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Citation Codes
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Case Number
Judges
  • K. Subba Rao, C.J
  • Bhimasankaram, J.
Acts
  • provisions of the Madras Act IV of 1938
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • K. Subba Rao, C.J
  • Bhimasankaram, J.
Acts
  • provisions of the Madras Act IV of 1938
See more information ...
Smart Summary

Structured Summary of the Opinion — Bhimasankaram, J.

Factual and Procedural Background

The reference was made at the instance of the assessee. The specific question posed to the court was whether the sum of Rs. 75,040 received by the assessee was a receipt not from business but of a casual and non-recurring nature exempt under Section 4(3)(vii) of the Income-Tax Act.

Relevant material facts stated in the opinion (as found in the text):

  • The assessee was a trader engaged in multiple lines of business (timber, tiles, furniture, iron-ware and hardware), sometimes in partnership and sometimes alone; he also jointly owned seagoing vessels used for cargo and passengers.
  • On 29 August 1941 the assessee purchased, by registered deed of transfer, a 25/56th share in a final mortgage decree for sale for Rs. 62,500. The decree itself was for about Rs. 2,60,527.
  • The assignors (Mutha Saravarayudu and his sons) were described in the deed as being in embarrassed circumstances; execution of the decree was stayed under the provisions of the Madras Act IV of 1938 pending an application to scale down the decretal debt, and there was no immediate prospect of realising their share of the decretal amount.
  • The deed recited that the assignors were transferring their interest to the assessee with a direction to him to pay off their creditors; the assessee undertook to pay off the assignors the balance, if any, outstanding after discharge of their obligations.
  • To pay the assignors' creditors the assessee borrowed money at interest from his brother Venkatasubba Rao and from Nagapotha Rao (both bankers/moneylenders). By October 1943 the assessee had paid all the debts he undertook to discharge; on 29 May 1944 he paid the balance of consideration to the assignors.
  • The assessee instituted execution proceedings and sold some mortgaged properties; on 14 August 1944 he realised Rs. 1,51,540 for his share of the decree.
  • The realised amount exceeded the purchase price by Rs. 89,040. After deducting Rs. 10,000 (expenses of realisation) and Rs. 4,000 (interest paid to assignors), the Income-tax Officer treated the balance of Rs. 75,040 as gains or profits of an adventure or concern in the nature of trade and assessed it as part of the assessee's income for the previous year ending 31 December 1944 (assessment year 1945–46).
  • The assessee unsuccessfully contended before the Income-tax authorities and the Appellate Tribunal that the Rs. 75,040 was not business income but a casual and non-recurring receipt exempt under Section 4(3)(vii); the present reference arises from that dispute.

Legal Issues Presented

  1. Whether the sum of Rs. 75,040 realised by the assessee is a receipt not from business but only of a casual and non-recurring nature exempt under Section 4(3)(vii) of the Income-Tax Act.
  2. Whether a single or isolated transaction can amount to an "adventure in the nature of trade" (i.e., be treated as business income) or whether such a characterization requires a series of similar transactions.

Arguments of the Parties

Assessee's Arguments

  • First submission: An "adventure in the nature of trade or commerce" must be one of a series of similar transactions; a single or isolated transaction cannot constitute such an adventure.
  • Second submission: The particular transaction (purchase of a share in a decree) had nothing to do with the several lines of business in which the assessee regularly engaged, and therefore it could not partake of the nature of trade.
  • Third submission: The assessee lacked profit motive; his motives were (a) to help Sarvarayudu and his sons out of financial embarrassment and (b) to help his brothers who had purchased the equity of redemption in two of the villages included in the mortgaged property, by confining execution to other properties.

Income-tax Authorities / Respondent

  • The Income-tax Officer treated the balance of Rs. 75,040 as gains or profits from an adventure or concern in the nature of trade and included it in the assessee's income for assessment year 1945–46.
  • The Appellate Tribunal and the Income-tax authorities rejected the assessee's contention that the receipt was casual and non-recurring and not business income.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Mrs. D.M. Alexander v. Commissioner of Income-tax, Madras (22 I.T.R. 379 at 399) Authority for the proposition that "even a single venture may amount to business, and the profits of such a single venture may be taxable as income arising from business." The court relied on this authority to reject the assessee's argument that a single transaction cannot be an adventure in the nature of trade.
Behari Lal Jhandu Mal, In re (Full Bench of the Lahore High Court) — per Muhammad Munir, J. Statement that the proposition that an isolated transaction may be a venture in the nature of trade is well established. The court cited this Full Bench view as further support for the conclusion that an isolated venture can be treated as trade.
Livingston v. Commissioner of Inland Revenue Illustrates that the scale of a transaction (e.g., purchase of large quantities) may indicate the thing was not bought for personal use but with trading intent. The court used this case as an example when discussing how scale of transaction is a material factor in determining whether an acquisition is for trade.
Bulgownie Land Trust Ltd. v. The Commissioners of Inland Revenue (Lord President Clyde) Conceptual authority (Lord President Clyde's phrase) that a person may be "plunging into the waters of trade"; used in assessing intention and whether a transaction amounts to trade. The court referenced this authority for the proposition that motive and intention (including the idea of "plunging into trade") are relevant in characterising a transaction.
Mothe Gangaraju v. The Commissioner of Income-Tax Facts were similar to the present case, but the court in that case did not intend to lay down any general rule of law according to the present opinion. The court noted the factual similarity but distinguished it on the ground that Mothe Gangaraju was not intended to be a statement of general legal principle; it did not alter the court's conclusion in the present reference.

