Appeals Nos 1594 and 1595 of 1968
Appeals from the judgment and order dated August 29 1963 of the Calcutta High Court in Income Tax Reference No 38 of 1960
Sachin Chaudhuri T A Ramachandran and D N Gupta the appellant in both the appeals
D Narsaraju section K Aiyar R N Sachthey and B D Sharma for the respondent in both the appeals
The Judgment of the Court was delivered by Shah J
In respect of assessment years 1949 50 and 1950 51 the Income tax Appellate Tribunal referred five questions to the High Court of Calcutta under section 661 of the Indian Income tax Act 1922
Three of those questions which are canvassed in these appeals need be set out  Assessment year 1949 50 1 Whether on the facts and in the circumstances of the case the sum of Rs 51550 was A profit in the nature of revenue and therefore liable to tax under the Indian Income tax Act  Assessment year 1950 51 3 Whether on the facts and in the circumstances of the case the sum of Rs 8756 was a profit 798 in the nature of revenue and was subject to tax under the Indian Income tax Act  4 Whether on the facts and in the circumstances of the case the loss of Rs 34891 was allowable as a deduction against the business income of the assessee for the assessment year 1950 51 The appellant a limited Company incorporated under the Indian Companies Act 1913 carries on business as managing agents dealers in shares and stocks stores and spare parts of machinery and acts as insurance agents and manufacturers of carbon dioxide
It also works certain coal mines
The Company obtained a prospecting licence from the State of Korea for the Chirimiri Colliery in 1944 and after prospecting for coal sold the colliery and thereby earned a profit of Rs 51550 in the account year 1948 49 and Rs 8756 in the account year 1949 50
The Income tax Officer brought the profits arising out of the sale of the colliery to tax as business profits
The order was confirmed in appeal by the Appellate Assistant Commissioner and the Income tax Appellate Tribunal
The Company conducted a Dry Ice Factory at Lahore
The factory was sold in September 1948 to the Indo Pakistan Corporation Ltd The purchaser took over the factory on October 1 1948 but the price was finally settled in December 1949
By the sale the Company suffered a loss of Rs 34891
The Company claimed to deduct this loss from its income assessable to tax in the assessment year 1950 51
The Income tax Officer disallowed the claim
The Appellate Assistant Commissioner agreed with that view and the Tribunal confirmed the order
In answering questions 1  3 the High Court observed The Chirimiri Colliery was sold after prospecting and proving coal
The sale in such a case was a part of the trading activities of the assessee and such activity could be gathered from the surrounding circum stances as also from the manner in which it was sold that is within a very short time after its acquisition and after it was made fit for obtaining a reasonably higher price at the sale 
The profit thus acquired can not be treated as a capital asset
 In answering question 4 the High Court observed The loss of Rs 34891 sustained by the assessee after the sale of Dry Ice Factory at Lahore in September 1948 cannot be treated as a loss of the business of sale inasmuch as the Tribunal found as a fact that the loss not having occurred in the relevant accounting 799 year was referable to the transaction of business during a period when the business completely ceased before the commencement of the accounting year
Counsel for the Company urges that prospecting for coal under a licence obtained from the State of Korea was not part of the business operations of the Company and that by selling the rights in the mine the Company disposed of its assets and made gains of a capital nature
In any event it was urged this was a single transaction and in the absence of evidence that the Company carried on the business of obtaining prospecting licences and of selling the mines if coal was proved the profit arising out of sale of the mine which was a capital asset acquired by that transaction was not taxable
Where a person disposes of a part or the whole of his assets the general rule is that the mere change or realisation of an investment does not attract liability to income tax but where such a realisation is an act which in itself is a trading transaction profit earned by sale or conversion is taxable  Commissioner of Taxes vs Melbourne Trust Ltd1 The cases which illustrate this distinction fall broadly into two categories those where the sales formed part of trading activity and those in which the sale or realisation was not an act of trading
As observed in Californian Copper Syndicate Limited and Reduced vs Harris Surveyor of Taxes 2 the test is 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  In determining whether the gain is realization of mere en hancement of value or is a gain made in an operation of business in carrying out a scheme for profit making do uniform rule ran be evolved
It was observed by this Court in Janki Ram Bahadur Ram vs Commissioner of Income tax3    no single fact has decisive significance and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record
But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases
if for instance a transaction is related to the business which is normally carried on by the assessee though not directly part of it an intention to launch upon an adventure in the nature of trade may readily be inferred
1  1010 PC 2 166
3  25
800 A similar inference would arise where a commodity is purchased and sub divided altered treated or repaired and sold or is converted into a different commodity and then sold
Magnitude of the transaction of pur chase the nature of the commodity subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture 
