DALMIA CEMENT LIMITED versus COMMISSIONER OF INCOME TAX, NEW DELHI

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DALMIA CEMENT LIMITED v. COMMISSIONER OF INCOME TAX, NEW DELHI

September 10, 1976

[A. N. RAY, C.J., M. H. BEG AND P. N. SHINGHAL, JJ.]

Income Tax Act, 1922, s. 2(4)-When can a single and isolated sale be a the Taxation business transaction within the meaning of-Onus probandi 011 Department-Initial purchase with intention of advantageous sale-Earning pro fit on delivery of goods not necessary.

In 1946, ·the appellant ordered cement manufacturing machinery from a firm in Denmark, for its f~ctory in Dandot, but long before the machinery was due, Instead of cancelling the country was parlit10ned and Dando! went to Pakistan. his order, the appellant imported the machinery. It was found that the appellant did so with the intention of selling 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, bnt later, obtained a profit. The Income Tax Officer treated the profit as income earned pursua.nt to an adventure in the nature of trade, and taxed it as such. The appellant's appeals were rejected by the Appellate Taxation Autho- rities. The inattei' was then referred to the High Court u/s. 66 ( 1) of the income Tax Act, but was dismissed.

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"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 falling within the definition of "business" if it bears clear indicia of trade. The fact that the transaction is not in the way of busi ness of the assessee does not in an}l way alter the character of the transaction.

[556H,-557A]

Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (25 I.T.R. 765), G. Venktttaswami Naidu & Co. v. The Commissioner of Income Tax [1959] Supp. (1) S.C.R. 646, Saroj Kumar Mazumdar v. The Commissioner of Income Tax, West Bengal, Calcutta [1959) Supp. (2) S.C.R. 846 followed.

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(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]

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(3) The appellant had the dominant intention of selling the Dando! machi nery 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 there after, the transaction, in the facts and circumstances of this case, would nonethe less have been an adventure in the "nature of trade", and a business transaction 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.

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Kishan Prasad & Co. Ltd. v. Commissioner of Income Tax, Punjab (27, I.T.R. 49), Saroj Kumar Mazumdar v. The Commissioner of l11;co_me 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 lnwrne Tax, Madras ( 43 I.T.R. 297) distinguished.

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DALMIA CEMENT v. COMMISSIONER OF I.T. (Shing!wl, J.)

555

Clv1L APPELLATE JURISDICTION

: Civil Appeal No. 1437 of 1971.

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(Appeal by Special Leave from the Judgment and order dated 28-4-1970 of the Delhi High Court in Income 'Pax Reference No. 50/ 65)

V. S. Desai, Mrs, Leila Seth and Parvee11 Kumar for the Appellant.

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 Tribunal (Delhi Bench A) under section 66 (l) of the Income-tax Act, 1922, hereinafter referred to as the Act; in respect of the following question,-

"Whether on the facts and circurnsta nccs 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 lndian .Income-tax Act, 1922 ?"

The liigh Court has answered the question in the affirmutive.

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We shall refer to the facts giving rise to the controversy in some It may be men detail when we state them in a chronological order. tioned, meanwhile, that the Dalmia Cement Ltd., hereinafter called the appellant, owned certain cement factories and it placed an order for the supply of four complete units of cement manufacturing nwchi nery with M/s F.L. Smidth and Co., Copenhagen, on . February 7, 1946, to increase the production in the following factori.es,-

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1. Shantinagar,

2. Dandot,.

3. balmianagar,

4. Daimiapuram ..

Since the factory in Dandot fell within the territory of Pakistan Qn its con:>titntion with effect from August 15, 1947, the appellant transferred tl)e m<ichinery which· was meant for the Dandot factory (hereinafter referred a:> the Dandot machinery), to a new company known as Orissa Cement Ltd. some time in 1950-51, and charged only the invoice nri~e.w.fuio:h it had paid to M/s.F. L. Smidth and. Co: The appellant thereaf:tt>r asked- .for a ·higher price and after some negotiations the Ori~sa Cement Ltd. agreed on December 4, 1951, to pay a further &lJl11. vf Rs. 7. J:;ikh6; in lieu of which 70,000 fully paid up ordinary s;hares -of.Rs. 1-0 /- each. were given to the appellant in that company. The Incomc-ta.x Officer treated that amount as income earned bv the appe]lant pvrsuant to an adventure in the nature of ti·ade in 1952-53 On appeal, the Assistant asscssmei1( year, ·and taxed it as sucl1.

4-I234SCI/76

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[1977] 1 S.C.R.

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Income-tax Officer.

