B.N Srikrishna, J.:— This reference made under section 256(1) of the Income-tax Act, 1961, refers for the opinion of this court the following questions of law arising out of the Tribunal's order dated September 6, 1975, in I.T.A No. 2230.B/74-75 pertaining to the assessment year 1971-72:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surplus of Rs. 1,60,482 realised by the assessee did not constitute profits from business?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not deciding the issue regarding the levy of interest under section 215 of the Act ?”
2. The assessee had a controlling interest in a company called the “India Sugar and Refineries Ltd.” Another company by name Salar Jung Sugar Mills Ltd. was a subsidiary company of this company. In or about 1968, Salar Jung Sugar Mills Ltd. acquired 47% shares in a company named Tungabhadra Pulp and Board Mills Ltd. A partnership firm, Messrs. Straw Board Dealers, which was the sole selling agent of Tungabhadra Pulp and Board Mills Ltd., was entitled to a sum of Rs. 31,39,061 from Tungabhadra Pulp and Board Mills Ltd. This amount was shown as a debt due to Messrs. Straw Board Dealers in the accounts of the Tungabhadra Pulp and Board Mills Ltd., as on March 31, 1967. towards loan and commission accrued. The financial affairs of Tungabhadra Pulp and Board Mills Ltd. were in a bad shape and, unless it was able to pay the amount owed by it to Messrs. Straw Board Dealers, there was an imminent danger of its being put into liquidation at the instance of Messrs. Straw Board Dealers in order to enforce their claim. When matters stood thus, in order to rejuvenate the Tungabhadra Pulp and Board Mills Ltd., Messrs. Salar Jung Sugar Mills Ltd., acquired 47% of its shares. The assessee, and his brother, Ratanlal R. Morarka, also simultaneously purchased the claim of Rs. 31,39,661 of Messrs. Straw Board Dealers against the Tungabhadra Pulp and Board Mills Ltd. for an amount of Rs. 4,03,560. They also incurred incidental expenses in connection with the purchase amounting to Rs. 12,629. Thus, the aggregate expenditure incurred by the assessee and his brother together for purchasing the claim amounted to Rs. 4,16,189. The assessee and his brother had put the money for this acquisition of claim in the ratio of 3:1. On September 26, 1968, the assessee and his brother settled their claim With Tungabhadra Pulp and Board Mills Ltd. for an aggregate amount of Rs. 7,50,000, out of which the assessee's share (in the ratio of 3:1) was Rs. 5,62,500. The assessee realised a sum of Rs. 4,72,626 out of his share during the accounting year relating to the assessment year 1971-72. Since the assessee had paid only a sum of Rs. 3,12,142 for purchasing the above claim, the surplus realised out of the transaction was Rs. 1,60,482. The Income-tax Officer, during the assessment proceedings, treated the said amount of Rs. 1,60,484 in the hands of the assessee as business profits to be taxed as such. He also charged interest under section 215 of the Income-tax Act, 1961.
3. In the appeal filed by the assessee, the Appellate Assistant Commissioner took the view that the amount added by the Income-tax Officer as business income was merely income of a casual and non-recurring nature, not taxable under section 10(3) of the Act. He, accordingly, directed the deletion of the said amount in computing the total income of the assessee. Consequent upon this finding, the Appellate Assistant Commissioner directed the Income-tax Officer to give credit to the assessee in respect of taxes deducted at source and not to levy interest under section 215 in case the income got reduced to nil on giving effect to the appellate order or, if the interest under section 215 was found chargeable, to make levy only up to the date of the filing of the return.
4. On appeal by the Department, the Tribunal followed the view taken by it in the case of the assessee's brother for the assessment year 1971-72 in I.T.A No. 3750.B/73-74 and held that the normal trade of the assessee and his brother was not purchasing of claims and that they had purchased this particular claim only with a view to see that Messrs. Straw Board Dealers did not enforce their huge claim against Tungabhadra Pulp and Board Mills Ltd., in which case the latter would have been strangulated. The Tribunal, in that case, was of the view that the circumstances of the case clearly indicated that the assessee and his brother entered into the transaction of purchasing the claim of Messrs. Straw Board Dealers only with a view to save Tungabhadra Pulp and Board Mills Ltd. and not with any idea or scheme to earn profits. In that case, the Tribunal had also taken the view that the additional amount received over what was invested for the purchase of the claim from Messrs. Straw Board Dealers was only a casual, non-recurring receipt and not out of an adventure in the nature of trade. In the assessee's case also, the Tribunal found the circumstances of the case to be identical and held that the Appellate Assistant Commissioner was correct in accepting the assessee's claim that the amount in dispute was only income of a casual and non-recurring nature. The Tribunal has, at the instance of the Revenue, referred the two questions, as stated hereinbefore.
