TaxTMI 
TaxTMI 
TaxTMI 
1961 (9) TMI 72
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....Malaya. 4. Some of the partners of the aforesaid firm incorporated on December 4, 1937, a private limited company under the name and style of P.K.N. Company Limited, the assessee in the reference, hereinafter referred to as the "company" under the Pudukottai Companies Regulation (Regulation V), 1929. The following are some of the objects for which the company was formed:...... "(ii) To carry on business as merchants, commission agents, financiers, concessionaires, mill-owners, land and house estate agents and owners, financial, commercial agents and to undertake and carry on and execute all kinds of financial, commercial business (except the issuing of policies of assurance on human life) which may seem to be capable of being conveniently carried on in connection with any of these objects or calculated directly or indirectly, to enhance the value of or facilitate the realisation of, or render profitable, any of the company's property or rights...... (xv) To purchase or otherwise acquire and to sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with property and rights of all kinds, and in particular, mortgages, de....
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....-3-48 ... 17,500 7,500 ... 31-12-48 ... 1,88,145 37,220 525 31-12-49 ... 1,20,734 43,333 550 31-12-50 1,000 3,26,362 1,40,899 180 Total 19,18,328 9,98,078 4,85,250 32,454 Note.--(i) Detailed statement of properties for the above totals are annexed hereuntoas annexures 11 "A" to "D" and form part of the case. Note.--(ii) *These represent transfers only. 9. Neither of the two properties referred to in paragraph 6 supra had been sold. They are shown in annexures "A-2" and "C-1" aforesaid as items 20-22 and item 6o respectively. 10. The share capital of the aforesaid company was ₹ 6,60,000 treated as fully paid and allotted to the various partners of the aforesaid firm in reduction of the purchase consideration due to them. The balance of purchase consideration was retained as a liability. 11. The following are the details of such moneys retained as at the end of the various years shown below: Date Share holders Directors and managers Near relatives Total (1) (2) (3) (4) (5) Rs. Rs. Rs. Rs. 31-3-39 9,00,000 ... ... 90,00,000 31-3-40 21,81,078 78,812 32,152 22,92,042 31-3-41 20,42,495 8....
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....iation. The company came into existence, inter alia, for the purpose of buying and selling properties of all kinds and of developing, cultivating and of disposing of them. The properties were purchased, developed, cultivated and sold in carrying out this object. These are all operations of business and were carried on in the same way as those which are characteristic of transactions normally carried on by Chettiars in Burma,, Malaya and other countries in the Far East. This is not the first year in which sales of properties were effected. Properties have been sold right from the inception of the company and the results exhibited in the profit and loss accounts. Further the company itself has treated in the computation of past profits available for remittance the properties as stock-in-trade and the loss arising from their destruction by enemy action as a business loss. In these circumstances, I hold as in previous years that the profit realised by their sale as business profit liable to tax and I accordingly include it in the assessment..." 15. The assessee appealed to the Appellate Assistant Commissioner against the aforesaid assessment and contended as follows: (a) it was ....
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....epresentative agrees to the statement. Counsel for the assessee agrees that all facts have been correctly set out and no material fact has been omitted therefrom. T. V. Viswanatha Iyer for S. Swaminathan and K. Ramagopal, for the assessee C. S. Rama Rao Sahib and S. Ranganathan, for the Commissioner JUDGMENT The judgment of the court was delivered by SRINIVASAN J.--A registered firm of the vilasam of "P.K.N." was carrying on money-lending business at several places in India as well as in Malaya. In the year 1937, the partners of the firm incorporated a private limited company under the name of "P.K.N. Company Ltd." This company is the assessee. We shall refer in due course to the memorandum and articles of association of the company. To this company were transferred all the properties of the erstwhile partners of the firm, such properties as were situated in the district of Muar in Malaya. These properties consisted of several rubber and coconut plantations, houses and vacant sites. The process of this transfer which was item by item went on till 1940. The total value of the purchases came roughly to 16? lakhs of dollars. In the year of account ending 31st ....
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....economic properties which had to be got rid of. It was also urged that the Tribunal's decision in the previous assessment year was the correct one which should have been followed by the Income-tax Officer. The appeal was, however, dismissed, the Appellate Assistant Commissioner taking the view that the memorandum and articles of association was not confined to the purchase of the properties of the "P.K.N." firm only but was general and that the continuous operations of sales in the absence of any compelling necessity to sell indicated either a business in such purchase and sale of properties or an adventure in the nature of trade. His further view was that in relation to the previous assessment year 1950-51, the full facts were not available to the Tribunal. The further appeal to the Tribunal also failed, the conclusion of the Tribunal being "For the aforesaid reasons, we hold that the properties acquired were in the course of a business of dealing in properties and not as investment pure and simple." Under section 66(2) of the Act, the following question stands referred for the determination of this court: "Whether, on the facts and circumstances o....
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....siness of purchase and sale of properties. These objects included the business of banking, business as merchants, commission agents, estate agents, etc., making of advances on properties, both moveable and immoveable and on produce; discounting and otherwise dealings in negotiable securities or documents; all kinds of trust agency carrying out business; to carry on business of planters, cultivators, dealings in rubber, coconuts, coffee, etc., to plant, grow produce, prepare for the market all agricultural produce such as rubber, coconuts, tea, etc., to generally to carry on the business of bankers, to deal in bullion, specie, etc., to purchase or otherwise acquire and to sell, exchange and deal with properties and rights of all kinds; to sell, mortgage, manage, improve, develop or otherwise deal with all or any part of the properties of the company; and numerous other activities of a like character. The department no doubt placed particular emphasis on clauses 2, 15 and 16. Clause 2 relates to the carrying on of business as land and house estate agents. Clause 15 specifically empowered the company to purchase and to sell, turn to account, dispose of and deal with property and right....
