G. Venkataswami Naidu & Co. Vs. The Commissioner of Income-Tax [1958] INSC 119 (24 November 1958)
GAJENDRAGADKAR, P.B.
AIYYAR, T.L. VENKATARAMA SARKAR, A.K.
CITATION: 1959 AIR 359 1959 SCR Supl. (1) 646
CITATOR INFO :
F 1959 SC1252 (7,9,14,15) RF 1961 SC1062 (7) R 1962 SC1141 (6) R 1962 SC1267 (14) R 1965 SC1898 (9) R 1968 SC 683 (9) F 1968 SC 788 (5,7) F 1968 SC 811 (3) R 1969 SC 460 (6) RF 1969 SC1053 (4) R 1970 SC1560 (9) R 1971 SC 794 (12) RF 1975 SC2106 (11,16) R 1976 SC2150 (3,7,10) RF 1986 SC1695 (21)
ACT:
Income Tax-Income from isolated transactions--" Adventure in the nature of trade "-Business income-Indian Income Tax Act, 1922 (XI Of 1922), SS. 2(4), 10. Reference to High Court-Transaction, whether or not an adventure in the nature of trade-Mixed question of law and fact-Indian-Income-tax Act,1922 (XI of 1922),s.66(1)
HEADNOTE:
The appellant, who was a firm acting as managing agents of a limited company (the Mills), purchased four plots of land adjoining the Mills on various dates between 1941 and 1942, and about five years later sold them to the Mills, as a result. of which the appellant realised a sum of Rs. 43,887 in excess of the purchase price, For the assessment year.
1948-49 the Income tax Officer treated the amount as the income. of the appellant 'and assessed it to income-tax under head 'business', on the ground that there was no evidence to show that the appellant had purchased the said lands for agricultural purposes or that they were acquired as an investment, and, that since the lands: were adjacent to the Mills the appellant must havepurchased them solely with a view to sell them to the Mills; with. profit. 'He considered that the transaction' had---;ill the elements of a business transaction' and was thus an adventure in the, natural of 'trade within s. 2(4)of the Indian Income-tax Act 7 The Appellate, Tribunal rejected the explanation given by the appellate 'regarding" the object with which it had purchased the plots of land agreed 641 with the view taken by the Income-tax Officer. At the instance of the appellant the Tribunal referred to the High Court the question: " whether there was material for the assessment of the sum of. Rs. 43 87 being the difference between the purchase and sale price of the four plots of land as income from all adventure in the nature of trade.
The High Court held that' the transaction in question was an adventure in the nature of trade and so the income-tax authorities were justified in taxing the amount under the head 'business' for the relevant year. On appeal by special leave to the Supreme Court, it was contended for the appellant that on the facts and circumstances of the case it was erroneous in law to hold that the transaction ill question was an adventure in the nature of trade. On the other hand, it was urged for the respondent that the question as raised before the High Court was one of fact not liable to be challenged under s. 66(1) of the Act.
Held, (1) that the expression " adventure in the nature of trade " in sub-s. (4) Of S. 2 of the Indian Income-tax Act, 1922, postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business and that a tribunal while considering a question as to whether a transaction is or is not an adventure in the nature of trade, before arriving at its final conclusion on facts, has to address itself to the legal requirements associated with the concept of trade or business. Such a question is one of mixed law and fact and the decision of the tribunal thereon is open to consideration under s. 66(1) of the Act.
Meenakshi Mills, Madurai v. Commissioner of Income-tax, Madras, [1956] S.C.R. 691 and Oriental Investment Co., Ltd. v. Commissioner of Income-tax, Bombay, [1958] S.C.R. 49, relied on.
Edwards v. Bairstow [1956] A.C. 14, considered and held not inconsistent with the above said decisions.
2) that in the circumstances of this case it would be more appropriate to frame the question in this from: " whether, on the facts and circumstances proved in the case, the inference that the transaction in question is an adventure in the nature of trade is in law justified." Held, further, that even an isolated transaction might be regarded as an adventure in the nature of trade within S.
2(4) Of the Act, if it is characterised by some of the essential features that make up trade or business.
Though judicial decisions which deal with the character of transactions alleged to be in the nature of trade do not purport to lay down any general or universal test, the presence of all the relevant circumstances, mentioned by..them my 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; it is the total effect of all the relevant factors and circumstances that determine the distinctive character of the transactions 648 If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit then it is a case of capital accretion and not profit derived from an adventure in the nature of trade. But where a purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser had no intention of holding the property for himself or otherwise enjoying or using it, there would be a strong presumption that the transaction is an adventure in the nature of trade;
but this may be rebutted by the other facts or circumstances of the case.
The Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes), (1904) 5 Tax Cas. 159; T. Beynon
lnland Revenue v. Livingston, (1926) 11 Tax Cas. 538; Martin v. Lowry, (1926) 11 Tax Cas 297; Rutledge v. Commissioners of Inland Revenue, (1929) 14 Tax Cas. 490; Balgownie Land Trust, Ltd. v. The Commissioners of Inland Revenue, (1929) 14 Tax Cas. 684; F. A. Lindsay, A. E. Woodward and W. Hiscox v. Commissioners of Inland Revenue, (1932) 18 Tax Cas. 43 and Cayzer, Irvine and Co., Ltd. v. Commissioners of Inland Revenue, (1942) 24 Tax Cas. 491, considered.
