S.K. Desai, J.
1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, made by the Income-tax Appellate Tribunal, BOmbay Bench 'A', Bombay.
2. The reference arise out of the assessment of a private limited company for the year 1959-60, the corresponding accounting year being the calendar year 1958.
3. This country was incorporation on 25th March, 1953. One H. L. Gupta was carrying on various business under several names and styles such as Himalayan Tiles and Marbles, Modern Concrete Art Industries, Hima Spun Pipes Co., Agarwal Overseas Trading Corporation and Himalayan Food Products. The said H. L. Gupta was at all relevant times the managing director of the assessee-company, the other shareholders and directors being Shankuntaladevi H. Gupta. He an agreement dated 25th April, 1953, the assessee-company took over the said business of Himalayan Tiles and Marbles and the other subsidiary business carried on under the name and styles of Modern Concrete Art Industries and Hima Spun Pipes Co., as going concerns along with the good will and other assets of the vendor including the tenancy rights of premises. By a further agreement dated 29th September, 1956, the business carried on by H. L. Gupta under the names and styles of Himalayan Food Products and Agarwal Overseas Trading Corporation together with the good will were also acquired by the assessee-company. The consideration, for such acquisition was Rs. 20,000. The said agreement dated 29th September, 1956, provided :
"The vendor shall pay, satisfy, discharge and fulfil all the debts or liabilities in relation to the said business and shall keep the company indemnified against all proceedings, claims and demands in respect thereof and the vendor shall also similarly be entitled to all the outstanding of the said business."
4. THe result of such provisions was that the outstandings and liabilities of these two concerns, viz., Himalayan Food Products and Agarwal OVerseas Trading Corporation, were not transferred to the assessee-company under the agreement but were retained by the said H. L. Gupta. Thereafter, on 30th July, 1957, H. L. Gupta informed the board of directors of the assessee-company that he was desirous of transferring the outstandings of the said two concerns, and inquired whether the company was interested in purchasing the same. The two outstandings which were sought to be transferred were : (1) the claim of the said H. L. Gupta as the sole proprietor of Himalayan Food Products against Messrs. A. V. Thomas & Co. (India) Ltd., Madras, in respect of which SUit No. 17 of 1953 was pending in the Bombay High Court, and (2) the claim of the said H. L. Gupta as the sole proprietor of Agarwal Overseas Trading Corporation against the Union of India in respect of which an arbitration was pending before counsel, Mr. M. V. Desai, Bar-at-law. The board of directors of the assessee-company at its meeting held on 30th July, 1957, considered this offer and ultimately resolved to purchase the aforesaid two claims for the aggregate amount of Rs. 57,716. It was further resolved that the said amount be forthwith credited to the said H. L. Gupta's account and paid to him in such convenient instalments as may be mutually agreed upon between him and the company. Subsequent to this resolution an agreement of assignment was entered into on 31st July, 1957, between the said H. L. Gupta as the assignor and the assessee-company as the assignee. THis agreement of assignment has been annexed as annexure "D" to the statement of the case and certain provisions of the same will be referred to later on. It is the admitted position that pursuant to this indenture of assignment H. L. Gupta account was credited with the sum of Rs. 57,716 and the said two claims were taken over by the assessee-company.
5. The second claim which was taken over by the assessee-company under the aforesaid agreement of assignment pertained to the claim made by H. L. Gupta against the Union of India in the following circumstances. The said Gupta had undertaken to transport foodgrains belongings to the Government of India, Department of Food, from and to its godowns. No formal agreement was executed between the parties but the work was carried out according to the terms to be found in correspondence exchanged between the department and the said H. L. Gupta, and for the work was carried out according to the terms to be found in correspondence exchanged between the department and the said H. L. Gupta, and or the work done, a bill for Rs. 48,706 was submitted by him. At this stage the Government of India abruptly decided to break the negotiations and refused to enter into a formal agreement. It was the contention of the said H. L. Gupta that he had already incurred substantial expenditure for the purchase of lorries and other items and he accordingly filed a suit against the Government to recover the sum of Rs. 48,706 for the work done; in the said suit he also claimed damages for wrongful breach of contract. The claim in the said suit was referred for arbitration to Mr. M. V. Desai, Bar-at-law.
6. During the previous year relevant for the assessment year in questions the arbitrator gave an award under which the assessee was to receive a sum of Rs. 1,20,000 from the Government. Clause 4 of the agreement of assignment (dated 31st July, 1957) provided as follows :
"4. It is hereby agreed if in spite of the due and diligent prosecution of the claim no decreed or award is passed in favour of the assignor, the company shall not hold the assignor responsible for the same. on the other hand, if the assignor receives in respect of the said claims a larger amount than what is paid by the company to the assignor hereunder, the assignor will not claim the said amount but will pay the same forthwith to the company."
