PETITIONER:
DALMIA CEMENT LIMITED
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, NEW DELHI
DATE OF JUDGMENT10/09/1976
BENCH:
SHINGAL, P.N.
RAY, A.N. (CJ)
BEG, M. HAMEEDULLAH
CITATION:
1976 AIR 2150 1977 SCR (1) 554
1976 SCC (4) 614
ACT
Income Tax Act, 1922, s. 2(4)--When can a single and
isolated sale be a business transaction within the meaning
of--Onus probandi on the Taxation Department--Initial
purchase with intention of advantageous sale--Earning profit
on delivery of goods not necessary.
HEADNOTE
In 1946, the appellant ordered cement manufacturing
machinery from a in Denmark, for its factory in Dandot, but
long before the machinery was due, the Country was parti-
tioned and Dandot went to Pakistan. Instead of cancelling
his order, the appellant imported the machinery. It was
found that the appellant did so with the intention of sell-
ing it at a profit, to the Orissa State. At the time of the
sale, the appellant charged only the invoice price initially
paid by it, but later, obtained a profit. The Income Tax
Officer treated the profit as income earned pursuant to an
adventure in the nature of trade, and taxed it as such. The
appellant’s appeals were rejected by the Appellate Taxation
Authorities. The matter was then referred to the High Court
u/s. 66 (1 ) of the income Tax Act, but was dismissed.
The appellant contended that making a profit was not its
intention at the time of sale, and that being a single and
isolated transaction of purchase and sale, it was not an
adventure in the nature of trade within the meaning of s.
2(4) of the Act, and that the onus of proving anything to
the contrary, lay upon the Department.
Dismissing the appeal, the Court--
HELD: (i) It is well settled that even a single and
isolated transaction can be held to be capable of failing
within the definition of "business" if it bears clear indi-
cia of trade. The fact that the transaction is not in the
way of business of the assessee does not in any way alter
the character of the transaction.
[556H,--557A]
Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax (251‘ I.T.R- 765), G. Venkataswami Naidu .& Co.
v. The Commissioner of Income Tax [1959] Supp. (1) S.C.R.
646, Sarol Kumar Mazumdar v. The Commissioner of Income Tax,
West Bengal, Calcutta [1959] Supp. (2) S.C.R. 846 followed.
(2) It is a correct proposition of law that as it was a
single and isolated transaction of purchase and sale, the
onus of proving that it was a transaction in the nature of
trade lay on the department- [560 D-E]
(3) The appellant had the dominant intention of selling
the Dandot machinery to its own advantage, and acted with
the set purpose of taking an advantage of its position as
the owner of the imported machinery- Even if the appellant
had not earned any profit whatsoever at the time of the sale
or very soon thereafter, the transaction, in the facts and
circumstances of this case, would nonetheless have been an
adventure in the "nature of trade", and a business transac-
tion within the meaning of Section 2(4) of the Act. [560H,
561B, 562A-B]
Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax (Supra). and G. Venkataswami Naidu & Co. v.
The Commissioner of Income Tax (Supra) followed.
Kishan prasad & Co. Ltd. v. Commissioner of Income Tax,
Punjab (27, I.T.R. 49). Saroj Kumar Mazumdar v. The Commis-
sioner of Income Tax. West Bengal, Calcutta (Supra). janki
Ram Bahadur Ram v. Commissioner of Income Tax., Calcutta
[1965] 3 S C.R. 604. and Ajax products Ltd. v. Commissioner
of IncomeTax, Madras (43 I.T.R. 297) distinguished.
555
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1437 of 1971.
(Appeal by Special Leave from the Judgment and order
dated 28-4-1970 of the Delhi High Court in Income Tax Refer-
ence No. 50/ 65)
V.S. Desai, Mrs, Leila Seth and Parveen Kumar for the
Appellantt.
S.T. Desai & M.N. Shroff, for the Respondent.
