TRIBHUVANDAS VALLABHDAS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question that arises for consideration on this reference is whether a certain transaction of the purchase and sale of silver entered into by the assessee was an adventure in the nature of trade.

(2.) THE assessee is an HUF, carrying on business in commission agency and money -lending over a large number of years. The karta of the assessee -family was one Vallabhdas Murlidhar until his death on the 27th Dec., 1944, and thereafter his son, Tribhuvandas Vallabhdas, has been acting as the karta of the family. The assessee had its head office at Yeola and its branch office at Bombay. In Samvat years 1996 and 1997, which correspond to calendar years 1939 -40 and 1940 -41, Vallabhdas, the then karta of the family had purchased 111 silver bars valued at Rs. 2,01,824. These purchases were made in six instalments between the dates 12th Aug., 1940 and 23rd Jan., 1941. Although the assessee -family was doing commission agency business in all kinds of goods, including bullion and also money -lending business, it never did any business in bullion on its own account. The assessee had a Tijori account at Yeola known as "Vallabhdas Gangaram Tijori Vahi". The amount for the purchase of 111 silver bars was taken out from this Tijori account and not from the funds of the assessee's regular business. Vallabhdas, who had purchased these 111 bars, did not sell any of them during his lifetime. After his death in 1944, when his son, the present karta of the HUF, came into possession and management of the family affairs, he utilised five out of the 111 bars of silver for preparing utensils some time in 1945 or 1946 and thereafter from 2nd of Dec., 1946 onwards he gradually sold all the silver bars during a period of more than two years. In the Samvat year 2003 he sold 45 bars and in the next Samvat year he sold 29 bars. The sale of 45 bars in the Samvat year 2003 was for a total amount of Rs. 1,97,263 and realised a surplus of Rs. 1,15,453 over its cost price. The 29 bars, which were sold in Samvat year 2004, fetched a price of Rs. 1,48,232 realising an excess of Rs. 95,510 over their cost. In the assessment of the assessee for the asst. yrs. 1948 -49 and 1949 -50 for which the relevant account years were Samvat years 2003 and 2004, respectively, these surplus amounts resulting from the sale of the silver bars were claimed by the assessee as accretions to capital and, therefore, not taxable. According to the assessee, the purchase of the bars made by Vallabhdas in the Samvat years 1996 and 1997 was by way of investment and not in the course of business. The ITO did not accept this claim of the assessee. According to him, the purchase and sale of the silver bars was an adventure in the nature of trade and the profits arising therefrom were liable to tax. In coming to the conclusion that the transaction was an adventure in the nature of trade, the ITO relied on the circumstances, firstly, that the purchase was made at the beginning of the Second World War in the expectation that the prices will go up as a result of the war as the experience of the last world war showed; secondly, Vallabhdas was a shrewd businessman and a money -lender and was not likely to lock up his capital in an investment, which was not capable of yielding any income. He had a large surplus cash in his "Tijori" at Yeola and was, therefore, in a position to wait, after having made these purchases, for a suitable opportunity to sell off the silver bars at a profit; that after purchasing the 111 bars, Vallabhdas, during his lifetime, had not put them to any use and although his son, after the death of Vallabhdas, had utilised some five out of the 111 bars for making utensils, the rest of the bars had been sold off at a profit. He also pointed out that the manner of purchase and sale, which was not in one lot, also indicated an intention to do business and not to go in for an investment. He accordingly took the surplus amounts to be parts of the taxable income of the assessee and brought them to tax. The assessee appealed to the AAC from these orders of assessment passed by the ITO. It was urged in the grounds of appeal that the silver bars were purchased from capital as an investment; five of the bars were utilised for making household utensils and 45 bars were sold in the Samvat year 2003 for making provision for income -tax and super -tax payments and for the advance payment of taxes under S. 18. Similarly, in the next Samvat year 2004, 29 bars were sold for paying income -tax and for meeting house -hold and other expenses. The AAC, before whom these appeals came for the first time, took the view, relying on the case of Lalit Ram Mangilal vs. CIT (1950) 18 ITR 286 (All) : TC12R.975 that the transaction in question not having been in the regular line of the assessee's business, the burden was on the Department to prove that the adventure was undertaken from a motive of making profit and not from any other motive. According to him, this approach to the question under consideration had not been properly adhered to by the ITO and it was, therefore, necessary to remand the case and call for a report from the ITO after a proper examination of the assessee's books of account and the other material on record in the light of the contentions, which the assessee had raised. In order to guide the ITO for the further enquiry, which was being called for, the AAC asked him to consider a few points which he enumerated. These points, briefly stated, were, firstly, to consider the significance of the period at which the purchases were made and the funds which were utilised for the purpose; secondly, the time -lag which had occurred between the purchase and the sale; thirdly, whether the assessee's explanation as to the reasons why the bars were sold was substantiated by the record, and, fourthly, whether the case came within the ratio of the decisions of the English cases reported as IRC vs. Livingstone (1926) 