Commissioners of Inland Revenue v. Reinhold, (1953) 34 Tax Cas. 389, distinguished and considered as not laying down any general proposition of law.
In the present case, the circumstances showed that the appellant whose ordinary business was not to make investment in lands had purchased the plots of land with the sole intention of selling them to the Mills at a profit and this intention raised a strong presumption that the purchase and the subsequent sale were an adventure in the nature of trade; and, it was held that in the absence of any rebutting evidence, the Income-tax authorities were justified in taxing the amount in question as income from business.
& Civil APPELLATE JURISDICTION: Civil Appeal No. 709 of 1957.
Appeal by special leave from the judgment and order dated April 18, 1955, of the Madras High Court in Case Referred No. 25 of 1952.
A. V. Viswanatha Sastri and M. S. K. Sastri, for the appellant.
"M. C. Setalvad, Attorney-General for India, R, Ganapathy Iyer, R. H. Dhebar and D. Gupta, for the respondent.
1958. November.24. The Judgment of the Court was delivered by 649 GAJENDRAGADKAR, J.-The appellant is a firm acting as managing agents of the Janardana Mills Ltd., Coimbatore. It purchased four contiguous plots of land admeasuring 5 acres 26 cents under four sale deeds executed on October 25, 1941, November 15, 1941, June 29, 1942, and November 19, 1942, respectively for a total consideration of Rs. 8,712-15-6.
After about five years these properties were sold by the appellant in two lots to the Janardana Mills Ltd. The first lot was sold on September 1, 1947, and the second on November 10, 1947, the total consideration for the two sales being Rs. 52,600. These two sales realised for the appellant a sum of Rs.43,887-0-6 in excess of the purchase price.
The Income-tax Officer treated the said amount of Rs. 43,887 as the income of the appellant for the assessment year 194849, and assessed it to income-tax under the head " business ". The officer held that there was no evidence to show that the appellant had purchased the said lands for agricultural purposes or that it had acquired them as an investment. He also found that, since the lands were adjacent to the Janardana Mills, the appellant must have purchased them solely with a view to sell them to the said mills with a profit.
That is why, though the transaction was in the nature of a solitary transaction, it was held that it had all the elements of a business transaction and was thus an adventure in the nature of trade.
Against this order of assessment the appellant preferred an appeal to the Appellate Assistant Commissioner. The appellate authority upheld the appellant's contention that the amount in question was not assessable as it cannot be hold to be income or profit resulting from a profit-making scheme, and set aside the order under appeal.
The respondent challenged the correctness of this order by taking an appeal against it to the Income tax Appellate Tribunal. The tribunal agreed with the view taken by the Income-tax Officer and held that the amount in question was not a capital accretion but a gain made in an adventure in the nature of business 82 650 in carrying out a scheme of profit-making. The tribunal rejected the explanations given by the appellant as to why it had purchased the properties and held that the purchase had been made by the appellant solely with a view to sell the said properties at profit to the Janardana Mills.
At the instance of the appellant the tribunal then referred to the High Court of Madras the question suggested by it in these words: " whether there was material for the assessment of the sum of Rs. 43,887 being the difference between the purchase and sale price of the four plots of land as income from an adventure in the nature of trade ".
This reference was heard by Rajagopalan and Rajagopala Ayyangar, JJ., and the question referred has been answered against the appellant. The High Court has held that the transaction in question was an adventure in the nature of trade and so the respondent was justified in taxing the amount in question under the head " business " for the relevant year. The application for leave made by the appellant was rejected by the High Court. Thereupon the appellant applied for, and obtained, special leave to appeal to this Court. That is how the appeal has been admitted in this Court ; and the only question which it raises for our decision is whether the High Court was right in holding that the transaction in question was an adventure in the nature of trade.
We may at this stage brie y indicate the material facts and circumstances found by the tribunal and the inference drawn by it in regard to the character of the transaction in question. The appellant purchased the four plots under four different -sale deeds. The first purchase was for Rs. 521 and it covered a piece of land admeasuring 281 cents; the second purchase related to 2 acres 791 cents and the price paid was Rs. 1,250; while the third and the fourth purchases were for Rs. 1,942 and Rs. 5,000 and they covered 28 1/4 cents and 1 acre and 90 cents respectively. The property purchased under the first sale deed was sold on November 10, 1947, for Rs. 2,825 whereas the three remaining properties were sold on September 1, 1947, 651 for Rs. 49,775, the purchaser in both cases being the Janardana Mills Ltd. The purchase of the first item of property by the appellant had been made in the name of Mr.
V. G. Raja, assistant manager of the Janardana Mills Ltd., who is the son-in-law Of G. Venkataswami Naidu, one of the partners of the appellant firm. Naturally when this property was sold to the mills the document was executed by the ostensible owner V. G. Raja. It is not disputed that the purchase in the name of V. G. Raja was benami for the appellant. All the plots which were thus purchased by the appellant piecemeal are contiguous and they adjoin the mills. On the plot purchased on June 29, 1942, there stood a house of six rooms which fetched an annual rent of about Rs. 100; and after deduction of taxes, it left a net income of Rs. 80 per year to the appellant. The other plots are vacant sites and they brought no income to the appellant.