Court's Reasoning and Analysis

Overview of approach

The court observed at the outset that the issue was essentially one of fact and that appellate interference with the tribunal's finding would be inappropriate unless the finding was vitiated by a legal error, reliance on inadmissible evidence, or refusal to consider admissible evidence. The court then addressed the main submissions advanced on behalf of the assessee and set out the relevant factors to be considered in determining whether a transaction is an "adventure in the nature of trade or commerce."

Step-by-step analysis (as stated in the opinion):

  1. On the first submission (that an adventure in the nature of trade must be a series of transactions): the court rejected the contention. It relied on the language of the statutory definition of "business" (which includes "any adventure or concern in the nature of trade, commerce or manufacture") and cited authority (Mrs. D.M. Alexander and the Lahore Full Bench) to conclude that "any adventure" can include a single venture. Therefore an isolated transaction may be taxable as business income.
  2. On the second submission (that the transaction was unrelated to the assessee's usual business): the court rejected the contention. It noted that the statutory definition does not require that the venture be of the same character as the assessee's ordinary trade; it is sufficient if the venture is in the nature of trade generally. The relation to the assessee's ordinary business may still be a relevant factor, but it is not decisive in every case.
  3. On the third submission (lack of profit motive; motives of accommodation/assistance): the court did not decide this issue on the merits because the Income-tax authorities and the Tribunal refused to accept the evidence tendered in support of these motives. The Court accepted the Tribunal's factual finding rejecting the asserted motives.
  4. The court then enumerated the relevant factors to determine whether a transaction is an adventure in the nature of trade:
    • The nature of the subject-matter purchased (e.g., whether it could be acquired for personal use or enjoyment).
    • The scale of the transaction (a large-scale purchase may be inconsistent with personal use and indicative of a trading intent).
    • The purpose, motive or intention in entering into the transaction (including whether it was to reap a profit).
    • The relation of the transaction to the assessee's ordinary business operations.
    • Whether the receipt is a casual windfall (e.g., lottery or prize) rather than business-derived income.
    • Whether the acquisition was an investment expected to fetch regular periodical returns (which would point away from trading intent), and the nature of the operations involved in acquiring and disposing of the asset.
  5. Application to the facts of the present case:
    • The item purchased was a decree, which by its nature could not be acquired for personal use or enjoyment, making it unlikely to be a purchase for private consumption.
    • The Tribunal found (and the court accepted) that the assessee had laid out money with a view to reap a profit; the transaction was not an investment yielding regular periodic returns.
    • The court characterized the transaction as a clear case of laying out money to make a profit and concluded that the material element of profit-making had been found by the Tribunal on the evidence before it.
  6. The court noted the similarity of facts to the case Mothe Gangaraju but stated that that decision was not intended to lay down any rule of law binding on the present issue; accordingly, it did not alter the court's conclusion.

Holding and Implications

Holding: The court answered the reference in the negative — the sum of Rs. 75,040 was not a receipt of a casual and non-recurring nature exempt under Section 4(3)(vii); instead, on the facts found by the Tribunal and accepted by the court, it was income arising from an adventure or concern in the nature of trade.

Immediate consequences:

  • The court upheld the Tribunal's factual conclusion that the transaction was undertaken with a profit motive and was not a casual windfall or exempt receipt.
  • The assessee was ordered to pay the costs of the Commissioner, fixed by the court at Rs. 250.

Broader implications: The opinion emphasizes that isolated transactions can, depending on their character, scale, motive and relation to the taxpayer's overall activities, amount to an adventure in the nature of trade. The decision rests on the facts of the case and the Tribunal's findings; the court did not purport to create a new general legal rule beyond applying established principles.