11 Tax Cases 538 : TC12R.573 and Martin vs. Lowry (1926) 11 Tax Cases 297 : TC12R.569. On remand the ITO examined Tribhuvandas Vallabhdas, the karta of the family, and also their munim. In his examination Tribhuvandas stated that being a minor at the time when the purchases were made, he did not know anything about the transactions, nor could he say anything about the circumstances under which the purchases were made. He had started looking after the business since 1944 and that he had to sell the bars for paying income -tax and super - tax, that is, as he had not sufficient cash in hand to meet the income -tax and super -tax dues within the period allowed by the IT Department, he had sold the bars by parts. At times the income - tax dues were first paid and to meet the cash shortage, the silver bars had to sold. The munim, Govindji Shamji, stated that Vallabhdas had purchased these bars as investment and that they had been sold to meet income -tax dues, and the cash shortage caused by the payment of income -tax and for purposes of business. After considering the evidence given by these two persons and the other material before him, the ITO submitted his report. His conclusions were that the purchase was not for investment, nor was the sale for the payment of income -tax dues, and having regard to the circumstances that the purchase was made at a time when the World War II had started and the prices were rising and that they were sold later on at profit, the sole intention in purchasing and selling the silver bars was to earn profits and the transaction was, therefore, an adventure in the nature of trade. The assessee gave its written objections to the remand report of the ITO. It stated therein that Vallabhdas Murlidhar had purchased 111 bars of silver as an investment from home -savings and they were not purchased from business cash balance; that they had been purchased with a view to make utensils for household use and Vallabhdas had no intention of purchasing or selling them for profit. They had been held in stock after their purchase for a long period and although they had ample other cash in the home -safe and also in the Bombay office to pay large amount of income -tax, they thought of selling the bars for replenishing the balance of cash in the home -safe. The AAC after receipt of the remand report from the ITO heard the appeals before him and came to the conclusion that there was clear and unmistakable profit motive behind the purchase of the bars and the ITO's action in bringing within charge the profit arising from the sale thereof was in order. He accordingly dismissed the appeals of the assessee. The assessee thereafter appealed to the Tribunal. The Tribunal held that the assessee's case that the purchase was by way of investment or for the purpose of making utensils could not be believed. There was also nothing on record to show that the purchase of silver was made to conserve capital at the time of a political upheaval. There was also no panic in the market at the time when the purchase was made and the only object, therefore, with which a shrewd businessman like the assessee had made a purchase of Rs. 2 lakhs worth of silver was with a view to earn profits. According to the Tribunal, the purchase having been made with the intention to sell at profit, it was immaterial whether the sale proceeds were utilised in the payment of taxes or otherwise. The Tribunal was, therefore, of the view that, by the purchase of the silver bars, Vallabhdas had entered into a venture in the nature of trade and the profits arising out of the transaction, therefore, were business profits of the assessee's HUF which were taxable under the Indian IT Act. The assessee applied under S. 66(1) for a reference of certain questions of law, which, according to it, arose on the order of the Tribunal. The application was rejected and it appears that an application made to this Court under S. 66(2) was also rejected. The assessee thereafter went in appeal by special leave to the Supreme Court. It succeeded in the said appeal and the Supreme Court directed the Tribunal to draw up a statement of the case and refer the following two questions of law for the opinion of this Court under S. 66(2) of the Indian IT Act : "(1) Whether, on the facts and in the circumstances of the case, the profit realised from the sale of 45 silver bars by the assessee in the previous year arose from an adventure in the nature of trade within the meaning of S. 2(4) of the IT Act and was liable to income -tax ? (2) Whether, on the facts and in the circumstances of the case, the profit realised from the sale of 29 silver bars by the assessee in the previous year arose from an adventure in the nature of trade within the meaning of S. 2(4) of the Indian IT Act and was liable to income -tax ?"

(3.) THE main grievance of Mr. Palkhivala, learned counsel who appears for the assessee, is that the Tribunal has not taken into consideration several important and material circumstances on record which are in favour of the assessee and which go a long way to show that the transaction of the purchase of silver bars was by way of an investment as alleged by the assessee and not an adventure in the nature of trade as held by the Departmental authorities and the Tribunal. The Tribunal further has not given proper consideration to the case urged by the assessee and has not cared to understand it properly. It has also not given good and sound reasons for the conclusions to which it has arrived. According to Mr. Palkhivala, therefore, the decision of the Tribunal is not capable of being sustained and on a proper consideration of the material on record, which is disclosed by the annexures to the statement of the case and the further material, which he wants to supplement by the notice of motion which he has taken out, it will be abundantly clear that the purchase of the silver bars in the present case was by way of investment and not as an adventure in the nature of trade.