Bombay High Court
Commissioner Of Income-Tax vs Principal Officer, Laxmi Surgical Pvt. ... on 25 November, 1992
Equivalent citations: [1993]202ITR601(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. This is a reference made by the Income-tax Appellate Tribunal, Bombay Bench, Bombay, under the direction from the High Court of Gujarat under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The reference has been made at the instance of the Commissioner of Income-tax. It relates to two assessment years, i.e., assessment year 1968-69 and assessment year 1969-70. The following four questions of law have been referred :
"(1) Whether the finding of the Tribunal that the asset i.e., rights in the property 'Nirmal building' acquired by the assessee was a business asset forming stock-in-trade, and not a capital asset, is unreasonable or contrary to evidence or based on no evidence at all ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the profit arising from sale of rights in the property was business income and not capital gain ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the business loss and unabsorbed depreciation of past years should be set off against the income from licence fees assessable under the head 'Income from property' ?
(4) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee was entitled to the set off of the unabsorbed loss as well as depreciation of earlier, years, is erroneous in law ?"
2. The facts giving rise to this reference, briefly stated, are as under : The assessee is a private limited company. The relevant previous years are calendar years 1967 and 1968, respectively. The head office as well as the factory of the company are situated at Bhavnagar in the State of Gujarat. The Company had been doing business of manufacturing surgical cotton at Bhavnagar. As the company suffered losses in earlier years, the bard of directors, by their resolution dated September 21, 1965, accepted the suggestions of the managing director to deal in lands and buildings which according to them, the company was authorised to do under clauses 30 to 32 of its memorandum of association. The Company, therefore, acquired 750 shares of Rs. 100 each of M/s. Nirmal Commercial Company Pvt. Ltd. Bombay (hereinafter referred to as "Nirmal Commercial"), and also paid to the said company a sum of Rs. 3,39,425 as non-refundable deposit on which it entitled to get interest. Although the formal agreement with Nirmal Commercial was entered into on November 7, 1967, the shares were acquired and deposit was made prior to 1967. According to the arrangement between the assessee and Nirmal Commercial, the assessee was to be allotted for occupation 7,535 sq. ft. space on the 17th floor of a building to be constructed by Nirmal Commercial at Nariman Point, Bombay, and also parking space for 3 cars on the ground floor. The assessee acquired permanent rights of occupation and these rights could also be sold or transferred by the sale of shares of Nirmal Commercial, whereupon the non-refundable deposit of Rs. 3,39,425 was also to stand transferred in the transfer's name. The premises were ready for occupation from July, 1977, but the admitted position is that even prior to that on August 18, 1966, the assessee had entered into a written agreement with Smt. Sushila Goenka, Uma Goenka and Indu Goenka, for giving the entire premises on leave and licence basis with an option to the Goenkas to purchase the shares and to acquire the occupancy rights in the said premises in their own name after a period of one year from the date of occupation. The minimum period for which the agreement was to remain valid was three years with effect from July 11, 1967, when the premises were occupied by the Goenkas. The licence fee payable by the Goenkas was fixed at Rs. 19,425 per month subject to the condition that a sum of Rs. 1,16,550 which was equivalent to 6 months' fees was to be paid in advance. The Goenkas also agreed to deposit with the assessee a sum of Rs. 6,99,330 at 7 1/2% interest for a period of three years during which the agreement was to remain valid. There is not dispute that the Goenkas did pay a licence fee of Rs. 1,16,550 for the last six months of 1967, and also a similar sum for the next six months of 1968. According to the arrangement with Nirmal Commercial, the assessee was also to share in common management expenses of the building, termed as administrative charges and such charges came to Rs. 12,880 for 1967, and Rs. 38,400 for 1968. After paying the licence fees for a year, the Goenkas in 1968, exercised the option of purchasing the shares of Nirmal Commercial by paying the considerations of Rs. 7,77,300. The surplus which the assessee-company thus derived from acquisition and sale of shares amounted to Rs. 3,47,875.
3. The assessee claimed before the Income-tax Officer that the income derived from the licence fees should be termed as business income. It was further claimed that the surplus of Rs. 3,47,875 derived by the assessee from the transfer of shares of Nirmal Commercial to the Goenkas was also business income. The claim was made on the basis that the transaction of purchase and sale of the property was an adventure in the nature of trade. It may be mentioned here that, during the relevant two years, there was little change in the nature of the activity undertaken by the assessee while carrying on its business of manufacturing surgical cotton. During these two years, the assessee did not manufacture surgical cotton on its own account, as it used to do in the past, but did on job work basis for and on behalf of another manufacturer by using it own machinery, labour and management. It was claimed by the assessee that this minor change in the nature of activity did not affect the continuance of the business of manufacture of surgical cotton by the assessee and that the assessee was entitled to get the benefit of set off of unabsorbed loss and unabsorbed depreciation of previous years against its total business income consisting of profit from manufacturing, licence fee income and for the assessment year 1969-70 surplus from the sale of shares of Nirmal Commercial which, as indicated above, in effect was the sale of occupancy rights of the premium in Nirmal building and which, according to the assessee, amounted to business profit, the same having arisen from an adventure in the nature of trade. The Income-tax Officer negatived all these contentions of the assessee. He, firstly, held that income from licence fee derived by the assessee from the Goenkas was income from house property and assessable under section 22 of the Act. He also rejected the assessee's claim that the surplus from the sale of shares of Nirmal Commercial was income from business and held the same to be in the nature of capital gains. The Income-tax Officer also held that there was discontinuances of the old business of the assessee of manufacturing surgical cotton on account of the assessee having undertaken job work and having stopped manufacturing on its own account. In view of this finding the Income-tax Officer also held that the assessee was not entitled to the benefit of set off of unabsorbed loss and unabsorbed depreciation of earlier years.
