1971-VIL-309-AP-DT

Equivalent Citation: [1973] 92 ITR 261

ANDHRA PRADESH HIGH COURT

Date: 26.03.1971

COMMISSIONER OF INCOME-TAX, AP

Vs

KRISHNA INDUSTRIAL CORPORATION LIMITED.

BENCH

Judge(s)  : KONDAIAH., SRIRAMULU.

JUDGMENT

The judgment of the court was delivered by

KONDAIAH J.-At the instance of the Commissioner of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, has referred under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act " ), the following question for the opinion, of this court :

"Whether, on the facts and in the circumstances of the case, the sum of Rs. 41,219 which represents 25 per cent. of the net profit of the Jeypore Sugar Company and received by the assessee-company is an item of revenue receipt liable to income-tax ? "

In order to appreciate the scope of the reference, it is necessary to refer to the material facts that gave rise to the aforesaid question : M/s. Krishna Industrial Corporation Ltd., Vuyyur (hereinafter called " the assessee "), is a public limited company having its registered office at Vuyyur. Though it was mainly engaged in the manufacture and sale of carbon dioxide, it was permitted under the Industries (Development and Regulation) Act to erect a factory for the manufacture of sugar in Kaikalur Taluk of Krishna District in the year 1954. As the assessee found it difficult to develop the area in Kaikalur, it obtained permission from the State Government to change the location of the proposed factory to Kovvur. On March 5, 1957, the licence was issued in favour of the assessee by the Government. The company invested approximately a sum of Rs. 41 lakhs towards the construction and establishment of the sugar factory at Kovvur. At or about the same time, a proposal to establish a factory for the manufacture of fertilizers was under active consideration of the assessee-company, pursuant to which a factory for fabrication of machinery was also set up by the company whose policies and activities are reflected in its annual reports for the years ending with September 30, 1954, to September 30, 1960.

In the year of accounting ending with September 30, 1960, the entire undertaking of the sugar factory was transferred by the assessee partly in favour of K.C.P. Ltd. and partly to the Jeypore Sugar Co. Ltd., with which only we are concerned in this reference. The terms of both transfers were similar. Both the transferee-companies are like concerns having some directors in common with the assessee-company. The terms of the sale are found in the proceedings of the board of directors of the assessee-company in the form of resolution dated June 18, 1960, and of the Jeypore Sugar Co. Ltd. in resolution dated June 27, 1960, which were followed up by a deed of sale (annexure " D ") dated July 1, 1960, relating to the immovable properties. The transaction was also referred to in the annual report for the year ending with September 30, 1960. The agreement was that the Jeypore Sugar Co. Ltd. should pay the assessee the book value of the assets transferred, i.e., Rs. 4,10,051, together with a sum calculated at 25 per cent. of the profits of the first two years of the working of the factory. As the erection of the factory on the date of transfer was not complete, the factory actually went into production only in November, 1961. In pursuance of the terms of the agreement, the Jeypore Sugar Co. Ltd. paid the assessee-company sums of Rs. 41,219 and Rs. 1,11,312, respectively, during its account years ending June 30, 1962, and June 30, 1963. The aforesaid amounts of Rs. 41,219 and Rs. 1,11,312 have been shown in the accounts of Jeypore Sugar Co. Ltd. in its profit and loss account as payment towards goodwill written off. These sums have also not been claimed as revenue deductions in the computation of the profits of the Jeypore Sugar Co. Ltd.

