Gujarat High Court
Commissioner Of Income-Tax vs Minal Rameshchandra on 13 October, 1986
Equivalent citations: [1987]167ITR507(GUJ), [1987]66STC294(GUJ)
JUDGMENT A.P. Ravani, J.
1. "Adopt a device and avoid payment of tax", can such a course be accorded approval of judicial process ?
2. In addition to the four question referred to us the aforesaid question is also required to be answered in the light of the facts that follow :
The assessee is an individual deriving income from share of profits from M/s. Star Radio Electric Company and M/s. Alloys Metal Casting Corporation. The assessee also derives income from dividend and interest. The assessment year under consideration is 1971-72. The previous year is the year ending on March 31, 1971, for the assessment year in question. The assessee filed a return of income on November 30, 1971, and showed total income of Rs. 40,480. A notice under section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was issued by the Income-tax officer. During the course of assessment proceedings, it transpired that the assessee along with her mother and brother had become a partner in the firm of M/s. Ashni Construction company. In the firm, the assessee, her mother and brother had contributed land as their share of capital contribution. There were seven other partners who contributed no capital whatsoever. The book value of the land as on March 31, 1970, was Rs. 34,728. As on April, 1, 1970, the assessee in her book of account put the market value of the land at Rs. 4,45,929. The surplus of Rs. 4,11,192 was transferred to the capital account No. 2 of the assessee. It is an admitted position that similar entries were made in the book of account of her mother and brother also. It was claimed by the assessee that the surplus was not capital asset nor was there any sale or exchange.
3. The Income-tax Officer found that only the assessee and two other partners (i.e., her mother and brother) had contributed capital in the form of land. The other seven partners had not contributed any capital whatsoever in the firm of M/s. Ashni construction company which was formed on April 1, 1970. The three partners contributing land retired from the partnership with effect from August 31, 1970, by executing a deed of retirement dated October 24, 1970. The firm had not done any business of dealing in land. Therefore, the Income-tax Officer held that all the transactions were sham and colourable and were intended to escape from the effect of capital gains tax. According to the Income-tax Officer, the land being an immovable property, the transfer was required to be under a deed of conveyance. As there was no conveyance and as the assessee continued to show the value of the land in her wealth-tax return for the assessment year 1971-72, the assessee continued to be the owner of the asset. As per the Income-tax Officer's order in para 10, even the assessee stated that the land was not transferred to the firm and that she continued to be the owner of the asset. For these reasons, the Income-tax Officer found that there was no transfer of the land whatsoever.
4. The Income-tax Officer did not compute or assess any profit a rising to the assessee from any of the transactions in land during the accounting year. He merely added an amount of Rs. 5,000 on account of goodwill received by the assessee on retirement from the partnership firm. In his view, the amount of Rs. 5,000 represented the anticipated share of profit and was, therefore, the assessee's income and was liable to be taxed as such. The Income-tax Officer passed the aforesaid order on March 27, 1974.
5. The Commissioner of Income-tax, Gujarat IV, Ahmedabad called for the record and examined the same. He found that the Income-tax Officer's order was erroneous as it was prejudicial to the interest of the Revenue. In his opinion, the income arising to the assessee on account of the land transactions during the previous year had not been correctly computed or assessed. The Commissioner of Income-tax issued show-cause notice under section 263 of the Act and called upon the assessee to explain as to why an appropriate order should not be passed revising the order of assessment after properly computing capital gains arising to the assessee on account if the transfer of her interest in the land to the partnership firm. During the course of the proceedings, the learned Commissioner called upon the assessee to show as to why the surplus arising out of the transactions in question should not be taxed as business income in the hands of the assessee. For this purpose, adequate opportunity of making representations and submissions was given to the assessee. Before the Commissioner, the assessee contended that the land was firstly treated as stock-in-trade in the assessee's own books of account and then transferred to the firm as stock-in-trade and as capital contribution.
6. The learned Commissioner found that the firm of M/s. Ashni Construction Company had filed a return for the first time for the assessment year 1972-73 on November 12, 1974. For the accounting year, period commencing from April 1, 1970, to June 30, 1971, a loss of Rs. 3,286 was shown as arising on account of expenses of advocate's fees and payment of land revenue, etc. There were no receipts. The address of firm was given as new cotton Mill No. 1 Compound, outside Raipur Gate. One of the seven partners, namely, Shri Gunvantlal M. Mistry, was servicing in New Cotton Mills on a salary of Rs. 10,000 per month per annum. In the next accounting year ending on June 30, 1972, the income of the firm was shown by way of sale of grass to the tune of Rs. 4,530 only. In the subsequent accounting year ending on June 30, 1973, an interest income of Rs. 5,260 as received from Ojas corporation was shown. According to the learned Commissioner of Income-tax, the firm did not make any fresh purchase of land and the entire activities were confined to the development and sale of the plot No. 53 in T.P.Scheme No. 10 purchased jointly by the assessee her mother and brother on March 12, 1962, and put in partnership on April 1, 1970. The firm was registered with the Registrar with the Registrar of Firms only on May 1, 1974, and the entries were registered only in the names of the seven partners with the dates of joining the firm given as September 1, 1970.
7. The learned Commissioner found that the assessee with her mother and brother jointly purchased on March 12, 1962, a plot No. 53 admeasuring 6 acres 36 gunthas in T.P.Scheme No. 10 from a group of 15 persons. These 15 persons had earlier purchased the land on February 23, 1962, from the original owner of the land who had already executed banakhat in favour of three other parties who were made confirming parties to the sale deed of March 12, 1962. The land had been converted into T.P.Scheme land on July 1, 1959. Out of the total area of 8 acres and 2 gunthas of plot No. 53 in T.P.Scheme, the area was truncated to 6 acres and 36 gunthas. The balance area was taken for roads, etc., on account of the scheme. The learned Commissioner further found that no income could be earned from the land except from sundry sale of grass. After 1959, the land was to be utilised only for house building. As found by the Commissioner of Income-tax, when the assessee purchased the land jointly with her mother and brother, the title to the land was in dispute. The land was not yielding regular income. The learned Commissioner of Income-tax found that the assessee and her mother and brother jointly purchased the land not as an investment but with the object if selling it later at substantial profit when the Town Planning Scheme developed further.
8. According to the Commissioner of Income-tax, such development took place in 1970 and the assessee along with her mother and brother decided to realise the profits from the land. The seven parties who are shown as partners in the partnership deed ultimately sold the land for Rs. 15,04,980 as per sale deed dated December 15, 1973. Prior to the the execution of the sale deed, two banakhats dated July 28, 1977 (sic) were executed with M/s. Adarsh Co-operative Industrial Estate Ltd. On February 1, 1973 possession of the land was given in part performance of the banakhat. After obtaining necessary permission under the provisions of the Gujarat vacant Land in urban Areas (Prohibition and Alienation) Act, 1972, the sale deed was executed in favour of the aforesaid society on December 15, 1973, for the purpose of construction of buildings. The Commissioner of Income-tax, after narrating the facts as stated above, observed as follows :
"All the facts and circumstances indicated that the assessee, along with her mother and brother acting jointly, chose to show the land as sold through a partnership firm with the sole object of avoiding the payment of tax on the huge profit actually earned and received by the assessee, her mother and brother jointly throwing the land into partnership and retiring therefrom immediately thereafter was only a device adopted to conceal taxable profits which would have been plainly visible had the land been sold outright to or through the seven partners of the firm."
