of any effect. Nor could the appellant company by entering the shares of the mills in its statement of shares in which trading transactions were carried on alter the real character of the acquisition. The subsequent disposal of some out of the shares by the appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was any evidence that the assessee's planting family was engaged in the transactions of purchase and sale of coffee estates. That the joint purchaser, M.C. Pothan, appears to have been indulging in such transactions as purchase and sale of coffee estates or that he was assessed in respect of his share of this estate cannot obviously colour the assessee's transaction, when there is no evidence whatsoever that the assessee ever had any other transaction of this kind. We have already pointed out that the mere circumstance that the assessee went in for borrowed capital cannot lead to the conclusion that even at the time of the purchase of the property he was actuated by the intention to sell the property at a profit. Indeed, from the facts which the Tribunal itself has recorded in its statement of the case, the diametrically opposite conclusion seems to be more than justified. The Tribunal has stated that between 1937 and 1943, the two co-owners were working the estate through an employee and the working profits of the estate were utilised in liquidating the loan to the bank and the balance was withdrawn by the partners from time to time. Obviously, therefore, the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be compelled to sell at a profit. But, in this purely fictional sale to himself, he is compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional. The conclusion reached by their Lordships was that the assessee might have stored up a future advantage to himself, but as the transactions were not business transactions and, as he derived no immediate pecuniary gain, the State amid not tax them, for, under the Income-tax Act, the State has no power to tax potential future advantage. We may also usefully refer to another decision bearing on this line of reasoning. In Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 ITR 928 a somewhat similar question arose. There, the assessee and his sons formed a private limited company and transferred to that company shares in several join stock companies which the assessee had held jointly with his sons. The difference between the cost price of these shares and the market price at which the transfer had been effected was sought to be subjected to tax on the ground that the assessee had made profit to that extent by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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