- The assessee was a public limited liability company. When the company was formed with a share capital of Rs. 6 lakhs, the objectives of the company as set out in clause 5 of the memorandum of association were to manufacture abrasives and steel products. The late Dewan Bahadur A.M. Murugappa Chettiar and his three sons, Murugappa, Vellayan (since deceased) and Arunachalam, who constituted Murugappa and Sons, were the managing agents of the assessee company. Besides the managing agency, that family had a large interest in the shareholding. The Tribunal observed that Murugappa and his sons were "vitally interested" in the company. Details of the shareholding were not furnished in the record, and when we asked the learned counsel for the assessee if that information was available, he said that out of 6,000 shares, Murugappa and his sons held 1,063 shares, while their wives held another 2,855 shares. None the less, the position remained that it was a public company in which the members of the public who held shares had a substantial interest.

In the rest of this judgment we shall refer to the late Dewan Bahadur Murugappa, the father, as Murugappa.

In September, 1943, Murugappa along with three others purchased the Chhoi Silk Mills Ltd., at Bombay, which was engaged in the manufacture of filature silk. It was the period of the Second World War, and there was a good demand for the manufactured product for parachutes. Murugappa had an eight annas share. Soon, however, he bought out the other three members of the syndicate, and by June 1944, Murugappa became the sole owner of the silk mills. The total outlay for the purchase was Rs. 2,88,750. It was common ground that, though the purchases had been effected in the name of Vellayan, the mills belonged only to Murugappa. It was equally common ground that Vellayan was in charge of the silk mills at Bombay.

While Murugappa was completing his acquisition of the entire silk mills, he apparently stared negotiations for the sale of the silk mills to the assessee company. It should be remembered that Murugapa and Sons were the managing agents of the assessee company. Vellayan himself was one of the directors of the assessee company. In April, 1944, the directors resolved to acquire the silk mills, and in May, 1944, the general body of shareholders affirmed that decision. The memorandum of association had to be amended to permit the assessee company to embark on this new business. The requisite sanction of the High Court was obtained, and the memorandum of association was duly amended. By September, 1944, the purchase was completed. After the purchase of the silk mills by Murugappa, they were styled Jaya Spun Silk Mills. These mills Murugappa sold to the assessee company for Rs. 4.25 lakhs. It should be remembered that Murugappa himself had spent Rs. 2,88,750 for acquiring the mills. Vellayan, who as we have pointed out, was also a director of the assessee company, continued to be in charge of the silk mills at Bombay.

Negotiations for the sale of the silk mills to the assessee company commenced, as we pointed out earlier, even in April, 1944, though the transaction was completed only in September, 1944. From June, 1944, the assessee company took steps to improve the silk mills after completing the purchase, and some correspondence was entered into with American business interests for the import of additional machinery.

The assessee company worked the silk mills from September, 1944, to February, 1946. The profits the assessee company made from September 1, 1944, to December 31, 1944, amounted to Rs. 51,449. In 1945, the assessee company realised a profit of a little over Rs. 2,50,000. During the two months of 1946 the profits realised amounted only to Rs. 1,734.

By about July, 1945, the Mysore Spun Silk Mills Ltd., opened negotiations for the purchase of the Jaya Spun Silk Mills at Bombay from the assessee company. Eventually the assessee company sold the Jaya Spun Silk Mills to the Mysore Spun Silk Mills Ltd. for Rs. 7.9 lakhs. The assessee company, it should be remembered, had purchased these mills for Rs. 4.25 lakhs. There were further items of capital outlay, and the capital cost of the mills to the assessee company was Rs. 4,51,164. The profit made by the sale was Rs. 3,41,586. Besides this, there was the amount of Rs. 85,791, which represented the difference between the written down value of the machinery and the original cost price at which the assessee company had acquired the silk mills.

In the assessment year 1947-48, the Income-tax Officer assessed the assessee company to tax on both these items of Rs. 85,791 and Rs. 3,41,586. The appeals the assessee company successively filed before the assistant Commissioner and the Tribunal failed, and the assessment made by the Income-tax Officer was confirmed.