 A transaction of sale may in a given case be isolated  in another it may be intimately related to the normal business of the tax payer
In the latter class profit arising from the transaction will probably arise out of the tax payer s business and will be assessable as business profits
An instructive case of this class is Imperial Tobacco Co of Great Britain and Ireland Ltd vs Kelly1
In that case the Company carried on the business of tobacco manufacture for which large quantities of tobacco leaf were purchased in the United States where the Company maintained a large buying Organisation
To finance the purchases and the expenses of this Organisation the Company bought dollars in the United Kingdom through its bankers who remitted them to the banking accounts of the Company in the United States and it was the practice of the Company to accumulate a large holding of dollars each year before the leaf season commenced
The Company never bought dollars for the purpose of resale as a speculation
On the outbreak of war in September 1939
the appellant Company at the request of the Treasury stopped all further purchases of tobacco leaf in the United States and as a result the Company had on hand a holding of dollars accumulated between January and August 1939
On September 30 1939 the Company was ordered under the Defence Finance Regulations 1939 to sell its surplus dollars to the Treasury and owing to the rise in the rate of exchange the sale resulted in a profit to the Company
It was held by the Court of Appeal that the profit was liable to be included as profits of its trade under Sch
D Case 1
The tax payer was not carrying on business in dollars but the transactions in dollars were intimately related to their principal business and the profits earned by sale of dollars were treated as profits taxable as business profits
In T Beynon  Co Limited V Ogg Surveyor of TaxeS2 the tax payer carrying on business as Coal Merchants Ship and Insurance Brokers and as sole selling agent for various Colliery Companies in which latter capacity it was part of its duty to purchase wagons on behalf of its clients bought a large number of wagons on his own account with the intention of reselling them 1 2 801 at profit
The contention of the tax payer that the transaction being an isolated one the profit was in the nature of a capital profit on the realisation of an investment was negatived
The profits realised in this transaction were held to result from the operation of the Company s business and properly includable in the computation of the Company s profits for assessment under Sch
D In Gloucester Railway Carriage and Wagon Co Ltd vs The Commissioners of Inland Revenue1 the tax payer carried on the business of manufacturing wagons for sale or hire
The tax payer sold some of the wagons which were formerly hired out
The tax payer contended that the profit realized by sale was an isolated transaction resulting in a capital profit
The House of Lords held that the business was all one  namely to make profit out of wagons and on that account the profits realized by sale of wagons were taxable
The Tribunal in the present case recorded the following findings  It is no doubt true that this was a single transaction  But we were told by the assessee s counsel that the assessee obtained prospecting licence in the colliery developed the colliery and then sold out
What was the purpose of obtaining the prospecting licence has not been told to us
The assessee was carrying on business of coal mining
The prospecting of coal is a part of the coal mining business
Therefore in our opinion the transaction of prospecting developing and selling the colliery is a transaction in the nature of a business
Therefore the profit arising from the sale is a profit in the nature of revenue and has been rightly brought to tax
 Our task would have been lightened if the Tribunal had stated the findings in greater detail
Nevertheless the Tribunal has found that the Company was carrying on the business of coal mining and prospecting of coal was a part of the coal mining business and on that account the transaction of prospecting developing and selling the colliery was a transaction in the nature of a business
On the findings recorded by the Tribunal it follows that the prospecting for coal being a part of the coal mining business the income was properly regarded as taxable
The answer recorded by the High Court on questions 1  3 must be upheld
Turning to the fourth question  the sale transaction of the Dry Ice Factory was completed on October 1 1948 but the price was finally settled in December 1949
In the settlement the Company suffered a loss of Rs 34891
The loss was suffered in the 1 802 business transaction and the only dispute raised before the Tribunal related to the year in which the loss was liable to be taken into account
The Tribunal disallowed the loss in the assessment of income for the year 1950 51
The Tribunal held that the business of the Dry Ice Factory was not carried on in the year of account April 1 1949 to March 31 1950 and on that account the loss was hot admissible as a permissible deduction in computing the taxable income of the Company for the assessment year 1950 51
The High Court agreed with the Tribunal
In our judgment the High Court was in error in holding that the loss was not a permissible deduction