During the time that the appellant was in possession of these plots it made no effort to put up any structures on them or to cultivate them; and so it was clear that the only object with which the appellant had purchased these plots was to sell them to the mills at a profit. It was, however, urged by the appellant that the properties had been bought as an investment. This plea was rejected by the tribunal.
The tribunal likewise rejected the appellant's case that it had purchased the plots for building tenements for the labourers working in the Janardana Mills. Alternatively it was urged by the appellant that the Janardana Mills decided to purchase the plots because' an award passed by an industrial tribunal in June 1947 had recommended that the mills should provide tenements for its labourers. Thus the appellant's case was that it had not purchased the properties with a view to sell them to the mills and the mills in fact would not have purchased them but for the recommendation made by the award which made it necessary for the mills to purchase the adjoining plots for the purpose of building tenements for its employees. The tribunal was not impressed even by this plea; and so it ultimately held that the plots had been purchased by the appellant wholly and solely, 652 with the idea of selling them at profit to the mills. The tribunal thought that since the appellant was the managing agent of the mills it was in a position to influence the decision of the mills to purchase the properties from it and that was the sole basis for its initial purchase of the plots. On these findings the tribunal reached the conclusion that the sum of Rs. 43,887 was not a capital accretion but was a gain made in the adventure in the nature of business in carrying out the scheme of profit-making.
The appellant contends that, on the facts and circumstances found in the cage, it is erroneous in law to hold that the transaction in question is an adventure in the nature of trade.
There is no doubt that the jurisdiction conferred on the High Court by s. 66(1) is limited to entertaining references involving questions of law. If the point raised on reference relates to the construction of a document of title or to the interpretation of the relevant provisions of the statute, it is a pure question of law; and in dealing with it, though the High Court may have due regard for the view taken by the tribunal, its decision would not be fettered by the said view. It is free to adopt such construction of the document or the statute as appears to it reasonable. In some cases, the point sought to be raised on reference may turn out to be a pure question of fact; and if that be so, the finding of fact recorded by the tribunal must be regarded as conclusive in proceedings under s. 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved. in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence; and, if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conclusion of fact drawn by the tribunal on the ground that it is not supported by any legal evidence; or that the impugned conclusion drawn 653 from the relevant facts is not rationally possible; and if such a plea is established, the court may consider whether the conclusion in question is not perverse and should not, therefore, be set aside. It is within these narrow limits that the conclusions of fact recorded by the tribunal can be challenged under s. 66(1). Such conclusions can never be challenged on the ground,,, that they are based on mis-appreciation of evidence. There is yet a third class of cases in which the assessee or the revenue may seek to challenge the correctness of the conclusion reached by the tribunal on the ground that it is a conclusion on a question of mixed law and fact. Such a conclusion is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles.
The need to apply the relevant legal principles tends to confer upon the final conclusion its character of a legal conclusion and that is why it is regarded as a conclusion on a question of mixed law and fact. In dealing with findings on questions of mixed law and fact the High Court would no doubt have to accept the findings of the tribunal on the primary questions of fact; but it is open to the High Court to examine whether the tribunal had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law.
This question has been exhaustively considered by this Court in Meenakshi Mills, Madurai v. Commissioner of Income-tax, Madras (1). In this case the appellate tribunal had come to the conclusion that certain sales entered in the books of the appellant company in the names of certain intermediaries, firms and companies, were fictitious and the profits ostensibly earned by them were in fact earned by the appellant which had itself sold the goods to the real purchasers and received the prices. On this finding the tribunal had ordered that the profits received from such sales should be added to the amount shown as profits in the appellant's books and should be taxed. The appellant 654 applied for a reference to the tribunal under s. 66(1) and the High Court of Madras under s. 66(2), but his application was rejected. Then it came to this Court by special leave under Art. 136 and it was urged on its behalf that the tribunal had erred in law in holding that the firms and companies described as the intermediaries were its benamidars and that its application -for reference should have been allowed. This plea was rejected by this Court because it was held that the question of benami is purely a question of fact and not a mixed question of law and fact as it does not involve the application of any legal principles for its determination. In dealing with the argument urged by the appellant, this Court has fully considered the true legal position in regard to the limitation of the High Court's jurisdiction in entertaining references under s. 66(1) in the light of several judicial decisions bearing on the point. The ultimate decision of the Court on this part of the case was that " on principles established by authorities only such questions as relate to one or the other of the following matters can be questions of law under s. 66(1): (1) the construction of a statute or a document of title (2) the legal effect of the facts found where the point for determination is a mixed question of law and fact; and (3) a finding of fact unsupported by evidence or unreasonable and perverse in nature ". Having regard to this legal position this Court held that the question of benami was a pure question of fact and it could not be agitated under s. 66(1).