Appellate Commissioner also held in his order dated September 16, 1958 that the transfer of the Dandot machinery was an adventure in ithe nature of trade and the payment of Rs. 7 lakhs was a revenue receipt which was rightly taxed by the 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 September 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 o~ It however drew up a statement trade" and dismissed the appeal. 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 to M/s Smidth & Co., "its intention was to purchase it with an idea resell" and that the fact that it was a single and isolated transaction In reaching that conclusion the did not materially affect the case. High Court took tl1e 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 judg ment of the High Court dated April 28, 1970.

Under section 10 of the Act, income-tax is payable by an 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 manu facture or any adventure or concern in the nature of trade, commerce or manufacture."

The question in this case is whether the transaction was an "adventure" 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. Commissioner of Excess Profits Tax,(') Kishan Prasad and Co. Ltd. v. Commissioner of Income-tax Punjab,( 2 ) G. Venkataswami Naidu & Co. v. The Commissioner of Income-tax,(') Soroj Kumar Mazumdar v. The Commissioner of Income-tax West Bengal and Janki Ram Bahadur Ram v. Commiss;oner Calcutta,(") of Income-tax, Calcutta( 5 ). Even so, on general principle can, for obvious reasons, be laid down to cover all cases of this kind because of their varied nature, so that each case has to be decided on the basis It is however well settled that of its own facts and circumstances. 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 Narain

(I) 26 I.T.R. 765. (3) (1959] Supp. (!) S.C.R. 646. (5) [1965] 3 S.C.R. 604.

(2) 27 I. T.R. 49. (4) (1959) Supp... (2) S.C.R. 846.

OALMJA CEMENT v. COMMISSIONER OF l.T. (Shing/wl, J.)

557

Swadeshi Weaving Mills v. Com111issio1ier of Excess Profits, G. Venka- A taswami Naidu & Co. v. The Commissioner of Income-tax, and Saroj Kumar Mazumdar v. The Commissioner of Income-tax, West Bengal, Calcutta (supra) ) . It is equally well settled that the fact that t~e transaction is not in the way or business of the assessee does not Ill any way alter the character of the transaction (vide G. Venkataswami Naidu & Co. v. The Commissioner of Income-tax, and Saroj Kumar Mazumdar v. The Commissioner of Income-tax, West Bengal, Calcutta B It would not therefore help the appellant's case merely to (supra). urge either of these points for the answer to the question will depend on a consideration of all the facts and circumstances.

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· The question under consideration is essentially a mixed question It will therefore be desirable, in the first instance,

of fact and law. to re-state the relevant facts in a chronological order;

As has been stated, the appellant owned some cement factories in It placed an various parts of India including the one in Dandot. order with M/s. Smidth & Co., Copenhagen, 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 February 1948 to October 1948. India was partitioned, and Pakistan came into existence on August 15, 1947. Dandot fell in the territory of Pakistan. Tne appel lant, 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 It was recorded in the note of the proceedings of factory in Orissa. 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 chippcc.l. 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 Orissa. 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-

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SUPREME COURT REPORTS

ll977] 1 s.c.n.

nagar and they will not now fit in exactly in the same manner in our proposed new factories. As such, it is essential that the whole.specifications are carefully scrutinised and manufac ture of the items which ar_e peculiar to the Jay out of Dandot and S)lantinagar 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 Government of fndia and intimated to M/s. F. L. Smidth and Co. in its letter dated August 2, 1948 that it had been permitted 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 require-el for the import of the machinery. A formal agreement was made between the appellant and the Orissa Govermnent on December 23, 1948. The Dandot machinery arrived in due course. It was delivered by the appeilant to Orissa Cement Ltd. and its actual cost was debited to it. Quite some time thereafter, on April 7, 1970, a Director of the appel fant wrote a Jetter to the Industries Minister of the Orissa Government that the machinery supplied to the Orissa Cement Ltd. should be re valued 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 Decem ber 4, 1951 allowing a further sum of Rs. 7 lakhs to the appellant and, ill lieu of cash payment, allotted 70,000 fully paid up ordinary shares <?f Rs.. 10/- each of the Orissa Cement Ltd. to the appellant. ·

The above fl.\CtS clearly establish that,-

( i) Even though the appellant initially placed an order on February 7, 1948 for the purchase of the Dandot Machin ery 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 Orisrn on su,itable terms. The appellant's General Mam1ger in fact met the.State Govern . ment authorities in January, 1948 where it was reiterated

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OALMIA CEMENT v. COMMISSIONER OF J.T. (Shinghal, !.)

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that the machinery order¢ 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 successful, the first lot of cement could be supplied by the beginning of 1950.

The negotiations with the Orissa Government proved suc cessful 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 permission of the Government of India to import the I)andot 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 specifications to suit the local conditions.

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(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 supplied by the

appellant to the Orissa factory against cost price, which was D debited to the Orissa Cement Company.