For the assessment year 1963-64, corresponding to the relevant accounting year ended with September 30, 1962, the assessee, in its return of income, showed the sum of Rs. 41,219 as capital gains arising on the transfers referred to earlier. The Income-tax Officer was of the view that the whole transaction was clearly an adventure in the nature of trade on the ground that the assessee intended to make a profit out of the sugar factory and it was in the habit of opening new lines of business. The company, according to the Income-tax Officer, had transferred the assets in return for a share of profit for two years which, in its hands, constituted income from business. Accordingly, the aforesaid amount was assessed by the Income-tax Officer as part of the business profits of the assessee for the year in question. Aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner who differed from the view taken by the Income-tax Officer. According to him, the assessee was not engaged in the business of purchasing or erecting new factories and selling the same. That apart, the admitted fact that the assessee had originally intended to run the factory and make a profit out of it excluded the theory of venture in the nature of trade. He, therefore, agreed with the assessee's contention that the amount of Rs. 41,219 constituted capital gains in its hands and allowed the appeal. The Income-tax Officer, aggrieved by the decision of the Assistant Commissioner, appealed to the Income-tax Appellate Tribunal before whom the contention of the department was two-fold, viz., (1) that the transaction amounted to an adventure in the nature of trade, and (2) that the sum of Rs. 41,219 which represented a share of the profits made by the transferee-company, should be treated as income of the assessee. Rejecting the submission of the Income-tax Officer, the Tribunal, on a consideration of the entire facts and circumstances, came to the conclusion that the assessee was not engaged in the business of erecting and selling factories and it had intended to carry on the business of manufacture and sale of sugar, but, however, the transaction of the sale of the factory was agreed to and completed as it desired to carry on more fruitful lines of business. The. Tribunal further held that the amount of Rs. 41,219 received by the assessee from the transferee-company represented part of the consideration for the parting of the capital assets. In arriving at such conclusion, it took note of the fact that the assessee-company was to receive profits of two years only in addition to the book value of the assets transferred. The departmental appeal was, therefore, rejected by the Tribunal. Hence, this reference.

Mr. P. Ramarao, the learned standing counsel for the income-tax department, reiterated the contentions raised on behalf of the department before the Tribunal. In support of his plea, he strongly relied upon the terms of the very resolutions of the transferor and transferee companies. Pointed reference has been made to the portion of the resolution of the assessee-company dated June 18, 1960, wherein it was stated that the transferee-company was willing to acquire the said undertaking of the sugar factory " at its book value as calculated plus twenty-five per cent. of the net profit which the said company may earn on the sugar factory to be erected thereon during its first two full years of working towards interest and profit which this company might have otherwise earned on the amount invested up till now on the said land and foundations " and similarly to the passage " a sum equal to twenty-five per cent. of the net profit which this company may earn on the sugar factory which is going to be erected thereon during its first two full years of working " used in the resolution passed by the transferee-company on June 27, 1960. It is also argued by Mr. Ramarao that the transaction amounts to an agreement to share the profits earned by the transferee-company for the first two years and is, therefore, an adventure in the nature of trade. In any event, it was argued that even assuming that 25 per cent. of the profits of the transferee-company have been received by the assessee towards the portion of the consideration for the transaction, still it is profit exigible to tax as the presence of an agreement to share the profits would invariably make the transaction an adventure in the nature of trade and cited the decisions in William John Jones v. Commissioners of Inland Revenue, National Cement Mines Industries v. Commissioner of Income-tax and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax in support of his pleas.

The learned counsel, Sri J. V. Srinivasarao, appearing for the assessee contended contra. It was urged by him that the transaction in substance is a sale of a capital asset whereunder the amounts of Rs. 41,219 and Rs. 1,11,312 agreed to be paid and in fact paid to the assessee by the transferee-company form part of consideration for the very sale, but not adventure in the nature of trade.

The income-tax being a tax on the real income computed as per the provisions of the Act, it is necessary to advert to what an income or capital receipt is and the difference and distinction between the two before adverting to the respective contentions of the parties. This distinction has to be borne in mind for the purpose of arriving at the real and taxable income of an assessee as per the provisions of the Act. The tax being levied on the income of a person in the year of account, the capital receipts in the same period are admittedly not taxable. It is the true character of the receipt in the hands of the recipient that is material for purposes of the Act. Similarly, the nature of the receipt must be judged not under the general law, but from the commercial point of view. There is no rule of thumb having universal application for a solution of the problem whether a particular receipt is income or capital. It is not the form or the name of the transaction which gives rise to the receipt and the characterisation of it, but the substance and the true nature and character of the transaction to be ascertained from the admitted facts and surrounding circumstances that is material and decisive. The dividing line between capital and income receipts as well as capital and revenue expenditure is often very thin, but, however, it is real and distinct. It is one of the moot points that arises in the law of taxation since inception. Whether a particular receipt is capital or revenue is a moot point which turns upon the facts and circumstances of each case.

