Case: G. Venkataswami Naidu &amp; Co Vs. The Comm1Ssioner Of Income-Tax

1. The appellant is a firm acting as managing agents of the Janardana Mills Ltd., Coimbatore. It purchased four contiguous plots of land admeasuring 5 acres 26 cents under four sale deeds executed on 25th October 1941, 15th November 1941, 29th June 1942, and 19th November 1942, respectively for a total consideration of Rs. 8712-15-6. After-about five years these properties were sold by the appellant in two lots to the Janardana Mills Ltd. The first lot was sold on 1st September 1947, and the second on 10th November 1947, the total consideration for the two sales being Rs. 52,600. These two sales realised for the appellant a sum of Rs. 43,887-0-6 in excess of the purchase price.2. The Income-tax Officer treated the said amount of Rs. 43,887 as the income of the appellant for the assessment year 1948-49, and assessed it to income-tax under the head "business". The officer held that there was no evidence to show that the appellant had purchased the said lands for agricultural purposes or that it had acquired them as an investment. He also found that, since the lands were adjacent to the Janardana Mills, the appellant must have purchased them solely with a view to sell them to the said mills with a profit. That is why, though the transaction was in the nature of a solitary transaction, it was held that it had all the elements of a business transaction and was thus an adventure in the nature of trade.3. Against this order of assessment the appellant preferred an appeal to the Appellate Assistant Commissioner. The appellate authority upheld the appellants contention that the amount in question was not assessable as it cannot be held to be income or profit resulting from a profit-making scheme, and set aside the order under appeal.4. The respondent challenged the correctness of this order by taking an appeal against it to the Income-tax Appellate Tribunal. The tribunal agreed with the view taken by the Income-tax Officer and held that the amount in question was not a capital accretion but a gain made in an adventure in the nature of business in carrying out a scheme of profit-making. The tribunal rejected the explanations given by the appellant as to why it had purchased the properties and held that the purchase had been made by the appellant solely with a view to sell the said properties at profit to the Janardana Mills.5. At the instance of the appellant the tribunal then referred to the High Court of Madras the question suggested by it in these words : "whether there was material for the assessment of the sum of Rs. 43,887 being the difference between the purchase and sale price of the four plots of land as income from an adventure in the nature of trade".6. This reference was heard by Rajagopalan and Rajagopala Ayyangar JJ. and the question referred has been answered against the appellant. The High Court has held that the transaction in question was an adventure in the nature of trade and so the respondent was justified in taxing the amount in question under the head "business" for the relevant year. The application for leave made by the appellant was rejected by the High Court. Thereupon the appellant applied for, and obtained, special leave to appeal to this Court. That is how the appeal has been admitted in this Court; and the only question which it raises for our decision is whether the High Court was right in holding that the transaction in question was an adventure in the nature of trade.

Court's reasoning:
28. The observations made by Viscount Dunedin were considered in the Commissionersof Inland Revenue v. Reinhold, (1953) 34 Tax Cas 389.We ought to add that the appellant has placed strong reliance on this decision. In this case, the respondent was a director of a company carrying on a business of warehousemen; he bought four houses in January 1945 and sold them at a profit in December 1947. He admitted that he had bought the property with a view to resale and had instructed his agents to sell whenever a suitable opportunity arose. The profits made by him on resale were assessed to tax. On appeal before the General Commissioners he contended that the profit on resale was not taxable. The Crown urged that the transaction was an adventure in the nature of trade and that profits arising therefrom were chargeable to tax. The General Commissioners being equally divided allowed the appeal and discharged the assessment. It was on these facts that the matter was then taken before the First Division of the Court of Session and it was urged on behalf of the Crown that the initial intention of the assessee clearly was to sell the property at a profit and so the view taken by the General Commissioners about the character of the transaction was erroneous. This argument was, however, rejected and the order of discharge passed by the General Commissioners was confirmed. When the Crown referred to the observations of the Lord Dunedin in the case of Leeming, (1930) 15 Tax Cas 333 which we have already cited, Lord Carmont observed that he did not wish to read the said passage out of its context and without regard to the facts of the case then under consideration. Then Lord Carmont added that though the language used by Lord Dunedin "may cover the purchase of houses", it "would not cover a situation in which a purchaser bought a commodity which from its nature can give no annual return". "This comment of mine", said Lord Carmont, "is just another way of saying that certain transactions shew inherently that they are not investments but incursions into the realm of trade or adventures of that nature". Then reference was made to the fact that the assessee was a warehouse company director and not a property agent or speculator and that the only purchases of property with which he was concerned were two separated by ten years and that the first heritage was acquired without the intention to sell, which only arose fortuitously. His Lordship then put his conclusion in this way :"I would therefore say that the Commissioners of Inland Revenue have failed to prove -and the onus is on them - the case they sought to make out".According to Lord Carmont. Lord Dunedins observations do not suggest that the initial declaration of intention per se leads to the