4. On appeal by the assessee, the Appellate Assistant Commissioner reversed the findings of the Income-tax Officer and accepted all the contentions of the assessee. It was held that income from licence fees as well as from disposal of shares was income derived from business. It was further held that the assessee's old business of manufacturing surgical cotton had not come to an end at all even when the assessee switched on to doing job work. He, accordingly, directed the Income-tax Officer to assess the income from licence fees as well as surplus from sale of shares under the head "Profits and gains of business" and further directed him to allow set off of unabsorbed depreciation and unabsorbed loss of earlier years. The Revenue filed appeals against the orders for both the years before the Tribunal.
5. The Tribunal also affirmed the findings of the Appellate Assistant Commissioner. In regard to the shares in Nirmal Commercial, it held that the asset acquired by the assessee was a business asset as the entire arrangement was an adventure in the nature of trade. This conclusion was arrived at by the Tribunal in view of its finding of fact that the company was aware of the business potentialities of the rights acquired and the very fact that, within a short time of acquiring the shares of Nirmal Commercial, it entered into an arrangement with the Goenkas to sell those rights showed that the initial acquisition was with a view to earn business profit. The Tribunal also took into account the fact that, within a short period of a year of two, the company was bale to earn nearly 3 1/2 lakhs of rupees from this asset. There was, however, no dispute in this case that the company did not enter into such transaction of immovable properties either before or subsequently. This fact, according to the Tribunal, was not material in deciding whether this was an adventure in the nature of trade or not. In view of this finding, the income from the licence fees as well as from sale of shares were held to be income from business. The Tribunal also confirmed the finding of the Appellate Assistant Commissioner in regard to the allowability of the claim of set off of unabsorbed loss and unabsorbed depreciation of earlier years.
6. Being aggrieved by the finding of the Tribunal, the Commissioner of Income-tax applied for reference under section 256(1) of the Act, which was rejected by the Tribunal. The Commissioner, therefore, approached the High Court under section 256(2) and the High Court, on being satisfied that questions of law arose, directed the Tribunal to draw up a statement of the case and refer the four questions set out above to this Court for opinion. Hence, the reference before us.
7. We have heard counsel for the Revenue, Dr. Balasubramaniam, as well as counsel for the assessee, Mr. Mehta, at length. The contention of the Revenue is that the acquisition of the property in question in the instant case can, by no stretch of imagination, be treated as stock-in-trade of the assessee. The conclusion arrived at by the Tribunal, according to learned counsel for the Revenue, is perverse and untenable in law inasmuch as even on findings recorded by the Tribunal itself, applying the law laid down by the supreme Court in this regard, the property cannot be said to be stock-in-trade of the assessee. Reliance was placed on a number of decisions of the Supreme Court and of this Court to which we shall refer a little later.
8. Before that, we may refer to the submissions of counsel for the assessee in this regard. The first submission is that the question only refers to the appreciation of the finding arrived at by the Tribunal as to whether the property acquired by the assessee formed its stock-in-trade or not and, in that view of the matter, the scope of enquiry by this court while hearing a reference is very limited. If there is the slightest evidence on record, this court has to accept that finding and it cannot go behind it. Counsel refers in this connection to a decision of the Supreme Court in the case of Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 and some other decisions on the same point. Another line of argument of learned counsel for the assessee is that on a careful consideration of the facts of this case and applying the principles laid down by the Supreme Court in the case of Khan Bhadur Ahmed Alladin and Sons v. CIT [1968] 68 ITR 573 and in other cases, no fault can be found with the finding of the Tribunal that the acquisition of property in the instant case formed the stock-in-trade of the assessee.
9. We have carefully considered the rival submissions in regard to question No. 1. The law in regard to the scope and ambit of powers of this court under section 256 of the Act are no more res integra. The principles are too well-settled to need reiteration. It was held as far back as in 1957 by the Supreme Court in Meenakshi Mills' case [1957] 31 ITR 28 that where the determination of the Tribunal is one of fact it is open to review by the court only on the ground that it is not supported by any evidence or that it is perverse. Reference may be made to the decision of the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594, where dealing with the question whether the transaction was in the nature of trade, the Supreme Court held that, even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly and necessarily to address itself to the legal requirements associated with the concept of trade or business. It was, therefore, held by the Supreme Court that the final conclusion of the Tribunal in such a case can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point and such a challenge is open under section 256(1) because it is a challenge on the ground of law. We may, therefore, look into the principles laid down by the Supreme Court for determining when a particular transaction can be held to be a transaction in the nature of trade. In the aforesaid case, the Supreme Court observed (at page 607) :
"This question has been the subject-matter of several judicial decisions; and in dealing with it all the judges appear to be agreed that no principle can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered."