9. According to the Commissioner of Income-tax, the assessee earned and received income. Under the terms of retirement deed, assessee became creditor for the firm to the extent of Rs. 4,50,920 which the firm promised to pay by instalments of Rs. 35,000 by June, 1972, and the balance in four equal yearly instalments. When the land was sold on December 12, 1973, the instalments have been paid as the firm realised Rs. 15 lakhs odd from the sale of the land. According to the Commissioner income-tax, the assessee got a right to receive the amount of Rs. 4,50,920 when the retirement deed dated October 24, 1970, was executed. The right to receive the amount was not in any way conditional. Hence the assessee made a profit or gain of Rs. 4,14,192 in the year 1970-71. The learned Commissioner of Income-tax found that the assessee jointly with her mother and brother purchased the land in the year 1962 with the intention of reselling the same and earning profit therefrom. It was not a purchase for investment.
10. The Commissioner of Income-tax has thereafter observed :
"The subsequent transactions in the lands whereby they were thrown into partnership and the assessee then retired from the partnership as a result of which she received her share in the market value of lands and made a profit or gain of Rs. 4,14,192 were clearly transactions in the course of business. The profit or gain arising from business and ever if it is a casual and non-recurring receipt, it is not exempt under any of the provisions of the Income-tax Act, 1961."
11. Alternatively, the Commissioner of Income-tax held that the ownership right of the assessee in the land ceased to exist on April 1, 1970, when she threw the land in the partnership firm as capital contribution. On this date, her ownership right in land was substituted by another right, namely, right in partnership which amounted to exchange. Therefore, the same was covered by the expression "transfer" within the meaning of section 2(47) of the Act. Hence, the Commissioner of Income-tax held that the sum of Rs. 4,45,920 which was credited in the assessee's capital account on April 1, 1970, was chargeable to capital gains subject to the deductions in respect of cost of acquisition amount to Rs. 36,728.
12. The Commissioner of Income-tax finally concluded that the income was chargeable under the head "Business". It was not so charged by the Income-tax Officer. Therefore, he held that the Income-tax Officer's order was liable to revision under the provisions of section 263 of the Act. Accordingly, the Commissioner of Income-tax directed the Income-tax officer to enhance the assessment by a sum of Rs. 4,14,192 under the head "Business" and consequently deleted the addition of Rs. 5,000 of short term capital gains as made by the Income-tax Officer. This order was passed by the Commissioner of Income-tax on March 26, 1976.
13. The assessee preferred an appeal before the Income-tax Appellate Tribunal, Ahmedabad Bench-A(Hereinafter referred to as "as Tribunal") Before the Tribunal, the assessee contended that the expression "business" connotes a continuous activity with a view to earn profit and this test was not satisfied. It was also contended that the profit did not arise out investment in land, ordinarily, the assumption is in favour of an investment rather than an adventure in the nature of business. The Tribunal passed its order on July 14, 1977.
14. In para. 11 of the order, the Tribunal observed as follows :
"The controversy before us is whether the said amount of Rs. 4,14,192 is assessable as business profit on the footing that the assessee on retirement from Ashni Firm on September 1, 1970, had got the right to receive the same amount which was chargeable to tax as profit and gain made by her by virue of transactions by which she entered into and retired from the partnership firm. The said profit was thus made in the course of transaction by entering into and retiring from the partnership business by which the right to receive the profits and gains that arose to the assessee in assessment year 1970-71 was clearly taxable in the hands of the assessee as business income".
15. This is how the controversy between the parties was focussed before the Tribunal. The Tribunal found that the character of the receipt of Rs. 4,14,192 was not established. The Tribunal relied upon a decision of the Supreme Court in the case of Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532, and held that the onus of proof that the receipt was taxable as income was on the Revenue. Hence the question was whether the receipt constituted income in the hands of the assessee ? The Tribunal observed that there was no organised activity which resulted in the dealing that has the attributes of a business transaction. The Tribunal also relied on the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 and observed :
"According to the ordinary notions, the solitary transaction of the type which is here before us cannot by any stretch of imagination be held be a business activity and, therefore, we are unable to sustain the conclusion reached by the learned Commissioner on the ground that the said income was assessee as profits and gains of business."
16. As referred to in para. 9 of the order of the Tribunal, the learned departmental representative had submitted before the Tribunal that in the year 1962, when the land was purchased, the title was in dispute. The land was situated at a distance, the area was considerably large and was purchased jointly and that there was no satisfactory evidence regarding the conversion of "capital asset " into stock-in-trade and the valuer's report and entries made in books of account were not contemporaneous. The learned departmental representative submitted that the commissioner of Income-tax had rightly brought to tax the amount as business income. Be it noted that the Tribunal did not deal with these contentions raised by the learned departmental representative. This aspect will be discussed in detail a little later.
17. The Tribunal also observed that the formation of partnership and introduction of land as capital contribution would not amount to sale by a partner to the firm and according to the Tribunal, the same will be the position in the case of retirement of the partner. The Tribunal held that the conclusion reached by the Commissioner of Income-tax that the order of the Income-tax Officer was erroneous in so far as it was prejudicial to the interest of the Revenue on the ground that the income from profits and gains had escaped assessment at the time of original assessment, could not be sustained. The Tribunal also found that the source from which the income arose was not established and, therefore, it was not correct to say that the amount received by the assessee on retirement was taxable on the ground that the income had accrued when the right to receive the same arose. Therefor, according to the Tribunal, the amount could not be taxed as capital gains.
18. Both the assessee and the Commissioner of Income-tax filed application before the Tribunal and sought references on certain questions of law which arose out of the order of the Tribunal and requested the Tribunal to refer the question to the High Court for its opinion. The Tribunal acceded to the request and referred the following question to this High Court for its opinion :
At the instances of the Commissioner of Income-tax :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was 'right in law'in holding that the amount of Rs. 4,14,192 received by the assessee on retirement from the firm styled M/S. Ashni Construction Co. was not chargeable to tax as business profit or, in the alternative, as capital gains ?
(2) Whether the conclusion reached by the Tribunal that the assessee is not chargeable to tax on the sum of Rs. 4,14,192 received by the assessee on retirement from the firm of M/S. Ashni Construction Company as the Revenue had not established the character of the said amount as a receipt in the nature of income is correct in law ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in setting aside the order of the commissioner of Income-tax made under section 263 of the Act and restoring the order of the Income-tax Officer ?
At the instances of the assessee :
(4) Whether, on the fact and in the circumstances of the case, the contribution of the land in question by the assessee as capital in the partnership firm amounts to transfer of the asset within the meaning of section 2(47) of the Income-tax Act, 1961 ?"
19. The question referred at the instances of the assessee need not detain us for long. The question is concluded by the Supreme Court in the case of kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509. As held by the Supreme Court, capital contribution by a partner in the partnership firm is "transfer" within the meaning of the section 2(47) of the Act. In view of this decision of the Supreme Court, the question will have to be answered accordingly.
20. Learned counsel for the Revenue submitted that the Tribunal has erred in holding that the amount in question received by the assessee on retirement from the firm styled as Messrs. Ashni Construction Company was not chargeable to tax as business profits or, in the alternative, as capital gains. In this submission, the Tribunal has not considered the question as to whether the transaction entered in to the assessee were of the type of adventure in the nature of trade and that the Tribunal, without looking into the evidence referred to and relied upon by the Commissioner of Income-tax, has held that, according to the ordinary notions, a solitary transaction of the type cannot by any stretch of imagination be held to be "business". Before arriving at this conclusion, the Tribunal has not even referred to the argument advanced by the department representative and has not considered the question as to whether there was a device to avoid payment of tax arising out of business profits. Alternatively, of Income-tax, the receipt in the hands of the assessee was chargeable to tax as representing capital gains. In his submission, there was a well planned device for transferring the capital asset by resorting to the arrangement of forming a partnership and then retiring therefrom by leaving the capital contribution of land in the hands of the partnership firm. If this was done by a device or as a subterfuge to avoid the tax, then it is open to the Court to pierce the veil and look at the substances of the transaction.