The point about the scope and effect of the provisions of s. 66(1)has again been considered by this Court in The Oriental Investment Co. Ltd. v. Commissioner of Income-tax, Bombay(1) This was a case on the other side of the line. It was held that whether the appellant's business amounted to dealing in shares and properties or to investment is a mixed question of law and fact and that the legal effect of the facts found by the tribunal as a result of which the appellant could be treated as a dealer or investor is a question of law. As a result of this conclusion the appeal (1) [1958] S. C. R. 49.
655 preferred by the appellant was allowed, the order passed by the High Court refusing the appellant's request for reference was set aside and the case was remitted to it for directing the tribunal to state a case, on the two questions mentioned in the judgment.' These two decisions bring out clearly the distinction between findings of fact and findings of mixed questions of law and fact.
What then is the nature of the question raised before us in the present appeal ? The tribunal and the High Court have found that the transaction in question is an adventure in the nature of trade; and it is the correctness of this view that is challenged in the present appeal. The expression " adventure in the nature of trade" is used by the Act in s.
2, sub-s. (4) which defines business as including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Under s. 10, tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profit or gains of any business, profession or vocation carried on by him. Thus the appellant would be liable to pay the tax on the relevant amount if it is held that the transaction which brought him this amount was business within the meaning of s. 2, sub-s. (4) and it can be said to be business of the appellant if it is held that it is an adventure in the nature of trade. In other words, in reaching the conclusion that the transaction is an adventure in the nature of trade, the tribunal has to find primary evidentiary facts and then apply the legal principles involved in the expression " adventure in the nature of trade " used by s. 2, sub-s. (4). It is patent that the clause " in the nature of trade " postulates the existence of certain elements in the adventure which in law would invest it with the character of a trade or business; and that would make the question and its decision one of mixed law and fact. This view has been incidentally expressed by this Court in the case of Meenakshi Mills, Madurai (1) in repelling the appellant's argument based on the decision of the (1) [1956] S. C. R. 691.
656 House of Lords in Edwards v. Bairstow (1). For the respondent, the learned Attorney-General has, however, relied on the fact that the relevant observations in the case of Meenakshi Mills, Madurai, are obiter and he has invited our attention to the decision in the case of Edwards (1) in support of his contention that the judgment of the House of Lords would show that the question about the character of the transaction was ultimately treated as a question of fact. Before we refer to the said decision it may be relevant to observe that there are two ways in which the question may be approached. Even if the conclusion of the tribunal about the character of the transaction is treated as a conclusion on a question of fact, it cannot be ignored that, in arriving at its final conclusion on facts proved, the tribunal has undoubtedly to address itself to the legal requirements associated with the concept of trade or business. Without taking into account such relevant legal principles it would not be possible to decide whether the transaction in question is or is not in the nature of trade. If that be so, the final conclusion of the tribunal can be challenged on the ground that the relevant legal principles have been misapplied by the tribunal in reaching its decision on the point; and such a challenge would be open under s. 66(1) because it is a challenge on a ground of law. The same result is achieved from another point of view and that is to treat the final conclusion as one on a mixed question of law and fact. On this view the conclusion is not treated as one on a pure question of fact, and its validity is allowed to be impeached on the ground that it has been based on a misapplication of the true legal principles. It would thus be seen that whether we call the conclusion in question as one of fact or as one on a question of mixed law and fact, the application of legal -principles which is an essential part in the process of reaching the said conclusion is undoubtedly a matter of law and if there has been an error in the application of the said principles it can be challenged as an error of law.
The difference then is merely one of form and not substance;
and on the whole it is (1) [1956] A. C. 14; 36 Tax Cas. 207.
657 more convenient to describe the question involved as a mixed question of law and fact. That is the view expressed by this Court in the case of Meenakshi Mills, Madurai (1); and, in our opinion, it avoids any confusion of thought and simplifies the position by treating such questions as analogous to those falling under the category of questions of law.
Let us then consider whether the decision of the' House of Lords in the case of Edwards(2) is inconsistent with this view. In this case the respondents, who were respectively a director of a leather manufacturing company and an employee of a spinning firm, purchased a complete cotton spinning plant in 1946 with the object of selling it as quickly as possible at a profit. They hoped to sell the plant in one lot, but ultimately had to dispose of it in five separate lots over the period from November 1946 to February 1948.
Assessments to income-tax in respect of profits arising from this transaction were made under Case I of Schedule D for the years 1946-47 and 1947-48. On the matter being taken before the Chancery Division, it was held in accordance with the earlier decisions of the Court of Appeal in Cooper v.
Stubbs (3) and Leeming v. Jones (4) that the finding of the General Commissioners was a finding of fact which could not be challenged in appeal. The attention of the court was drawn to the different view expressed in a Scottish case, Commissioners of Inland Revenue v. Fraser (5) where the Court of Session had held that it was at liberty to treat the matter as a mixed question of fact and law, and in fact it had overruled the finding of the General Commissioners in that behalf " It does not seem to me ", observed Upjohn, J., " that in this court I am at liberty to follow the practice of the Scottish Court, attractive though it would be to do so, if the matter was res integra ". However, since apparently the finding of the General Commissioners did not appear to the court to be satisfactory, the matter was remitted to them with an intimation that they should consider (2) [1956]A.C.14;36 Tax Cas. 207 (4) (1930) 15 Tax Cas. 333 (1) [1956)S.C.R. 691.
