INDIAN HUME PIPE CO. LTD. VS COMMISSIONER OF INCOME-TAX, 1992 PTD-BOMBAY-HIGH-COURT-INDIA 1485 (1991)

Income-tax---

----Business---Adventure in the nature of trade ---Tests---Assessee-company carrying on business of manufacture and sale of hume pipes, RCC Pipes, etc.- - In 1936 BCC a sister concern purchasing land and leasing out same to assessee--In 1937 Factory of assessee shifted to that area ---Assessee using entire area for its business purposes---BCC making further purchases of land in subsequent years and leasing out same to assessee---During 1942 to 1957, assessee purchasing from BCC entire area leased out to it ---Assessee also making purchases of land in 1942, 1945 and 1953---Assessee selling small plots of land in 1951-52 to 1955-56---Assessee not a dealer in real estate or developer of land---Bulk of land purchased from BCC represented an isolated transaction of purchase of land ---Assessee investing its own surplus funds in acquiring land---No development such as plotting of land carried out---No improvement made on land to make it readily marketable---Area of plot of land sold during different years in small quantities as no normal trader in land would have done---Lands were purchased with no intention to trade but merely . as investments of surplus investible funds---Transaction not an adventure in the nature of trade---Surplus realised on sale of land not assessable as business profits.

Where there is an isolated transaction, some of the indicia for testing whether the transaction was a transaction in the nature of investment or of an adventure in the nature of trade, are: .

(i) Was the purchase a trade and were the purchase of the commodity and its resale allied to the assessee's usual trade or business or incidental to it?

(ii) What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold?

(iii) did the purchaser by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resaleable?

(iv) What were the incidents associated with the purchase and resale?

(v) Where they similar to the operations usually associated with trade or business?

(vi) Are the transactions of purchase and sale repeated?

(vii) In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture?

(viii) Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assessee or whether they represent borrowed money?

The assessee-company which carried on the business of manufacture and sale of hume pipes, RCC pipes, etc., was incorporated in the year 1926 to take over the business carried on by two concerns engaged in the manufacture and sale of hume pipes. In the year 1933-34, a sister concern of the assessee, BCC, was incorporated to undertake building construction activities. In the year 1936, BCC purchased land and leased out the same to the assessee. In the year 1937, the factory of the assessee was shifted to that area and the assessee used the entire area for its business purposes. BCC made further purchases of land in the years 1938, 1940 and 1941-42 and leased out the same to the assessee. The assessee also took lease of land in the year 1942. During the years 1942 to 1957, the assessee purchased from BCC the entire area leased out to it. The assessee also made purchases of land in the years 1942, 1945 and 1953. The assessee sold various plots of land during the period 1951-52 to 1955-56 in bits and pieces and the areas sold were very small and in driplets. The income-tax authorities and the Tribunal held that the surplus realised on the sale of the lands was business profits. On a reference:

Held, that the assessee was not a dealer in real estate or a developer of land as its line of business was entirely different and that the bulk of the land purchased from BCC in the year 1941-42 represented an isolated transaction of purchase of land. Looking to the standing of the assessee-company and the amount invested, the surplus funds of the assessee were invested in acquiring the land. The assessee did not carry out any development such as plotting of the land, nor did it make any improvement on the land to make it readily marketable. The areas of plot sold were of different dimensions during different years and in such small quantities as no normal trader in land would have done. Therefore, the lands were not bought by the assessee with any intention to trade in land but merely as investments of surplus investible funds and the surplus realised on the sale of. the plots was not assessable as business income.

G. Venkataswami Naidu & Co. v. CIT (1959) 35 TTR 594 (SC) ref.

S.J. Mehta and I.M. Munim for the Assessee.

Dr. V. Balasubramanian with J.P. Devdhar, P.S. Jetley and K.C. Sidhwa for the Commissioner.

JUDGMENT

B.N. SRIKRISHNA, J.---These two references made under section 256(1) of the Income-tax Act, 1961, pertain to different assessment. years. Income-tax Reference No. 447 of 1977 pertains to the assessment year 1962-63 while Income-tax Reference No. 295 of 1978 pertains to the assessment years 1963-64, 1965-66 and 1966-67. Both these references have been made at the instance of the assessee and the questions referred for the opinion of this Court are as under:

"(1) Whether there is any evidence on record to support the finding that right from the first purchase in 1942, the intention of the applicant in acquiring the land was stamped with the character of a trading venture and, therefore, the tax authorities were correct in taxing the profits as business income?

(2) Whether the conclusion of the Tribunal that, right from the first purchase in 1942, the intention of the applicant in acquiring the land was stamped with the character 'of a trading venture and, therefore, the tax authorities were correct in taxing the profits involved as business income is consistent with the evidence on record, and, therefore, valid in law?"