5. According to learned counsel for the Department, the circumstances clearly indicated a scheme to earn profits. He submits that the assessee was a money-lender and was looking out for an opportunity to earn profits elsewhere. The assessee and his brother who had a controlling interest in the principal company (i.e, India Sugar and Refineries Ltd.) were very much aware that the subsidiary company (viz., the Salar Jung Sugar Mills Ltd.) had acquired 47% shares in Tungabhadra Pulp and Board Mills Ltd., with a view to rejuvenate the said company and that, in course of time, Tungabhadra Pulp and Board Mills Ltd. would turn the corner and earn profits. With this foreknowledge, the assessee acquired the claim of Messrs. Straw Board Dealers for Rs. 31,39,661 for a paltry amount of Rs. 4,03,560 so that, at the opportune moment, this claim could be settled for a higher amount so as to realise a profit in the transaction. That a profit would be made was foreseen by the assessee because of his intimate connection with the principal company, viz., India Sugar and Refineries Ltd. He strongly contended that this was an adventure in the nature of trade as the assessee, being a shrewd businessman, had made an elaborate scheme to earn a substantial profit to himself. The fact that Tungabhadra Pulp and Board Mills Ltd. was in a bad financial position and the fact that the assessee's brother was a director in the said company would enable the assessee and his brother to buy the claim against the said company for a song and thereafter, to settle the said claim at a higher price, realising a substantial profit in the bargain. Not only was this foreseen, but it was also engineered, according to learned counsel for the Revenue. He relied upon the judgments of this court in CIT v. Himalayan Tiles and Marble Pvt. Ltd., [1975] 100 ITR 177 and P.D Ghanekar v. Commissioner Of Income-Tax, Bombay City I.*, [1971] 80 ITR 236 to support his submissions.
6. In Ghanekar's case, [1971] 80 ITR 236 (Bom), one D had earned a commission of Rs. 3,25,000 for services rendered to F and Co. There were differences between D and F and Co. P and Co. expressed its willingness to pay to I) Rs. 2,25,000 to avoid litigation. The assessee who was a chartered accountant and known to both the parties was approached for bringing about a settlement. The assessee who knew that F and Co. was prepared to pay D Rs. 2,25,000, took an assignment of D's claim for a sum of Rs. 1,25,000 and transferred his right to the company for Rs. 2,10,000, making a profit of Rs. 85,000 in the transaction. This court rejected the contention of the assessee that the income was of a casual and non-recurring nature and not liable to be taxed. The fact that the assessee, before he embarked upon tihe negotiations with D, had prior knowledge of the company's decision to pay up to Rs. 2,25,000 and utilised this prior knowledge to take up the assignment in his own favour was held by this court as indicative that it was a venture: in the nature of trade upon which the assessee embarked. Said the court (p. 243):
“… By taking the assignment in his own favour, the assessee embarked on a venture, a venture on his own account. In view of his previous knowledge, he was, as it were, to use racing language, betting on a certainty…”
7. It was also found that the assessee did hot possess the means to make the payment of Rs. 1,25,000 to D and, if the company had not satisfactorily settled his claim, he might have had to resort to litigation. In these circumstances, this court took the view that the assessee must be considered to have acquired the claim just as a trader acquires an asset or stock-in-trade with the expectation of making profit, but at the same time not ruling out a possibility of making a loss. This case does not assist the Department, inasmuch as, in the present case, the Tribunal has found that the assessee's motive for acquiring the claim of Messrs. Straw Board Dealers was to avoid embarrassment to Tungabhadra Pulp and Board Mills Ltd. and to avoid strangulation of the said company.
8. In Himalayan Tiles and Marble's case, [1975] 100 ITR 177 (Bom), the assessee, a private limited company, took over businesses of two going concerns in 1956. The outstandings and liabilities of the concerns were not transferred to the company. In 1957, two claims of the concerns were purchased by the company for an aggregate amount of Rs. 57,716. In the accounting year 1958-59, there was an award under which the assessee received a sum of money. The surplus realised over costs, amounting to Rs. 60,940, was brought to tax as income from business by the Income-tax Officer. This court took the view that, as, at the time of purchasing the actionable claim, the assessee was under no obligation or compulsion to do so and as there was close proximity between the purchasing of the claim and realisation, the circumstances showed that the assessee had embarked upon a venture in the nature of trade and that the surplus realised from the venture was liable to be included in his income under section 10 of the Act. This decision was reached by this court despite the fact that the memorandum of association of the assessee-company therein did not permit the assessee-company to trade in actionable claims. We think that the circumstances indicated by the court were too glaring and ruled out any other motive on the part of the assessee in purchasing the actionable claim, except to embark on a venture in the nature of trade.