21. On the other hand, learned counsel for the assessee submitted that there was no contention before the Tribunal regarding device or subterfuge. There is no finding arrived at by the Tribunal in this regard. In fact, there was no such question before the Tribunal. The finding of fact cannot be disturbed by this Court in a references under the section 256 of the Act expect on the ground that the same is arrived at without being any evidences whatsoever or that the conclusion is perverse. Learned counsel for the assessee submitted that, in that eventuality, the question which ought to have been raised would be as to whether the finding of facts is based on no evidence or is perverse. In the instant case, a there was no question with regard to device or any subterfuge adopted by the assessee, the contention raised by the Revenue cannot be gone into by this Court.
22. In support of the aforesaid contention, learned counsel for the assessee has relied upon the following decisions of the Supreme Court :
(1) Sree Meenakshi Mills Limited v. CIT [1957] 31 ITR 28.
(2) CIT v. Imperial chemical Industries (India) (P.) Ltd. (1969) 74 ITR 17.
(3) CIT v. Kamal Singh Rampuria [1970] 75 ITR 157.
(4) Kusumben D. Mahadevia v. CIT [1960] 39 ITR 540.
23. IN the case of Sree Meenakshi Mills Limited, [1957] 31 ITR 28, after discussing the authorities at great length, the Supreme Court summed up the legal position as follows (at page 50) :
"(1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is not open to references to the Court under section 66(1).
(2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the fact found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the Court.
(3) A finding on a question of facts is open to attack under section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.
(4) When the finding is one of the fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact."
24. In CIT v. Imperial Chemical Industries India (P.) Ltd. (1969) 74 ITR 17 and CIT v. Kamal Singh Rampuria (1970) 75 ITR 157, the Supreme Court has observed to the effect that the High Court is not a Court of appeal in a references under section 256 of the Act and it is not open to the High Court in such a references to embark upon a reappraisal of the evidences and to arrive at a finding of fact contrary to that of the Appellate Tribunal. It is also observed that the High Court should confine itself to the facts as found by the Tribunal and answer the question in the setting and context of those facts. In Kusumben D. Mahadevia's case [1960] 39 ITR 540, the Supreme Court has held that, in reference jurisdiction, the High Court has no power to decide a different question of law not arising out of the order of the Tribunal. It may be that the same question of law may involve different approaches for its solution and the High Court may amplify the question to take into consideration all the approaches, but the question must remain the same as which was before the Tribunal and decided by it. The High Court cannot reframe the question in such a way that the question may become entirely a different one which was not before the Tribunal. Learned counsel for the assessee also relied upon a decision of the Supreme Court in the case of CIT v. Scindia Steam Navigation Co. Ltd.[1961] 42 ITR 589, and contented that there was no question as regard to the devices or subterfuge to avoid tax. It is further submitted that no such contention was raised and there is no such finding arrived at by the contention raised by the learned counsel for the Revenue.
25. The contention raised by the learned counsel for the assessee is contrary to the fact on the record. From the record of the case, it cannot be said that there was no contention whatsoever with regard to the device being adopted by the assessee for avoiding tax. In para. 10 of the order passed by the learned Commissioner of Income-tax, it is clear that the Commissioner of Income-tax referred to the purchase of plot by the assessee jointly with her mother and brother. He referred to the attendant circumstances under which she purchased the land and observed to the effect that she purchased the land jointly with her mother and brother when the tittle of the land was in dispute and when the land was not yielding any regular income. The learned Commissioner of Income-tax has observed :
"It is clear that the assessee and her mother and brother jointly purchased the land not as an investment but with the object of selling it later at substantial profit when the Town Planning Scheme developed further..."
26. Thereafter he has referred to the formation of the partnership and the subsequent transactions in land and observed as follows :
"All the facts and circumstances indicate that the assessee, along with her mother and brother acting jointly, chose to show the land as sold through a partnership firm with the sole object of avoiding the payment of tax on the huge profit actually earned and received by the assessee, her mother and brother jointly throwing the land into the partnership and retiring therefrom immediately thereafter was only a device adopted to conceal taxable profits which would have been plainly visible had the land been sold outright to or through the seven parties who were shown as partners in the firm."
27. It would be pertinent to note that the assessee preferred an appeal before the Tribunal and in the ground of appeal, in para. 5B, the assessee contended that the finding arrived at by the Commissioner of Income-tax as stated hereinabove was erroneous. Even in para. 3 of the statement of the case submitted by the Tribunal, these facts have been reproduced and there is a clear references to the devices adopted to conceal taxable profits. It may be noted that a draft statement of case was placed before both the parties and the suggestion made were duly incorporated (para. 10 of the statement of case). In view of this position of record, it cannot be said that the question regarding device being adopted by the assessee to conceal the income was not there before the Tribunal.
28. However, in fairness to the learned counsel for the assessee, it must be said that the Tribunal has not dealt with this aspect at all. It is clear that the question was very much there before the Commissioner of Income-tax. He has elaborately discussed the same. Before the Tribunal, on this aspect, arguments were advanced by the departmental representative. Still, however, surprisingly the Tribunal even without answering the same, has come to the conclusion that there was only a solitary transaction in land and, therefore, there was no business activity. In para. 9 of the order of the Tribunal, arguments advanced by the departmental representative have been referred to. The departmental representative submitted that the surplus was sought to be taxed as business income mainly on the grounds -
(1) that when the property was purchased in 1962, the title of the same was disputed;
(2) that the location of the land was far away;
(3) that the area of the land was very large, i.e., 6 acres 36 gunthas (33,444 x 3=1,00,332);
(4) that there was no apparent purpose of earning any income. There fore, the very purpose of buying the land jointly was to enter into a venture of buying land with a view to sell the same at a higher rate at a later date.
(5) that the assessee tried to convert the capital asset into stock-in-trade but there was no evidence except the entries made in the books to support the said claim; and (6) that the entries in the assessee's books were not contemporaneous. While making the entries, reliance was placed on the report of the valuer which had come on a later date.
29. In his order, the Commissioner of Income-tax extensively referred to the sale deed dated December 12, 1973, which the firm of Ashni Construction Company sold the land to Adarsh Co-operative Industrial Estates Ltd. In this document, the assessee along with her mother and brother has signed as confirming parties. This document was produced before the Commissioner of Income-tax by the assessee on March 23, 1976. This is a very important document. The very basis of the order passed by the Commissioner of Income-tax rest on this document. And yet, this document has not been referred to at all by the Tribunal. Again, in fairness to the learned counsel for the assessee, it must be said that he did concede that this document was part of the record and further conceded that the Tribunal had neither looked into it nor referred to the same. In the above view of the matter, it cannot be said that the question with regard to the device being adopted by the assessee with a view to avoid the tax arising out of the transfer of land to the Ashni Construction Company did not arise and was not there before the Tribunal.
30. The factual position which emerges from the aforesaid discussion is as follows :
(i) That the Commissioner of Income-tax did come to the conclusion that the assessee had purchased the land in March, 1962, not as an investment but with a view to sell the same at a later date at a substantial profit and all the facts and circumstances indicated that the assessee had chosen to show the land as sold through a partnership firm with the sole object of avoiding payment of tax on the huge profit actually earned and received. The assessee, her mother and brother jointly adopted a device of forming a partnership and retiring therefrom to conceal taxable profits which would have been plainly visible if the land had been sold outright.
