Citation Codes

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Case Number

Income Tax Referred Case No. 18 of 1965

Attorney(S)

For the Appellant: C. T. Peter

Judges

M.S Menon, C.J
S. Velu Pillai, J.

Acts

sub-section (5) of Section 66 of the Indian income-tax Act, 1922.BK/VPP/G.G.M17.
SECTION 6 INDIAN INCOME TAX ACT
Section 66(1) of the Indian Income-tax Act, 1922.
Indian Income-tax Act, 1922.

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Smart Summary

Judgment Summary

Factual and Procedural Background

This is a reference made by the Income-tax Appellate Tribunal, Madras Bench, under Section 66(1) of the Indian Income-tax Act, 1922, concerning the assessment year 1956–1957 (accounting period ended 31 March 1956). The question referred was whether, on the acts and in the circumstances of the case, the transactions constituted a venture in the nature of trade and whether the surplus of Rs. 1,25,000 was assessable to tax.

Key factual events stated in the opinion:

18 May 1955: Mundakayam Valley Rubber Company Ltd. agreed to sell the Kuttikal Estate (477.71 acres) to A.V. George (who acted on behalf of Kailas Rubber Company Ltd.).
15 August 1955: The assessee entered into an agreement with A.V. George to purchase the entire Kuttikal Estate for Rs. 6,00,000 and paid an advance of Rs. 11,000. The agreement provided that on payment of the balance, A.V. George would execute the sale deed (or cause it to be executed) in favour of the assessee or his nominees, with stamp and registration charges to be borne by the assessee.
The assessee divided the estate into 23 plots and found purchasers for 22 plots (total 373.59 acres) for an aggregate price of Rs. 5,18,500.
31 March 1956: Sale deed executed by Mundakayam Valley Rubber Company Ltd.; the 22 plots were conveyed to the respective purchasers and the 23rd plot (104.12 acres) to the assessee. A.V. George and Kailas Rubber Company Ltd. were parties to the deed.
The Department valued the 104.12-acre plot at Rs. 2,08,000 (value not disputed by the assessee). The assessee's outlay to obtain that plot was Rs. 81,500 (inclusive of the Rs. 11,000 advance), yielding a financial benefit of Rs. 1,26,500 (rounded to Rs. 1,25,000 by the Department and Tribunal), which they treated as profit from an adventure in the nature of trade and hence assessable to tax.
The Tribunal and the Department took the view that the sum (rounded to Rs. 1,25,000) was assessable as profit from an adventure in the nature of trade; the court was asked to determine whether that view was justified.

Legal Issues Presented

Whether on the acts and in the circumstances of the case the transactions constituted a "venture in the nature of trade" (an "adventure in the nature of trade").
Whether the surplus of Rs. 1,25,000 (the financial benefit to the assessee from obtaining the 104.12-acre plot) was assessable to income-tax as profits and gains of business under the Indian Income-tax Act, 1922.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Fletcher-Moulton L.J Liverpool and London and Globe Insurance Co. v. Bennett (1911-1912) 6 Tax Cas 327	Interpretation that the words "in the nature of trade" qualify only the word "concern" and do not qualify "adventure", so "adventure" stands unqualified.	The court noted this earlier view as a point of interpretation but observed that it had not been followed in later English cases.
G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax, (1959) 35 I.T.R 594 : (AIR 1959 SC 359)	Supreme Court reading that the words "in the nature of trade" qualify the word "adventure" as well.	The court relied on this later authoritative reading to treat an "adventure" as capable of being an "adventure in the nature of trade" for the purposes of taxation under the Act.

Court's Reasoning and Analysis

The court's analysis proceeded as follows (limited to the reasoning stated in the opinion):

