1950 (1) TMI 10 - HC - Income Tax

Court rules gold bar profits not subject to income tax; assessee awarded costs.

Lalit Ram Mangilal of Cawnpore Versus Commissioner of Income-Tax, U.P., Lucknow

The court held that the profits from the sale of three gold bars on 27th April 1943 were not proven to have arisen from an adventure in the nature of ... - Issues Involved:1. Whether the profits from the sale of three gold bars on 27th April 1943 arose from an 'adventure in the nature of trade' and were liable to income tax.2. Whether the profits from the transaction of the sale of gold bars on 27th April 1943 could be taxed before the entire profits from the sale of all the gold bars were determinable.Issue-wise Detailed Analysis:Issue 1: Nature of the Transaction and Tax LiabilityThe primary question was whether the profits from the sale of three gold bars on 27th April 1943 constituted an 'adventure in the nature of trade' under Section 2(4) of the Income-tax Act and were thus liable to income tax.Findings:- Facts Established: The assessee, who primarily carried on a cloth business, purchased eight gold bars between 29th October 1942 and 6th November 1942. Three bars were sold on 27th April 1943 at a significant profit.- Assessee's Argument: The gold bars were purchased not for profit but for two reasons: to have a portable medium due to political disturbances and for use in his daughter's marriage.- Income-tax Officer's View: The gold bars were purchased with the sole objective of being sold at a profit, thus constituting a venture in the nature of trade.- Tribunal's Conclusion: The Tribunal upheld the Income-tax Officer's view, concluding that the transaction was an adventure in the nature of trade aimed at making a profit.Court's Analysis:- Primary Findings vs. Inferences: The court distinguished between primary findings of fact and inferences drawn from those facts. The primary facts, such as the purchase and sale dates and prices, were undisputed. However, the inference that the purchase was made with a profit motive was contested.- Legal Inference: The court noted that the legal effect of proved facts is a question of law. The Tribunal's inference that the transaction was an adventure in the nature of trade was not binding if it was not supported by sufficient evidence.- Evidence Considered: The Tribunal's findings included the context of political disturbances, the financial status of the assessee, and the timing of the sales relative to the daughter's marriage. However, the court found these did not conclusively prove a profit motive.- Conclusion: The court concluded that the facts did not satisfactorily establish that the assessee embarked on the gold transactions with a view to make a profit. Therefore, the profits from the sale of the three gold bars were not proved to have arisen from an adventure in the nature of trade and were not liable to income tax.Issue 2: Timing of Taxation on ProfitsThe secondary question was whether the profits from the sale of the gold bars on 27th April 1943 could be taxed before the entire profits from the sale of all the gold bars were determinable.Findings:- Assessee's Argument: The assessee contended that profits could not be ascertained until all the gold bars were sold, relying on precedents where the entire stock had to be disposed of to determine profits or losses.- Tribunal's View: The Tribunal found that the purchase of the eight gold bars did not constitute a single transaction, and profits could be determined based on ordinary commercial principles of accountancy.Court's Analysis:- Precedents Considered: The court examined cases like In re K.H. Mody and Commissioner of Income-tax, Burma v. A.K.A.R. Family, which dealt with land transactions where profits could only be determined after the entire property was sold.- Distinction in Commodities: The court noted that these cases involved land, a non-commercial commodity, unlike gold, which is a commercial commodity with a consistent price irrespective of quantity.- Tribunal's Finding: The Tribunal's finding that the purchase of the eight gold bars did not constitute a single transaction was upheld. The court agreed that profits from the sale of individual bars could be taxed before the entire stock was sold.Conclusion: The court concluded that if the profits from the sale of the gold bars on 27th April 1943 were from an adventure in the nature of trade, they could be taxed before the entire profits from the sale of all the gold bars became determinable.Final Judgment:1. The profits from the sale of the three gold bars on 27th April 1943 were not proved to have arisen from an adventure in the nature of trade and were therefore not liable to income tax.2. If the profits from the sale of the gold bars on 27th April 1943 were from an adventure in the nature of trade, they could be taxed before the entire profits from the sale of all the gold bars became determinable.The assessee was awarded costs of Rs. 500, payable by the department.