Case: Dalmia Cement Limited Vs. Commissioner of Income Tax, New Delhi

This appeal by special leave is directed against the judgment of the Delhi High Court dated April 28, 1970 in a reference made by the Income-tax Appellate Tribunal (Delhi Bench A) under section 36(1) of the Income-tax Act, 1922, hereinafter referred to as the Act in respect of the following question, --"Whether on the facts and circumstances of the case the sum of Rs. 7 lakhs received from M/s Orissa Cement Ltd. was pursuant to an adventure in the nature of trade and as such tanable under the Indian Income-tax Act, 1922 ?"The High Court has answered the question in the affirmativeWe shall refer to the facts giving rise to the controversy in some detail when we state them in a chronological order. It may be mentioned, meanwhile, that the Dalmia Cement Ltd., hereinafter called the appellant, owned certain cement factories and it placed an order for the supply of four complete units of cement manufacturing machinery with M/s F.L. Smidth and Co., Copenhagen, on February 7, 1946. to increase the production in the following factories, -- ,Since the factory in Dandot fell within the territory of Pakistan on constitution with effect from August 15, 194 7, the appellant transferred the machinery which was meant for the Dandot factory (hereinafter referred as the Dandot machinery), to a new company known as Orissa Cement Ltd. some time in 1950-51, and charged only the invoice price which it had paid to M/s F.L. Smidth and Co. The appellant thereafter asked for a higher price and after some negotiations the Orissa Cement Ltd. agreed on December 4, 1951, to pay a further sum of Rs. 7 lakhs, in lieu of which 70, 000 fully paid up ordinary shares of Rs. 10/- each. were given to the appellant in that company. The Income-tax Officer treated that amount as income earned by the appellant pursuant to an adventure in the nature of trade in 1952-53 assessment year, and taxed it as such. On appeal, the Assistant Appellate Commissioner also held in his order dated September 16, 1958 that the transfer of the Dandot machinery was an adventure in the nature of trade and the payment of Rs. 7 lakhs was a revenue receipt which was rightly taxed by the Income-tax Officer. The matter went up in appeal to the Income-tax Appellate Tribunal (Delhi Bench) which remanded the case to the Income-tax Officer by its order dated September 13, 1960, for report on certain specific points. On receipt of the Income- tax Officers report, the Tribunal held that the transaction in question was "certainly an adventure in the nature of trade" and dismissed the appeal. It however drew up a statement of the case, and that is how the aforesaid question of law was referred to the High Court under section 66(1) of the Act. The High Court held that by the time the appellant placed the despatch order with M/s Smidth &Co., "its intention was to purchase it with an idea to resell" and that the fact that it was a single and isolated transaction did not materially affect the case. In reaching that conclusion the High Court took the subsequent developments into consideration, and rejected the contention that the machinery was purchased by way of an "investment". The present appeal has been filed against that judgment of the High Court dated April 28, 1970.Under section 10 of the Act, income-tax is payable by , m assessee under the head "Profits and gains of business, profession or vocation", inter alia, in respect of the profits and gains of any "business" carried on by him, and the controversy in this case is whether the receipt of the additional sum of Rs. 7 lakhs, over and above the cost of the Bandot machinery, could be said to arise out of any "business" of the appellant.

Reasoning:
This is a correct proposition of law and, .as would appear from what has been stated above, we have examined the controversy on the assumption that the burden of proving that the transaction was an adventure in the nature of trade lay on the department. The ancillary argument of Mr. V.S. Desai that a question like the present has to be examined with reference to the indicia or characteristics of the trade, is also quite correct, but counsel has not been able to contend, in the face of the facts and circumstance s mentioned above, which indicia or characteristics could be said to be lacking to take it out of the category of an adventure in the nature of tradeWe have given our reasons for the contrary view that the transaction would be an adventure in the nature of trade even if the question of profit was left out of consideration, and that the appellant in fact acted with the set purpose of reselling the Dandot machinery to its advantage and not by way of a favour or a gratuitousact.We have also shown how the appellant ultimately claimed and succeeded in securing a higher price merely on the ground that there was an appreciable increase in the price after the purchase of the Dandot machineryIt was therefore an after thought to Claim that the initial purchase was by way of an investment and was a capital asset.The facts of Kishan Prasad and Co. Ltd. v. The Commissioner of Income-tax, Punjab (supra), Saroj Kumar Mazumdar v. The Commissioner of Income-tax, West Bengal, Calcutta (supra) and Janki Ram Bahadur Ram v. Commissioner of Income-tax, Calcutta (supra) referred to by Mr. V.S. Desai were different. In the case of Kishan Prasad and Co. Ltd. (supra) there was agreement to give the managing agency to the assessee on the erection of the mill because it had subscribed to shares worth Rs. 2 lakhs. The mill was not erected and the assessees sold the shares. There was therefore justification for holding that the purchase of the shares was an investment to acquire the managing agency and was not an adventure in the nature of trade. In Saroj Kumar Mazumdars case (supra) there was a single transaction of sale of rights for the purchase of land measuring 3/4 acres by the assessee who was an Engineer by profession. His construction activities declined and that was why he sold his rights in the land for Rs. 74, 000 odd in excess of the amount paid by him. TheIncometaxdepartment however failed to prove that the assessees dominant intention was to embark on a venture in the nature of trade as distinguished from capital investment. That was also therefore a different case. In the case of Janki Ram Bahadur Ram (supra) the assessee was a dealer in iron scrap and hardware. He agreed to purchase all rights of a company in a jute pressing factory , but sold it at a profit. It was held that as the property purchased by the assessee was not such that an inference that a venture in the nature of trade must have been intended could be raised, the profit was not liable to tax. It was held that a person purchasing a jute press might intend to start his own business or he might let it out on favourable terms. The property was in fact let out by the earlier owner before the date of sate. That was also therefore quite a different case and cannot avail the appellant. In the remaining case of Ajax Products Ltd. (supra) it was held that on the facts the assessee company having acquired the sick mill to open new line of business, the purchase was, really in the nature of an investment and the purchase and sale did not amount to an adventure in the nature of trade. That was therefore also quite a different case. It would thus appear that in spite of the fact that the appellant withheld some of the correspondence bearing on the controversy, the Department has succeeded in proving that the transaction of sale in question was an adventure in the nature of trade and fail within the definition of "business" in clause (4) of section 2 of the Act.