Case: Commissioner of Income Tax, Madras Vs. P. K. N. Company Limited

Malayan dollars, and expended a large sum of money thereon and later sold it for a "handsome profit. It may be mentioned that this last statement was the result of misconception of evidence, and it was corrected by the Tribunal in the statement of the case.9. But these facts found by the Tribunal do not, in our judgment, justify the inference that the acquisition of the estates was for the purpose of carrying on business in real estate. Existence of power in the memorandum of association to sell or turn into account, dispose of, or deal with the properties and rights of all kinds, has no decisive bearing on the question whether the profits arising therefrom are capital accretion or revenue income. In delivering the judgment of this Court in Karanpura Development Co. Ltd. v. Commr. of Income-tax, West Bengal, (1962) 44 ITR 362 : (AIR 1962 SC 429 ), Hidayatullah, J., observed at p. 377 (of ITR): (at p. 438 of AIR):"Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. * * * * In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter.10. In Kishan Prasad and Co. Ltd. v. Commr. of Income-tax, Punjab, (1955) 27 ITR 49 : ( (S) AIR 1955 SC 252 ), it was observed that the circumstance whether a transaction is or is not within the Companys power has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income.11. Raja J. Rameshwar Rao. V. Commr. of Income-tax, Hyderabad, (1961) 42 ITR 179 : (AIR 1963 SC 352 ), was a case on the other side of the line. In that case a person acquired land with a view to selling it later after developing it and making the plots more attractive. This Court held, having regard to the circumstances, that the venture was in the nature of trade, and the assessee was dealing with land as his stock-in-trade and carrying on business and making profits.12. In St. Aubyn Estates Ltd. v. Strick (H. M. Inspector of Taxes), (1933) 17 Tax Cas 412, the appellant Company incorporated with powers to develop and dispose of lands and other property, acquired by purchase from the life tenant of a settled estate, all the funds and properties subject to the settlement, including therein some twelve hundred acres of land adjoining a populous town. The Company proceeded to develop a part of the land as building sites and to sell of portions of the estate as opportunities arose. Certain areas were laid out as desirable sites, involving expenditure on development by the Company, and the developed sites were sold in plots to applicants. The General Commissioners decided that the profits from sales of lands were profits of a trade or business and assessable to income-tax, and the High Court declined to interfere with that conclusion. It was observed by Finlay, J.,:"When one looks at the memorandum and articles, when one looks at the inception of the Company, when one looks at what the Company in fact did, it did in fact purchase, it did in fact develop, it did in fact sell and it did in fact make profits by selling. When one looks at all those circumstances, I think it is impossible to say that they do not constitute evidence upon which a tribunal of fact might arrive at a conclusion that here there was a trade being carried on.13. These cases merely illustrate that the nature of the transaction must be determined on a consideration of all the circumstances, and the fact that a transaction is within the powers of a trading Company is relevant but has, standing alone, not much significance.14. The assessee Company did acquire two large blocks of properties between the years 1939 and 1941, but thereafter no substantial acquisitions were made. Limitation upon the admission of members to the Company and other attendant features suggest an intention of conserving the properties of the members of the P. K. N. firm. Some of the houses purchased from the P. K. N. firm were destroyed by fire and the vacant sites and outlying properties were sold on account of difficulty of management of outlying portions of the estate. Occasional sales of small and unimportant portions out of the estate acquired from the P. K. N. firm was motivated by necessity and not to realize profits. The Lee Estate was never disposed of and it was treated as a nucleus for carrying on profitable business of producing rubber and selling it on advantageous terms.15. As already observed, determination of the question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a Company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a whole or in plots decisive. Profit motive in entering into a transaction is also not decisive. Here, as already pointed out, the primary object of the Company was to take over the assets of the P. K. N. firm to carry on the business of planters and to earn profits by sale of rubber. The incidental sale of uneconomic or inconvenient plots of land or houses could not covert what was essentially an investment into a business transaction in real estate.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]On an analysis of this table it is clear that there were no fresh acquisitions after July 7, 1941 till 1950. The two items mentioned in the year of account ending March 31, 1943 and March 31, 1945 are only transfer entries. 30,600 Malayan dollars entered in the last column in the year ending March 31, 1943, it is common ground represents loss by fire and does not represent loss as a result of a sale transaction. Admittedly there were sales spread over a number of years resulting in profit to the Company. These sales were affected when opportunity arose or necessity dictated. It is not, however, disputed by the Department that the primary activity of the Company was that of planters. It is disclosed by the books of account maintained at the head office in India that during the year ending March 31, 1948, the Company spent on the estates about Rs. 3,50,000 and made realisation from the stocks of rubber exceeding Rs. 5,25,000. In the next year the expenditure was Rupees 3,31,000 and the receipts from rubber were Rs. 6,70,000. In the year ending December 31, 1950 the disbursements of the estates including salaries were Rs. 5,25,000 while the receipts by way of sales of rubber and stocks came to Rs. 16,50,000. These lend support to the view that the primary object of the Company was to function as planters and dealers in rubber, and that year after year the Company was extending its planting operations. It is true that some items of property purchased in the year 1939 were sold from time to time, but these were not transactions of purchase and sale of immovable properties indicating an intention on the part of the Company to treat its investment in immovable properties as an adventure in the nature of trade.But these facts found by the Tribunal do not, in our judgment, justify the inference that the acquisition of the estates was for the purpose of carrying on business in real estate. Existence of power in the memorandum of association to sell or turn into account, dispose of, or deal with the properties and rights of all kinds, has no decisive bearing on the question whether the profits arising therefrom are capital accretion or revenue income.These cases merely illustrate that the nature of the transaction must be determined on a consideration of all the circumstances, and the fact that a transaction is within the powers of a trading Company is relevant but has, standing alone, not much significance.14. The assessee Company did acquire two large blocks of properties between the years 1939 and 1941, but thereafter no substantial acquisitions were made. Limitation upon the admission of members to the Company and other attendant features suggest an intention of conserving the properties of the members of the P. K. N. firm. Some of the houses purchased from the P. K. N. firm were destroyed by fire and the vacant sites and outlying properties were sold on account of difficulty of management of outlying portions of the estate. Occasional sales of small and unimportant portions out of the estate acquired from the P. K. N. firm was motivated by necessity and not to realize profits. The Lee Estate was never disposed of and it was treated as a nucleus for carrying on profitable business of producing rubber and selling it on advantageous terms.15. As already observed, determination of the question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a Company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a whole or in plots decisive. Profit motive in entering into a transaction is also not decisive. Here, as already pointed out, the primary object of the Company was to take over the assets of the P. K. N. firm to carry on the business of planters and to earn profits by sale of rubber. The incidental sale of uneconomic or inconvenient plots of land or houses could not covert what was essentially an investment into a business transaction in real estate.