COMMISSIONER OF INCOME-TAX Vs. SARASWATI BAI

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Amritsar Bench, Amritsar, has referred to us four questions of law. The facts giving rise thereto, as stated, are these : Sarvshrimati Saraswati Bai, Maina Bai and Pushpa Bai purchased two adjacent pieces of land along with existing structure measuring about 3,085 square yards situated at Kandivali, Bombay, from one V. P. Shaha for Rs. 1,25,000 on December 5, 1963. They sold this property to one Shri M. K. Mehra, Chief Secretary of Shimita Co-operative Society, for Rs. 2,10,000, on February 24, 1964. This resulted in a profit of Rs. 66,000 to the aforesaid ladies. For the assessment year 1964-65, the three ladies individually filed their returns showing Rs. 22,000, respectively, as capital gains accrued to them individually. The ITO assessed Sarvshrimati Maina Bai and Pushpa Bai individually and treated the said sum of Rs. 22,000 each as capital gains but on protective basis observing that the transaction appeared to be an adventure in the nature of trade carried on by an association of persons. So far as Shrimati Saraswati Bai was concerned, the ITO held it to be business income in her hands. On March 1, 1969, a single notice under Section 148 of the I. T. Act, 1961, was issued to the aforesaid three ladies. In response to this notice, these ladies filed a return showing their income at rupees nil contending that they did not constitute an association of persons and that the notice issued to them under Section 148 of the Act was invalid. They further submitted that they did not carry on any business and as such the sum of Rs. 66,000 was not liable to be assessed in their hands as business income. They went on to explain that they had purchased the land in question for constructing a residential house but on finding out that the locality was not good, they changed their mind and sold the property. According to them, therefore, the transaction in question was not an adventure in the nature of trade. They pointed out that their individual assessments had been concluded in their individual capacities and as such the ITO could not assess the same amount in their hands as 'association of persons' as well. The ITO, rejecting their pleas, held that the ladies constituted an AOP and that the transaction in question was an adventure in the nature of trade and thus the profit of Rs. 66,000 was assessable in the hands of the assessee-AOP as its business income. The AAC upheld the order of the ITO but on second appeal to the Tribunal, the order was reversed. On the findings recorded by the Tribunal, the following are the questions of law referred to us: " (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Sarvshrimati Saraswati Bai, Maina Bai and Pushpa Bai did not constitute an AOP and that the transaction in question was not an adventure in the nature of trade ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the notice under Section 148 served upon the appellants was not valid in the eye of law ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, after having assessed Smt. Saraswathi Bai, Smt. Maina Bai and Smt. Pushpa Bai in their individual capacities, the Income-tax Officer could not legally assess the so-called AOP of the appellants in respect of the same profit ? (iv) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the profit of Rs. 66,000 in question was not assessable in the hands of the so-called assessee-AOP as 'business income'?

(2.) WE would deal with them one after the other.

(3.) ON the twin question whether the three ladies constituted an AOP and whether the transaction in question was an adventure in the nature of trade, the Tribunal held as follows: "7. The first and the most important question for consideration is whether Smt. Saraswati Bai, Smt. Maina Bai and Smt. Pushpa Bai constituted an AOP and whether they embarked upon an adventure in the nature of trade. An 'association of persons' means an association in which two or more persons join in a common purpose or common action with the object of producing income, profits or gains. Now, in the present case, there is not an iota of documentary or oral evidence on record to prove that Smt. Saraswati Bai, Smt. Maina Bai and Smt. Pushpa Bai jointly carried on business in the sale and purchase of land either before the transaction in question or thereafter. It cannot, therefore, be said that they had constituted an 'association of persons' with the common object of producing income, profits or gains. The only transaction in which they joined together is the transaction under consideration. The case of the appellants has throughout been that they purchased the land in question with the intention of constructing a house for their residence, but, later on, they abandoned the idea and sold the land as they did not find the locality suitable for their residence. There is no good reason to reject this version as the ladies purchased residential flats at Malabar Hills some time after the sale of the land in question. Even if we presume, in view of the circumstances referred to by the Appellate Assistant Commissioner, that the intention of the appellants to purchase the land was to make profit out of the same, this being a solitary transaction, it cannot be said that the same was necessarily an adventure in the nature of trade. In this connection, we may refer to the commentary at pp. 114 and 115 of the Law and Practice of Income-tax by Kanga and Palkhivala. As stated therein, 'a transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale'. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced value motivated the enhancement. In Leeming's case [1930] 15 TC 333 (HL), a syndicate of four persons acquired two assets with a view to their resale at a profit. They resold the two estates to a company at a profit. The Commissioners found that the acquisition was made with the sole object of turning it over at a profit and that the syndicate at no time had any intention of holding it as an investment. Rowlatt J. remanded the case to the Commissioners for a finding as to whether there was or was not a concern in the nature of trade. The Commissioners found that the transaction in question was not a concern in the nature of trade. The House of Lords held that it was an isolated capital transaction, and the profit was not liable to tax. Lord Buckmaster said 'an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value. If it does so rise, its realisation does not become its income'. In IRC v. Reinhold [1953] 34 TC 389 (C. Sess) the assessee purchased four houses and after two years sold them at a profit. It was an isolated transaction outside the assessee's ordinary line of business, but he admitted that he had bought the property with a view to resale and had instructed his agents to sell whenever a suitable opportunity arose. The Court of Session held that the intention to resell did not per se establish that the transaction was an adventure in the nature of trade and the Commissioners were justified in treating the profit as a capital accretion. As observed at p. 115 of The law and Practice of Income-tax by Kanga and Palkhivala, a man may purchase land, shares and securities as a capital investment producing revenue or may purchase an article with a view to using it and, coupled with the intention to invest or use, there may be the intention of reselling at a profit when the market is favourable. The purchase would none the less be on capital account and not in the nature of trade. In the illustration given at p. 113 of the said commentary, the assessee, a prosperous businessman, with a view to building a residential house for himself and constructing a workshop agreed to purchase a plot of land from an insurance society which had undertaken a land development scheme and also paid a part of the purchase price. The purchase was to be completed later since the land was under acquisition by the Government. After a year, the assessee changed his mind and assigned to a third party at a profit his rights under the agreement with the society. The Supreme Court held that in the absence of any evidence to support the inference that the isolated transaction constituted an adventure in the nature of trade, it should be regarded as on capital account Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC ). 8. In view of the above discussion, we hold that there is no evidence to hold that the appellants constituted an AOP and carried on the business of sale and purchase of land in that capacity. We are also of the opinion that, in the circumstances attending the case, the transaction in question, being an isolated transaction, was not an adventure in the nature of trade and as such the profit of Rs. 66,000 is not assessable in the hands of the so-called AOP as 'business income'. "