An intention to start an adventure in the nature of trade could be inferred if a transaction related to the business which was normally carried on by the assessee
According to the inclusive definition of business in Section 2(13), an adventure in the nature of trade is to be regarded as business for the purpose of the Income Tax Act. The word adventure would imply that the activity described by it many not be a continuous activity. Therefore, continuity and regularity are not the features of the adventure in the nature of trade. Several judicial pronouncements have held that even a single transaction may constitute an adventure in the nature of trade, provided it satisfies the basic elements of trade.
Let us refer to the case of P.M. Mohammed Meerakahn v. CIT (1969), where the main issue under consideration is whether, the division of land into plots and their subsequent sale constituted adventure in the nature of trade and the surplus thereon was assessable to tax or not.
Facts of the Case:
- The assessment of the assessee was completed and the Income Tax Officer (ITO) later on came to know that the assessee’s income from the sale of estates had escaped assessment.
- Under an agreement, a company called Mundakayam Valley Rubber Co. Ltd. sold and delivered an estate to Mr. A.V. George.
- The area of the estate was 477.71 acres.
- Mr. A.V. George had entered into the agreement in his own name and on behalf of another company called the Kailas Rubber Co. Ltd.
- It was agreed that the vendor would execute the necessary conveyance in favour of Mr. A.V. George or his nominees.
- Later, the assessee entered into an agreement with Mr. A.V. George whereby the assessee agreed to purchase 447.71 acres of the estate for Rs. 6 lakhs.
- An advance of Rs. 11,000 was paid by the assessee.
- The balance of Rs. 5,89,000 was to be paid by the assessee on or before 25th September, 1955.
- It was agreed that Mr. A.V. George would execute a sale deed himself or cause it to be executed by Kailas Rubber Co. Ltd. on whose behalf he was acting in favour of the assessee or his nominees.
- The assessee subsequently divided the area of 477.71 acres into 23 plots and found purchasers for 22 of these plots.
- The total extent of 22 plots for which he found purchasers was 373.58 acres, and the total price paid by the 22 purchasers was Rs. 5,18,500.
- A sale deed was executed by the Mundakayam Valley Rubber Co. Ltd. and it covered all the 23 plots. The 22 plots for which the assessee found purchasers were conveyed to the respective purchasers and the 23rd plot was conveyed to the assessee himself.
- Mr. A.V. George and the Kailas Rubber Co. Ltd. were parties to this document.
- The plot which the assessee had retained for himself was 104.13 acres in extent. Its value was estimated by the Income-tax Officer at Rs. 2,08,300.
- The Income-tax Officer worked out the profit from the transaction of purchase and sale of land at Rs. 1,26,500.
- The Income-tax Officer held that a sum of Rs. 1,25,000 in round figures represented the assessee’s profit from an adventure in the nature of trade and included this amount in his total income.
Appeal before the Appellate Authorities and the High Court (HC)
- The assessee appealed to the Appellate Assistant Commissioner who rejected the appeal.
- The assessee took the matter in further appeal to the Appellate Tribunal which also rejected the appeal holding that the amount of Rs. 1,25,000 represented profit from an adventure in the nature of trade.
- On reference the High Court answered the question against the assessee. Then, the assessee preferred an appeal to the Supreme Court (SC)
Observations of the SC on how to determine whether a transaction is an adventure in the nature of trade
- According to the SC, the question whether a transaction was an adventure in the nature of trade had to be decided on a consideration of all the relevant facts and circumstances which were proved in the particular case.
- The answer to the question did not depend upon the application of any abstract rule or principle or formula but depended upon the total impression and effect of all the relevant facts and circumstances established in the particular case.
- But in judging the character of such transactions several factors were treated as significant.
- For instance, if a transaction related to the business which was normally carried on by the assessee, though not directly a part of it, an intention to launch upon an adventure in the nature of trade could readily be inferred.
- A similar inference would arise where a commodity was purchased and sub-divided, altered, treated or repaired and sold or is converted into a different commodity and then sold.
- The magnitude of the transaction of purchase, the nature of the commodity, the subsequent dealings of the assessee, the nature of the organisation employed by the assessee and the manner of disposal may be such that the transaction may be stamped with the character of a trading nature
Observations of the SC on the
- It was clear from the recital of the agreement, that the intention of the assessee in purchasing the estate was to re-sell it at a profit.
- An advance was paid by the assessee on date of agreement, the balance was agreed to be paid on a token date.
- It was open in the terms of the agreement that Mr. A.V. George could execute the sale deed either in favour of the assessee or his nominees.
- It was also found that the assessee did not have the resources to buy any estate worth a lakh of rupees when he entered into the agreement for the purchase of the Estate for an amount of Rs. 6 lakhs.
- In the intervening period the assessee divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers.
- The division of the land into 23 plots and the sale of the various purchasers indicated that there was scheming and organization on the part of the assessee.
- It was found that the assessee did not have the means and resources to cultivate land himself and that he had arranged for the sale of 22 plots to different purchasers
- Further SC observed that it was not a correct proposition to say that the profits of the assessee could not be ascertained even on the assumption that the transaction of the adventure of trade was not completed.
- For the purpose of assessment each year was a self-contained unit and in the case of trading adventure the profits had to be computed in the manner provided by the statute.
- It was true that the Act of 1922 made no express provision with regard to the value of stock.
- It charged for payment of tax the income, profits and gains which had to be computed in the manner provided by the Act of 1922.
- In the case of a trading adventure the profits had to be calculated and adjusted in the light of the provisions of the Act of 1922 permitting allowances prescribed thereby.
- For that purpose, it was the duty of the ITO to find out what profit the business had made according to the true accountancy practice.
- As a normal rule, the profit should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year.
SC held that the HC was right in its conclusion that the transactions of the assessee constituted an adventure in the nature-of-trade and were in the course of a profit-making scheme and the question was rightly answered by the HC against the assessee. Therefore, it was to be held that the income-tax authorities had correctly estimated the profit of the assessee by treating the land as stock-in-trade and valuing it according to the normal accountancy practice.