(3) (1925) To Tax Cas. 29.
(5) (1942) 24 Tax Cas. 498.
83 658 the question whether the transaction, being an isolated transaction, there was nevertheless an adventure in the nature of trade which was assessable to tax under Case 1 of Schedule D. The Commissioners were directed to hear further arguments on this point before stating a supplementary case.
After remand, the Commissioners adhered to their earlier view and stated that they were of opinion that the transaction was an isolated case and not taxable and so they discharged the assessments. With the statement of this supplementary case, the matter was argued before the Chancery Division again. Wynn-Parry, J., who delivered the judgment on this occasion referred to the earlier decisions of the Court of Appeal and held that " on those authorities prima facie the matter is concluded by the decision of the Commissioners that the transaction, the subject-matter of the case, was not an adventure in the nature of trade ".
Then the learned judge examined the question as to whether the decision of the Commissioners can be said to be perverse; and held that it could not be so characterised.
In the result the appeal was dismissed. The question then reached the Court of Appeal but the result was the same.
The Court of Appeal observed that the earlier decisions were binding on it no less than the Court of First Instance ; and so it held that the conclusion of the Commissioners was a finding of fact which the court cannot disturb. However, it is apparent from the discussion that took place when the court granted leave to. the Crown to take the matter to the House of Lords that the court did not feel happy about the correctness of the finding made by the General Commissioners in the case. That is how the matter reached the House of Lords.
The facts in this case were so clearly against the finding of the Commissioners that Viscount Simonds made it clear at the outset that in his opinion, " what. ever test is adopted, that is, whether the finding that the transaction was not an adventure in the nature of trade is to be regarded as a pure finding of fact or as the determination of the question of law or of mixed law and fact, the same result would be reached in this 659 case. The determination cannot stand. This appeal must be allowed and the assessments must be confirmed". It is in the light of this emphatic statement that the rest of the judgment of Viscount Simonds must be considered. He referred to the divergence of views expressed in English and Scottish decisions and his conclusion was that " if and so far as there is any,, divergence between the English and Scottish approach it is the former which is supported by the previous authority of this House to which reference has been made "; but he analysed the position involved in both the approaches and held that the difference between them was not of substance. " To say that a transaction is or is not an adventure in the nature of trade ", observed Viscount Simonds, " is to say that it has or has not the characteristics which distinguish such an adventure but it is a question of law not of fact what are those characteristics, or, in other words, what the statutory language means. It follows that the inference can only be regarded as an inference of fact if it is assumed that the Tribunal which makes it is rightly directed in law what the characteristics are and that, I think, is the assumption that is made ". Dealing with the merits of the case, Viscount Simonds observed that " sometimes, as in the case as it now comes before the Court where all the admitted or found facts point one way and the inference is the other way, it can only be a matter of conjecture why that inference has been made. In such a case it is easy either to say that the Commissioners have made a wrong inference of fact because they have misdirected themselves in law or to take a short-cut and say that they have made a wrong inference of law, and I venture to doubt whether there is more than this in the divergence between the two jurisdictions which has so much agitated the Revenue authorities ". Lord Radcliffe substantially agreed with this view. He also referred to the divergence of views expressed in Scottish and English decisions and observed that " the true position of the Court in all these cases can be shortly stated. If a party to a hearing before the Commissioners expresses dissatisfaction with their determination 660 as being erroneous in point of law, it is for them to state a case and in the body of it to set out the facts that they have found as well as their determination. I do not think that inferences drawn from other facts are incapable of themselves being findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When -the case comes before the Court, it is its duty to examine the determination having regard to its knowledge of the relevant law. If a case contains anything ex facie which is bad in point of law and which' bears upon the determination, it is obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no persons acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the Court must intervene ". Lord Radcliffe remarked that the English courts had been led to be rather over ready to treat these questions as pure questions of fact and added "if so I would say with very great respect that I think it a pity that such a tendency should persist ". Therefore, it seems to us that in effect this decision is not inconsistent with the view we have taken about the character of the question raised before us in the present appeal. As we have already indicated, to avoid confusion or unnecessary complications it would be safer and more convenient to describe the question about the character of the transaction in the context as a question of mixed law and fact.
The learned Attorney-General has invited our attention to the fact that the form in which the question referred to the High Court has been framed in the present case seems to assume that the impugned finding is a finding of fact. It is only in regard to a finding of fact that a question can be properly framed as to whether there was material to support the said finding. We would, therefore, like to add that it would be more appropriate to frame the question in this form: whether, on the facts and circumstances proved in the case, the inference that the transaction in 661 question is an adventure in the nature of trade is in law justified ? In substance, that is the basis on which the question has been framed by the respondent and considered by the High Court.
This question has been the subject-matter of several judicial decisions; and in dealing with it all the judges appear to be agreed that no principle can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. When s. 2, sub-s. (4), refers to an adventure in the nature of trade it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself.
It is characterised by some of the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade. It was faintly argued for the appellant that it would be difficult to regard a single or an isolated transaction as one in the nature of trade because income resulting from it would inevitably lack the characteristics attributed to it by Sir George Loundes in Commissioner of I. T. v. Shaw Wallace and Company(1).
