The incidental sale of uneconomic or inconvenient plots of land or houses by a company that is primarily engaged in the business of planting and selling rubber does not convert what is essentially an investment into a business transaction in real estate.

Judgment

SHAH, J. : A partnership styled P. K. N. was carrying on money-lending business in several towns in India and also in the Federated States of Malaya. In the course of its business the P. K. N. firm acquired rubber estates and other immovables in the Districts of Murar and Segamat in the Federated States of Malaya. On December 4, 1937 a private limited company was registered in the name of P. K. N. Company Ltd. - hereinafter called the Company - under the Pudukottai Company Regulation V of 1929 with its head Office at Viswanathapuram, in the territories of His Highness the Maharaja of Pudukottai. The share capital of the Company was of the face value of 6,60,000 Malayan dollars. Between March 23, 1939 and July 8, 1939, an area of more than 3,000 acres of rubber plantations, several houses and open plots of land, which were the assets of the P. K.N. firm were transferred to the Company for an aggregate consideration of 16,50,000 Malayan dollars. In consideration of the transfer of these properties, the Company allotted shares of the face value of 6,60,000 Malayan dollars to the partners of the firm of P. K. N. and the balance remained outstanding as a debt due by the Company to the firm of P. K. N. On March 14, 1941 the Company purchased a rubber estate called the Lee Estate for 2,62,655 Malayan dollars. On July 7, 1941 the Company purchased for 5,000 Malayan dollars a house in co-ownership with another firm. In the year 1941 and 1942 some of the properties acquired from the firm of P. K. N. were sold by the Company. Between 1942 and 1945 the territory of Malaya was under occupation by the Japanese forces, and it appears that during that period some houses belonging to the company were destroyed by fire. After 1945 some more lands admeasuring approximately 700 acres in the aggregate were sold by the Company.

2. On August 1, 1949 the State of Pudukottai integrated with the Province of Madras, and after the extension of the Indian Income-tax Act to that territory, the Company was assessed by the Income-tax Officer, Pudukottai as a dealer in real estate and profits amounting to 34,272 Malayan dollars and 40,613 Malayan dollars were brought to tax in the assessment years 1949-50 and 1950-51. But the Income-tax Appellate Tribunal set aside the orders. The Tribunal observed that the activities of the Company outside India were limited to the holding of properties, and deriving income therefrom, and that the properties did not come to the Company in the course of its money-lending business, nor could it be said that they were acquired for the purpose of resale at a profit, and that the Company "was formed in order to take over these properties and it would be far from correct to say that the properties taken over were intended to be turned into stock-in-trade , and therefore profits realised by sale of the properties were of capital nature.

3. Before the order of the Tribunal was pronounced, the Income-tax Officer assessed the Company for the assessment year 1951-52 on a total profit of 1,41,326 Malayan dollars earned from the sale of immovable properties. The Appellate Assistant Commissioner confirmed the order in appeal. On further appeal the Income-tax Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner observting that all the material facts were not brought to the notice of the Tribunal at the hearing of the appeals in respect of the earlier years. Thereafter pursuant to a direction of the High Court of Madras under S. 66 (2) of the Income-tax Act, 1922, the Tribunal referred the following question for the opinion of the High Court:

"Whether on the facts and circumstances of the case, the surplus of $ 1,41,326 realised by the assessee company by the sale of some of its estates and properties held by it in Malaya was income chargeable to tax under the Indian Income-tax Act?

The High Court answered the question in favour of the Company and held that the amount sought to be brought to tax was not in