7. Accordingly, the assessee-company credited this amount to the account of Agarwal Overseas Trading Corporation and after setting off this amount against the debit of Rs. 48,706, the balance of Rs. 71,694 was shown as realised against the claim pending adjustment in the balance-sheet.
8. In the assessment proceedings the Income-tax Officer considered the question of the surplus realised by the assessee-company and held that the whole transaction constituted an adventure in the nature of trade by the assessee-company; he, however, allowed deduction in respect of legal costs in the amount of Rs. 10,354 which, under clause 3 of the agreement of assignment, the company had to bear and pay. Accordingly, the net excess realised, viz., Rs. 61,340 was held to be taxable by the Income-tax Officer. The Income-tax Officer also rejected the contention that unless and until both the claims taken over were finally settled and the legal expenses in respect thereof fully paid, the result could not be determined. According to him, two separate claims were purchased and there were two separate adventures in the nature of trade.
9. An appeal was thereafter preferred to the Appellate Assistant Commissioner, before whom it was contended that the surplus realised by the assessee was in the nature of a capital receipt. The other contention urged before the Income-tax Officer and rejected by him was also repeated. Both the contentions of the assessee were rejected by the Appellate Assistant Commissioner, who confirmed the decision of the Income-tax Officer regarding the taxability of the amount of Rs. 61,340. It may be mentioned here that the correct figure appears to be Rs. 60,940 and not Rs. 61,340 as per the figure worked out in para. 8 of the statement of the case which is also the figure to be found in the question referred to us.
10. Being aggrieved by the order of the Appellate Assistant Commissioner the assessee-company preferred an appeal to the Income-tax Appellate Tribunal. Before the Tribunal also the earlier contentions were repeated and it as further submitted that under the memorandum and articles of association of the assessee-company it was not permitted to carry on the business of purchasing actionable claims and accordingly there could not be any business of acquiring such claims. It was urged that any excess realised in respect of the claims taken over under the agreement of assignment dated 31st July, 1927, were of a casual and non-recurring nature. The alternative argument raised earlier before both the Income-tax Officer and the Appellate Assistant Commissioner was repeated and it was contended that the excess could not be worked out only on the realization of one outstanding claims whilst the other claim remained outstanding and unrealised.
11. The Tribunal accepted the contention of the assessee, holding that the amount of excess was not assessable as profit in the hand of the assessee and could not be consider das having arisen from an adventure in the nature of trade. In view of this decision, if further held that the other catenation raised by the assessee need not be adjudicated upon.
12. In this reference the following question has been referred to us :
"WHether, on the facts and in the circumstances of the case, the sum of Rs. 60,940 could be assessed in the hands of the assessee-company as income from an adventure in the nature of trade ?"
13. Mr. Joshi, on behalf of the Commissioner, has urged that the amount was sought to be charged to tax under the head "profits and gains of business" and accordingly to definition of "business" found contained in section 2(4) of the Indian Income-tax Act, 1922, would become relevant. The said definition read as follows :
"2. (4) 'business' includes any trade, commerce, or manufacture any adventure or concern in the nature or trade, commerce of manufacture."
14. The short question, therefore, is whether it can be said that the assessee-company obtained this amount as a result of any adventure in the nature of trade.
15. The expression "adventure in the nature of trade" appearing in the definition of "business" under section 2(4) of the Act came to be considered by the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, where after exhaustive analysis of the statutory provisions and the English and Indian authorities, Gajendragadkar J. (as he then was), speaking for the Supreme Court, indicated the proper approach and the relevant considerations for determining the question. It was observed (pages 607, 608) :
"When section 2, sub-section (4), refers to an adventure in the nature of trade, it clearly suggests that the transactions 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"
16. It was further observed (page 609) that it was impossible to evolve any formula which could be applied in determining the character of isolated transactions which come before the courts in tax proceedings. But several factors were indicated 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 incidental to it ? Affirmative answers to these questions may furnish relevant date 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 enjoyment. 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 purchased and sale repeated ? In regard to the purchase of the commodity and its subsequent possession by the purchase, does the element of pride of possession come into the picture ?"
17. These factors were called from judicial decisions, but a note of caution was added and it was observed that in considering these factors it would be necessary to remember that they did not purport to lay down any general or universal test, and that it is the total effect of all the relevant factors and circumstances that determined the character of the transaction.
18. It may be mentioned that in G. Venkataswami Naidu's case the assessee-firm had purchased four contiguous plots of land adjacent to the place where the mills of the company managed by it were situate. It was found by the Tribunal that they had purchased the four plots of land with the sole intention of selling them to the mills at a profit. It was decided by the Supreme Court that the transactions was rightly held to be an adventure in the nature of trade.