conclusion that the transaction was in the nature of trade. He thought that much more was required to show that the assessee was engaged in an adventure in the nature of trade than was proved in the case before the Court. Lord Russell, who concurred with this opinion, began with the observation that "prima facie the difference of opinion among the General Commissioners suggests that the case is a narrow one and that the onus on the appellants of showing that the transaction was an adventure in the nature of trade is not a light one". Lord Russell then mentioned the argument of the Lord Advocate that if a person buys anything with a view to sale that is a transaction in the nature of trade because the purpose of the acquisition in the mind of the purchaser is all-important and conclusive ; and that the nature of the thing purchased and the other surrounding circumstances do not and cannot operate so as to render the transaction other than an adventure in the nature of trade, and observed that in his opinion the argument so formulated "is too absolute and is not supported by the judicial pronouncements on which it was sought to be raised". He then referred to the variety of circumstances which are or may be relevant to the determination of such a question: and he concluded with the observation that the appellants had not discharged the burden of showing that the transaction was an adventure in the nature of trade. Lord Keith also took the same view and stated that "the facts were, in his opinion, insufficient to establish that this was an adventure in the nature of trade". This case was no doubt a case on the border line ; and if we may say so with respect it was perhaps nearer an adventure in the nature of trade than otherwise. It would not be unreasonable to suggest that, in this case, if the Commissioners had found that the transaction was an adventure in the nature of trade, the Court would probably not have interfered with the said conclusion ; but the Commissioners were equally divided and to assessment (sic) had been discharged by them. It was under these circumstances that the point about the onus of proof became a matter of substance ; and as we have already pointed out, all the learned judges have emphasized that the onus had not been discharged and that no case had been made out for reversing the order of discharge passed by the commissioners. However that may be, it would, we think, be unsafe to treat this case as laying down any general proposition the application of which would assist the appellant before us. We would also like to add that there can be no doubt that Lord Russells criticism against the contention raised by, the Lord Advocate was fully justified because the contention as raised clearly overstated the significance and effect of the initial intention.As we have already pointed out, if it is shown that, in purchasing the commodity in question, the assessee was actuated by the sole intention to sell it at profit, that no doubt is a relevant circumstance which would raise a strong presumption that the purchase and subsequent sale are an adventure in the nature of trade; but the said presumption is not conclusive and it may be rebutted or offset by other relevant circumstances.29. What then are the relevant facts in the present case ? The property purchased and resold is land and it must be conceded in favour of the appellant that land is generally the subject-matter of investment. It is contended by Mr. Viswanatha Sastri that the four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realised that cannot impress the transaction with the character of and adventure in the nature 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 is difficult to treat it as a matter of investment. The property was a small piece of 28-1/4 cents and it could yield no return whatever to the 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 the first purchase was made by the appellant in the name of its benamidar V. G. Raja. Apparently the appellant changed its mind and took the subsequent sale deeds in its own name. The conduct of the appellant in regard to these plots subsequent to their purchase clearly shows that it was not interested in obtaining any return from them. No doubt the appellant sought to explain its purpose on the ground that it wanted to build tenements for the employees of the mills; but it had taken no steps in that behalf for the whole of the period during which the plots remained in its possession. Besides, it would not be easy to assume in the case of a firm like the appellant that the acquisition of the open plots could involve any pride of possession to the purchaser. It is really not one transaction of purchase and resale. It is a series of four transactions undertaken by the appellant in pursuance of a scheme and it was after the appellant had consolidated its holdings that at a convenient time it sold the lands to the Janardana Mills in two lots. When the tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment it would have tried either to cultivate the land, or to build on it ; but the appellant did neither and just allowed the property to remain unutilised except for the net rent of Rs. 80 per annum which it received from the house on one of the plots. The reason given by the appellant for the purchase of the properties by the mills has been rejected by the tribunal; and so when the mills purchased the properties it is not shown that the sale was occasioned by any special necessity at the time.In the circumstances of the case the tribunal was obviously right in inferring that the appellant knew that it would be able to sell the lands to the mills whenever it thought it profitable so to do. Thus the appellant purchased the four plots during two years with the sole intention to sell them to the mills at a profit and this intention raises a strong presumption in favour of the view taken by the tribunal. In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts the presumption arising from the initial intention; on the other hand, most. of them corroborate the said presumption. We must, therefore, hold that the High Court was right in taking the view that, on the facts and circumstances proved in this case, the transaction in question is an adventure in the nature of trade.