10. The Supreme Court also referred to transaction of sale and purchase of land and observed (at page 609) :
"As we already observed it is impossible to evolved any formula which can be applied in determining the character of isolated transaction which come before the courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoy its income for some time, an 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."
11. This case and a number of other cases on the point were considered by the Supreme Court in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21. The Supreme Court observed (at page 25) :
"No useful purpose would be served by entering upon a detailed analysis and review of the observations made in the light of the relevant facts, for no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record."
12. The Supreme Court in this case made a distinction between transactions in commercial commodities and transactions on purchase of land distinguishing transaction on purchase of land from the cases dealing with commercial commodities. It was observed (At page 26) :
"But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade."
13. The court also emphasised that (at page 26) "........ a profit motive in entering into a transaction is not decisive, for an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit." In Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253, the Supreme Court again reiterated that (at page 262) : "Where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax." It was observed (at page 262) :
"If the transaction is in the ordinary lien of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction."
14. In CIT v. Asian Dry Dock Co. [1977] 108 ITR 822, this court also observed that in determining whether a transaction is an adventure in the nature of trade it is the total effect of all the facts and circumstances that have to be considered. The same principles have been reiterated by this court in the case of CIT v. Radheshyam R. Morarka [1981] 127 ITR 111 and in CIT v. V. A. Trivedi [1988] 172 ITR 95. In Khan Bahadur Ahmed Alladin and Sons v. CIT [1968] 68 ITR 573, the Supreme Court reiterated (at page 581) :
". . . it is not possible to evolve any legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depends in each cases on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction..."
15. Applying the tests laid down by the supreme Court in the various judgments referred to above to the facts of the present case, we are of the clear opinion that the asset, namely, rights in the property 'Nirmal building' acquired by the assessee was not its business asset forming part of its stock-in-trade. It was clearly a capital asset. The facts as set out above are clear. The assessee decided to purchase land and sell it to earn some profits. The managing director was allowed to undertake this transactions. He accordingly purchased the property and held it for some time. During this period he gave it on leave and licence basis, earned a licence fee, later transferred the same and thereby earned some profit. This was the sole transaction. This transaction had no connection with the ordinary business activities of the assessee. It is correct. As counsel for the assessee submitted, that the transaction was undertaken with the intention to earn profit because the company had suffered losses in the past but that by itself, as held by the Supreme Court, is not enough to give it the character of stock-in-trade or to bring the transaction within the ambit of an adventure in the nature of trade. Considering the totality of the facts and circumstances of the case, we hold that Tribunal was not justified in its conclusion that the property acquired by the assessee was it stock-in-trade. Question No. 1 is, therefore, answered in the negative and in favour of the Revenue.
16. In view of the answer to the first question the answer to the second question is self-evident. The profit earned from the sale of the said property was not business income in the hands of the assessee. The second question, therefore, is also answered in the negative and in favour of the Revenue.
17. There is no dispute at the Bar that unabsorbed loss from one head of income cannot be set off against income under another head in the subsequent year. The only submission of counsel for the assessee was that in truth and substance it the property in question is held to be stock-in-trade of the assessee then the licence fee earned by the assessee, even if it was to be assessee under the head "Income from house property", it would in reality be income from business and that being so, carried forward unabsorbed loss can be set off against such profit even if they are assessed under as different head. Reliance was placed in support of this contention on the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. However, in view of our finding that the property in question was not stock-in-trade of the assessee and the answer given by us to question No. 1 the controversy raised in question No. 3 is academic and us such need not be answered. Accordingly question No. 3 is not Answered.
18. So far as question No. 4 is concerned, there are two aspects of the matter. Once is set off of unabsorbed loss and another is set off of unabsorbed depreciation. The Tribunal allowed the claimed. The Tribunal did not approve the contention of the Revenue that the assessee by undertaking job work to manufacture surgical cotton instead of manufacturing it on its own account discontinued its business and held that the assessee was entitled to the benefit of set off. Counsel for the Revenue submits that there was a discontinuance of business. We find it difficult to accept this contention because, in our opinion, not only the business of the assessee continued but the nature also remained exactly the same. It makes no difference whether the assessee manufactured surgical cotton on its own account or on job work others. This change by no stretch of imagination, can be said to be a discontinuance of business. We are, therefore, of the opinion that the Tribunal was right in holding that the assessee was entitled to set off of unabsorbed loss and unabsorbed depreciation of earlier years. We may, however, observe that so far as the unabsorbed loss is concerned, it will be governed by the provisions of section 72(1)(ii) if the Act and it can be adjusted only against the income under the same head. But so far as the carried forward of unabsorbed depreciation is concerned, as under section 32 such carried forward depreciation is deemed to be depreciation of the subsequent year to which it is carried forward. It would be permissible to set off such depreciation against the income of the subsequent year under any head. We, therefore, answer question No. 4 accordingly.
19. No order as to casts.