The Tribunal referred the following questions to this court under section 66(1) of the Act :

"1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,41,586 being the excess realised on the sale of Jaya Spun Silk Mills (plant and machinery) constitutes income from business and so was assessable to tad ?

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 85,791, being the difference between the cost price and the written down value of the Jaya Spun Silk Mills (plant and machinery) is assessable to income-tax under the provisions of section 10(2)(vii) of the Act ?"

It should be easy to dispose of the second of these question. The learned counsel for the assessee realised that he position taken by the department was unassailable, and that this amount of Rs. 85,791 was taxable in the hands of the assessee company under section 19(2)(vii) of the Act. That by the sale of the entire plant and machinery the assessee company parted with that line of business in the course of its accounting year 1946 made no real difference to the applicability of section 10(2)(vii). We therefore answer the second question in the affirmative and against the assessee.

To appreciate the respective contentions of the learned counsel for the assessee and the department on the first question, it is desirable to examine what were the findings of the departmental authorities and the Tribunal.

The Income-tax Officer treated it as income from the business the assessee company carried on. He pointed out that clause 15 in the memorandum of association provided for the acquisition and sale of properties. He, therefore, treated the acquisition and sale of the silk mills as a transaction in the normal course of the business activities of the assessee company and treated the profits of the sale as an item of income of the assessees business. He apparently overlooked the fact, that clause 15 of the memorandum of association was only ancillary to clause 5 which set out the objects, and certainly clause 5 did not provide for the company conducting any business in the purchase and sale of commercial concerns like the silk mills. The assistant Commissioner, no doubt, pointed out in paragraph 8 of his order, that business as defined in section 2(4) of the Act included an adventure in the nature of trade. But the assistant Commissioner did not record any specific finding, that the transaction of purchase and sale of the silk mills by the assessee company constituted an adventure in the nature of trade. His final conclusion was :

"I uphold the finding of the Income-tax Officer that the surplus of Rs. 3,41,586 derived from the sale of the mills was a business profit."

As we pointed out earlier, the Income-tax Officer certainly did not take the view, that the purchase and sale of the silk mills constituted an adventure in the nature of trade, independent of the normal business activities of the assessee company sanctioned by the memorandum of association.

The Tribunal pointed out in paragraph 11 of its judgment :

"There is no doubt that the business of silk mills was quite outside the assessees usual line."

The Tribunal also recorded :

"There can be no doubt that there was that element of careful calculation, design or organization present in making the profits and similarly in carrying out the negotiations for sale with a view to realise the profit thereby. This is a carefully and coolly calculated deal and the running of the mills for a short time was just to give that gloss that would attract would-be buyers."

There was however no express finding, whether the Tribunal confirmed the view taken by the Income-tax Officer, that it was a case of profit realised by the assessee company in the course its normal business activities, or whether it was a case of profit realised by the assessee company from an adventure in the nature of trade, independent of its normal line of business activities. The Tribunal should certainly have been aware of the distinction between the two heads, though adventure in the nature of trade is included in the statutory definition of business, and profit arising out of an adventure in the nature of trade is also assessable as income from business. The question as framed either made no reference to any adventure in the nature of trade, obviously because there was no specific finding in the order of the Appellate Tribunal, that the transaction of purchase and sale constituted an adventure in the nature of trade.

The learned counsel for the department urged that on a fair reading of the order of the Appellate Tribunal it should be held to have recorded a finding, that the profit in question, Rs. 3,41,586, was a profit from an adventure in the nature of trade. The learned counsel did not seek to support the correctness of the view taken by the Income-tax Officer of the scope of clause 15 of the memorandum of association or of the nature of the transaction of purchase and sale of the silk mills. The learned counsel for the department agreed that, since clause 15 was only ancillary to clause 5 of the memorandum of association, the purchase and sale of a going commercial concern like the silk mills, which did not constitute the companys stock-in-trade, could not be viewed as one of the normal business activities of the assessee company.

