Profit made by an assessee by sale of property is not taxable under S. 10 of the Indian Income-tax Act, 1922, unless the purchase of the property was an adventure in the nature of trade.

Headnote:
INCOME TAX - Capital gains - Whether profit made by assessee by sale of property to another was taxable under S. 10 of the Indian Income-tax Act, 1922 - Held, no.
Fact of the Case:

The assessee, a Hindu undivided family carrying on business as a dealer in "iron scrap and hardware", purchased a jute pressing factory and appurtenant premises from a company. The assessee then sold the property to another person at a profit. The Income-tax Officer brought to tax the profit arising from the sale, holding that it was taxable under S. 10 of the Indian Income-tax Act, 1922. The Income-tax Appellate Tribunal partially modified the order and reduced the total income by Rs. 7,000. The Tribunal then referred the question of whether the profit was taxable to the High Court, which answered the question in the affirmative.
Finding of the Court:

The Supreme Court held that the profit made by the assessee by sale of the property to another was not taxable under S. 10 of the Indian Income-tax Act, 1922. The Court found that the purchase of the property by the assessee was an isolated transaction not related to the business of the assessee, and that there was no evidence that the assessee intended to start a venture in the nature of trade by purchasing the property.
Issues: Whether the profit made by the assessee by sale of the property to another was taxable under S. 10 of the Indian Income-tax Act, 1922.
Ratio Decidendi: The Court held that the profit made by the assessee by sale of the property to another was not taxable under S. 10 of the Indian Income-tax Act, 1922, because: * The purchase of the property by the assessee was an isolated transaction not related to the business of the assessee. * There was no evidence that the assessee intended to start a venture in the nature of trade by purchasing the property. * The property purchased was capable of being let out and it had in fact been let out by the Company before the date of sale in favour of the appellant.
Final Decision: The Supreme Court discharged the answer given by the High Court in respect of the question submitted by the Tribunal and recorded a negative answer. The appeal was allowed.

Judgement

SHAH, J.: The appellant is a Hindu undivided family and carries on business as a dealer in "iron scrap and hardware". Messrs Hoare Miller and Company ltd. - Hereinafter called the Company - were owners of a jute pressing factory installed on a piece of land belonging to the Company. Adjacent to that land were two pieces of land; one was lease-hold, and the other held by the Company as a licensee from the Government of West Bengal. On January 21, 1941 the Company leased out to one Ramnath Bajoria the jute pressing factory together with the machinery standing on the land owned by the Company for ten months commencing from January 10, 1941. Ramnath Bajoria failed to vacate and deliver up possession of the premises demised to him, after the expiry of the period of the lease, and the Company instituted a suit in ejectment against him.

2. By an agreement dated October 31, 1942 the appellant agreed to purchase all the rights of the Company in the factory and the appurtenant premises for Rs. 2,45,000. On November 14, 1942 the Company delivered to the appellant possession of the property agreed to be sold, save and except the factory demised under the lease to Ramnath Bajoria and the machinery included in the lease. On February 26, 1943 the Company executed a conveyance in favour of the appellant conveying the factory and the appurtenant premises.

3. On June 12, 1943 the appellant agreed to sell to one Ranada Prasad Saha the property purchased from the Company for Rs. 4,73,364/3/6 free from all encumbrances. On August 10, 1943 the appellant was substituted as a plaintiff in the suit filed by the Company against Ramnath Bajoria, and obtained possession of the factory premises. By a deed of conveyance dated September 30, 1943 the appellant conveyed to Ranada Prasad Saha the factory and the appurtenant premises and delivered possession thereof. In the deed of conveyance the property sold was described in three separate Schedules. Schedule I; Press House, office, residential buildings and three warehouses on land owned by the Company; Schedule II; leasehold land together with a warehouse known as Kalibari godown; Schedule III; two warehouses on land held as licensee by the Company from the Government of West Bengal.

4. The Income-tax officer, District II(1), Calcutta, brought to tax in the hands of the appellant Rs. 2,24,864 being the profit arising out of the sale of the property to Ranada Prasad Saha. The Income-tax Appellate Tribunal partially modified the order and reduced the total income by Rs. 7,000. The Tribunal then drew up a statement of case and referred the following question to the High Court of Judicature at Calcutta :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,35,211 received by the assessee as a result of the sale of the jute press referred to in the appellate order arose out of an adventure in the nature of trade and was therefore rightly assessed to tax?"

The High Court answered the question in the affirmative. With special leave granted by this Court, the appellant has appealed to this Court.

5. At the material time, capital gains were not taxable, and the only question falling to be determined is whether profit made by the appellant by sale of the property to Ranada Prasad Saha was taxable under S. 10 of the Indian Income-tax Act. The Tribunal found the following facts proved :

6. The appellant was carrying on business in iron scrap and hardware and never carried on any business in jute or in pressing jute. At the material time when the purchase of the Jute. Press was made, the appellant had because of abnormal conditions prevailing in the town of Calcutta, closed its business in iron scrap and hardware. The appellant purchased the jute press and the premises appurtenant thereto subject to litigation pending in the High Court, effected certain repairs and kept the factory in running condition, but made no attempt to start or organise the bu

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