It is well-settled that where capital is repaid either in lump sum or in instalments, it is not income liable to tax under the Act. A person may sell his property and agree to receive the stipulated price either in kind or in cash, be it in lump sum or in a number of instalments. But, however, where a person transfers or conveys property in consideration of what in substance and truth is annuity payable for a definite or definable period, such payment is held to be income liable to tax. See Chadwick v. Pearl Life Insurance Co., Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax and State of Bihar v. Kameshwar Singh. Equally settled is the law that where property is conveyed in consideration of periodical payments which are no other than share of profits of a business or profession, such receipts are of income nature. There is a catena of cases on this aspect. Suffice it to refer to a few leading cases.

In William John Jones v. Commissioners of Inland Revenue, Jones and another were joint inventors of certain apparatus in respect of which they were entitled to letters patent. They agreed to sell to another company their inventions, letters patent and all other rights appertaining to it and the goodwill of the company, in consideration of a sum of pound 750 payable as to pound 300 by three instalments of pound 100 each and as to the balance of pound 450 by a " royalty ". It was also agreed by the purchasers to pay by way of additional consideration a " further royalty " of 10 per cent. upon the invoice price of all machines constructed under the said inventions and sold during a period of ten years. The question that fell for decision was whether the further royalty payable to Jones and his co-inventors by the purchasers was a capital or revenue receipt. We may usefully notice as to how the problem was approached by the learned judge, Rowlatt J. :

" I therefore think that what one has to do is to look and see what the sum payable really is. I think that Mr. Latter is right in this sense, that the ascertaining of an antecedent debt is not the only thing that governs it. It does not govern it by magic, but it is a very valuable guide in a great many cases, undoubtedly. Here, when we look at it, I do not think there is any difficulty in seeing what was intended. The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent, in effect, on the volume of business done ; that is to say, he took something which rose or fell with the chances of the business. I think, when a man does that, he does take an income--that is what it is. It is in the nature of income, and on that ground I decide this case. "

It is pertinent to notice that the periodical payments in Jones' case were admittedly for a considerable period of 10 years. The test laid down by Rowlatt J. that the amount of instalments, if rose or fell with the chances of business, partake of income, was not accepted as a general rule of universal application by the Court of Appeal in Commissioners of Inland Revenue v. Ramsay. Lord Wright M.R., in his judgment, while holding that the instalment payments in the case of Foley v. Fletcher were payments of money due as capital and approving the decision in Chadwick v. Pearl Life Insurance Company proceeded to observe thus :

" ...it cannot, I think, be said as a general rule that, if the amount of the instalments is one which is to fluctuate during the period in which they are payable according to certain circumstances, that is necessarily inconsistent with these instalments being instalments of capital, and that it necessarily involves that they must be treated as annual payments of annuities. The case of Jones v. Commissioners of Inland Revenue, which was referred to, does contain a proposition to that effect by Rowlatt J., in his judgment, but he was clearly there dealing with the facts of the case. "

After stating the facts and circumstances and the dicta referred to earlier of Rowlatt J., the learned judge proceeded to comment on Jones' case as follows :

" In my judgment, the learned judge there was laying down that proposition with reference to the circumstances before him and did not intend, and I think could not rightly have intended, to state that as a universal proposition applicable to all cases of this character. The decision in any particular case can only be arrived at by considering what is the substance of the transaction in question, and what is the substance of that transaction can only be ascertained by a careful consideration of the contract which embodies the transaction. "

The learned law Lord proceeded to examine the effect of accepting a fluctuating sum towards the sale price of a capital asset and said at page 95 as follows :