19. Section 2(4) and the expression again came to be considered by the Supreme Court in Janki Ram Bahadur Ram v. Commissioner of Income-tax. It may be mentioned that very strong reliance was placed upon the observations and the decisions in this case by the learned advocate for the assessee. In that case the facts were as follows : On October 31, 1942, the assessee, a dealer in iron scrap and hardware, agreed to purchase all the rights of a company in a jute pressing factory installed on a piece of land belonging to it, together with certain other lands held on lease and werehouses including two held as licensee. At that time the factory premises were in the occupation of a lessee and a suit in ejectment was pending against him. Possession of the property except the factory premises and the machinery was obtained in November 1942, and, thereafter, a sale deed in favour of the appellant was executed in February, 1943. In June, 1943, the assessee agreed to sell the property to one Saha. The assessee obtained possession of the factory premises from the lessee in August, 1943, after succeeding in the ejectment suit, and, thereafter, in September, 1943, the property was conveyed to the said Saha. In the transaction the assays made a profit of Rs. 2,24,864, being the difference between the price paid by the assessee under the agreement of October, 1942, and the price realised by him from Saha under the conveyance. It was observed by Shah J. (as he then was), speaking for the Supreme Court, that it was for the revenue to establish that the profit earned in the transaction is within the taxing provisions and is on that accountable to be taxed as income. The considerations which were relevant for the decision whether the surplus amount was taxable or not have been indicated at pages 25 and 26 of the report. It appears that on behalf of the Commissioner reliance was placed on a number of cases, but they were distinguished on the basis that they were cases of commercial commodities whereas the transaction before the Supreme Court was one concerning purchase of land, and it was observed : "But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade."
20. It was further observed that :
"The profit motive in entering into a transaction is not decisive, for an accretion to capital does not become taxable income merely because an asset was acquired in the expectation that it may be sold at a profit."
21. The conclusion of the court was that barring the expectation of profit and realization of profit by sale of the property, there was no evidence bearing on the intention with which the property was purchased, and it was held that these could not without other circumstances justify an inference that the assessee intended by purchasing the property to undertaken a venture in the nature of trade.
22. The Income-tax Appellate Tribunal in its order has very strongly relied upon Reynolds and Gibson v. Crompton. Although the facts before the House of Lords were quite different and somewhat complicated, on behalf of the assessee reliance was placed on a passage to be found on page 313 of the report where Lord Reid has observed that "something more would have to be proved that the mere fact that the entity sought to be charged with the payment of tax took over the debts and received the sums due". It was contended on behalf of the assessee that in the case before us also there was nothing more on the record than the fact that the assessee-company had taken over the two claims and had ultimately realised surplus. It was submitted that this was not enough to characters it as an adventure in the nature of trade to bring it within the meaning of section 10 read with section 2(4) of the Act.
23. It may be mentioned that other cases were cited at the Bar, but in my opinion the Supreme Court has dealt with the question in detail in the two judgments above referred to where clear guide-lines have been provided, and no useful purpose would be served by referring to those authorities, or setting out the facts thereof and the ultimate conclusion.
24. It is not possible to accept the contention advanced on behalf of the assessee that in this case, apart from the fact of acquisition of the two claims and realisation of a surplus, there was nothing more which would enables a finding to be made to the effect that there was an adventure in the nature of trade. It was submitted that there was nothing on the record to indicate that on 31st July, 1957, when the agreement of assignment was executed there was any exception of making a profit. Now, it is to be remembered that the outstanding claims of H. L. Gupta pertaining to Himalayan Food Products and Agarwal Overseas Trading Corporation were not taken over by the assessee-company on 29th September, 1956, when it acquired the two business as going concerns together with their good will for the sum of Rs. 20,000. The acquisition was ten months thereafter. This must have considerable bearing on the point under consideration. Further, as the recitals in the agreement of assignment dated 31st July, 1957 (annexure "D"), show, the two claims acquired by the assessee-company did not constitute all the outstandings which H. L. Gupta had in respect of the two proprietary business he had carried on prior to 29th September, 1956, but were only two claims out of the many. The relevant recital reads of follows :
"AND WHEREAS it was inter alia agreed that the assignor shall be entitled to all outstanding of the said business AND WHEREAS the outstanding inter alia include the following claims -
(a) claim of the assignor as proprietor of the said Himalayan Food Products against A. V. Thomas & Co. (India) Ltd., in respect whereof a suit is pending in the High Court of Bombay, and
(b) claim of the assignor as proprietor of Agarwal Overseas Trading Company against the Union of India, in respect whereof an arbitration is pending before Shri M. V. Desai, Barrister-at-Law."
