1965 (12) TMI 23 - SC - Income Tax

Supreme Court: Surplus from property sale not taxable under Income-tax Act

Commissioner Of Income-Tax, Madras Versus PKN. Company Limited

Commissioner Of Income-Tax, Madras Versus PKN. Company Limited - [1966] 60 ITR 65 Issues Involved:1. Whether the surplus realized by the assessee-company from the sale of its estates and properties in Malaya was income chargeable to tax under the Indian Income-tax Act.2. Whether the company was carrying on business in real estate or was merely realizing capital accretion from the sale of properties.Detailed Analysis:1. Chargeability of Surplus to Tax:The core issue was whether the surplus of $1,41,326 realized by the assessee-company from the sale of some of its estates and properties held in Malaya was income chargeable to tax under the Indian Income-tax Act. The High Court had answered this question in favor of the company, holding that the amount sought to be taxed was not income chargeable under the Act. The Supreme Court upheld this view, noting that the company's primary activity was that of planters and not dealing in real estate. The incidental sale of uneconomic or inconvenient plots of land or houses did not convert what was essentially an investment into a business transaction in real estate.2. Nature of Company's Activities:The company was floated with the object of taking over the assets of the P. K. N. firm. The memorandum of association contained clauses permitting the company to carry on various types of business, including dealing with property and rights of all kinds. However, the Supreme Court emphasized that the existence of such powers in the memorandum of association has no decisive bearing on whether the profits are capital accretion or revenue income. The court observed that the primary activity of the company was to function as planters and dealers in rubber, with substantial income derived from rubber cultivation and sales. The sales of properties were spread over several years and were motivated by necessity or opportunity rather than an intention to engage in real estate business.3. Tribunal's Findings:The Income-tax Appellate Tribunal had initially set aside the assessment orders, observing that the company's activities outside India were limited to holding properties and deriving income therefrom. The properties were not acquired in the course of money-lending business nor for resale at a profit. However, for the assessment year 1951-52, the Tribunal confirmed the assessment, noting continuous sale transactions and large borrowings for acquiring and developing properties. The Supreme Court disagreed with this inference, stating that the acquisition of estates was not for the purpose of carrying on business in real estate.4. Judicial Precedents:The court referred to several precedents, including Janki Ram Bahadur Ram v. Commissioner of Income-tax, which emphasized that the nature of a transaction must be determined by considering all facts and circumstances. The court also cited Karanpura Development Co. Ltd. v. Commissioner of Income-tax, where it was observed that ownership and leasing of property might be part of a business or done as a landowner, depending on the object of the act. The court concluded that the company's primary object was to take over the assets of the P. K. N. firm and carry on the business of planters, not real estate dealers.Conclusion:The Supreme Court concluded that the incidental sale of properties did not convert the company's investment into a business transaction in real estate. The appeal by the Commissioner of Income-tax was dismissed, and the High Court's decision in favor of the company was upheld. The court reiterated that the primary activity of the company was to function as planters and dealers in rubber, and the sales of properties were motivated by necessity rather than an intention to engage in real estate business.Appeal Dismissed.