The department and the Tribunal should certainly have been alive to the distinction between profits from the normal line of business activities of an assessee and a profit derived by an assessee from an adventure in the nature of trade independent of his normal line of business. When we asked the learned counsel for the department whether the first question should not be redrafted to bring out that the basis of the decision was an adventure in the nature of trade, as distinct from the normal business activities of the assessee, learned counsel represented that, since the word "business" would take in also an adventure in the nature of trade, it was not necessary to reframe the question. We are not reframing the question, though we should observe that in normal circumstances we would like to keep alive the distinction between the normal business activity of an assessee and an adventure in the nature of trade, so that attention could be focussed on that aspect even in the frame of the question itself. Despite the fact that there was no express finding of the Tribunal in its order, or even a finding which could be gathered by necessary implication, that the transaction of purchase and sale of the silk mills entered into by the assessee company was an adventure in the nature of trade, we shall examine whether there was any material which could support such a finding.

We should clear the ground to some extent by pointing out that we are not now concerned with the question, whether the purchase and sale of the silk mills by Murugappa constituted an adventure in the nature of trade as far as he was concerned. We are concerned only with the question, whether the purchase and sale under taken by the assessee company was an adventure in the nature of trade on which the assessee company embarked. Again to clear the ground, we can ignore the fact, that Murugappa originally made the purchase in the name of his son, Vellayan. Apart from the fact, that despite the original purchase having been in the name of Vellayan, Murugappas title to the mills and his sloe right to sell the property to the assessee company were never in issue, the purchase in the name of Vellayan was wholly irrelevant in deciding whether the assessee company embarked upon an adventure in the nature of trade when it purchased the silk mills from Murugappa. We have adverted to all this at some length because the department and the Tribunal do not appear to have kept in view the fact, that whether the purchase and sale by Murugappa constituted an adventure in the nature of trade was wholly irrelevant in deciding whether the subsequent purchase and sale by the assessee was an adventure in the nature of trade as far as the assessee was concerned.

The Tribunal also appears to have overlooked one significant feature of the case. The assessee was a public company. The profits made by the company out of the purchase and sale of the silk mills were available to all the shareholders of the company, and neither Murugappa alone, nor Murugappa and his sons alone, nor even all the members of Murugappas family alone could keep the whole of the profits. The Tribunal pointed out, as one of the relevant factors, that even when Murugappa purchased the mills, the Mysore company wanted to acquire these mills. The learned counsel for the assessee contended that there was really no material on record apart from the oral representation made by the departmental representative, that factually the Mysore company was in the field even when Murugappa purchased the silk mills. Independent of that feature of the case, if the possibility of the Mysore company eventually buying these silk mills was a relevant factor at all, one is left wondering why Murugappa, who knew it, should have sold the silk mills to the assessee company and let the company make a profit by further sale, instead of making the whole profit and keeping it to himself by a sale direct to the Mysore company.

The learned counsel for the department contended that it must be treated as one continuous operation from the date Murugappa, as a member of the syndicate, acquired an eight annas share in the silk mills up to the date on which the assessee company sold the silk mills to the Mysore company. The learned counsel contended that that was the view taken by the Assistant Commissioner on appeal, particulary in paragraph 8 of his judgment. If that was the view taken by the Assistant Commissioner, that view in our opinion was erroneous. Murugappa was the vendor and the assessee company was the purchaser. No doubt Murugappa was a member of the firm, Murugappa and Sons, which had the managing agency of the assessee company. But that did not establish the identity of interests between the vendor and the vendee. We have already pointed out that the departmental authorities and the Tribunal failed to keep in view the distinction between the two sets of transactions, purchase and sale entered into by Murugappa, and the purchase and sale entered into by the assessee company. Whether the transaction of purchase and sale made it an adventure in the nature of trade as far as Murugappa was concerned could have no bearing on the question, whether the transaction of purchase and sale constituted an adventure in the nature of trade in the case of the assessee company.

We are unable to see any real basis on the material on record for any possible finding, that either when the assessee company commenced negotiations in 1944 to purchase the silk mills or when the company purchased the silk mills in September, 1944, the intention of the company was to sell these mills and at a profits to the Mysore company.

It was a well settled proposition of law that Chakravartti J. stated in Radha Debi Jalan v. Commissioner of Income-tax :

"..... it is not correct to state broadly that a purchase, not for the purpose of holding the commodity purchased permanently but with its disposal at a profit in contemplation, can, in every case, be regarded as an indication or as evidence of an intention to trade."

