Adventure in the nature of trade requires trading intention at inception; depreciation balancing charge still applies on sale of machinery.

Surplus on the sale of a silk mill was not business income where the assessee's pre-existing business was unrelated to silk manufacture and the acquisition was not shown to have been made with a trading intention or resale scheme at inception; the later sale therefore did not constitute an adventure in the nature of trade. By contrast, the difference between the original cost and the written down value of plant and machinery was assessable under the depreciation-balancing provision when the depreciable assets were sold for more than their written down value, even though the business line had ceased.

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Issues: (i) whether the surplus realised on the sale of the silk mills constituted income from business as an adventure in the nature of trade; and (ii) whether the difference between the cost price and the written down value of the plant and machinery was assessable under section 10(2)(vii).

Issue (i): whether the surplus realised on the sale of the silk mills constituted income from business as an adventure in the nature of trade.

Analysis: The business carried on by the assessee before acquiring the silk mills was unrelated to silk manufacture. The purchase of the mills was treated as an acquisition of a new line of activity and not as a transaction entered into with a proved intention, at the time of purchase, to resell at a profit. The absence of material showing that the assessee embarked upon a trading adventure at the inception, coupled with the character of the acquisition as an investment in a new business line, negatived the department's case that the later sale was part of a trading scheme.

Conclusion: The surplus of Rs. 3,41,586 was not business income; the answer was in favour of the assessee.

Issue (ii): whether the difference between the cost price and the written down value of the plant and machinery was assessable under section 10(2)(vii).

Analysis: The statutory allowance provision applied notwithstanding that the assessee had sold the entire plant and machinery and had ceased that line of business. The amount represented the difference between the original cost and the written down value of depreciable assets, which fell within the scope of the provision once the machinery was sold for more than the written down value.

Conclusion: The sum of Rs. 85,791 was assessable under section 10(2)(vii); the answer was in favour of the revenue.

Final Conclusion: The reference was answered by holding that the trading-adventure question failed for the department, while the depreciation-balancing charge question succeeded for the revenue, resulting in a divided outcome on the two referred questions.

Ratio Decidendi: A purchase followed by a later sale is not, by itself, an adventure in the nature of trade; to treat the resulting surplus as business income, the revenue must establish that the assessee embarked on the transaction with a trading intention or trading scheme at the inception, whereas depreciation-balancing provisions apply according to their terms on the sale of depreciable assets.

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