Statutory framework: The court referred to Section 6 of the Income-tax Act, 1922 (heads of income) and the definition of "business" in Section 2(4), which expressly includes "any adventure or concern in the nature of trade, commerce or manufacture".
Precedential interpretation: The court discussed competing interpretive views. It cited Fletcher-Moulton L.J.'s view that "in the nature of trade" qualified only "concern" and left "adventure" unqualified, but noted that later English cases did not follow that view. The court cited the Supreme Court decision in G. Venkataswami Naidu & Co. which read the qualifying words as applying to "adventure" as well, supporting the concept of an "adventure in the nature of trade".
Treatise observation: The court quoted an explanation (attributed to "Sampalh" as reproduced in Iyengar on Income Tax) that the expression "adventure in the nature of trade" denotes an activity that possesses some, but not necessarily all, characteristics of trade, and that whether a particular activity is such an adventure is a question dependent on the facts of each case.
Application to the facts: The court identified the adventure as beginning when the assessee entered the August 1955 agreement (with payment of advance) and ending with the execution of the sale deed on 31 March 1956. The court concluded that, on these facts (the scheme of purchase, subdivision into plots, finding purchasers for 22 plots, receipt of prices, and conveyance), the activity was "an adventure in the nature of trade."
Quantification of profit: The court accepted the Department's valuation that the plot obtained by the assessee was worth Rs. 2,08,000 and the assessee's outlay was Rs. 81,500; the court treated the resulting financial advantage (rounded by the authorities to Rs. 1,25,000) as the profit of that adventure.
Credibility and corroboration: The court noted the assessee's false statements to the Income-tax Officer (denying payment of any advance and denying involvement in finding purchasers) and observed that the sale deed and other evidence demonstrated the falsity of those statements. The court also noted the assessee's lack of resources when he entered into the purchase agreement as a factor of significance.
Conclusion on the reference question: Based on the statutory definition, precedent, treatise guidance, the facts of the transaction and the surrounding evidence, the court found that the transactions constituted an adventure in the nature of trade and that the assessed surplus was chargeable to tax.

Holding and Implications

Holding: The reference was answered in the affirmative — the court held against the assessee and in favour of the Department, concluding that the surplus (rounded to Rs. 1,25,000) represented profit from an adventure in the nature of trade and was assessable to income-tax.

Direct implications for the parties (as stated in the opinion):

The assessee's profit of Rs. 1,25,000 was held to be assessable as profits from an adventure in the nature of trade under the Income-tax Act, 1922.
The court awarded costs against the assessee: advocate's fee Rs. 100/-.
A copy of the judgment (under the seal of the High Court and signature of the Registrar) was to be sent to the Appellate Tribunal as required by sub-section (5) of Section 66 of the Income-tax Act, 1922.

Broader precedent:

The opinion applied existing interpretive authority and did not purport to set out a new general rule beyond applying the established test that whether an activity is an "adventure in the nature of trade" depends on the facts of each case.

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P.M. Mohammed Meerakhan v. Commissioner Of Income-Tax

M.S Menon, C.J:— This is a reference at the instance of the issessee by the Income-tax Appellate Tribunal, Madras Bench, under Section 66(1) of the Indian Income-tax Act, 1922. The assessment ??? concerned is 1956–1957; and the accounting period, the twelve months ended on the 31st March, 1956. The question referred is:

“Whether on the acts and in the circumstances of the case, the transactions constituted a venture in the nature of trade and the surplus of Rs. 1,25,000/- was assessable to tax?

2. There was an agreement dated the 18th May, 1955 by which the Mundakayam Valley Rubber Company Limited agreed to sell to one A.V George a rubber state called the Kuttikal Estate measuring 477.71 acres. A.V George entered into that agreement on behalf of the Kailas Rubber Company Limited. On the 15th August, 1955 the assessee entered into an agreement with A.V George to purchase the Kuttikal Estate for Rs. 6 lakhs and paid an advance of Rs. 11,000/-. The agreement provided that on payment of the balance of Rs. 5,89,000/- A.V George will execute the sale deed himself or cause it to be executed by the Mundakayam Valley Rubber Company Limited in favour of the assessee or his nominees and that the stamp duty and registration charges will be borne by the assessee.

3. The assessee divided the 477.71 acres into 23 plots and found purchasers for 22 of those plots. The total extent of the 22 plots for which he found purchasers was 373.59 acres and the total price paid by the 22 purchasers was Rs. 5,18,500/-.

4. The sale deed was executed by the Mundakayam Valley Rubber Company Limited on the 31st March, 1956. It covered to the 23 plots the 22 plots for which the assessee found purchasers were conveyed to the respective purchasers and the 23rd plot to the assessee himself. A.V George and the Kailas Rubber Company Limited were also parties to the document.

5. The plot that the assessee obtained for himself was 104.12 acres in extent. Its value as estimated by the Department—the estimate is not disputed by the assessee—was Rs. 2,08,000/-.