Disposition: Reference answered in the negative; costs awarded to the Commissioner Rs. 250.

Show full summary ...

    Jaldu Manikyala Rao v. Commissioner Of Income-Tax

    Bhimasankaram, J.:— This reference is made at the instance of the assessee and the question to be answered by us is formulated as follows:

    “Whether the sum of Rs. 75,040 is a receipt not from business, but only of a casual and non-recurring nature exempt under Section 4(3)(vii) of the Income-Tax Act?”

    2. Having regard to the nature of the question, it is necessary to state the material facts which have a bearing on the character of the transaction leading to the receipt by the assessee of the sum in question. The assessee is a trader interested in several lines of business. He does business in timber, tiles, furniture, iron-ware and hardware, some in partnership with others and some entirely on his own. He also owns seagoing schooners and other boats jointly with others which are plied for transport of cargo as well as passengers. He belongs to a family of bankers and traders, he and his brothers having been described by the Appellate Assistant Commissioner of Income-Tax as being the foremost businessmen of Masulipatam. On the 29th August 1941, by a registered deed of transfer, he purchased for a sum of Rs. 62,500 a 25/56th share in a final mortgage decree for sale. His assignors were one Mutha Saravarayudu and his sons. The decree itself was for a sum of about Rs. 2,60,527. It is recited in the assignment deed that Saravarayudu and his sons were in embarrassed circumstances, that they were under pressure to meet the demands of their creditors, that the execution of the decree was stayed under the provisions of the Madras Act IV of 1938 pending an application forscaling down of the decretal debt and that, as there was no immediate prospect of realising their share of the decretal amount, they were transferring their interest in the decree to the assessee with a direction to him to pay off their creditors. The assessee also, undertook to pay off his assignors the balance, if any, that might be still outstanding with him after the discharge of their obligations. To enable him to pay the creditors of the assignors, it appears that the assessee borrowed some moneys at interest from his brother Venkatasubba Rao and one Nagapotha Rao, both of whom were bankers and moneylenders by profession. By October 1943, the assessee had paid off all the debts he had undertaken to pay and, on 29-5-1944, he paid the balance of consideration still due to the assignors. In the means while, he instituted proceedings in Court for the execution of the decree and brought to sale some of the mortgaged properties. As a result of the execution proceedings the assessee realised on the 14th August 1944 a sum of Rs. 1,51,540 for his share of the decree. The amount so realised exceeded the price paid by him for the purchase of the decree by a sum of Rs. 89,040. Deducting a sum of Rs. 10,000 for the expenses of realisation and another sum of Rs. 4,000 which the assessee had to pay his assignors by way of interest from the above sum, the Income-tax Officer treated the balance of Rs. 75,040 as gains or profits of an adventure or concern in the nature of trade and computed it in the assessment year 1945-1946 as part of the income of the asseesee in the previous year ending with 31st December 1944. Before the Income-tax authorities and the Appellate Tribunal, the assessee contended unsuccessfully that this sum is not a receipt arising from business and is only one of a casual and non-recurring nature coming within the exemption of section 4(3)(vii).

    3. Before we consider the contentions raised on behalf of the assessee, we would like to observe that, in our view, the issue raised is essentially one of fact. Unless the finding thereon is vitiated by a wrong view of the law, by consideration of inadmissible or refusal to consider admissible evidence, it is not open to us to substitute a finding of our own for that of the ultimate tribunal of fact, though we might ourselves be inclined to come to a different conclusion on the same evidence.

    4. Three main submissions have been made before us on behalf of the assessee. It is argued, in the first place, that in order that any transaction may be an adventure in the nature of trade or commerce, it must form one of a series of similar transactions. On this view, no single or isolated transaction can ever be an adventure of the required character. Apart from authority, it seems to us that the very language of the enactment militates against any such interpretation. ‘Business’ has been defined as including …… ‘any adventure or concern in the nature of trade, commerce or manufacture’. It is common ground that taxis leviable on all receipts from business. The words ‘any adventure’ clearly comprehend in our judgment even a single venture or an isolated transaction. There is also authority negativing the construction sought to be put upon the language by the counsel for the assessee in Mrs. D.M Alexander v. Commissioner of Income-tax, Madras 22 I.T.R 379 at 399. where their Lordships of the Madras High Court state:

    “Even a single venture may amount to business, and the profits of such a single venture may be taxable as income arising from business.”

    5. A Full Bench of the Lahore High Court expressed the same view in Behari Lal Jhandu Mal, In re2 and Muhammad Munir, J. observed at page 220 of the report as follows:

    “If Mr. Kirpa Ram Bajaj's argument is that an isolated venture cannot be a venture in the native of trade, the position is untenable because in the present state of authorities the proposition that an isolated transaction may be a venture in the nature of trade is too well established to admit of any doubt.”