'Income their Lordships (1) (1932) L. R. 59 I.A. 206.
662 think ", observed Sir George Loundes, " in this Act connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources Then the learned judge proceeded to observe that income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital". In our opinion, it would be unreasonable to apply the test involved in the use of this pictorial language to the decision of the question as to whether a single or an isolated transaction can be regarded as an adventure in the nature of trade. In this connection we may, with respect, refer to the comment made by Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of I. P., Bihar and Orissa (1) that " it is clear that such picturesque similes cannot be used to limit the true character of income in general ". We are inclined to think that, in dealing with the very prosaic and sometimes complex questions arising under the Income-tax Act, use of metaphors, however poetic and picturesque, may not help to clarify the position but may instead introduce an unnecessary element of confusion or doubt.
As we have already observed it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not.
It is the cases on the border line that cause difficulty.
If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade.
Cases of realisation of investments consisting Of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding (1) (1943) L.R. 70 I.A, 180, 193.
663 the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidential to it ? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold ? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or Government. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable ? What were the incidents associated with the purchase and resale ? Were they similar to the operations usually associated with trade or business ? Are the transactions of purchase and sale repeated ? 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 ? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction ; and if such a claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. 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.
In this connection it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to resell it at a profit ? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise 'Where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered.
The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself for otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade.
We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and 665 mst in every case depend upon all the relevant facts and circumstances.
Let us now consider some of the decisions to which our attention was invited. Normally the purchase of land represents investment of money in land; but where a company is formed for the purpose inter alia of acquiring and reselling mining property, and after acquiring and working various property, it resells the whole to a second company receiving payment in fully-paid shares of latter company, it was held in The Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) (1) that the difference between the purchase price and the value of the shares for which the property was exchanged is a profit assessable to income-tax. In this case Lord Justice Clerk has observed that "it is quite a well settled principle in dealing with the question of assessment of Income Tax, that where the owner of an ordinary in. vestment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act "; and he added that " it is equally well established that the enhanced value obtained from realisation or conversion of security may be so assessable where what is done is not merely a realisation or a change of investment but an act done in what is truly the carrying on or carrying out of a business ". This was a clear case where the company was held to be carrying on the business of purchase and sale of mining property.
Where land purchased, and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset in Cayzer, Irvine and Co. Ltd. v. Commissioners of Inland Revenue(2). In his judgment, Lord President Normand referred to the large development expenditure incurred by the assessee to improve the property and observed that it appeared to be on the whole consistent with the idea that it was carrying on a trade in land rather than with the idea that (1) (1904) 5 Tax Cas. 159.
(2) (1942) 24 Tax Cas. 491.
84 666 it was throughout holding it as an investment only to be realised if at all when it desired to meet some financial need. In repelling the plea that the transaction showed investment, the Lord President added that the Commissioners " with their knowledge and experience of these matters, have come to the conclusion that the intention was to hold this estate not as an investment but as a trading asset and in, order to develop it and to market it ". It would thus appear that the conduct of the assessee in incurring a large amount of expenditure on the development of land consisting mainly in the construction of roads and sewers was held to justify the inference that the transaction was an adventure in the nature of trade, though the property purchased and sold was land.
In the Commissioner's of Inland Revenue v. Livingston (1) the assessees respondents were a ship repairer, a blacksmith and a fish salesmen's employee; they purchased as a joint venture a cargo vessel with a view to converting it into a steam-drifter and selling it. They were not connected in business and they had never previously bought a ship. After the ship was purchased, extensive repairs and alterations were carried out by the orders of the respondents and the ship was then sold at a profit. It was held that the profit arising from the transaction was assessable to income-tax under Case I of Schedule D. Lord President Clyde said that in deciding whether the profits in question were taxable, regard must be had to the character and circumstances of the particular venture. " If the venture was one consisting simply in an isolated purchase of some article against an expected rise in price and, a subsequent sale ", observed the Lord President, " it might be impossible to say that the venture was in the nature of trade ". According to him the test to be applied would be whether the operations involved in the transaction are of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business in which the venture was made. If they are, there was no reason why the venture should not be (1), (1926) 11 Tax Cas. 538.
667 regarded as in the nature of trade merely because it was a single venture which took only three months to complete.
Reference was then made to the steps taken ,by the assessees to buy a secondhand vessel and to ,convert into a marketable drifter; and it was stated -that the profit made by the venture arose not from the mere appreciation of the capital value of an isolated purchase for resale but from the expenditure on the subject purchased of money laid out upon it for the purpose of making it marketable at a profit. " That ", said the Lord President, " was the very essence of trade ". It was in this connection that the Lord President observed that the appearance of a single swallow does not make a summer. It would thus be noticed that this decision was based substantially on the ground that after the ship was purchased the assessees bestowed labour and money on converting it into a marketable drifter and that imprinted upon the transaction the character of trade. It is true that some of the observations made by the Lord President would indicate that from the intention to resell at a profit it would be impossible to attribute to the transaction the character of an adventure in the nature of trade. However, as we will presently point out, these observations have been explained by the Lord President himself subsequently in Rutledge v. Commissioners of Inland Revenue (1); and it is to this case that we will now refer.