The same principle had been laid down by Lord Dundin in Jones v. Leeming :

"The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever."

That was quoted with approval by the Supreme Court in Saroj Kumar Mazumdar v. Commissioner of Income-tax.

Thus the existence of an intention to sell at a profit even at the time of the purchase may be a relevant factor in decidding whether the transaction of purchase and sale constituted an adventure in the nature of trade. The existence of such an intention is neither conclusive nor decisive in proving that the purchase and the subsequent sale together constituted an adventure in the nature of trade. The proved absence of an intention to sell when a given property was purchased, and was subsequently sold, has however a much higher probative value in deciding whether the purchase and the subsequent sale together constituted and adventure in the nature of trade. If there was no intention to sell when the property was purchased, then the purchase and sale become independent transactions. Dissociation of the two transactions would be consistent only with the view that what was purchased was purchased as an investment. The purchase by itself could not constitute an adventure in the nature of trade. The proved absence of an intention to sell when a given property was purchased, and was subsequently sold, has however a much higher probative value in deciding whether the purchase and the subsequent sale together constituted an adventure in the nature of trade. If there was no intention to sell when the property was purchased, then the purchase and sale become independent transactions. Dissociation of the two transactions would be consistent only with the view that what was purchased was purchased as an investment. The purchase by itself could not constitute and adventure in the nature of trade. The sale by itself could not constitute and adventure in the nature of trade. The sale could only then mean the sale of property acquired and held as an investment.

The Supreme Court pointed out in G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax . :

"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 an adventure in the nature of trade."

That in our opinion is how the purchase by the company and the subsequent and unconnected sale should be viewed in this case.

We do not think it necessary to embark again upon any extensive examination of the case law on the subject of what constitutes an adventure in the nature of trade. Such an exhaustive review was under taken by the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax ., and again to some extent in Saroj Kumar Mazumdar v. Commissioner of Income-tax. As has been repeatedly pointed out even if the purchase and sale was contemplated and provided for even at the time of the purchase, the two transactions together might lead to either the inference, that the purchase constituted an investment or that the purchase and sale together constituted an adventure in the nature of trade. It is either the one or the other with no possibility of a half way house. If however there was no intention to sell at all and the purchase and sale constituted two independent transactions, the purchase would really be consistent only with an intention to acquire and hold the property purchased as an investment. If it is an investment, the subsequent sale will not make either the purchase or the sale or both taken together an adventure in the nature of trade.

We have already pointed out that in the case of the assessee company there was no material on record from which it can be held that at the time of the purchase in September, 1944, the company intended to sell the mills, and to sell the mills to the Mysore company. No doubt the Tribunal did not except the case put forward by the assessee company, that the mills had to be sold because Vellayan left Bombay for Burma. The fact that that explanation of the assessee company for the sale was not accepted in no way helps the department to establish that the transaction the assessee company entered into constituted an adventure in the nature of trade.

The Tribunal stated in its order and reiterated it in paragraph 10 of the statement of the case :

"...... there had been that element of careful calculation, design and organisation in carrying out the negotiation for sale with a view to realise a profit......"

If, as we have pointed out above, the sale was a transaction independent of the original purchase, the subsequent sale would be quite consistent with the acquisition of the property having constituted only an investment, but what was acquired as an investment was held as an investment until it was sold.

Absence of an intention to sell when the assessee company negotiated and purchased the silk mills, taken in conjunction with the other circumstances in the case, including the alteration of clause 5 in the memorandum of association, leads only to one conclusion, that the assessee company acquired the silk mills to open a new line of business, with very expectation of that lone of business being profitable, and that the purchase was really in the nature of an investment. It follows that the assessee company did not embark upon an adventure in the nature of trade either at the time of purchase or at the time of the sale. Once again we have to point out that there was no express finding by the Tribunal, that it was an adventure in the nature of trade. But none the less, we have examined that position in view of the contention of the learned counsel for the department, that the assessment could be rested on the basis that the transaction of purchase and sale amounted to an adventure in the nature of trade.

We answer the first question in the negative and in favour of the assessee. As neither side has wholly succeeded in this reference there will be no order as to costs.

Reference answered accordingly.