".... I cannot see why a creditor who has sold property for a particular price should not, in discharge of that price, agree to accept a fluctuating sum if, as may be the case, and no doubt was the case here, there are sufficient reasons of convenience or other considerations which make it desirable to adopt that method of payment. The mere fact that in the result the amount paid may be greater or less than what is called here the primary debt, that is to say, a specified balance, does not seem to me in itself to throw light on the position one way or the other. "

The test laid down by Lord Wright M. R. in Ramsay's case has been approved by Lord Sorn in Commissioners of Inland Revenue v. Pattison. Therein it fell for decision whether the periodical payments made in pursuance of an agreement for transfer of business were deductible in computing trading profits under the Income Tax Act, 1952. The learned law Lord pointed out :

" ..... that merely to stipulate for instalment payments in no way alters the character of the payment itself, ...... Next, does it matter that the amount of the payment is not fixed once and for all, and that it might fluctuate in the course of time according to the shape of events ? Again, I think that this is not inconsistent with the payments being capital payments, and the case of Commissioners of Inland Revenue v. Ramsay is in point here. "

The expression " periodical payments " is not defined in the Act or the Rules made thereunder or under the General Clauses Act. " Periodical payments " as per Stroud's Judicial Dictionary, volume III, page 2155 " must be payments occurring periodically, that is, at fixed times from some antecedent obligation, and not at variable periods at the discretion of individuals ". Mere payment of instalments periodically does not by itself determine the character of the payment. Whether such periodical payments would be capital or revenue turns upon the facts and circumstances of each case. Even if the periodical payments are made from and out of the profits earned by a person to the other contracting partly as per the terms of the agreement, the position relating to the nature of such payments will not in any way alter on that factor alone. We may notice the following observations of Lord Macmillan in Pondicherry Railway Company v. Commissioner of Income-tax wherein the claim of the railway company to deduct half of the net profits made by it pursuant to an agreement to the Colonial Government as an expenditure incurred solely for the purpose of earning its own profits was negatived :

" A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits. "

In Legge (H. M. Inspector of Taxes) v. Flettons Ltd., the instalment payments based on yearly profits received by a trader from a railway company toward the sidings and the cost of construction were held to be capital receipts. Lawrence J. observed thus :

"...... the substance of the transaction embodied by the agreement was that new sidings should be constructed, and that on construction the ownership therein should pass, on payment by the traders of what were, in my view, capital payments, and that on repayment of those sums, the ownership in the sidings should pass to the railway company. In my view, that is equivalent to a sale and resale of a capital asset ; and the sums paid as the price of such resale, although measured at the time of payment by reference to the railway company's share of freight, are, in my opinion, in their nature capital sums. "

See Trustees of Earl Haig v. Commissioners of Inland Revenue, where receipts by trustees of the estate of a deceased for use of his diaries by a biographer were held to be of capital nature for a partial realisation of an estate.

We may also notice the following observations of Lord Greene M. R. in Commissioners of Inland Revenue v. 36/49 Holdings Ltd. :

" ...... there are many cases in which, applying the proper principles, periodical payments have nevertheless been held, having regard to all the circumstances there present, to be in the nature of capital payments. "

The learned Master of the Rolls, Lord Greene, had clearly laid down in the aforesaid case that the length of time during which a payment is agreed to be paid towards the consideration of a capital asset is a very important and germane factor in determining the nature and character of the instalment paid, as can be seen from the following passage at page 183 :

" I find it myself very difficult to class under the category of 'capital' a perpetual payment. The length of time during which a payment is to endure may be a very important factor in determining its character. It is obviously much easier to treat a payment which is only going to extend over two years as really a payment of purchase price by instalment, than it is to treat a payment which it is contemplated may continue in perpetuity. That characteristic of these particular payments appears to me to be one of substantial importance. "

We may now turn to the decisions of the Supreme Court in National Cement Mines Industries v. Commissioner of Income-tax and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax and that of the Bombay High Court in Commissioner of Income-tax v. Devidas Vithaldas & Co. In National Cement Mines Industries v. Commissioner of Income-tax, the payments amounting to Rs. 77,820 received by the assessee on the basis of quantities of products sold by purchaser towards the transfer of benefits under the leases were held in substance to be a commercial transaction for sharing the profits of commercial activities of the purchaser and were income liable to tax but not capital. In that case, the purchaser-company had agreed to pay the assessee-company 13 annas for every ton of cement sold by it. The purchaser-company was also given an option to determine the lease on giving 6 months' notice in writing if the limestone in the areas was exhausted. The purchaser-company undertook to pay all rents, royalties, etc., due under the rights and concessions. In those circumstances, the aforesaid receipts amounting to Rs. 77,820 were held to be income of the assessee who has in fact shared the profits of the purchaser-company.

In Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax the Government of Travancore agreed to sell the assets of a sugar manufacturing concern, a distillery and a tincture factory to the appellant-company for a cash consideration of Rs. 3.25 lakhs. In addition, the purchaser agreed to pay 20% of the annual net profits, subsequently amended as 10%, subject to a maximum of Rs. 40,000 after providing for depreciation and remuneration of the secretaries and treasurers. For the assessment year 1958-59, the question was whether the sum of Rs. 42,480 paid by the assessee-company to the Government on percentage basis of annual net profits was a capital or revenue expenditure allowable under section 10 of the Indian Income-tax Act, 1922. The Supreme Court, referring to the decision in Jones' case observed that the principle enunciated by Rowlatt J. is applicable to that case where the facts were closely parallel. But, however, as the High Court had not dealt with the other question arising under the reference, the case had been remanded to the High Court observing that as the commission paid by the assessee to the Government was not capital but revenue expenditure, certain other questions would arise for consideration.

In Commissioner of Income-tax v. Devidas Vithaldas & Co., the amounts payable to or received by a retiring chartered accountant for sale of his goodwill on payment of a share of profits for life and to his widow and son after his death, under a covenant by the new firm, were held to be capital expenditure to acquire a capital asset and were not deductible expenditure.

The foregoing discussion may be summed up thus : The income-tax being a tax on the real income computed as per the provisions of the Act of a person earned during the previous year relevant for the assessment year in question, the receipts of capital nature during the same period and others exempted as per the provisions of the Act are not liable to be taxed. Hence, whether a particular receipt is income or capital assumes great importance and it is always a debatable moot point in the law of taxation, which turns upon the cumulative effect of all the relevant and material facts and circumstances of each case. In order to determine whether a particular payment is revenue or capital, it should be judged not under the general law but from the commercial point of view in the hands of the recipient. It is the nature of the receipt in the hands of the recipient, but not the source of its payment, that really determines the character of such a receipt. The dividing line between capital and revenue receipt as well as capital and revenue expenditure is very often thin ; but, nonetheless, it is real and distinct. It is the totality of the relevant material and germane facts and circusmstances but not each factor taken by itself that should form the basis and guide for determining the question whether a particular receipt in the hands of the recipient is revenue or capital. As observed by Rowlatt J. in Jones' case, in order to find out whether a particular payment is capital or revenue, " what one has to do is to look and see what the sum payable really is ". According to the learned judge, the test to be applied is, if the sums agreed to be paid are annual sums or instalments which rise or fall with the volume and chances of the business, they are income but not capital. The aforesaid dictum evolved by Rowlatt J., said Lord Wright M. R. in Ramsay's case, is not a general rule of universal application but must be confined to the facts in Jones' case. As observed by Lord Sorn " each case must depend on its own facts and its own documents " in order to determine whether a particular periodical payment is income or capital. There is, therefore, no single rule of thumb having universal application for the solution of the problem, whether a particular receipt is capital or revenue and a particular payment is revenue or capital expenditure. All periodical payments made towards the consideration of a capital asset cannot always be construed as income receipts alone. There may be cases where perodical payments are also made towards capital asset in which case they are capital. That apart, periodical payments are payments occurring periodically at fixed times without depending upon the discretion of the individuals. Therefore, whether a particular payment is a periodical payment or not is again a question of fact depending upon the facts of each case.