In the case of Rutledge(2) the appellant was a moneylender who was also interested in a cinema company in 1920. Since that time he had been interested ill various businesses. He was in Berlin in 1920 on business connected with the cinema company where he was offered an opportunity of purchasing very cheaply a large quantity of paper. He effected the purchase and within a short time after his return to England he sold the whole consignment to one person at a considerable profit. This profit 'Was held liable to assessment to income-tax, Schedule D, and to excess profits duty as being profit of an adventure in the nature of trade.
This assessment was the subject-matter (1) (1929) 14 Tax Cas. 490.
668 of an appeal before the Court of Appeal, and on behalf of the appellant the observations made by the Lord President Clyde in the case of Livingston (1) were pressed into service; but the Lord President did not accept the plea based on his earlier observations because he said that the said observations were intended to show that a single transaction fell far short of constituting a dealer's trade;
whereas, in the present case, the question was whether the transaction was an adventure in the nature of trade. The Lord President agreed that mere intention is not enough to invest a transaction with the character of trade but he added that, if the purchase is made for no purpose except that of resale at a profit, there seems little difficulty in arriving at the conclusion that the deal was in the nature of trade though it may be wholly insufficient to constitute by itself a trade. Then he referred to the illustration which he had cited in his earlier decision about the purchase of a picture and observed that if a picture was purchased to embellish the purchaser's own house for a time, he might sell it if the anticipated appreciation in the value ultimately realised itself. " In such a case ", says the Lord President, " I pointed out that it might be impossible to affirm that the purchase and sale constituted an adventure in-the nature of trade although, again, the crisis of judgment might turn on the particular circumstances ". It would thus be clear that the strong observations made by the Lord President in the case of Livingston (1) must be considered in the light of the clarification made by him in this case. Lord Sands, who agreed with the Lord President has thus observed: "Your Lordship in the Chair has indicated that there may be cases of purchase and resale at a profit where the transaction cannot be said to be in the nature of trade. In particular, this may be the case where there is no definite intention of reselling when the purchase is made ". This decision, therefore, shows that where the assessee purchased a very large quantity of paper with the intention to sell it at profit the transaction was treated as an adventure in the nature of trade. It was held (1) (1926) 11 Tax Cas. 538.
669 to be a most successful adventure on the part of the assessee and having regard to the circumstances attending the purchase and sale it was treated as an adventure in the nature of trade.
In T. Beynon & Co. Ltd. v. Ogg (1) the court was dealing with the case of a company which was carrying on business as coal merchants, ship and insurance brokers and as sole selling agent for various colliery companies in which latter capacity it was a part of its duty to purchase wagons on its own account as a speculation and -subsequently to dispose of them at a profit. The assessee contended that the transaction of purchase and sale being an isolated one the profit was in the nature of a capital profit on the sale of an investment and should be excluded in computing its liability to income-tax. The court held that the profit realised was made in the operation of the company's business and was properly included in the computation of company's profits for assessment under Schedule D. It appears that, in 1914, acting as agent on behalf of two colliery , companies, the assessee had purchased two lots of wagons each of which consisted of 250 wagons. During the course of negotiations the assessee, foreseeing that the cost of material and wages was likely to increase, determined to buy a, third lot of 250 wagons for itself and did eventually purchase it. In July 1915 the assessee sold this lot and made a profit of pound 2,500. The question which arose for decision was whether this sum was chargeable to incometax. In dealing with the argument that as an isolated transaction the profit arising out of it was not chargeable to tax, Sankey, J., observed that he thought " in most cases an insolated transaction does not fall to be chargeable ". But he added " you have to consider the transaction and you cannot lay it down as a matter of law without regard to the circumstances that in this case the pound, 2,500 is not chargeable ". Then the learned judge considered that the number of wagons purchased was large and held that the other circumstances attending the purchase and sale of the said wagons showed that this transaction was a (1) (1918) 7 Tax Cas. 125.
670 transaction, and this profit was a profit " -with the result that it made the operation of the assessee in that behalf its business. The learned judge' however, added a word of caution that he did not think it desirable to lay down any rule as to where the line ought to be drawn, and that it was not even possible to lay down such a rule. " But ", said the learned judge, " it is perfectly easy to say whether Case A or Case B falls on the one side or the other ".
In the Balgownie Land Trust, Ltd. v. The Commissioners of Inland Revenue (1) the owner of a landed estate, at his death, had left his estate to trustees with a direction to realise. The trustees were not successful in their efforts to sell the estate in the market. So they formed a company with general powers to deal in real property' and transferred the estate to this company in exchange for shares which were allotted to the beneficiaries under the trust and were, at the date of the appeal still mainly held by those beneficiaries or their representatives. Soon after its incorporation the purchaser company made a substantial purchase of some other property acquired by borrowing on the security of the original estate. The company received rents and paid a regular dividend on its capital. In 1921 and the following years parts of the original estate were sold and in 1925 the whole of the additional property was sold. When the profits realised by the sales were taxed under Schedule D for the year 1926-27, the assessee contended that the transactions in question were not in the nature of trade and the profits arising therefrom cannot be taxed. This contention was negatived by the General Commissioners whereupon the assessee appealed. Lord President Clyde described the problem raised by the assessee as one of. the most familiar problems under Case I of Schedule D and ob.
served that " a single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade; but the sale of a piece of property-if that is all that is involved in the plunge-may easily fall short of anything in the nature of trade.