The Judgment of the Court was delivered by
SHINGHAL, J.--This appeal by special leave is directed
against the judgment of the Delhi High Court dated April 28,
1970 in a reference made by the Income-tax Appellate Tribu-
nal (Delhi Bench A) under section (36(1) of the Income-tax
Act, 1922, hereinafter referred to as the Act. in respect of
the following question,--
"Whether on the facts and circumstances of the case
the sum of Rs. 7 lakhs received from M/s Orissa
Cement Ltd. was pursuant to an adventure in the
nature of trade and as such tanable under the
Indian Income-tax Act, 1922 ?"
The High Court has answered the question in the affirmative.
We shall refer to the facts giving rise to the
controversy in some detail when we state them in a
chronological order. It may be mentioned, mean-
while, that the Dalmia Cement Ltd., hereinafter
called the appellant, owned certain cement facto-
ries and it placed an order for the supply of four
complete units of cement manufacturing machinery
with M/s F.L. Smidth and Co., Copenhagen, on
February 7, 1946. to increase the production in
the following factories,-- ,
1. Shantinagar,
2. Dandot,
3. Dalmianagar,
4. Dalmiapuram.
Since the factory in Dandot fell within the territory of
Pakistan on constitution with effect from August 15, 1947,
the appellant transferred the machinery which was meant for
the Dandot factory (hereinafter referred as the Dandot
machinery), to a new company known as Orissa Cement Ltd.
some time in 1950-51, and charged only the invoice price
which it had paid to M/s F.L. Smidth and Co. The appellant
thereafter asked for a higher price and after some negotia-
tions the Orissa Cement Ltd. agreed on December 4, 1951, to
pay a further sum of Rs. 7 lakhs, in lieu of which 70,000
fully paid up ordinary shares of Rs. 10/- each. were given
to the appellant in that company. The Income-tax Officer
treated that amount as income earned by the appellant pursu-
ant to an adventure in the nature of trade in 1952-53 as-
sessment year, and taxed it as such. On appeal, the
Assistant
4--1234SCI/76
556
Appellate Commissioner also held in his order dated Septem-
ber 16, 1958 that the transfer of the Dandot machinery was
an adventure in the nature of trade and the payment of Rs. 7
lakhs was a revenue receipt which was rightly taxed by the
Income-tax Officer. The matter went up in appeal to the
Income-tax Appellate Tribunal (Delhi Bench) which remanded
the case to the Income-tax Officer by its order dated Sep-
tember 13, 1960, for report on certain specific points. On
receipt of the Income-tax Officer’s report, the Tribunal
held that the transaction in question was "certainly an
adventure in the nature of trade" and dismissed the appeal.
It however drew up a statement of the case, and that is how
the aforesaid question of law was referred to the High Court
under section 66(1) of the Act. The High Court held that
by the time the appellant placed the despatch order with M/s
Smidth & Co., "its intention was to purchase it with an idea
to resell" and that the fact that it was a single and iso-
lated transaction did not materially affect the case. In
reaching that conclusion the High Court took the subsequent
developments into consideration, and rejected the contention
that the machinery was purchased by way of an "investment".
The present appeal has been filed against that judgment of
the High Court dated April 28, 1970.
Under section 10 of the Act, income-tax is payable by ,m
assessee under the head "Profits and gains of business,
profession or vocation", inter alia, in respect of the
profits and gains of any "business" carried on by him, and
the controversy in this case is whether the receipt of the
additional sum of Rs. 7 lakhs, over and above the cost of
the Bandot machinery, could be said to arise out of any
"business" of the appellant. The term "business" has been
defined as follows in clause (4) of section 2 of the Act,-
"(4) "business" includes any trade, commerce, or
manufacureor any adventure or concern in the nature
of trade, commerce or manufacture."