A capital asset may be sold for consideration, be it cash or otherwise. Where the payments are made by the purchaser to the seller towards the sale price of the capital asset, they are invariably of capital nature notwithstanding the nature and method or form of such payments. The sale price may be paid either in lump sum or by periodical payments or in any other form as agreed upon by the contracting parties. The instalments may be periodical for an indefinite period or for a few years or for some months. The mode of payment to a great extent depends upon the terms and conditions agreed upon by the contracting parties. There is no prohibition for the contracting parties to receive a sum of money either in lump sum or to accept a fluctuating sum depending upon the rise or fall with the volume and chances of business, where sufficient reasons, convenience and other considerations justify or the parties thought fit proper and desirable to adopt such a mode of payment. The mere fact that the ultimate amount received in the bargain is really more than or exceeds what was originally called the primary debt or price valued for the capital asset sold does not, in our considered opinion, ipso facto make such payments invariably income receipts. Where the amount of instalments is one which is to fluctuate during the period in which they are payable according to the terms of the agreement and the circumstances necessitated by the parties, it cannot invariably be said that such payments are of income nature notwithstanding the fact that they are specifically agreed to be paid periodically every year or like annuities. If, on the facts and in the circumstances of a given case, it can be determined that the payment in question was, in substance, towards the part-consideration of the capital asset transferred to him, it is only a capital receipt. Where the transaction, in substance and in truth, was an arrangement to share the profits earned by the purchaser in his business, the amounts paid thereunder must be termed to be income but not capital. Where the purchaser agreed to pay certain percentage of profits earned by him in the business asset and goodwill purchased by him over and above the sale price agreed upon, the same, if paid for an indefinite or considerable period of time, must be held to be income receipts in the hands of the recipient. However, where the seller of a capital asset receives a share in the profits earned by the purchaser for a year or two, over and above the amount of consideration received or agreed to be received, such payment cannot be termed to be of income nature but only a capital gain. The length of the period during which the payments from the profits of the purchaser are agreed to be paid to the seller would also be a material factor and pointer to determine the nature of the receipt. Where the amounts partake of annuity for an indefinite period, they are undoubtedly of revenue nature. Similarly, if the period during which the payments are agreed to be made is considerable, it has to be held that they are income. The same criteria are also applicable to a case of expenditure, whether capital or revenue. Where the expenditure is laid out for a number of years to earn profit, it has been held to be of capital nature.

On the application of the aforesaid principles, we shall proceed to examine the contention of Sri P. Ramarao that there was no transaction of sale of movable and immovable properties of the assessee's concern evidenced by a regular registered deed of sale and the transaction is nothing but an adventure in the nature of trade amounting to business and the receipts in question are of income nature. True, there is no registered deed of sale in respect of movables and the sale deed dated July 1, 1960, is confined only to the transfer of immovable property alone. The Act and Rules made thereunder do not prohibit the income-tax authorities from gathering evidence, oral and documentary, from all sources although they are bound to disclose the material and afford a reasonable opportunity to the assessee to explain before using the same in support of their conclusion in the orders of assessment and other proceedings. It is well settled that the provisions of the Evidence Act are not strictly applicable to the proceedings before the income-tax authorities whose powers and functions are circumscribed and regulated by the very provisions of the Act and the Rules made thereunder. Indisputably, the resolutions passed by the vendor and vendee companies, the correspondence that passed between them at the relevant time and the entries in their accounts and the balance-sheets are relevant and germane evidence and material in order to determine the terms of the agreement between the contracting parties and the real nature of the transaction. In our considered opinion, the terms of the agreement in the present case can safely and have to be inferred from the resolutions passed by the transferor and transferee companies, the correspondence that passed in this regard between them, the recitals of the sale deed dated July 1, 1960, the relevant entries in their accounts and balance-sheets and other material made available to the income-tax authorities. In fact, the agreed statement submitted by the Tribunal to this court discloses that the terms of the transaction have been gathered from the material referred to above. For these reasons, we have no hesitation, on the facts and in the circumstances, to infer the terms and the nature of the transaction in the instant case from the resolutions and other material referred to above.