(ii) The Commissioner of Income tax came to the aforesaid conclusion on the basis of examination of -
(a) entries made by the assessee in her books of accounts as on March 31, 1970, and as on April 1, 1970;
(b) deed of partnership dated April 1, 1970;
(c) deed of retirement with effect from August 31, 1970, which was executed on October 24, 1970; and
(d) sale deed dated December 15, 1973, executed by Ashni Construction Company in favour of Adarsh Industrial Co-op. Estates Ltd., wherein the assessee along with her mother and brother is a confirming party.
(iii) That the assessee did feel aggrieved by the finding regarding device given by the Commissioner of Income-tax and raised the point in the ground of appeal filed before the Tribunal.
(iv) That the departmental representative argued the points and contended that there was a device. The points argued have been mentioned in para. 25 hereinabove.
(v) The Tribunal has not even referred to the arguments advanced by the departmental representative and has not referred to the important documents examined by the Commissioner of Income-tax and on which he has based his conclusions.
(vi) The question as regards device to avoid tax was very much there before the Tribunal; factual basis was also there, even contentions were raised, but the Tribunal did not deal with the same.
31. Having cleared the mist surrounding the factual position, we may have a look at a certain decisions of the Supreme Court on this point. In the case of Estate of Late A.M. K. M. Karuppan Chettiar v. CIT [1969] 72 ITR 403, the Supreme Court has in terms held that the question, if raised before the Tribunal but not expressly dealt with by the question, if raised before the Tribunal but not expressly dealt with by the Tribunal, still arose out of the order of the Tribunal.
32. In Scindia Steam Navigation's case [1961] 42 ITR 589, the Supreme Court has observed as follows (at page 612) :
"Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the Court of decision and which the Court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspect of the question which had been argued before the Tribunal. It will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act."
33. Again in the case of CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474, the Supreme Court has held as follows (at page 480) :
"Granting that an aspect of the question was not argued before the Tribunal, the question was on that account not one which did not arise out of the order to the Tribunal. In our judgment, the expression 'question of law arising out of such order; in section 66(1) is not restricted to take in only those question which have been expressly argued and decided by the Tribunal. If a question of law is raised before the Tribunal, even if an aspect of that question is not raised, in our judgment, that aspect may be argued before the High Court."
34. Thus the legal position is abundantly clear. Simply because the Tribunal did not deal with the aspect of the question, though there was enough material and argument were advanced by the party, it cannot be said that the question was not there before the Tribunal and, therefore, the High Court would be precluded from dealing with a same in a reference under the section 256 of the Act. As stated hereinabove, the question was very mush before the Tribunal. Necessary material on record of the case was also there. Arguments were also advanced, but the Tribunal did not deal with the same. In the aforesaid background, if the contention raised by the counsel by the assessee is accepted, it would amount to penalising the revenue for the fault of the Tribunal. This can never be done. If the Tribunal failed to deal with certain factual and legal aspects of the question, the Revenue cannot be deprived of its legitimate right to argue the argument so as to bring out all the relevant aspects of the question at issue.
35. Here it would be appropriate to refer to the decision of the Supreme Court in the case of CIT v. S. P. Jain [1973] 87 ITR 370, wherein, after referring to the English authorities, it is observed (page 382 and 383) :
".... what has to be safeguarded against is that any crystallisation of the views of this Court and its reluctant to interfere with the findings of fact should not make the Tribunal or the income-tax authorities smug in the belief that, as the Court do not interfere with the findings which form the bed rock upon which the law will be based, they can act on that assumption in finding facts or by their mere ipsi dixit that they are findings of fact wish it to be so assumed irrespective of whether they are sustainable in law or on the materials on record. In a number of cases, this Court has set out the principal upon which it will be interfere with the findings of the facts at by the Tribunal."
36. Now the question framed in this case may be seen. The important words in the question are : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law..." The phrase "was right in law" would take in its sweep the question as to whether the Tribunal considered the argument raised before it and also a to whether it considered the relevant evidence which was the basis of the order passed by the Commissioner of Income-tax. Be it noted that the Tribunal itself, while summarising the order, of Commissioner of Income-tax (para. 5 of the Tribunal's order), did refer to the device adopted to conceal taxable profit which would have been plainly visible had the land been sold outright top the seven partners of the firm. Thereafter, the Tribunal has described the controversy in para. 11 of its order which has been produced herein above in para. 14 of this judgment.
37. Thus, viewed from the legal as well as factual position, it is clear that the question regarding device to avoid tax did arise before the Tribunal. Some of the vital aspects of the question, though argued, have not been dealt with the Tribunal. Therefore, it cannot be said that the point were being raised and argued on behalf of the Revenue for the first time before the high Court and that the question did not arise out of the order of the Tribunal.
38. Learned counsel for the Revenue submitted that it was not the case of the Revenue that there was any organised activity of sale and purchase of land and of developing the same for the purpose of construction for the residence and commerce. But the specific case of the Revenue was that the assessee along with her mother and brother purchased the land with a view to sell the same later on for a profit. The purchased of land in the year 1962 was an adventure in the nature of trade. This was covered by the definition of "business" given in section 2(13) of the Act. The definition of the term "business" is an inclusive one. It includes any adventure in the nature of trade.
39. Here again the learned counsel for the assessee submitted that there was no question as to whether the transaction was an adventure in the nature of trade or not. In his submission, neither was there any contention nor a finding on this point. Therefore, this question also cannot be said to arise out of the order of the Tribunal. The contention cannot be accepted for the simple reason that the entire order of the Commissioner of Income-tax is based on the footing that the assessee and her mother and brother purchased the land in the year 1962 with a view to resell it at a profit and right from the beginning, there was an object of selling it profit and right from the beginning, there was an object of selling it later on at a substantial profit when the Town Planning Scheme developed. Before the Commissioner of Income-tax, learned counsel for the assessee contended that the amount could not have been taxed as profit arising out of an adventure in the nature of business. In paragraph 8 of the order passed by the Commissioner of Income-tax, this contention raised by learned counsel for the assessee has been referred to. It was contended by the counsel for the assessee that a plot of land purchased in 1962 jointly which was kept up to 1970 and introduced a stock-in-trade in partnership business does not in any way fulfill the tests of adventure in the nature of business. It was also contended that when an investment is made in land, ordinarily, the assumption is in favour of (it being in the nature of) investment rather than of a business venture. This contention has been dealt with by the Tribunal in para. 11 of its order. After referring to the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765, the Tribunal has observed as follows :
"According to the ordinary notions, the solitary transaction of the type which is here before us cannot by any stretch of imagination be held to be a business activity and, therefore, we are unable to sustain the conclusion reached by the learned Commissioner on the ground that the said income was assessable as profits and gains of business."
40. Hence, the contention raised by learned counsel for the assessee that there was no contention, and there is no finding given by the Tribunal, cannot be accepted.
41. Learned counsel for the assessee submitted that at any rate the finding by the Tribunal on this point is a finding of fact and it cannot be said to be a question of law arising out of the order of the Tribunal. We are afraid, the contention of learned counsel for the assessee is not based on correct legal position. First of all, the question whether a transaction us an adventure in the nature of trade or not is a mixed question law and fact as held by the Supreme Court. Such a question involves application of legal principles which is an essential part of the process in reaching the conclusion regarding the character of the transaction. This aspect would undoubtedly be a matter of law and, therefore, if there is an error in the application of these principles, it can certainly be challenged as an error of law. This is the view taken by the view taken by the Supreme Court in the case of G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594.
42. In this background let us see what the Tribunal has done in the instant case. In para. 11 of its order, as regards the business activity, the Tribunal has observed :
"It is difficult to infer from the above facts there was any organised business activity on the part of the assessee which could clothe the above transaction with attributes of a business transaction".