The question in this case is whether the transaction was
an "adveuture" in the "nature of trade" within the meaning
of the definition ? Some decisions have been rendered by
this Court on the point, and our attention has been invited
to the decisions in Narain Swadeshi Weaving Mills v. Commis-
sioner of Excess Profits Tax, (1) Kishan Prasad and Co. Ltd.
v. Commissioner of Income-tax Punjab,(") G. Venkattaswami
Naidu & Co. v. The Commissioner of Income-tax,(3) Soroj
Kumar Mazurndar v. The Commissioner of Income-tax West
Bengal Calcutta, (4) and Janki Ram Bahadur Ram v.
Commissioner of Income-tax, Calcutta(5). Even so, on gener-
al principle can, for obvious reasons, be laid down to
cover. all cases of this kind because of their varied na-
ture, so that each case has to be decided on the basis of
its own facts and circumstances. It is however well settled
that even a single and isolated transaction can be held to
be capable of falling within the definition if it bears
clear indicia of trade (vide Natgin
(1) 26 I.T.R. 765. (2) 27 I.T.R. 49.
(3) [1959] Supp. (1) S.C.R.. 646. (4) (1959) Supp...
(2) S.C.R. 846.
(5) [1965] 3 S.C.R. 604.
557
Swadeshi Weaving Mills v. Commissioner of Excess Profits, G.
Venkataswami Naidu & Co. v. The Commissioner of Income-tax,
and Sarol Kumar Mazumdar v. The Commissioner of Income-tax,
West Bengal, Calcutta (supra)). It is equally well settled
that the fact that the transaction is not in the way or
business of the assessee does not in any way alter the
character of the transaction (vide G. Venkataswatni Naidu &
Co. v. The Commissioner of Income-tax, and Saroj Kumar
Mazumdar v. The Commissioner of InCome-tax, West Bengal,
Calcutta (supra). It would not therefore help the appel-
lant’s case merely to urge either of these points for the
answer to the question will depend on a consideration of all
the facts and circumstances.
The question under consideration is essentially a mixed
question of fact and law. It will therefore be desirable,
in the first instance, to re-state the relevant facts in a
chronological order;
As has been stated, the appellant owned some cement
factories in various parts of India including the one in
Dandot. It placed an order with M/s. Smidth & Co., Copenha-
gen, for the supply of four complete units of machinery for
the manufacture of cement, to increase the production of its
factory at Dandot and three other factories. A firm order
for all the four units was placed on February 7, 1946. It
was confirmed by M/s. F.L. Smidth & Company on August 6,
1947 and the appellant was informed that the supply of the
Dandot machinery would be made in various months from Febru-
ary 1948 to October 1948. India was partitioned, and Paki-
stan came into existence on August 15, 1947. Dandot fell in
the territory of Pakistan. The appellant, which was an
Indian Company, did not however cancel the order in respect
of the Dandot machinery. On the other hand, a Director of
the appellant informed the Orissa Government in his letter
dated November 25, 1947 that it had "got a cement plant for
which it had placed order a couple of years back", of which
early delivery was expected, and that it would be willing to
put it in Orissa on "suitable terms." The appellant’s
General Manager held discussions with the Orissa Government
on January 8, 1948 for the setting up of a cement factory in
Orissa. It was recorded in the note of the proceedings of
that meeting that the appellant had ordered machinery for
replacing its cement plant, the said machinery was expected
to be shipped at an early date and parts of it would start
arriving in March 1949. It was further stated that the
complete supply of the plant was estimated to take about six
months, and if the negotiations were fruitful the first lot
of cement would be produced by the beginning of 1950. The
appellant’s representative insisted that a final decision
might be taken at an early date so that the machinery which
had to be chipped from abroad could be diverted, depending
upon the decision, to the Calcutta or Bombay port. The
appellant thereafter wrote a letter to M/s. F.L. Smidth and
Co. (Bombay) Ltd. on September 9, 1948 directing that the
plant meant for the Dandot works might be diverted to Oris-
sa. It was specially stated in the letter as follows,--
"There are certain equipments in the specifications
of the plants for extension No. 3 and 4, which were
peculiar to the layout and design for the extension at
Dandot and Shanti
558
nagar and they will not now fit in exactly in the same
manner in our proposed new factories. As such, it is essen-
tial that the whole specifications are carefully scrutinised
and manufacture of the items which are peculiar to the lay
out of Dandot and Shantinagar Works only should be kept in
abeyance in order to suit the local conditions."