Transactions of sale are characteristic (1) (1929) 14 Tax Cas. 684.
671 of trade, but they are not necessarily distinctive of it;
much depends on the circumstances". Then the conduct of the assessee after its incorporation was considered and it was held that the purchase of the property in substance amounted to a launching forth albeit, not in a very large scale. In the result the finding of the Commissioners was confirmed and the profit, Was held liable to tax.
In Martin v. Lowry (1) the House of Lords was considering a case of a wholesale agricultural machinery merchant who had never had any connection with the linen trade purchasing from the government the whole of its surplus stock of aeroplane linen (some 44 million yards) at a fixed price per yard. The contract of purchase provided in detail as to delivery, and the payment of the price. The purchaser failed in his original attempt to sell the whole of the linen to Belfast linen manufacturers outright. Then he sought to bring pressure on them by placing the linen for sale to the public. It led to an extensive advertising 'campaign, renting of offices and engaging advertising manager, a linen expert as adviser and a staff of clerks.
Sales then proceeded rapidly and soon the whole stocks were disposed of. In all 4,279 orders were received from 1,280 purchasers. Assessment to income-tax and excess profits duty were made upon the assessee in respect of profits of the transaction. It was held that the dealings of the assessee in linen constituted the carrying on of a trade of which the profits were chargeable to income-tax and excess profits duty. One of the points raised before the House of Lords was that the assessee did not carry on trade or business but only engaged in a single adventure not involving trading operation. In rejecting this contention, Viscount Cave, L. C., observed that " the Commissioners have found as a fact that he did carry on trade, and they set out in the Case ample material upon which they could come to that conclusion ". He added that, indeed, having regard to the methods adopted for the resale of the linen, to the number of operations into which the assessee entered and to the time occupied by (1) [1926] 11 Tax Cas. 297.
672 the resale, he did not himself see how they could have come to any other conclusion. The other point raised in the appeal was that the profits in question did not come within the description of annual profits or ,gains but we are not concerned with that point.
In F. A. Lindsay, A. E. Woodward and W. Hiscox v. Commissioners of Inland Revenue (1) the appellant L, a wine merchant, had on hand a large quantity of American rye whisky. He invited the appellants W & H who were also engaged in the wine trade to join with him in a venture of shipping the whisky to the United States. It was agreed that W & H should contribute certain sums towards expenses and that the profits should be shared in certain proportions. The. agreement was not reduced to writing.
The shipping of the whisky was arranged by L with consultation with W & H and was carried out gradually over a period of two years. From time to time W & H met L who told them that the whisky had been successfully shipped to the United States and sold their profitably. Subsequently the appellants decided to discontinue the export of whisky and to employ the monies which they had accumulated in the purchase with a view to resale of a wine business in Portugal. In respect of the profits made by the appellants from the sale of wine an assessment was made on them jointly for 1922-23. The Special Commissioners found that a partnership or joint venture subsisted between the appellants and that the profits of the sales of whisky were assessable to income-tax. The Lord President Clyde rejected the appellant's contention and observed that " the nature of the transaction-apart from the fraudulent breaches of law which were inherent in it-was neither more nor less than the commercial disposal of a quantity of rye whisky ". In point of fact the disposal was not affected by a single transaction but extended over a year and more; and so it could not fall outside the sphere of trade. This was a clear case where a large number of distinctive features of trade were associated with the transaction.
(1) (1932) 18 Tax Cas. 43.
673 The transaction of the purchase and sale of whisky was again brought before the court for its decision in the Commissioners of Inland Revenue v. Fraser (1). In this case the assessee, a woodcutter, bought through an agent for resale whisky in bond for pound 407. Nearly three years thereafter the whisky was sold at a profit for pound, 1,131.
This was the assessee's sole dealing in whisky. He had no special knowledge of the trade and he did not take delivery of the whisky nor did he have it blended and advertised.
Even so, it was held that the transaction was an adventure in the nature of trade. It may be mentioned that when the matter was first taken before the Commissioners they took the view that an adventure in the nature of trade had not been carried on by the assessee, that merely an investment had been made and subsequently realised and so the profit was not assessable to income-tax. This view was, however, reversed by the First Division of the Court of Session and it was held that in coming to the conclusion the Commissioners had misdirected themselves as to the meaning of " being engaged in an adventure in the nature of trade ".
The Lord President Normand conceded that it would be extremely difficult to hold that a single transaction amounted to a trade but he added that it may be much less difficult to hold that a single transaction was an adventure in the nature of trade. " There was much discussion ", observed the Lord President, " as to the criterion which the court should apply. I doubt if it would be possible to formulate a single criterion." The following observations made by the Lord President in this connection may be usefully quoted:
" It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade.
(1) (1942) 24 Tax Cas. 498.
85 674 But what is a good deal more important is the nature of the transaction with reference to the commodity dealt in. The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration.
An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues t
