TaxTMI 
TaxTMI 
1961 (9) TMI 72
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.... East, at Muar and Segamat in 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 part....
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....00* 4,400* ... 30,600 31-3-44 ... 3,331 1,881 ... 31-3-45 500* 2,67,610 2,32,751 ... 31-3-48 ... 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 Rs. 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 ....
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....s for selling them especially when they were proving themselves to be good investments and Yielding fabulous income. The real reason seems to have been the making of the maximum profits by their sale in a market which was exceedingly favourable in accordance with the scheme of business and profit-making as laid down in the memorandum of association. 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 a....
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....rty purchased on July 7, 1941, referred to in paragraph 6 supra, which, however, as stated in paragraph 9 supra, does not appear to be correct as the property was not sold at all. Nevertheless, there were other reasons as stated in the aforesaid annexure in support of the Tribunal's decision. 18. The departmental representative 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 sit....
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....of association." There was an appeal to the Appellate Assistant Commissioner, the assessee claiming that it was only a land-owning company formed to hold the properties and realise income therefrom and that there had been no subsequent purchases and that the sale was only of non-remunerative and uneconomic 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....
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....at the company did not acquire any properties after 1941. The memorandum of association of the company contains a multitude of objects, as many as 29 being set out therein. We may indicate a few as they would be relevant for the determination of the question whether the company did engage itself in the business 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....
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....any was formed only for the purpose of selling away all these properties item by item. Indeed, we may say that practically the only argument that was advanced before us on behalf of the department was that there is a company with one of its declared objects being the purchase and sale of properties. It has sold 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 argu....
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....extent to which the company did purchase and sell some of the items of properties, the activity of the company was no doubt authorised by the relevant clause of the memorandum. That as far as we can see cannot be held to be determinative or final on the question whether, in the particular circumstances 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 attend....
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....#39; connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether 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 ....
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....certainly expect to find that when some property, which was capable of being turned to account at a profit became available in the market, the company would have purchased it with a view to sell it in future. This remarkable feature taken in the light of the other attendant circumstances considerably detracts from the validity of the view taken by the department with regard to the business. On behalf of the department, reliance was placed upon Californian 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,....
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....is it a gain made in an operation of business in carrying out a scheme for profit-making?" We are unable to see any application of Thew v. South West Africa Co. Ltd.* to the facts of the present case. That dealt with the case of a company incorporated with the primary object of acquiring, developing and turning to account certain concessions in German South West Africa. It was understood between the company and the German Government that the colonisation of the country should be encouraged by the sale of land to the settlers. In pursuance of this object, considerable tracts were sold both to the 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 t....
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....se, where a company purchased a landed estate. It sold certain portions of the estate and further granted to a building contractor options to build dwelling houses on parts of the estate. Between 1918 and 1937, it had granted over 1,100 feus to purchasers of such houses and to other private individuals. It was held that the company had acquired the estate as a trading asset with a view to developing and marketing it and that the profits made from the sale of land were trading profits assessable to tax. In dealing with this case, the Lord President observed: "On the other hand, they were a company which was formed for the purpose of earning a trading 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 partic....
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....d these lands to the company managed by it at a profit. The Tribunal held that the amount was not a capital accretion but was a gain made in an adventure in the nature of business and was therefore taxable. On a reference, the High Court accepted this view of the matter. In the appeal to the Supreme Court, the question arose whether the transaction was an adventure in the nature of a trade. It is sufficient for us to extract the head-notes of this decision. "If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from and adventure in the nature of trade. Cases of realisation of investments consisting 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 ....