6. The amount spent by the assessee for obtaining the 104.12 acres worth Rs. 2,08,000/- was Rs. 81,500/- inclusive of the advance of Rs. 11,000/- paid by him. In other words the assessee had a financial benefit to the extent of Rs. 1,26,500/-

7. The Department and the Tribunal have taken the view that the amount of Rs. 1,26,500/- mentioned above rounded off to Rupees 1,25,000/- represents the profit of the assessee from an adventure in the nature of trade and is hence assessable to income-tax under the Indian Income-tax Act, 1922. The sole question for determination is whether that view is justified on the facts and circumstances of the case.

8. Section 6 of the Indian Income-tax Act, 1922, specifies the heads of income chargeable to income-tax. Profits and gains of business come under the fourth of the six heads specified in that section. The expression “business” is defined in Section 2(4) of the Act. According to that definition it includes “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”

9. According to Fletcher-Moulton L.J Liverpool and London and Globe Insurance Co. v. Bennett (1911-1912) 6 Tax Cas 327 the words “in the nature of trade” qualify only the word “concern” which immediately precedes those words he said:

“I hold that as a matter of interpretation the words ‘in the nature of trade’ only qualify the word ‘concern’ that immediately precedes them. They cannot be taken to qualify all the preceding words inasmuch as it would be absurd to speak of a ‘trade in the nature of trade’, and, therefore, they can only be construed as qualifying the last of these words. The word ‘adventure’ therefore stands unqualified.”

10. This view has not been followed in later English cases, and the Supreme Court has read the words “in the nature of trade” as qualifying the word “adventure” as well (G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax , (1959) 35 I.T.R 594 : (AIR 1959 SC 359))

11. Sampalh deals with the expression “adventure in the nature of trade” as follows:

“The collocation of the words ‘adventure in the nature of trade’ implies that an adventure has the characteristic of trade, but not all of them, and that indeed is the distinguishing mark of an adventure, since if it possessed all the characteristics, it would be a fullblown trade straightaway. The idea of the legislature by including an ‘adventure’ in the definition of trade is to rope in receipts from adventure to tax, even as receipts from trade proper. To define ‘adventure’ is a difficult task. The business characteristics appertaining to trade are diverse the content of these in an adventure may vary both in quality and quantity. The business characteristics or the business elements which exist in one adventure may not exist in another, and the characteristics which are in fact present might vary from one adventure to another. So, courts have observed that it is difficult to frame a formula which would be applicable to whatever state of facts, so as to determine whether a given activity is or is not an ‘adventure in the nature of trade’. Each case would have to be examined on its own facts.” (Iyengar on Income tax, 5th Edition, Volume 2, page 958).

12. In the case before us the adventure commenced when the assessee entered into the agreement with A.V George to purchase the Kuttikal Estate for a sum of Rs. 6 lakhs and paid an advance of Rs. 11,000/-. It terminated with the execution of the sale deed by the Mundakayam Valley Rubber Company Limited in favour of the assessee and the 22 purchasers he had found for 22 out of the 23 plots into which he had in the meanwhile divided the Estate. In our view it is not possible to consider this adventure as anything other than an adventure in the nature of trade and the profit obtained by the assessee of Rs. 1,25,000/- by securing 104.12 acres worth Rs. 2,08,000/- for Rs. 81,500/- as the profit of that adventure.

13. The assesse apparently realised the difficulty of avoiding income-tax in respect of the profit that he had obtained. He was examined by the Income-tax Officer. His deposition was nothing less than an adventure in the nature of perjury. His statement was that there was an agreement between himself and A.V George, that he did not pay any advance to him, and that he had nothing to do with the finding of purchaser for the 22 plots.

14. A reading of the sale deed quite apart from the other evidence available is sufficient to demonstrate the falsity of the assessee's statement. The fact that the assessee did not have the resources to buy even an estate worth a lakh of rupees when he entered into the agreement for the purchase of the Kuttikal Estate for Rs. 6 lakhs is of equal importance.

15. In the light of what is stated above we must answer the question referred in the affirmative, that is, against the assessee and in favour of the Department. We do so with costs, advocate's fee Rs. 100/-.

16. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (5) of Section 66 of the Indian Income-tax Act, 1922.

BK/VPP/G.G.M

17. Reference answered in the affirmative.

P.M. Mohammed Meerakhan v. Commissioner Of Income-Tax

Judgment Summary

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

P.M. Mohammed Meerakhan v. Commissioner Of Income-Tax

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