    6. We do pot think it necessary to refer to other cases cited. The other contention urged on behalf of the assessee was that this particular transaction had nothing to do with the several lines of business in which the assessee was interested, and therefore, it could not partake of the nature of trade. We cannot accede to this contention either. The definition does not say that the particular venture or a transaction should be in the nature of trade usually carried on by the assessee. It is enough if it is in the nature of trade in general, though, as we shall show, in the course of our discussion later, whether it is or is not akin to the assessee's line of business may be a factor to be taken into consideration in arriving at a finding.

    7. The third argument urged on behalf of the assessee was that the assessee had no profit motive in entering into the transaction and that he was actuated by one or both of two motives, viz., (a) to help Sarvarayudu and his sons out of their financial embarrassment and (b) to help his own brothers who had purchased the equity of redemption in two of the villages included in the mortgaged property by ensuring that the execution of the decree was confined to the other properties. It is unnecessary for us to deal with this contention, because the Tribunal as well as the Income-Tax authorities refused to accept the evidence in support of this case.

    8. We may now state what, in our opinion, constitute relevent factors in arriving at a conclusion of fact on the question as to whether a particular transaction is or is not an adventure in the nature of trade or commerce. What is the nature of the thing to which the transaction relates? Could its acquisition have been for use or enjoyment in the ordinary way? A man may buy a horse, a book or a piece of land. They may be for use or enjoyment by himself. If a man buys a decree, for instance as in this case, it is impossible to say that the subject matter of purchase is for use and enjoyment. The scale of the transaction is also a material factor. If a man goes into the market and buys an immense quantity of a metal or cotton or toilet paper as in the case of Livingston v. Commissioner of Inland Revenue, it would not be natural and reasonable to suppose that the thing purchased was for personal use. The purpose, the motive or intention in entering into the transaction will also be a proper matter for consideration. One may buy a thing merely because it is going cheap with the remote intention of making a profit at an opportune time. In such a case, he may not be, in the phrase of Lord President Clyde, ‘plunging into the waters of trade’ (vide Bulgownie Land Trust Ltd. v. The Commissioners of Inland Revenue.) Then again, the relation of the particular transaction to the ordinary business of the assessee would be a proper element to be taken into account. If it is clearly connected with the assessee's normal business, the determination of the question would, of course, be easy. It would then be manifestly stamped with the qualities of trade. Further, the question may also be asked: Is the receipt arising out of the transaction in the nature of a windfall, of a casual and non-recurring nature and not properly describable as arising from any business or trade? If a man draws a prize at a lottery or makes a profitable bet or wins a prize in a Crosswords Competition as it is called, the receipt could scarcely be described as arising from any business. Still another question which would have a bearing on the matter would be: Is it an investment, i.e, is the money laid out in buying a thing expected to fetch a regular periodical return? A lawyer may buy a share certificate or a debenture in a company. There would be no presumption in such a case that the share or debenture was purchased with the sole object of re-selling at a profit. On the other hand, if a person regularly dealing in shares does so, surely it would be a piece of business. The nature of the operations involved in acquiring and disposing of a thing may also be relevant. It is true that a consideration of all these questions may not be necessary in deciding a particular case. A clear answer to one or other of the questions thus raised may be decisive in some cases. But all or some of them would have to be answered in many cases. In the present case, what is purchased is a decree. As stated above, the very nature of the subject-matter precludes its acquisition for use or enjoyment. Of course, it is conceivable that a man may purchase a decree to accommodate the decree-holder or the judgment debtor or it may be even to harass or annoy the one or the other of them, but such a motive has been ruled out in this case. The transaction cannot be described as one of speculation, like a bet, or buying a ticket in a lottery. It is a clear case of laying out money with a view to reap a profit. This material element has been found by the Tribunal. It is in no sense an investment, because, as shown above, it could not yield a regular and periodical return. That being so, we are of the opinion that there was evidence before the Tribunal on which they could arrive at the conclusion which they reached. The learned counsel for the assessee has drawn our attention, however, to a case reported in Mothe Gangaraju v. The Commissioner of Income-Tax. It is true that the facts of that particular case are very near to the facts of the present one. But we are satisfied that their Lordships did not intend to lay down any rule of law in deciding that case. The question therefore referred to us is answered in the negative. The assessee will pay the costs of the Commissioner which we fix at Rs. 250.

    T.A.B

    9. Reference answered.

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    Comments

    Jaldu Manikyala Rao v. Commissioner Of Income-Tax
    (Jan 20, 1955)