1976 (9) TMI 2 - SC - Income Tax

Supreme Court affirms taxability of machinery transaction as trade under Indian Income-tax Act

The Supreme Court affirmed the High Court's decision that the transaction involving the receipt of Rs. 7 lakhs by the appellant from Orissa Cement Ltd. ... Whether higher price received after revaluation by arbitrator is income from adventure in the nature of trade - inspite of the fact that the appellant with held some of the correspondence bearing on the controversy, the department has succeeded in proving that the transaction of sale in question was an adventure in the nature of trade and fell within the definition of 'business' in clause (4) of section 2 of the Act. The High Court has rightly answered the question in the affirmative Issues Involved:1. Whether the sum of Rs. 7 lakhs received from M/s. Orissa Cement Ltd. was pursuant to an adventure in the nature of trade and thus taxable under the Indian Income-tax Act, 1922.Detailed Analysis:1. Nature of the Transaction:The primary issue was whether the transaction involving the receipt of Rs. 7 lakhs by the appellant from Orissa Cement Ltd. was an adventure in the nature of trade and thus taxable under the Indian Income-tax Act, 1922. The term 'business' as defined in clause (4) of section 2 of the Act includes any trade, commerce, manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture.2. Factual Background:The appellant, Dalmia Cement Ltd., owned several cement factories and placed an order for four complete units of cement manufacturing machinery with M/s. F.L. Smidth and Co., Copenhagen, on February 7, 1946. One of these units was intended for the Dandot factory, which later fell within the territory of Pakistan post-partition. The appellant transferred this machinery to Orissa Cement Ltd. in 1950-51, initially charging only the invoice price.3. Subsequent Developments:After negotiations, Orissa Cement Ltd. agreed to pay an additional Rs. 7 lakhs, for which 70,000 fully paid-up ordinary shares of Rs. 10 each were given to the appellant. The Income-tax Officer treated this amount as income earned from an adventure in the nature of trade for the 1952-53 assessment year and taxed it accordingly. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this view, leading to a reference to the High Court.4. High Court's Findings:The High Court held that the appellant's intention was to purchase the machinery with an idea to resell it, and the fact that it was a single and isolated transaction did not materially affect the case. The High Court rejected the contention that the machinery was purchased as an investment.5. Supreme Court's Analysis:The Supreme Court affirmed the High Court's judgment. It noted that the appellant did not cancel the order for the Dandot machinery even after Dandot became part of Pakistan. Instead, the appellant negotiated with the Orissa Government to set up a cement plant in Orissa using the Dandot machinery. The machinery was imported and diverted to Orissa, and a formal agreement was executed on December 23, 1948.6. Dominant Intention:The Court found that the appellant had the dominant intention of reselling the machinery almost from the beginning, and this intention was the driving force behind the import and subsequent sale to Orissa Cement Ltd. The appellant's actions were aimed at securing an advantageous position, and the transaction bore clear indicia of trade.7. Revenue Receipt:The Court held that the transaction was a business transaction within the meaning of section 2(4) of the Act. The subsequent demand for a higher price and the appellant's success in securing an additional Rs. 7 lakhs further evidenced the intention to profit from the transaction.8. Onus of Proof:The Court acknowledged that the onus of proving that the transaction was an adventure in the nature of trade lay on the department. The department successfully demonstrated that the transaction met the characteristics of trade, despite being a single and isolated transaction.9. Capital Investment Argument:The appellant's argument that the machinery was a capital investment and thus a capital asset was rejected. The Court noted that the appellant treated the sale price as a revenue receipt in its own profit and loss account and balance sheet, indicating that it was not a capital investment.Conclusion:The Supreme Court concluded that the transaction was indeed an adventure in the nature of trade and thus taxable under the Indian Income-tax Act, 1922. The appeal was dismissed with costs, affirming the High Court's decision.