25. In my view these two circumstance can be consider to be additional material which might prove decisive for the point under consideration, via., whether it was an adventure in the nature of trade. It is pertinent to note that in the minutes of the meeting of the board of directors of the assessee-company held on 30th July, 1957 (annexure "C"), and the agreement of assignment dated 31st July, 1957 (annexure "D"), no reason or motive is indicated why ten months after the initial acquisition of the two running businesses the offer of purchase was made or accepted in respect of these two claims. We were referred by the learned counsel for the assessee to para. 9 of the order of the Appellate Assistant Commissioner where such reason has been indicated why these two claims were not taken over in September, 1956. The reason indicated does not appear to me to be at all sound, but it is unnecessary to go into the same as what we are concerned with is not the position is September, 1956, but in July, 1957. Different considerations would come into play if such claims had been acquired at the time of taking over the running businesses. It would be possible for the assessee-company to contend that "We had per force to acquire these claims as otherwise the vendor was not willing to transfer his running business." No such situation existed in July, 1957, when the running business had already been acquired by the assessee-company, and in July, 1957, the company was under no obligation nor under any compulsion to acquire these two outstanding claims.
26. In some of the cases cited at the Bar one of the considerations which had weighed with the court was the fairly large interval of time between the acquisition of the asset and its subsequent disposal or realisation. In the case before us, it is clause that in the very next year, i.e., in the calendar year 1958, the surplus has resulted, so that this consideration which may have appealed to the court in these cases is not available for rendering assistance to the assessee. All the circumstances indicated above would, in my opinion, lead to only one conclusion, viz., that the acquisition of the two claims in July, 1957, was with the expectation of earning a profit. The question still remains to be answered whether such acquisition was by way of an adventure in the nature of trade.
27. It was submitted that this was an isolated transaction. But in G. Venkataswami Naidu's case, Gajendragadkar J. (as he then was), speaking for the SUpreme Court, has exposed the fallacy of this approach. If was further submitted that the acquisition or purchase of an actionable claims as subject-matter of the litigation cannot be trade or business. It was pointed out in connection with this branch of the argument - and this seems to have impressed the Tribunal also - that the memorandum of objects of the company did not permit it to trade in actionable claims. The fact that there was no such provision in the memorandum of objects appears to me to be irrelevant for the purpose of this decision, though if there had been such a provision it would have clearly decided the matter against the assessee. That the assessee embarked upon a venture different from his usual line of business or even embarked on a venture which in law it was not permitted to embark upon, cannot really effect the consideration of the question whether the venture embarked upon was by way of trade or not. In this connection I have already noted how in the facts and circumstances of the case it would be proper to come to the conclusion that such acquisition was with a view to or in the expectation of making a profit. I have already emphasized in this connection the lack of compulsion in July, 1957, on the part of the assessee to acquire these two claims. I have further emphasized the fairly close proximity between the acquisition of the claims and the realisation of surplus in respect of the second claims.
28. It was submitted, however, that something more than mere expectation of making a profit was required and that the onus of establishing such additional fact or circumstances was on the revenue, which onus has not been discharged by the revenue. I have in the earlier part of this judgment referred to two circumstances, which must in my opinion be regarded as additional circumstances having a bearing on our conclusion on this aspect of the matter.
29. As stated earlier, very strong reliance was placed on behalf of the assessee on Jankiram's case. It must be point out, however, that the Supreme Court in that case was considering the acquisition of land, an asset which normally is regarded as of a capital character except in the case of an assessee whose business is to deal in land. Such was not the case before the Supreme Court. The observations to be found in the above judgment, therefore, would appear to me to be inapposite with reference to the facts of the case before us.
30. In that very case the Supreme Court has distinguished with reference to decided English cases the case of a person who has acquired and subsequently disposed of at a profit "commercial commodities". Now, actionable claims are certainly not land, nor can they be designated as "commercial commodities". But, as expressed earlier in G. Venkataswami Naidu's case, the court has to consider the total effect of all relevant factor and circumstances that determined the character of the transactions and must seek the answer to the question in that light. Bearing tin mind all relevant factor and circumstances which I have attempted to indicate earlier during the course of this judgment, in my opinion, in acquiring or purchasing these two claims in July, 1957, the assessee-company had embarked upon a venture in the nature of trade, and, that if surplus was realised from such venture, such surplus was liable to be included in the income of the assessee-company under section 10 of the Indian Income-tax Act, 1922.
31. I agree with the judgment just delivered by my brother, Desai J., and would like to add only a few words. There is no material at all on record which would show that the two claims in question were purchased for any purpose other than to undertaken an adventure in the nature of trade. In fact, the material on record pointed out by my brother, Desai J., in his judgment points only one way and that is that at a the when the company was not bound to purchase the said two claims, it purchased them with the sole object of trading in them for profit. On the authorities cited by my brother, Desai J., the fact that this was not the main business of the company makes no difference.
BY THE ORDER.
32. The question referred to us is answered in the affirmative and in favour of the Commissioner.
33. The assessee will pay the costs of the reference to the Commissioner.