Section 24 of the Income tax Act 1922 in the relevant year of assessment read as follows  1 Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6 he shall be entitled to have the amount of the loss set off against as income profits or gains under any other head in that year Provided that 2 Where any assessee sustains a loss of profits or gains in any year being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940 under the head profits of business profession or vocation and the loss cannot be wholly set off under sub section 1 the portion not so set off shall be carried forward to the following year and set off against the profits or gains if any of the assessee from the same business profession or vocation for that year Provided that By sub section
 1  the loss or profits or gains suffered under any head in any year was liable to be set off against the income profits or gains under any other head and by sub section
2 where the loss suffered in any business profession or vocation could not be wholly set off under sub section
 1  the loss not so set off had to be carried forward to the following year and set off against the profits and gains of the same business in the subsequent years
The Tribunal and the High Court applied sub section
2 of section 24 in computing the taxable income of the Company for the assessment year 1950 51
But in so proceeding in our judgment they were in error
The business of Dry Ice Factory was sold in October 1948
We will assume that the Dry Ice Factory was a separate business of the Company and was not a part of the other business carried on by the Company
But the price for which the business was sold was settled in December 1949
Until the price was 803 settled loss did not accrue or arise to the Company
The loss was suffered in the account year 1949 50 and could be allowed against the income of that year under section 241
The assumption that the loss was suffered in the previous year ie 1948 49 was in our judgment not warranted
The case was plainly governed by sub section
1 of section 24
The answer to the fourth question recorded by the High Court must be discharged
The answers to questions 1  3 recorded by the High Court are affirmed
Question 4 Will be answered in the affirmative and in favour of the Company
In view of the divided success there will be no order as to costs in this Court
The order as to costs in the High Court is maintained
VPS Appeals allowed in part


Summary:
The assessee company was carrying on the business of coal mining and of a Dry Ice Factory in addition to various other kinds of business
It obtained a prospecting licence and after prospecting for coal sold it within a short time of its acquisition and thereby earned profits in the accoun ting years 1948 49 and 1949 50
It sold the Ice Factory in 1948
Though the purchaser took possession of the ice factory in 1948 the price was finally settled in December 1949
By that sale the assessee company suffered a loss
The assessee claimed 1 that the profits were gains of a capital nature and hence not liable to tax and 2 that the loss was deductible from its income in the assessment year 1950 51
1 The department Tribunal and High Court held that the profits from the sale of colliery were in the nature of revenue and were liable to tax under the Income Tax Act in the two corresponding assessment years namely 1949 50 and 1950 51 and 2 It was held that loss in the ice factory transaction was suffered in the accounting year 1948 49 and assessee s claim could be sustained only under section 242 of the Income tax Act 1922 but that the subsection was not applicable because the business ceased completely before the commencement of the following accounting year 1949 50 assessment year 1950 51
In appeal to this Court HELD  1 Where a person disposes of a part or the whole of his assets the general rule is that the mere change or realization of an investment does not attract liability to income tax but where such a realisation is an act which in itself is a trading transaction profit earned by sale or conversion is taxable
In determining whether the gain is realization of a mere enhancement of value capital gain or is again made in an operation of business in carrying out a scheme for profit making revenue no uniform rule can be evolved
Though a transaction is an isolated one it may be intimately related to the normal business of the tax payer
in such a case the profit arising from the transaction will be out of the tax payer s business and will be assessable as business profits
799 C D F 800 B C Prospecting of coal was a part of the mining business which the assessee was carrying on
Therefore the transaction of prospecting developing and selling the colliery was one in the nature of business
797 Hence the profit arising from the sale though it was an isolated transaction was in the nature of revenue and liable to tax
801 F H Janki Ram Bahadur Ram vs Commissioner of Income tax  25SC followed
Commissioner of Taxes vs Melbourne Trust Ltd 1914 AC 1001 1010 PC Californian Copper Syndicate Limited and Reduced V Harris Surveyor of Taxes  166 Imperial Tobacco Co vs Kelly  Beynon  Co Ltd vs Ogg Surveyor of Taxes and Gloucester Railway Carriage and Wagon Co Ltd vs Commissioners of inland Revenue  referred to
2 By section 241 the loss or profits or gains suffered under any head in any year was liable to be set off in that year against the income profits or gains under any other head but by section 242 where the loss suffered in any business profession or vocation could not be wholly set off under sub section
1 the loss not so set off has to be carried forward to the following year and set off against the profits and gains of the same business in the subsequent year
L802 F G In the present case loss was suffered in the accounting year 1949 50 when the price was settled and not in 1948 49 when the sale took place
Therefore under section 241 the loss was allowable against the business income of the assessee for the accounting year 1949 50 that is in proceedings for the assessment year 1950 51
803 A B