It would thus appear that, long before the Dandot machinery was It bas due, the appellant knew that it could not be used in Dandot. been found that after the partition cif 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 E on suitable terms. It therefore resold it to the Orissa factory in accord ance 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 It is also quite clear machinery after the partition of the country. 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 F It the State Government for the setting up of a factory in Orissa. was in fact the appellant's own case that the price of the Dandot machinery had gone up substantially. 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 advantage but, in doing so, it acted with the set purpose of taking an advantage of its position G 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 meianing of section 2 ( 4) of the Act. It does not matter if the appellant did not earn a, pro.fit 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 H if the appellant had not earned any profit whatsoever at the time of the sale or even thereafter, the transaction in the facts and circum .stances of the case, would nonetheless have been adventure in the

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'·nature of trade" and no other.) We are fortified in this view by the decJS1ons in Narain Swadeshi Weaving Mills v. Commissioner Excess Profits Tax (supra) and G. Venkataswami Naidu and Co. v. The Com missioner of Income-tax (supra).

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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 subse quent course of conduct in bringing about a substantial profit is a clear It was for that reason pomter to the real intention behind the sale. that the appellant's Director addressed a letter to the Minister of Indus tries of the Oris~ Government on April 7, 1950 stating that the Dandot machinery should be revalued and the appellant allowed a higher price due to the rise in its price at the time of the supply. The entire cor- respondence 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 the role 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.

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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 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 transaction was an adventure in the nature of t$de lay on the department. The ancil lary 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.

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All that Mr. V. S. Desai has pointed out is that there was no inten tion to make a profit when the Dandot machinery was sold the Orissa Cement Ltd., and it has been :urged tha~ would ~ §nfficient trade. to take it out of the category of an adventure in the nature of 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 Mazumdar v. Th~ Commissioner of Income-ta.x, West Bengal, Calcutta (supna), and A1ax Products Ltd. v. Commis sioner of Income-tax, Madras('). 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 the that the appellant in fact acted with the set purpose of

reselling

(1) 43 T.T.R. 297

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DALMIA CEMENT v. COMMISSIONER OF I.T. (Shinghal, J.)

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Dandot machinery to its advantage and not by way of a favour or a' 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 investment so that it was merely a capital asset. This argument is also futile for, as has been shown, the appellant made the purchase with the do~t intention ~f reselling the machinery to advantage and made the resale only when it was able to enter into an agreement with the Orissa Government for the setting of a cement factory in that state on terms and conditions which It may also be stated that even were suitable from its point of view: 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 It was therefore an after thought to Claim that the initial pur ment. chase was by way of an investment and W:as a capital asset.

justification

Income-tax, Calcutta

The facts of Kishan Prasad and Co. Ltd. v. The Commissioner of Income-tax, Punjab (supra), Saroj Kumar Mazumdar v. The Commis sioner of IncomMax, West Bengal, Calcutta (supra) and Janki Ram Bahadur Ram v. Commissioner of (supra) In the case of Kishan referred to by Mr. V. S. Desai were different. Prasad and Co. Ltd. (supra) there was agreement to give tlie manag- ing agency to tlie assessee on the erection of tlie mill because it had subscribed to shares worth Rs. 2 lakhs. The mill was not erected and for the assessees sold the shares. There was tlierefore holding ~t tlie 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 transac tion of siale of rights for the purchase of land measuring t acres by tlic assessee who was an Engineer by profession. His construction activi ties declined and that was why he sold his land for Rs. 74,000 odd in excess of the amount paid by him. The Income tax department however failed to prove that tlie assessee's dominant intention was to embark on a venture in the nature of trade as distin guished from capital investment. That was also tlierefore a different In the case of lanki Ram Bahadur Ram (supra) tlie assessee case. was a dealer in iron scrap and hardware. He agreed to purchase all rights of a company in a jute pressing factory, but sold it at a profl.t. It was held that as tlie property purchased by the assessee was not such that an inference that a venture in the nature of trade must have been It was held intended could be raised. the profit was not liable to tax. 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 fract let out by the earlier owner before tlie date of sale. That was also therefore quite a defferent case and cannot avail the appellant. In the remaining case of Ajlll~ Products Ltd. (supra) it was held that on the facts the assessee company having acquired the sick mill to open a· 'new line of bus.iness, 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.

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It would thus appear that in spite of the fact that the appellant with the held some of the correspondence bearing on Department has succeeded in proving that the transaction of sale in ,question was an adventure in the nature of trade and fall within the The definition of "business" in clause ( 4) of section 2 of the Act. High Court has rightly answered the question in the affinnative, and as we find no merit in this appeal, it is dismissed wnh costs.

the controversy,

M.R.

Appear dismissed.

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