43. Thereafter the Tribunal referred to the observations of the Supreme Court in the case of Narain Swadeshi Weaving Mills' case [1954] 26 ITR 765, which read as follows (at page 773) :
"The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is."
44. Immediately thereafter, the Tribunal has jumped to the conclusion and has observed as follows :
"Applying the above tests to the above facts, we are of the opinion that the said transaction as entered into by the assessee cannot partake of the character of business. According to ordinary notions, the solitary transaction of the type which is here before us cannot by any stretch of imagination be held to be a business activity and, therefore, we are unable to sustain the conclusion reached by the learned Commissioner on the ground that the income was assessable as profits and gains of business."
45. In the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills [1954] 26 ITR 765, referred to by the Tribunal, it is clearly stated that a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The Supreme Court clearly stated that the question must be decided according to our ordinary nations as to what a business is., When the Tribunal said "applying the above tests to the above facts", the Tribunal did not apply any test whatsoever and straightaway jumped to the conclusion without taking into consideration the contentions raised and arguments advanced by the departmental representative. This circumstance, i.e., the failure of the Tribunal to take into consideration the contentions raise and argument advanced by the departmental representative also make it a question of law capable of being gone into by this court. Further, apart from this circumstance, as indicated hereinabove, this is a mixed question of law and fact and, therefore, this Court can go into the same in a reference under section 256 of the Act.
46. Learned counsel for the assessee submitted that there was only one transaction in a dead and since there is no finding that the land was purchased solely with a view to resell at a profit and the property was held only with idea in mind, the conclusion arrived at by the Tribunal should not be interfered with. In this connection, learned counsel for the assessee has relied upon the following decisions of the Supreme Court and of this High Court :
1. G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC) 2. Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242(SC), 3. Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), 4. CIT v. P. K. N. Co. Ltd. [1966] 60 ITR 65 (SC) and 5. D. S. Virani v. CIT [1973] 90 ITR 255 (Guj).
47. In G. Venkataswami Naidu's case [1959] 35 ITR 594, the Supreme Court has stated to the effect that while deciding the character of such transactions, several factor are treated as relevant. After referring to some such factors, the Supreme Court observed (at the page 609 and 610) :
"The presence of all the relevant circumstances mentioned in any of them may help the Court to draw a similar inference : but it is not a matter of merely counting the number of facts and circumstances pro and con; What is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to the facts before us."
48. Thus, that total effect of all relevant factors and circumstances would and should determine the character of the transaction. This is what is required to be kept in mind and not the enumeration of relevant factors and circumstances present or absent in the case.
49. In Saroj Kumar Mazumdar's case [1959] 37 ITR 242 (SC), the assessee had purchased three quarters of an acre of land in the suburbs of Calcutta. The land was forming part of a co-operative society and on account of the fact that the land was under acquisition, the assessee had sold it at a profit. In the facts and circumstances of the case, it was held that it was not an adventure in the nature of trade. But what was observed by the Supreme Court at page 248 of the report is very much important.
"Each case must be determined on the total impression created on the mind of the court by all the facts and circumstances disclosed in that particular case. Hence, no decided case can, strictly speaking, be a precedent which could govern the decision of a later case involving a similar question. Those decision can be used only by way of illustrations of the different view-points which have a bearing on the decision of the case in hand."
50. In Janki Ram Bahadur Ram's case [1965] 57 ITR 21, at page 24 of the report, the Supreme Court observed that the question whether profit in transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact. Thereafter at page 25 of the report, it is observed :
"No useful purpose would be served by entering 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."
51. Similarly in the case of P.K.N.Co. Ltd. [1966] 60 ITR 65, the Supreme Court has reiterated the same principle (at page 73) :
"As already observed, determination of the question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances."
52. Then the Supreme Court has stated that the object for which a company is incorporated may have some bearing but it is not decisive similarly, profit motive while entering into the transaction is also not considered decisive.
53. In the case of D. S. Virani {1973} 90 ITR 255, this Court held that one "V" purchased land with three brothers who were not residing in India. In this case, after referring to the various decisions of the Supreme Court in which the aforesaid principle have been laid down, the court came to the conclusion that the purchase of land by the three brothers who were not residing in India was not an adventure in the nature of trade, while purchase of land by one of the four brothers who was residing in India was an adventure in the nature of trade and, therefore, a business activity. This High Court has not laid down any new principle in this behalf. As a result of the total cumulative effect of all the relevant factors and circumstances present in the case, the Court came to the conclusion as stated above.
54. The principles which emerge form the aforesaid decisions of the Supreme Court are that there are several relevant factors which count in the process of reading a conclusion as to whether a transaction is an adventure in nature of trade or not. But no single factor is a decisive one. It is the total cumulative effect of all the relevant factors and circumstances which create an impression in the mind of the court the determines the character of the transaction. This is the legal principle laid down by the Supreme Court. While relying upon the aforesaid decisions of the Supreme Court and this High Court, learned counsel for the assessee has given much stress on the facts of each case. What is to be seen in a decision of the Supreme Court or this Court. What is binding on the Court is the ratio or the principle laid down by the Supreme Court and not each and every word stated while deciding a case.
55. In this regard, reference may be made to the decision of the Supreme Court in the case of Dalbir Singh v. State of Punjab, AIR 1979 SC 1384. At pages 1390 and 1391, Sen J., speaking (minority view) for the Supreme Court has observed as under :
"According to the well-settled theory of precedents, every decision contains three basis ingredients :
(i) findings to the material facts, direct and inferential. An inferential finding of fasts is the inference which the judge drawn from the direct or perceptible facts;
(ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and
(iii) judgment based on the combined effect of (i) and (ii) above.
For the purpose of the parties themselves and their privies, ingredient No. (iii) is the material element in the decisions for it determines finally their rights and liabilities in relation to the subject-matter of the action. It is the judgment that stops the parties from reopening the dispute. However, for the purpose of the doctrine of precedents, ingredient No. (ii) is the vital element in the decision. This indeed is the ratio decidendi. It is not everything said by a judge when giving judgment that constitutes a precedent."
56. Thus, in the decisions relied upon by learned counsel for the assessee, all that is relevant and important is the principle laid down by the Supreme Court and this court. Each and every word stated by the Court while deciding a case does not become the law of the land. In fact, in Mazumdar's case[1959] 37 ITR 242, the Supreme Court has clearly laid down that each case should be determined on the basis of the total impression created on the mind of the Court by all the facts and circumstances disclosed in that particular case. Hence, while deciding the nature and character of a particular transaction, no decided case can, strictly speaking be a precedent which could govern the decision of a later case involving a similar question. Those decision can be used only by way of illustration of the different view point which my have a bearing on the decision of the case in hand.
57. In this case the Tribunal ought to have addressed itself as to whether the totality of the facts and circumstances led to the conclusion that the transaction was an adventure in the nature of trade or not. Unfortunately the Tribunal has not only failed to address itself to this question but it has also failed to deal with the points raised and arguments advanced by the Departmental representative. Without referring to the well-settled principles of law, the Tribunal, by mere ipsi dixit, stated that "because there was a single transaction, by no stretch of imagination it could be said to be a business activity." With respect, the Tribunal lost sight of the fact that only when there is no continuous activity with a view to earn profit and when there is a solitary transaction, the question arises as to whether such transaction is an adventure in the nature of trade or not.
58. Learned counsel for the assessee submitted that as held by this Court and the Supreme Court in various cases, purchase of land should be held to be an investment of money in land. Learned counsel has particularly relied upon the following passage from the judgment of this Court in D. S. Virani's case [1973] 90 ITR 255 (at the page 260) :
"So far as land is concerned, it is now clear from the decisions of the Supreme Court in G. Venkataswami Naidu and Company's case [1959] 35 ITR 594, 609, 610...... 'Normally the purchase of land represents investment of money in land'; and to the same effect we find the following observation of Shah J., in Janki Ram Bahadur Ram's case [1965] 57 ITR 21, 26 .... a transaction of purchase of land cannot be assumed, with - out more, to be a venture in the nature of trade'."