9. Learned counsel for the assessee contended, firstly, that a receipt in the hands of the assessee could not straightaway be taxed as income and the burden of showing that the receipt was of the nature of income was upon the Revenue and, in this case, the Revenue had failed to discharge this onus. He relied upon the decision of the Supreme Court in Parimisetti Seetharamamma v. CIT, [1965] 57 ITR 532 in support. In that case, the Supreme Court laid down that, in all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon the assessee. Applying this test to the facts of the present case, we are of the view that the Department has failed to discharge the burden placed upon them. The receipt of the money was not disputed. The assessee contended that this receipt was not the result of his embarking upon a venture in the nature of trade. He explained that his motive in purchasing the actionable claim was only to avoid Tungabhadra Pulp and Board Mills Ltd. being brought to liquidation by Messrs. Straw Board Dealers to enforce their huge claim. That the assessee was interested in Tungabhadra Pulp and Board Mills Ltd., not being embarrassed is obvious because of its intimate connection with the principal company, viz., Indian Sugar and Refineries Ltd. When the assessee set up this motive as the only motive for acquiring the claim, the burden squarely lay upon the Department to rebut it by cogent evidence which it has failed to do.
10. Learned counsel for the assessee relied upon and drew support from the judgment of the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax , [1959] 35 ITR 594. The Supreme Court in this case has laid down a number of indicia which would stamp even a solitary dive in the ocean of trade as a venture in the nature of trade. We are afraid, none of this can be said to be satisfied in the present case.
11. Finally, learned counsel for the assessee brought to our notice another judgment of our High Court in Commissioner Of Income-Tax, Bombay City-I v. Radheshyam R. Morarka, [1981] 127 ITR 111, which seems to be on all fours with the assessee's case. In this case also, an actionable claim was purchased by the assessee and the Revenue showed that the said transaction had been entered into with a possibility of making profit. The court, however, took the view that this, per se, would not establish that the transaction was an adventure in the nature of trade. The court distinguished the judgment in Himalayan Tiles' case, [1975] 100 ITR 177 (Bom), and took the view that the facts showed that the assessee was closely connected with the mill against which there were decrees and that it would be reasonable to say that the possible motive of the assessee in purchasing the decrees against the said mill was to avert the pressure which might be exerted against the mill. Desai J., observed (at p. 121):
“The question which we have to consider is whether it has been made out that the dominant intention of the assessee was to embark on a venture in the nature of trade when he purchased the two decrees. If the reasonable possibility of the assessee having a motive of assisting the judgment-debtors under the decrees cannot be ruled out, this conclusion cannot be arrived at and it cannot be held that the dominant intention of the assessee has been sufficiently or satisfactorily established. It is true that the assessee had made a profit and realised a surplus. It is true also that this had been done within a fairly short period of nine to ten months. But the mere earning of the surplus or realisation of profits is not equivalent to embarking upon an adventure in the nature of trade… It is not sufficient for the Revenue to succeed by merely showing that the transaction was entered into having the possibility of making a profit in mind. In addition to this aspect of the matter, it must bear the indicia of trade. For such purpose, the motive and the purpose of the transaction, must be decisively held to be not of the nature suggested by the Tribunal; and unless we are in a position to do so, which we are not, we must hold that the Tribunal was not in error in arriving at the conclusion it did.”
12. In our view, the observations in this case are apposite to the facts of the present case. In fact, the assessee's case here is on a stronger footing. Firstly, the profit was not realised within a short time as in the above case; it was realised only after about 28 months. Secondly, the Department has hardly laid any material on record to rebut the declared motive of the assessee in purchasing the actionable claim. We must, therefore, accept the assessee's motive for purchasing the claim against Tungabhadra Pulp and Board Mills Ltd., as what he says it was, viz., to avoid embarrrassment to the said company at the instance of Messrs. Straw Board Dealers. Nothing has been placed on record to detract from this suggested motive on the part of the assessee. As the Supreme Court said in Parimisetti's case, [1965] 57 ITR 532 and as our court observed in Morarka's case, [1981] 127 ITR 111, the Department has failed to discharge the burden of showing that the receipt was in the nature of income. In the result, we answer the first question in the affirmative and in favour of the assessee. The second question does not require an answer, as it is seen that, if the amount of Rs. 1,60,482 is deleted in assessing the total income of the assessee, there would be a nil return. The questions are answered accordingly.
13. There will be no order as to costs.