Profit-motivated transaction treated as business income and an adventure in the nature of trade.

Surplus from a pre-arranged transaction was held taxable as business income because the structure was designed to realise profit rather than produce a mere capital accretion. The court also stated that an isolated transaction can still amount to an adventure in the nature of trade where it has the essential features of a trading venture and the dominant intention is profit-making. The assessee's control over the companies, the prior guarantee, and the manner in which the liability was dealt with supported that characterisation, so both reference questions were answered against the assessee.

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Issues: (i) Whether the surplus arising from the arrangement was assessable as business income; (ii) Whether the transaction amounted to an adventure in the nature of trade within the meaning of the Income-tax Act, 1922.

Issue (i): Whether the surplus arising from the arrangement was assessable as business income.

Analysis: The transaction was found to be a planned arrangement by which the assessee, taking advantage of his position and the guarantee earlier given, derived a gain from the liability owed to the shareholders. The surrounding circumstances showed that the agreements were structured to realise profit and that the receipts could not be treated as a mere capital accretion or casual return.

Conclusion: The surplus was taxable as business income and the finding was against the assessee.

Issue (ii): Whether the transaction amounted to an adventure in the nature of trade within the meaning of the Income-tax Act, 1922.

Analysis: An isolated transaction may still be an adventure in the nature of trade if it bears the essential features of a trading venture and the dominant intention is profit-making. On the facts, the dominant intention was to embark on a venture calculated to produce profit, and the arrangement was not a mere passive realisation of an obligation. The pre-arranged structure, the assessee's control over the companies, and the manner in which the liability was dealt with supported that conclusion.

Conclusion: The transaction was an adventure in the nature of trade and the answer was against the assessee.

Final Conclusion: Both reference questions were answered in favour of the Revenue, and the assessee failed on the merits.

Ratio Decidendi: A transaction, even if isolated, is taxable as business income when its dominant intention is to make a profit and its essential character is that of an adventure in the nature of trade.

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