59. The observations made by the Supreme Court in the case of Venkatswami Naidu & Company [1959] 33 ITR 594 and also in Janki Ram Bhahadur Ram's case [1965] 57 ITR 21, cannot be elevated to the level of presumption, either of facts or of law.
60. Whether the purchase of land represents an investment or the transaction is an adventure in the nature of trade, has got to be examined in the context of the socio-economic and commercial background in which the transaction takes place. With the changing socio-economic scenario in the country, the attitude of the people in general and particularly that of people belonging on the business community has undergone a drastic change. For example, before a decade or two, silver was ordinarily considered to be a commodity of investment. Today it would be difficult to say that silver is purchased by people with a view to invest their surplus savings. In the context of a developing economy and fast changing socio-economic conditions of people, even the words occurring in a statute are required to be interpreted differently. In this context, reference may be made to the decision of the Supreme Court in the case of S. P. Gupta v. Present of India AIR 1982 SC 149. In para. 62 of the separate judgment delivered by P. N. Bhagwati J. (as he then was), it is observed (at page 232) :
"The interpretation of every statutory provision must keep pace with changing concept and values and it must, to the extant to which its language permits or rather does not prohibit, suffer adjustments through judicial interpretation so as to accord with the requirements of the fast changing society which is undergoing rapid social and economic transformation."
61. In the same para, it is further observed to the effect that law is intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate.
62. In the case of National Taxtile Workers' Union v. P. R. Ramakrishnan, AIR 1983 SC 75, in para. 9 of the judgment [1983] 53 Comp Cas 184 at p. 205, the Supreme Court has observed :
"We cannot allow the dead hand of the past to stifle the growth of the living present. Law cannot stand still; it must change with the changing social concept and values."
63. In the same para, it is further observed :
"Law must, therefore, constantly be on the move adapting itself to the fast changing society and not leg behind. It must shake off the inhibiting legacy of its colonial past and assume a dynamic role in the process of social transformation."
64. We are conscious of our limitations. Wherever there is binding decision of the Supreme Court, we cannot change or mould the law as may be done by the Supreme Court. But the principles laid down by Supreme Court itself, command us, not to be unnecessarily influenced by some observation made in an altogether different context and background by the Supreme Court and also by this Court regarding the character of a transaction involving purchase of land. The aforesaid observations made by the Supreme Court in S. P. Gupta's case, AIR 1982 SC 149 and in the case of National Taxtile Workers' Union, AIR 1983 SC 75 ; [1983] 53 Comp Cas 184 impel us to limit the scope of the observations made by this Court and the Supreme Court to the facts and circumstances of each case. The observations were relevant for deciding each case before the court. These observations cannot be raised to the level of presumption either of fact or of law. Again applying the principles laid down by the Supreme Court in Dalbir Singh's case, AIR 1979 SC 1384, we are of the opinion that the observations made by the Supreme Court regarding the transaction involving purchase of land cannot be raised to the level of presumption of fact or of law and their scope cannot be widened so as to be applied universally in all cases.
65. Therefore, the question as to whether a transaction of purchase of land in an investment simpliciter or is an adventure in the nature of trade and commercial background prevailing at the time. Earlier, in the year 1960, the state Legislature thought it fit to put a ceiling on agricultural land by passing the Gujarat Agricultural land ceiling Act. On May 1, 1960, a separate State of Gujarat was formed. Thereafter, there was a spurt in building activities in the city of Ahmedabad. By 1972, commercial and speculative transaction in land became so wide and rampant that the state Legislature was required to pass an enactment called the Urban Area (Prohibition and Alienation) Act, 1972. Thus, in the year 1972, land did not remain even a commodity of commercial activity apart from the fact that it had already ceased to be a commodity to be considered as a convenient form of ordinary investment. The speculative and hoarding activity in land has assumed menacing proportions and, therefore, the State Legislature had to step in and pass the aforesaid Act. On the national plane, with the avowed object of preventing profiteering and speculation from the scare commodity called urban land, the Urban Land (ceiling and Regulation) Act, 1976, was required to be enacted. It is trite known ledge that it is recognised by various committees and commissions that land is a convenient form of adjusting black money. It may be noted that the agricultural income is free from income-tax. Therefore, many people become agriculturists on paper. They use land neither as an investment nor as a commodity of commerce, but to them, it is a convenient instrument of converting black money into regular money. Similar is the case with construction activity. All these factors have considerably changed commercial community. In this changing socio-economic situation and in entirely different commercial background, the transaction in question has taken place. At the relevant time, the State of Gujarat and particularly the city of Ahmedabad was embarking upon its separate and independent journey towards the goal of socio-economic development when there was spurt in building activity. In this background, it is difficult to consider purchase of land as "ordinarily representing an investment". Having regard to the entire socio-economic and commercial background, the question cannot be examined with any set notion in mind.
66. Even assuming for a moment that there is such presumption with respect to the transaction of purchase of land, even then it is a qualified one. In Janki Ram's case [1965] 57 ITR 21, the Supreme Court has observed that a transaction of purchase of land cannot be assumed, without more, to be a venture in the nature of trade. The words "without more' are very important. Again we come to the same thing; it is the totality of all the facts and circumstances of the case creates an impression on the mind of the Court that determines the character of the transaction in question. While taking into consideration the totality of all the facts and circumstance of the case, the Court has also to take into consideration the immediate antecedents and subsequent circumstances. The Commissioner of Income-tax has come to a categorical conclusion that the intention of the assessee was not to make an investment in land but the land was purchased with a view to resell the same at a profit as and when the Town Planning Scheme developed in future. This finding appears to be quite just and proper.
67. Judicial notice of the fact can be taken that the State of Gujarat was formed on May 1, 1960. Thereafter, there was a spurt in building activity in the city of Ahmedabad. Learned counsel for the Revenue argued that in the context of the formation of the State of Gujarat from the bigger bilingual State of Bombay, it should be held that at least in a big city of the state of Gujarat and particularly in Ahmedabad, land had ceased to be a commodity of investment. It had became a commodity of commerce and trade. In the instant case, the assessee though a minor (who appears to have become a major same time in 1964-65) has acted through her guardian. The guardian being the mother was also a joint purchaser of the land in her individual capacity. The land formed part of T.P.Scheme No. 10. The title of the land was in dispute, or at any rate it was not free from defects. If one reads the sale deed dated December 12, 1973, originally the land was that of service tenure. Only by an order dated February 17, 1962, passed by the Collector was it held to be of ordinary ryotwaritenure. This decision of the collector was subject to revision and remained in litigation for quite some time. The title of the land was in dispute even with regard to the real holder of the land Bai Hira, in whose name the land was entered in the revenue records, and she had in support of her title to the land only the entry in her name in the revenue records. It goes without saying that entries in the revenue records are made for fiscal purposes. These entries at the most raise a presumption of title in favour of person whose name is entered in the record. Such entries are not and cannot be treated as documents of title. Again the entry in the name of Bai Hira ordered to be mutated by order dated February 17,1962. Prior to that, the name of one Chimanlal was there in the record of rights. The land was purchased from Bai Hira by 15 persons for the purpose of business. This transaction took place on February 23, 1962, the day on which the entry was actually mutated in the name of Bai Hira. Within a very short period, i.e., on March 12, 1962, these 15 persons who had purchased the land for the purpose of business, sold the same to the assessee, her mother and brother. The total contribution in the transaction ran into lakhs of rupees. Yet, it did not yield any income whatsoever between the years 1962 and 1970. When purchased, it was an agricultural land. Nothing was done to extract any return from the land.