The plants were expected to arrive from March 1949 onwards,
but this would not have been possible without an import
licence. The appellant obtained the licence from the Gov-
ernment of India and intimated to M/s. F.L. Smidth and Co.
in its letter dated August 2, 1948 that it had been permit-
ted to import in the Indian Dominion the two plants meant
for Dandot and Shantinagar. The suppliers were accordingly
requested to intimate the dates upto which extension was
required for the import of the machinery. A formal agree-
ment was made between the appellant and the Orissa Govern-
ment on December 23, 1948. The Dandot machinery arrived in
due course. It was delivered by the appellant to Orissa
Cement Ltd. and its actual cost was debited to it. Quite
some time thereafter, on April 7, 1970, a Director of the
appellant wrote a letter to the Industries Minister of the
Orissa Government that the machinery supplied to the orissa
Cement Ltd. should be revalued and the appellant allowed a
higher price than the invoice price due to a rise in the
cost of the cement .plant at the time of supply as compared
with the price at the time when it was originally ordered by
the appellant. The name of one F.B. Mogensen was suggested
for the revaluation of the machinery. This was agreed to by
the State Government on June 4, 1950. Mogensen reported
that the Orissa Cement Ltd, had benefited to the extent of
almost Rs. 21 lakhs in the bargain. The Orissa Government
passed a resolution dated December 4, 1951 allowing a fur-
ther sum of Rs. 7 lakhs to the appellant and, in lieu of
cash payment, allotted 70,000 fully paid up ordinary shares
of Rs. 10/- each of the Orissa Cement Ltd. to the appellant.
The above facts clearly establish that,--
(i) Even though the appellant initially placed
an order on February 7, 1948 for the purchase of
the Dandot Machinery for improving the production
in the Dandot factory, and the supply was not to
commence until February. 1948, it did not make any
effort to cancel that order even after Dandot was
included in the territory of Pakistan with effect
from August 15, 1947.
(ii) On the other hand, in pursuance of an
enquiry by the Government of Orissa whether the
appellant would be interested in putting up a
cement plant in the State, one of the appellant’s
Directors informed the State Government on November
25, 1947 that it had got a cement plant for which
it had placed an Order a couple of years ago and
that it could be put up in Orissa on suitable
terms. The appellant’s General Manager in fact met
the State Government authorities in January, 1948
where it was reiterated
559
that the machinery ordered by the appellant was
expected to start arriving in March 1949 and could
be diverted to Calcutta and that if the appellant’s
negotiations with the State Government were suc-
cessful, the first lot of cement could be supplied
by the beginning of 1950.
(iii) The negotiations with the Orissa Govern-
ment proved successful and the appellant wrote a
letter to M/s. F.L. Smidth and Co. on August 2,
1948 informing it that it had obtained the permis-
sion of the Government of India to import the
Dandot machinery in India. The appellant also
informed the suppliers on September 9, 1948 that it
should divert the Dandot machinery to Orissa and
supply the same according to the revised specifica-
tions to suit the local conditions.
(iv) A formal agreement was executed by the
appellant and the Orissa Government on December 23,
1948 for the setting up of a cement factory in
Orissa.
(v) The Dandot machinery arrived and was sup-
plied by the appellant to the Orissa factory
against cost price, which was debited to the Orissa
Cement Company.
It would thus appear that, long before the Dandot machinery
was due, the appellant knew that it could not be used in
Dandot. It has been found that after the partition of the
country the appellant could have cancelled the order for the
import of the machinery but it did not do so and decided to
import it with a view to supplying it to Orissa on suitable
terms. It therefore resold it to the Orissa factory in
accordance with the terms and conditions of its negotiations
with the State Government. The intention of resale was
therefore there almost from the beginning, and was really
the dominant intention in importing the machinery after the
partition of the country. It is also quite clear that the
appellant was not inclined to make it a gratuitous sale, but
agreed to it only when it was able to secure a suitable
agreement with the State Government for the setting up of a
factory in Orissa. It was in fact. the appellant’s own case
that the price of the Dandot machinery had gone up substan-
tially. Even so, the appellant did not care to utilise it
for any of its own plants, but sold it to Orissa Cement Ltd.
The appellant therefore did not only have the dominant
intention of selling the Dandot machinery to its own advan-
tage but, in doing so, it acted with the set purpose of
taking an advantage of its position as the owner of the
imported machinery of which the price had on the appellant’s
own showing, gone up much higher. It was therefore a real
transaction by way of an adventure in the nature of trade
and was as such a business transaction within the meaning of
section 2(4)of the Act. It does not matter if the appel-
lant did not earn a profit immediately on delivering the
machinery, and sold it without any profit in the first
instance, for there can be no denying the fact that even if
the appellant had not earned any profit whatsoever at the
time of the sale or even thereafter, the transaction in the
facts and circumstances of the case, would nonetheIess have
been adventure in the
560
"nature of trade" and no other.) We are fortified in this
view by the decisions in Narain Swadeshi Weaving Mills v.
Commissioner Excess Profits Tax (supra) and G. Venkataswami
Naidu and Co. v. The Commissioner of Income-tax (supra).
It is true that the question of asking for payment in
excess of the cost price was raised by the appellant some
time later, but its subsequent course of conduct in bringing
about a substantial profit is a clear pointer to the real
intention behind the sale. It was for that reason that the
appellant’s Director addressed a letter to the Minister of
Inustries of the Orissa Government on April 7, 1950 stating
that the Dandot machinery should be revalued and the appel-
lant allowed a higher price due to the rise in its price at
the time of the supply. The entire correspondence in that
respect has not been placed on record by the appellant, but
it appears that the appellant was able to secure a further
sum of Rs. 7 lakhs, under an agreement dated December 4,
1951 in lieu of which it was able to secure 70,000 fully
paid up shares of Rs. 10/-. The appellant succeeded in
doing so merely because it was able to substantiate its
claim for a higher price, or profit, on thesole ground
that it was entitled to it because of the increase in the
price at the time of the sale. There is therefore nothing
wrong in the view which has prevailed with the High Court
that it was an adventure in the nature of trade.
It has been argued by Mr. V.S. Desai, for the appellant
that as it was a single and isolated transaction of purchase
and sale,, the onus of proving that it was a transaction in
the nature of trade lay on the department. This is a
correct proposition of law and, .as would appear from what
has been stated above, we have examined the controversy on
the assumption that the burden of proving that the transac-
tion was an adventure in the nature of trade lay on the
department. The ancillary argument of Mr. V.S. Desai that a
question like the present has to be examined with reference
to the indicia or characteristics of the trade, is also
quite correct, but counsel has not been able to contend, in
the face of the facts and circumstances mentioned above,
which indicia or characteristics could be said to be lacking
to take it out of the category of an adventure in the nature
of trade.
All that Mr. V.S. Desai has pointed out is that there
was no intention to make a profit when the Dandot machinery
was sold to the Orissa Cement Ltd., and it has been urged
that would be sufficient to take it out of the category of
an adventure in the nature of trade. Reference in this
connection has been made to the decisions in Kishan Prasad &
Co. Ltd. v. Commissioner of Income-tax, Punjab (supra), G.
