1961 (9) TMI 72 - HC - Income Tax

Company's Property Sales Not Taxable as Business Income

PKN. CO. LTD. Versus COMMISSIONER OF INCOME-TAX, MADRAS

PKN. CO. LTD. Versus COMMISSIONER OF INCOME-TAX, MADRAS - [1963] 47 ITR 195 (Mad) Issues Involved:1. Whether the surplus of $1,41,326 realized by the assessee company by the sale of some of its estates and properties held by it in Malaya was income chargeable to tax under the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Nature of the Assessee's Business:The primary issue was whether the assessee company engaged in the business of purchase and sale of properties or merely realized part of its investments. The assessee, a private limited company incorporated in 1937, acquired properties from a firm and made subsequent purchases but ceased acquisitions after 1941. The properties included rubber and coconut plantations, houses, and vacant sites. The company's memorandum of association included numerous objects, including dealing in properties.2. Continuous Sale of Properties:The company sold portions of its properties from 1940 to 1950, realizing profits. The Income-tax Officer assessed these profits as business income, arguing that the sales were part of a profit-making scheme. The Appellate Assistant Commissioner and Tribunal upheld this view, noting continuous sales and no compelling necessity to sell, suggesting a business nature.3. Memorandum and Articles of Association:The memorandum listed various objects, including dealing in properties. However, the articles of association restricted membership to the P.K.N. family, indicating intent to conserve family property and efficient management, not business in properties.4. Previous Tribunal Decision:For the assessment year 1950-51, the Tribunal had concluded that the properties were investments, not business assets. The assessee argued this should apply to the current assessment year, but the Appellate Assistant Commissioner and Tribunal disagreed, citing incomplete facts previously.5. Nature of Transactions:The court emphasized the need to determine if the sales were incidental to property ownership or part of a business. The company sold only portions of its properties, retaining significant assets and not acquiring new properties after 1941. The sales were argued to be due to communist disturbances and management difficulties, not business intent.6. Business or Investment:The court noted that while the memorandum authorized property dealings, this alone didn't determine business nature. The Supreme Court's precedent in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax clarified that the nature of transactions, not just powers, determines business. The company's primary activity was plantation, supported by significant expenditures and income from rubber sales.7. Adventure in the Nature of Trade:The court considered if the transactions were an adventure in the nature of trade. Supreme Court guidelines in Venkataswami Naidu and Co. v. Commissioner of Income-tax emphasized factors like intent, subsequent actions, and transaction nature. The court found no evidence of systematic commercial activity or intent to trade, rebutting any presumption of trade adventure.Conclusion:The court concluded that the company did not engage in the business of dealing in properties. The sales were incidental to property ownership, driven by management needs, not business intent. The question was answered in the negative, favoring the assessee, and the profits were not chargeable to tax as business income. The assessee was entitled to costs, with counsel's fee set at Rs. 250.