This brings us to consider whether the present transaction amounts to business or sale. "Business" is defined under section 2(13) of the Act as any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture ". It is an inclusive definition. As ruled by the Supreme Court in the case of Narain Swadeshi Weaving Mills :

The word ' business ' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. "

However, no such "business activity" need be present in a sale. Whether a particular transaction is a sale or an adventure in the nature of trade, is a mixed question of fact and law depending upon the terms of the agreement, other available material and the surrounding circumstances. As pointed out earlier, any lump sum or periodical payments received by the seller from the vendee towards sale consideration of a capital asset are capital but not revenue. Where either the whole or any portion of the sale consideration in respect of a capital asset was agreed upon or could be inferred to be invested in the business of the purchaser who pays out of his business earnings to the vendor a portion of his profits earned from such business, such transaction must be held to be an adventure in the nature of trade, as it is a business activity. The length of the periodical payments agreed upon also is a material factor to be taken into consideration.

We are unable to agree with the submission of the learned standing counsel for the department that the case on hand falls within the dicta enunciated by Rowlatt J. in Jones case for reasons more than one. Firstly, the principle enunciated by Rowlatt J. in Jones case, as pointed out by Lord Wright M.R. in Ramsay's case, can have no universal application but has to be confined to the facts of that case. Secondly, the periodical payments agreed upon in Jones case were for a period of 10 years which is a material factor to determine the nature of the payment. Thirdly, a portion of the sale price was treated as a capital invested in the business of the purchaser who agreed to pay for a period of 10 years certain amounts periodically. In the present case, the transferee-company has, according to the terms of the agreement, to pay 25% of its net profits only for a period of two years after the commencement of its business. Indisputably the assessee had spent Rs. 4,10,051 which was the book value of its business so transferred to the transferee-company. The real price of the entire business asset including the goodwill and the buildings would have certainly been more than the book value of Rs. 4,10,051. Instead of agreeing to receive any sum over and above Rs. 4,10,051, the book value, the parties have agreed to receive 25% of the net profits earned by the transferee-company for the first two years of the working of the sugar factory. Applying the principles enunciated above, we have no hesitation to hold that the transaction if viewed as a whole and judged from the commercial point of view is only a sale but not an adventure in the nature of trade, and the instalments paid by the transferee-company towards 25% of its profits for the first two years of the working of the factory are only capital receipts in the hands of the assessee.

That apart, the Tribunal. has categorically found that the assessee was not engaged in the business of erecting and selling factories and, in fact, intended to carry on the business of manufacture and sale of sugar after constructing the sugar factory which was subsequently sold to the transferee-company. It is also pertinent to notice that it is not even the case of the revenue that the assessee never intended to erect the factory for the manufacture of sugar nor it intended to start the business with a view to earn profit by selling the concern. It may also be noticed that the amounts of Rs. 41,219 and Rs. 1,11,312 paid to the assessee in the respective years of account have been described by the transferee-company in its profit and loss account as payments towards " goodwill written off ". In fact, the vendee-company has paid income-tax on the aforesaid two amounts treating them as income receipts in its hands but did not claim them as revenue expenditure deductible in the computation of its profits. The aforesaid amounts attracted income-tax when they have been earned by the transferee-company in its business. As observed by Lord Macmillan in the case of Pondicherry Railway Company profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits ". The assessee-company has in fact disclosed the receipts in question as capital gains arising on the transfer of the capital asset but not as income receipts. For these reasons, we must hold that the present case does not fall within the principle laid down by Rowlatt J. in Jones case. We may also add that the facts in the decisions of the Supreme Court in National Cement Mines Industries v. Commissioner of Income-tax and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax and that of the Bombay High Court in Commissioner of Income-tax v. Devidas Vithaldas & Co., are distinguishable from the facts of the present case.

For all the reasons stated, our answer to the question, therefore, is in the negative and the amounts in question are capital receipts not liable to income-tax. The Commissioner of Income-tax, against whom the reference is answered, shall pay the costs of this reference. Counsel's fee is fixed at Rs. 300.

 

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