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....ld properties. Why should it not then be held that such sales were in the exercise of its declared object and that it had embarked upon a business of dealing in properties? It is also pointed out that during the several preceding years, there had been several sales which yielded "profit". The continuity of transactions of these sales is one of the features relied on by the department. The department no doubt has no answer when it is pointed out that the company did not acquire any properties whatsoever after 1941 and what it sold was a comparatively small part of its assets. Mr. Rama Rao Sahib, appearing for the department, asks us to infer that the object of the company must have been only to sell all these properties from the circumstances that the patties, that is, the P.K.N. family, who are the shareholders of the company, are not residents in Malaya. It was further argued that there was no pressure upon the company necessitating these sales. For the assessee, Mr. Viswanatha Aiyar claims that there have been only two purchases of a large extent and that there would have been repeated purchases if the company had really embarked on a business of dealing in properties. ....
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....tances of this case, the course of transactions assumed the character of a business in dealing with properties. Indeed, the Supreme Court laid down in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R. 49; [1955] 25 Comp. Cas. 9 (S.C), that the circumstances whether a transaction is or is not within the company's powers has no bearing on the nature of the transaction or on the question whether the profits arising therefrom are capital accretions or revenue income. Nor can it be said that the acts available in the present case disclose a commercialised activity on the part of the company in so far as its transactions in the sale of the properties are concerned. We have stated that the company acquired two large blocks of properties and the background of the formation of the company, the limitation upon the members who could be admitted to the company and other attendant features clearly suggested an intention of conserving the properties of a particular family. It has been found also that some of the houses properties were destroyed by fire and that the vacant sites and outlying properties were sold, the reasons advanced by the assessee being communist distu....
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....a particular source of income is business or not must be decided according to our ordinary notions as to what a business is". Referring to the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 I.T.R. 451; [1952] S.C.R. 1, their Lordships said: "This court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles." In the case on hand, except for the circumstance that there were sales spread over a number of years, which activity is capable of a perfectly rational explanation, no evidence is available of anything that would suggest that in selling these properties the company did so as a dealer in properties. What all is evident is that as and when opportunity arose and as necessity dictated, the company disposed of some of the properties. During the period of the past 12 years, the company actually went on with what appears to have been its principal and major activity, viz., that of planters. For instance, during the year ended 31st March, 1948, the company expended on the estates....
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....fornian Copper Syndicate v. Harris*. In that case, the syndicate was formed to acquire copper and other mines and to prospect and explore and to enter into treaties, contracts and engagements with respect to the mines, mining rights, etc. After investing a part of its capital in a copper bearing field and investing a sum in the development of the field and in preliminary and head office expenses, the company sold the property to another company. Clark L.J. said: "Although that was a sale, the price to be paid in shares, I feel compelled to hold that this company was in its inception a company endeavouring to make profit by a trade or business, and that the profitable sale of its property was not truly a substitution of one form of investment for another. It is manifest that it never did intend to work this mineral field with the capital at its disposal. Such a thing was quite impossible. Its purpose was to exploit the field, and obtain gain by inducing others to take it up on such terms as would bring substantial gain to themselves. This was that the turning of investment to account was not to be merely incidental, but was, as the Lord President put it in the case of the Sco....
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.... settlers and other companies. The profit arising from these transactions was held to be liable to income-tax. It is obvious that, on the facts, the principal and probably the sole activity of the company was to dispose of the lands in the nature of trade. Reliance was also placed by the department on Commissioners of Inland Revenue v. Korean Syndicate Ltd.**, where the difference between an individual and a limited company was relied upon in holding that transactions of this kind by a limited company would bear a construction different from similar transactions by an individual, for the reason that a limited company comes into existence for some particular purpose "and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not". We do not read these observations and other observations occurring in the body of the judgment as laying down that where dealing in properties is only one of the many objects of a company, such an object is conclusive with regard to the actual....
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....profit and their activities, one might suppose, were mainly directed to that end. They had power under the objects clause of the memorandum of association to trade in land. That is not disputed; and accordingly if they did trade in land they were acting intra vires and the profits of that part of their business would be just part of the normal and contemplated trading profits of the company. Moreover, a company formed to carry on in the main a particular line of business may often and does often carry on a subordinate business or trade the profits of which are a part of the profits of the company as a whole." The reliance placed upon these two cases by the learned counsel for the departmental does not seem to us to be justified in its application to the peculiar facts of the present case. To our minds it is not enough merely to say that the company in the present instance engaged in a dozen transactions of sale. We have said enough to indicate that the company was promoted solely for the purpose of conserving the family assets and was engaged in the business of planters from which it derived a very large income. That some portions of the property were sold cannot immediately ....
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....of purchase and resale, though profitable, are clearly outside the domain of adventures of the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent and thereby make it improve the quality of the commodity purchased and thereby make it more readily resoluble; any act prior to the purchase showing a design or purpose; the incidents associated with the purchase and resale; the similarity of the transaction to operation usually associated with trade or business; the repetition of the transaction; the element of pride of possession...The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines ....