CHUNNILAL GANPATRAI, RANCHI vs COMMISSIONER OF Income Tax, BIHAR AND ORISSA.

AGARWALA, C.J. - This reference by the Income Tax Appellate Tribunal arises out of two applications by the assessee u/s 66(1) of the Income Tax Act. One relates to the assessment of Income Tax made section 23(3) of the Income Tax Act and the other to the assessment u/s 14(1) of the Excess Profits tax Act. The facts relevant to both applications are precisely the same and raise only one question.

In 1935 the assessee, a Hindu undivided family, obtained a licensee under the Electricity Act to supply the town of Ranchi with electricity current. Thereafter, buildings were acquired and the necessary machinery and plant installed. The supply of current to consumers began in April, 1937. The Ranchi Electric Supply Co., Ltd., was then floated by the assessee and the permission of Government was sought on the 2nd July to assign the licensee to the company. Permission was granted and the licensee and business of supplying electric current was transferred to the company for a considerations of Rs. 4,70,483 on the of July 20, 1940. The amount expended by the assessee up to the dated of transfer was Rs. 394,332 and there were outstanding dues amounting to Rs. 29,516. The net value of the assets was, therefore, Rs. 3,64,816. The difference between this sum and the stated amount of the considerations was, therefore, Rs. 1,05,667. Under the terms of the license the income -holder was entitled to 15% above the value of the assets in the event of the concern being compulsorily acquired by Government. The sum of Rs. 1,05,667 was stated to represent (a) this 15% (b) the value of the goodwill of the business, and (c) the amount by which the plant, machinery, mains etc., had appreciated in value.

In assessing the assessees income for 1941-42 the Income Tax officer treated the whole of the sum of Rs. 1,05,667 as profits and gains, holding that it was the fruit of an adventure in the nature of trade. This decision was affirmed by the Appellate Assistant Commissioner on appeal and by the Appellate Tribunal u/s 33.

On the application of the assessee the Tribunal referred the following question to this Court u/s 66(1) :-

"Whether there is material justifying the finding that the transaction of sale, in the circumstances of the case, constitutes adventure in the nature of trade, so as to make the whole of the surplus of Rs. 1,05,667 realised by the sale, assessable to Income Tax ?"

When the reference was heard question arose whether, in any event, the whole sum of Rs. 1,05,667 was taxable. The Bench which heard the reference refered the case back to the Tribunal for findings on four points, namely :-

(1) What was the real market value of the shares with a face value of Rs. 3,60,000 on the date of the transfer to the undertaking by the assessee to the Ranchi Electric Supply Company, Limited ?

(2) What was the price of the goodwill of concern of the date of transfer stated above ?

(3) What was the difference between the original cost and the written down value of the undertaking on the date of the transfer as stated by the Tribunal in paragraph 19 of the their order dated on the May 30, 1944 ?

(4) Whether Rs. 4,66,267 is composed of any other item which may come within the word "etcetera" so as to represent a capital or a non-taxable receipt ?

These question appear to have been considered necessary for the determination of the the question whether the whole sum of Rs. 1,05,667 could be regarded as the actual profits accruing to the assessee in the event of it being held that the sale to the company was an adventure in the nature of trade. The relevance of the first of these question was that the consideration for the transfer to the company was only Rs. 1,10,483 in cash amount, the balance of Rs. 3,60,000 being in the form of fully paid shares issued to the vendor. The Tribunal has now held that market value of these shares on the date of transfer was Rs. 3,60,000.

With regard to the second question, the companys prospectus having stated that nothing was payable to the vendor an account of goodwill, the Tribunal held that no such amounts was included in the consideration for the transfer.

With regard to the third question, the Tribunal found the difference to be Rs. 29,323, i.e., depreciation on original cost for the years 1938-39 and 1939-40.

With regard to the fourth question, the Tribunals a finding is in the negative.

In view of these findings it is conceded that if this sum is taxable at all, the whole of it is taxable.

Section 10 of the Income Tax Act provides that tax shall be payable by an assessee under the head "profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him. Section 2(4) defines "business" as in clouding any trade, commerce, or manufacture, or any adventure or concern in the corn in the nature of trade, commerce or manufacture. On behalf of the assessee is contended that as the assessee is not a dealer in buildings, electrical machinery and plant, and as the promotion of companies is no part of his business, the entier sum in dispute represents an accretion to his capital assets, namely, in his lands, buildings, plants etc. I have already stated that when the terms of the proposed transfer were under consideration, the sum in dispute was described as representing the 15 per cent. payable to the assessee on compulsory acquisition of the concern, the value of the goodwill and the amount by which the plant machinery etc., had appreciated up to the time of the transfer. The Tribunal, however, had found that nothing is payable on account of goodwill, and that the sum of Rs. 1,05,667 represents exactly the difference between the cost of the lands, buildings, plant etc., to the assessee and the valuation of these assets given by the assessee in agreement of transfer to the company, that is to say, the entire sum, was accounted for as appreciation in value of the assets. The short answer to the assessees contention that this sum or any part of it represents an accretion to his capital assets is that there is no evidence whatsoever that the assets in question had in fact appreciated at the date of the sale. With regard to the question referred to us, the material available for the finding that the sale constitutes an adventure in the nature of trade was this : the assessee is a family carrying on basin of various kinds : besides dealing in number of commodities, the family are arhatdars, money-lenders, contraction and bus propritors. In addition, it has been found as a fact that from the beginning the assessee did not intend to work the licensee or to sell the land, plant etc., necessary for working it at cost price but to sell the whose business as going concern at a profit. In these circumstances, it seems to me that the Income Tax at a profit. In these circumstances, it seems to me that the Income Tax authorities had material on which they could find that the aim of this project was to make a profit or the assessee and that the project was an adventure in the nature of trade. I would, therefore, answer the question referred to us in the affirmative.

The department is entitled to its costs which we assess at Rs. 250.

MEREDITH, J. - I agree.

Reference answered in the affirmative.