68. It may be noted that after the decision of the Collector who held in favour of Bai Hira and ordered to convert the land from service tenure to ryotwari tenure, the matter was taken in revision of the Commissioner under the provisions of the Bombay Land Revenue Code. Some time in the year 1967, the Commissioner reversed the decision of the Collector. This decision of the Commissioner was challenged before the High Court by filing two separate petitions. The petitioner, her mother and brother filed Special Civil Application No. 241 of 1967. Another special civil Application No. 361 of 1967 was filed by Bai Hira. These two petitions were disposed of by this High Court by a common judgment and order dated April 2, 1970. The High Court allowed the petitions and quashed and set aside the decision of the Commissioner and restored the order passed by the Collector. It is very significant to note that the assessee purchased the land as agricultural land which was originally of service tenure. Thereafter, the assessee converted the land into non-agricultural land. Thus the assessee also took the risk of facing many imponderables and overcoming many hurdles such as facing litigation and conversion of agricultural land into non-agricultural land.
69. At this stage, let us examine what are the ordinary attributes of a transaction representing investment and of a transaction which is an adventure in the nature of trade or business. When a person decides to invest his saving for a purpose other than business or trade, he ordinarily looks for safety of the principal amount. The other object would be to receive regular and certain return on amount invested. If there is no safety of the capital invested and if there is no certainty of regular return, it is difficult to say that such a transaction can be said to be in the nature of investment. As against this, an adventure means an enterprise or undertaking involving some risk in the transaction. The very word "venture" connotes change plus risk. Business activity or transaction necessarily implies the activity with an object to earn profit. The larger the risk, the greater the margin of profit. Uncertainty about the return to be received from the investment made in business and also the facing of many imponderables and even the risk of losing the capital invested, are inherent in the activity called "business". The same will be case with regard to a transaction which is an adventure in the nature of trade or business. Safety of capital coupled with certainty and regularity of return are terms which are alien in the world of business. Risk, uncertainty, foresightedness to visualise the essential requisites for business activity. So would be the case with regard to a transaction which is an adventure in the nature of trade.
70. Now, let us examine the fact of the aforesaid background. When the assessee purchased the land, the assessee took the risk of clearing the disputed and defective title. The assessee also took the risk of facing litigation. The litigation lasted up to April 2, 1970. Be it recalled that the Collector rendered his decision on February 17, 1962 and, thereafter, on February 23, 1962, the name of Bai Hira was actually entered in the revenue records. On the same day, i.e., February 23, 1962, Bai Hira sold the land to 15 person jointly who purchased the land for business purposes. It appears that within a few days thereafter, the land was agreed to be sold to other persons who have put their signatures as confirming parties when the land was sold to the assessee, her mother and brother by document executed on March 12, 1962. The Tribunal ought to have kept this background in mind and dealt with the contentions raised by the Departmental representative before it.
71. The Departmental representative had contended that the land was purchased in the year 1962 with disputed title, its location was far away, the area of the land was very large which would normally be not the case where the land is purchased for the purpose of investment only. Moreover, there was no apparent purpose of earning income. Further, the previous owners, who were a group of 15 persons, had purchased the land for business purposes and in quick succession, within a short period of about three weeks, the land was again sold to the assessee, her mother and brother. There was no evidence except the entry in the books of account were of the assessee to shown that the entries made in the book of account of the assessee to shown that the land was converted into stock-in-trade on March 31, 1970. It is obvious that the entries made in the book of account were not contemporaneous. The entries have been made subsequently. There are two entries extracts which have been produced on record. The first part of the entries is dated April 1, 1970. It relates to the conversion of capital asset into stock-in-trade. Therein it is stated that all the three(i.e., assessee, her mother and brother) have jointly considered today the land as stock-in-trade and the value thereof is considered to be Rs. 40 per sq. yd. as per the approved valuer's certificate. The book value thereof is Rs. 34,727.93 while market value as per the approved valuer's certificate would be Rs. 4,45,929 and the difference would be Rs. 4,11,192. This difference is credited to the capital account and debited to the business of land. The is another entry dated August 31, 1970. This entry mentions that the amount represents goodwill as per the retirement deed. Both the entries are not contemporaneous and not supported by documents. The approved valuer's certificate is dated April 9, 1970, while the entry is dated April 1, 1970. Similarly, another entry of Rs. 5,000 is made on August 31, 1970, but the retirement deed referred to therein is executed on October 24, 1970.
72. Even the valuer's report makes very interesting reading. Inter alia it reads :
"Holders of the estates have converted their holdings of land into their stock-in-trade, and they have started a business in partnership for dealing in lands and estate management. For this object the estate holders have brought their above converted stock-in-trade in the contribution of capital for the partnership firm."
73. The date of valuation given is April 1, 1970. It is not understood how and for what reasons this statement regarding the conversion into stock-in-trade and forming partnership, etc., was necessary in the valuation report. Thus, the valuer's report is not free from doubt. It appears to have been obtained subsequently to support the entries made in the books of account. In the above view of the matter, the contention raised by the departmental representative that the entries are not contemporaneous has much force. All these points raised, and arguments advanced, have not been taken into consideration at all by the Tribunal. We see much force in all these arguments advanced and points raised by the departmental representative. We find that there was no error in the finding arrived at by the Commissioner of Income-tax that the land was purchased with an intention to sell the same later at a profit.
74. The aforesaid finding is further reinforced by the subsequent facts. When the High Court decided in favour of the assessee and when the title became clear and the land was free from litigation, the assessee rushed to transfer the same. For this purpose, a partnership was formed with effect from April 1, 1970. A firm of 10 persons was formed wherein the assessee, her mother, and brother were the partners whose shares in profit were 15 per cent., each having 5 per cent. However, strangely enough, all these three persons contributed the entire capital of the firm while the other seven persons did not contribute even a rupee. Each one of the other partners was having 12 paise share in the profit of the firm as shown in the deed. Thereafter, within a short period, i.e., on August 31, 1970, the assessee along with her mother and brother retired from the firm. Had the partnership been genuine and had there not been an intention to transfer the land through a device with a view to avoid payment of tax, the assessee, her mother and brother would have insisted on the return of the land rather than allowing the other seven partners to retain the land with them. From this fact, it appears that there was an idea to realise the price rather than retain the land. Had it been a case of investment in land, the assessee, her mother and brother would have certainly insisted on retaining the land. They would not have incurred the further risk of keeping the amount due and realising the same on some future dates. This would be much more so because the other seven partners had not contributed anything by way of capital in the firm.
75. The totality of the aforesaid facts and circumstances of the case creates an impression in the mind of the Court that there was a piece of land which was included in the Town Planning Scheme. It was at a far distance from the developed locality of the city. The area of the land was very large. The assessee, though not dealing in land, belonged to a family of businessmen. The assessee along with her mother and brother took a calculated risk and purchased the land with a view to reap profit. An essential characteristic of an adventure (or for that matter, of business) is that, there is always an element of risk. The greater the risk, the larger the profit. In the instant case, there was risk of defective and disputed title. There was also the risk of litigation. There were several imponderable and uncertainties before the land could be converted for non-agricultural use. The assessee took all these risks. the assessee daringly decided to face the inherent uncertainties in the transaction. the assess also decided to run the risk of uncertainties of litigation as well as facing many imponderables and hurdles in the way of converting the land from agricultural use to non-agricultural use. In the process of clearing the title and then in getting the permission for non-agricultural use of the land and other permits and sanctions for developing the land, many uncertainties are involved. The assessee without expecting any regular return from the land ran the risk of facing the aforesaid uncertainties and hurdles. The subsequent effort to show that the land was treated as stock-in-trade is not supported by any convincing evidence. On the contrary, the entries made in the books of accounts are not contemporaneous and appear to have been subsequently created. Therefore, the conclusion is irresistible that the assessee entered into a transaction which can only be described as an adventure in the nature of trade.
