Commissioner of Income Tax vs R.M. Meenakshisundaram

Jayasimha Basu, J.—Pursuant to the order of this court u/s 256(2) of the Income Tax Act, 1961, the following questions of law have been

referred to us for our decision :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was carrying on

money-lending business and that the interest income should be assessed only under the head ''Business'' and not under the head ''Other sources'' ?

Whether the finding of the Tribunal that the assessee carried on money-lending business could be said to be based on material on record ?

Whether the conclusion of the Tribunal that the interest income is to be assessed as business income could be regarded as reasonable on the

facts and in the circumstances of the case ?

The relevant facts leading to the reference may now be set out. The income returned by the assessee, who was an individual and a minor at the

relevant time, for the assessment years 1966-67 to 1969-70 included interest from certain loan transactions. The Income Tax Officer relying upon

the fact that the entire capital that was received by the minor at a family partition had been invested with a small number of persons, was of the

view that there was no money-lending business to which the interest income could be correlated. Therefore, be assessed the interest income under

the head ""Other sources"".

On appeal, the Appellate Assistant Commissioner considering the fact that the assessee belonged to a family which was engaged in money-

lending business and that even that after the partition, the assessee''s funds had been advanced on loan and that interest had been earned thereby,

held that the assessee must be taken to have carried on the business of money-lending and the interest income should be assessed as business

income.

The Department having preferred an appeal against the order of the Appellate Assistant Commissioner, the Tribunal held that the fact that the

assessee was a minor did not preclude him from carrying on business through his agent or guardian; that the assessee had obtained certain funds at

a partition which were undoubtedly part of money-lending business prior to the partition; that after the partition, these amounts were withdrawn

from the firm in which they had been invested under a financial arrangement; that at the time of so withdrawing the amounts, certain discount had

been given which showed the treatment of the fund as stock-in-trade; that the assessee came from a family of money-lenders to whom money was

always stock-in-trade and not capital; that interest had been earned by the assessee on loans advanced by him; and that even if the amount was

kept with the father for utilisation in the business for some time, the same constituted money-lending business by the assessee. The Tribunal rightly

held that the interest earned by the assessee on annuity deposits has to be taxed under the head ""Income from other sources"".

Sri N. V. Balasubramaniam, learned counsel for the Revenue, submitted before us that the facts found by the Tribunal did not warrant the

conclusion that the assessee was carrying on the business of money-lending, and that the interest income should be taxed under the head ""Income

from other sources"". He invited our attention to the definition of the word ""business"" in section 2(13) of the Act and to the decisions of the

Supreme Court in Narain Swadeshi Weaving Mills Vs. The Commissioner of Excess Profits Tax, and The Sole Trustee, Lok Shikshana Trust Vs.

The Commissioner of Income Tax, Mysore, .

In the case of Narain Swadeshi Weaving Mills Vs. The Commissioner of Excess Profits Tax, , the court examined the concept of business and

observed :

Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is

always a difficult question to answer. . . . The word ''business'' connotes some real, substantial and systematic or organised course of activity or

conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the

definition of business as being an adventure in the nature of trade provided the transaction bears a clear indicia of trade. The question, therefore,

whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is.

In The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, , the court while pointing out that the expression

business"" is a word of indefinite import, stated (at page 243) :

The expression ''business'', as observed by Shah J., speaking for the court in the case of State of Gujarat Vs. Raipur Manufacturing Company

Ltd., , though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or

profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business

there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.

Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions

of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit motive.

The question as to whether a particular source of income is business income must therefore be decided according to our ordinary notions of

what a business is. The activity from which the income is derived must have a set purpose. The motive for the activity must be profit and not sport

or pleasure. Even a single or isolated transaction can constitute business if it bears a clear indicia of trade, although the activity would normally be

systematic and organised characterised by a course of dealings which are frequent, regular and continuous.

Applying these tests to the facts as found by the Tribunal in the instant case, it is clear that the assessee had carried on the business of money-

lending and the interest income derived therefrom constituted income from ""business"". The assessee belongs to a family of money-lenders. Out of

the sums allotted to his share at a family partition, during the year 1965-66, a sum of Rs. 4 lakhs was lent by him through his father and natural

guardian to Alagappa Cotton Mills and interest was paid by the mill to the assessee. The remaining amounts were advanced by the assessee to his

father and interest was paid by the father to the minor. In the assessment year 1966-67, a loan of Rs. 25,000 was advanced by the assessee to

Messrs. Lotus Mills and interest was earned on that loan. During the year, the loan advanced to Alagappa Cotton Mills was repaid and was

subsequently lent to the assessee''s father who paid interest to the assessee on the said loan. During the assessment year 1971-72, a new loan in

the course of money-lending was made to one Ramiah Chettiar and interest income received thereon. Further, interest from the same borrower

was received in the subsequent assessment year also. The amounts received by the assessee as interest ranges from Rs. 28,000 in 1966-67 to Rs.

35,312 in 1969-70.

Thus, the monies received by the assessee at the family partition has been his stock-in-trade and has been continuously lent by him with a view

to earn profit thereon. Even when the money was utilised by the father, it was treated as a loan from the assessee and interest was credited to the

assessee''s account. We are, therefore, satisfied that the assessee was carrying on the business of money-lending during these assessment years.

The interest received on these loan transactions constitute business income.

We accordingly answer the questions referred to us in favour of the assessee and against the Revenue. No costs.