Venkataswami Naidu and Co. v. The Commissioner of Income-tax
(supra), Saroj Kumar Mazurndar v. The Commissioner of In-
come-tax, West Bengal, Calcutta (supra), and Ajax Products
Ltd. v. Commissioner of Income-tax, Madras(1). We have
given our reasons for the contrary view that the transaction
would be an adventure in the nature of trade even if the
question of profit was left out of consideration, and that
the appellant in fact acted with the set purpose of resell-
ing the
(1) 43 I.T.R. 297
561
Dandot machinery to its advantage and not by way of a favour
or a gratuitous act. We have also shown how the appellant
ultimately claimed and succeeded in securing a higher price
merely on the ground that there was an appreciable increase
in the price after the purchase of the Dandot machinery.
Lastly, it has been argued by Mr. V.S. Desai that in
purchasing the machinery the appellant made a capital in-
vestment so that it was merely a capital asset. This argu-
ment is also futile for, as has been shown, the appellant
made the purchase with the dominant intention of reselling
the machinery to advantage and made the resale only when it
was able to enter into an agreement with the Orissa Govern-
ment lot the setting of a cement factory in that state on
terms and conditions which were suitable from its point of
view. It may also be stated that even in its own profit and
loss account and balance sheet, the appellant treated the
sale price as a revenue receipt and not as a capital invest-
ment. It was therefore an after thought to Claim that the
initial purchase was by way of an investment and was a
capital asset.
The facts of Kishan Prasad and Co. Ltd. v. The Commis-
sioner of Income-tax, Punjab (supra), Saroj Kumar Mazumdar
v. The Commissioner of Income-tax, West Bengal, Calcutta
(supra) and Janki Ram Bahadur Ram v. Commissioner of
Income-tax, Calcutta (supra) referred to by Mr. V.S. Desai
were different. In the case of Kishan Prasad and Co. Ltd.
(supra) there was agreement to give the managing agency to
the assessee on the erection of the mill because it had
subscribed to shares worth Rs. 2 lakhs. The mill was not
erected and the assessees sold the shares. There was there-
fore justification for holding that the purchase of the
shares was an investment to acquire the managing agency and
was not an adventure in the nature of trade. In Saroj Kumar
Mazumdar’s case (supra) there was a single transaction of
sale of rights for the purchase of land measuring 3/4 acres
by the assessee who was an Engineer by profession. His
construction activities declined and that was why he sold
his rights in the land for Rs. 74,000 odd in excess of
the amount paid by him. The Incometax department however
failed to prove that the assessees dominant intention was
to embark on a venture in the nature of trade as distin-
guished from capital investment. That was also therefore a
different case. In the case of Janki Ram Bahadur Ram
(supra) the assessee was a dealer in iron scrap and hard-
ware. He agreed to purchase all rights of a company in a
jute pressing factory, but sold it at a profit. It was held
that as the property purchased by the assessee was not such
that an inference that a venture in the nature of trade must
have been intended could be raised, the profit was not
liable to tax. It was held that a person purchasing a jute
press might intend to start his own business or he might
let it out on favourable terms. The property was in fact
let out by the earlier owner before the date of sate. That
was also therefore quite a different case and cannot avail
the appellant. In the remaining case of Ajax Products Ltd.
(supra) it was held that on the facts the assessee company
having acquired the sick mill to open new line of business,
the purchase was, really in the nature of an investment and
the purchase and sale did not amount to an adventure in the
nature of trade. That was therefore also quite a different
case.
562
It would thus appear that in spite of the fact that the
appellant withheld some of the correspondence bearing on
the controversy, the Department has succeeded in proving
that the transaction of sale in question was an adventure
in the nature of trade and fail within the definition of
"business" in clause (4) of section 2 of the Act. The High
Court has rightly answered the question in the affirmative,
and as we find no merit in this appeal, it is dismissed with
costs.
M.R. Appeal dismissed.
563