The assessee is a company, which carries on a business in manufacture and sale of hume pipes, R CC pipes, priestesses pipes, etc. The assessee -company was incorporated in the year 1926 to take over the business carried on by two concerns engaged in the manufacture and sale of hume pipes. Initially, the factory of the assessee (for carrying on the said business) was situated at Nesbit Road, Mazagaon, Bombay. In or about 1933-34, a sister concern of the assessee called Building Construction Company Ltd. (hereinafter referred to as "BCC") was incorporated with a view to undertake building construction activities. In 1936, BCC purchased an area admeasuring 21,000 sq. yds., together with the factory building, sheds, etc., from one Pioneer Company and, after the said purchase; BCC leased out that area to the assessee. In 1937, the factory of the assessee was shifted to the said property situated at Wadala from Nesbit Road and the manufacturing activities of the assessee have thereafter been carried on at Wadala. Initially, the entire area of 21,000 sq. yds. was utilised for the business purpose of the assessee. In 1938, 1940 and 1941-42, BCC made the following further purchases of land at Wadala:

Thus, the total area purchased by BCC, including the purchase in the year 1936, came to 2,86,841 sq. yds. BCC also leased out to the assessee the land purchased by it from 1938 to 1941-42 soon after the purchases were made. The assessee had also taken on lease an area admeasuring 24,798 sq. yds in the year 1942 from one. H.H. Khetsey.

During the period from 1942 to 1957, the assessee purchased from BCC the entire area of 2,86,841 sq. yds. already leased out to it, together with another entire area admeasuring 1,021 sq. yds. in the manner indicated below:

It may be noted at this stage that, though BCC had acquired by purchase land admeasuring 2,86,841 sq. yds., the assessee had purchased that entire area which turned out, on measurement, to be 2,87,941 sq. yds. (the difference between the two figures being attributable to defective measurement originally).

Apart from purchasing the land from BCC, the assessee had also purchased land from different parties during different years as under:

In the aforesaid manner, the assessee came to acquire a total area of land admeasuring 3,92,355 sq. yds. The entire area of land purchased by the assessee is situate near Antop Hill,

Wadala, and all the lands were contiguous except two purchases on the west side of Antop Hill. The land on the west side of Antop Hill was purchased in 1945 and the total area admeasured 31,896 sq. yds.

Out of the purchased land admeasuring 3,92,353 sq. yds., the assessee sold various plots of land on both sides of Antop Hill during the period 1951-52 to 1955-56 in bits and pieces, the smallest being an area of 30 sq. yds. in 1953-54, and the largest being an area of 22,326 sq. yds. in 1956-57. An area of 34,430 sq. yds. was acquired by the Government in 1955-56. As regards the sale id 1956-57 of the area of 22,326 sq. yds., the Tribunal had found that the assessee had a wire drawing factory situate on the said land and that it had sold the said factory, alongwith the land on which the factory was situate, to M/s. Krishna Steel Industries. Barring the two instances of sale of large plots, one to M/s. Krishna Steel Industries in 1956-57 and plot acquired by the Government in 1965-66, the areas of land sold during the period 1951-52 to 1965-66 are very small and in driblets.

The Departmental authorities and the Tribunal have treated the surplus in the hands of the assessee from the sale of the aforesaid pieces of land as business profits and did not accept the contention of the assessee that it should be taxed as capital gains. .

The questions as aforesaid have been referred to this Court for its opinion at the instance of the assessee.

It is not disputed that the assessee was not a dealer in real estate or a developer of land as its line of business was entirely different, as stated earlier. It is also not disputed that the bulk of the land was purchased in 1941-42 from BCC and represents an isolated transaction of purchase of land. In such a situation, where there is an isolated transaction, as pointed out by the Supreme Court in G. Venkataswami Naidu and Co. v. CIT (1959) 35 ITR 594, some of the indicia for testing whether the transaction was a transaction in the nature of investment or of an adventure in the nature of trade, are:

(i) Was the purchase a trade and were the purchases of the commodity and its resale allied to his usual trade or business or incidental to it?

(ii) What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold?

(iii) Did the purchaser, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resaleable?

(iv) What were the incidents associated with the purchase and resale?

(v) Were they similar to the operations usually associated with trade or business?

(vi) Are the transactions of purchase and sale repeated?

(vii) in regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture?

(viii) Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assessee or whether they represent borrowed money?

The Supreme Court pointed out in the above case that, though none of these tests is in itself conclusive, the Court must look at the cumulative effect of all the factors and arrive at a conclusion as to whether the transaction was an instance of investment or an adventure in the nature of trade.

Let us now apply these tests to the transactions in question before us. There is no finding. one way or the other, by the Tribunal as to whether the money for purchase of the land came from the surplus funds in the hands of the assessee or whether from borrowed money. However, looking to the standing of the company and the amount invested, we think that it is more probable that the company may have invested its own surplus funds in acquiring the land. The assessee did not carry out any development such as plotting of the land, nor did it make any improvement on the land to make it readily marketable. The areas of plot sold were of different dimensions during the different years and in such small quantities, as no normal trader in land would have done. Applying these tests and taking the cumulative effect of the answer thereto, and examining the course of conduct of the assessee from 1941-42 to 1965, we have no manner of doubt that these lands were not bought by the assessee with any intention to trade in land but merely as investments of surplus investible funds. We arc of the view that the assessee's contention in this regard must be upheld. Consequently, we answer the questions referred to Lis in the following manner:

Question No.1: In the negative and in favour of the assessee.

Question No.2: In the negative and in favour of the assessee.

There will be no order as to costs.

M.BA./1638/TQuestion answered.