76. Learned counsel for the assessee submitted that in para. 11 of the order passed by the Commissioner of Income-tax, the Commissioner of Income-Tax had held that the partnership transactions were genuine, and, therefore, there dose not arise any question of device at all. The reading of this part of the order and submission made on the basis thereof are not correct. The aforesaid sentence, i.e., "partnership transactions were genuine", has not to be read in the context of the entire order. The entire context in which the Commissioner of Income-tax made the observations may be looked at :
"The Income-tax Officer has held that no profits or gains are taxable because the transactions of entering and leaving the partnership were all sham. However. subsequently, the partnership has been treated as a genuine firm and registration has been granted for the assessment years 1973-74 onwards. For the assessment year 1972-73, no application for registration was filed and the status taken was that of an unregistered firm. But assessment was made on the firm. In these circumstances, it has to be held that the partnership transactions were genuine."
77. By making the aforesaid observation, all that the Commissioner of Income-tax has held is that it cannot be said that the firm was fake and fictitious. By these observations, the Commissioner of Income-tax did not hold that there was no device to avoid payment of tax.
78. Simply because the firm was given registration and considered genuine, the Court is not precluded from examining the real nature of the transaction. In this connection, reference may be made to the observations made by the Supreme Court in the case of CIT V. B. M. Kharwar [1969] 72 ITR 603. At page 607 of the report, the Supreme Court has observed as follows :
"The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document, and to case where it has to be gathered from evidence oral and documentary and conduct of the parties to the transaction."
79. Applying the aforesaid principle laid down by the Supreme Court, it was the bounden duty of the Tribunal to unravel the device with a view to determine the true character of the transaction. However, after piercing the veil, the taxing authority could not have given effect to, that is to say, it could not have said that there was no sale in favour of the firm whatsoever. As laid down by the Supreme Court, the Commissioner of Income-tax was within his right when he unravelled the device. He found out the real nature of the transaction and brought within the net of taxation the profits or gains of business which had arisen out of the transaction which the assessee had entered into by forming a partnership and retiring therefrom during the course of the year under assessment.
80. The same view is reiterated by the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77. The Supreme Court has observed to the effect that it is the duty of the Court in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The Court is not to be satisfied with the form and leave well alone the substance of a transaction.
81. It may be noted that the learned counsel for the assessee has not advanced any arguments on the merits as regards the question whether the course adopted by the assessee was a device to avoid payment of tax on the gains arising out of the transaction in land. On merits we agree with the reasons given and conclusions arrived at by the Commissioner of Income-tax that the assessee did adopt a device of showing the land as stock-in-trade and throwing the same in the partnership.
82. The learned counsel for the Revenue relied upon a decision of the Supreme Court in the case of McDowell & Company Ltd. v. CTO [1985] 154 ITR 148, and submitted that the earlier view that a taxpayer may resort to a device to divert the income before it accrues or arises to him and the effectiveness of the device depends not upon the morality of the taxpayer but on the operation of Income-tax Act, is no longer good law. The earlier view of the Supreme Court in CIT v. A. Raman and Co. [1968] 67 ITR 11 to the effect that taxing statutes may lawfully be circumvented does not hold good. He invited our attention to the following observations made by O. Chinnappa Reddy, J. in the aforesaid decision [1985] 154 ITR 148 at page 160 :
"In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it."
83. Learned counsel for the assessee submitted that the aforesaid decision is in direct conflict with the Supreme Court decision in the case of A. V. Fernandez v. State of Kerala [1957] 8 STC 561. He relied upon the following passage from the aforesaid decision (at page 570) :
It is no doubt true that in construing fiscal statutes and in determining the liability of the subject to tax, one must have regard to the strict letter of the low and not merely to the spirit of the stature or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion that the appellant was liable to assessment as contended by the Sales Tax Authorities."
84. The submission made by learned counsel for the assessee cannot be accepted. The decision in A. V. Fernandez case [1957] 8 STC 561, related to the interpretation of taxing statutes and it did not relate to the consideration and determination of the correct nature of the transaction. In McDowell's case [1985] 154 ITR 148, the Supreme Court was not dealing with the construction of the particular provision of a taxing statute. The Supreme Court indicated the proper way to construct a taxing statute while considering a device to avoid tax. This question (i.e., what is the proper way to construe a taxing stature while considering a device to avoid tax ?) was not at all there before the Supreme Court in A. V. Fernandez's case [1957] & STC 561. Therefore, this submission cannot be accepted.
85. Learned counsel for the assessee submitted that the observation made by the Supreme Court in McDowell's case [1985] 154 ITR 148, are obiter and they do not lay down any principle. This is not correct. In McDowell's case [1985] 154 ITR 148, the company issued bills by excluding excise duty. The company arranged its affairs in such a way that the buyer of the liquor was directly making the payment of excise duty. In this context the entire controversy arose before the Supreme Court as to whether the excise duty component of the payment made by the buyer can be considered to be a part of the total turnover of the company or not. Simply because the company arranged its affairs in such a way that the excise duty component was not reflected in the bill, can it be said that it did not form part of the price of the liquor ? Having regard to the entire factual background and the controversy which arose before the Supreme Court, it can never be said that the question regarding device to avoid tax did not arise before the Supreme Court. Even assuming for the moment that the McDowell's case [1985] 154 ITR 148, The Supreme Court has made certain observations only and has not laid down any principle as contended by learned counsel for the assessee even then we cannot ignore the observations made by the Supreme Court. As observed by the Supreme Court in the case of CIT v. Vazir Sultan and Sons [1959] 36 ITR 175, even obiter dicta of the Supreme Court are entitled to considerable weight. A any rate, the High Court cannot ignore the same. In this view of the matter, this Court is bound to adopt the approach which the Supreme Court has indicated in McDowell's case [1985] 154 ITR 148, that is to say the Court must examine the substance of the transaction, and then pose a question to itself - Is the transaction such that the judicial process may accord its approval to it ? Applying this standard, we feel that it would not be proper to accord approval of the judicial process to the transaction in question.
86. No other argument was advanced by learned counsel for the assessee to show that there was no device whatsoever adopted by the assessee. On an overall consideration of the facts are circumstances of the case and for the reasons stated hereinabove, we are of the opinion that the Commissioner of Income-tax was right when he came to conclusion that the assessee had adopted a device a conceal the income with a view to avoid payment of tax on business income which arose when the assessee retired from Ashni Construction Company on August 31, 1970.
87. In the above view of the matter, we are of the opinion that the Tribunal was not right in law in holding that the amount of Rs. 4,14,192 received by the assessee on retirement from the firm styled M/s. Ashni Construction Company was not chargeable to tax as business profits. We, therefore, answer the question referred to us as follows :
Question No. 1 : In the negative and against the assessee.
Question No. 2 : In the negative and against the assessee.
Question No. 3 : In the negative and against the assessee.
Question No. 4 : The question is concluded by the decision of the Supreme Court in the case of Kartikeya Sarabhai [1985] 156 ITR 509. As held in that case, the capital contribution by the partner in the firm, would amount to transfer. Following the said decision, we answer question No. 4 in the affirmative and against the assessee.
88. Reference answered accordingly. There shall be no order as to costs.