Patna H.C : Whether, on the facts and in the circumstances of the case, the income derived from hiring of bulldozer is assessable under the head ‘Business’ or ‘other sources’ ?

Section 2(13)

Asst. Year 1970-71, 1971-72, 1972-73, 1973-74

Tax Cases Nos. 5 of 1977 & 33, 34 & 35 of 1980

21st April, 1988

Counsel Appeared

K. N. Jain & A. B. Ohja, for the Assessee : B. P. Rajgarhia & S. K. Sharan, for the Revenue

DAY SINHA, J. :

These are four references under s. 256(1) of the IT Act. The references have been made by two different orders but as the assessee as well as the questions referred to us are common, we have heard them together and they will be disposed of by this common judgment.

2. We are concerned in these references with the asst. yrs. 1970- 71, 1971-72, 1972-73 and 1973-74. The question falling for consideration in these references is whether income from leasing of bulldozer by the assessee would constitute income from ‘‘business” of the assessee or whether it was rightly treated as income from ‘‘other sources”. In this behalf, the question referred to us is : ‘‘Whether, on the facts and in the circumstances of the case, the income derived from hiring of bulldozer is assessable under the head ‘Business’ or ‘other sources’ ?” Other questions suggested by the assessee did not find favour with the Tribunal. It declined to refer other questions to us.

The assessee is a private limited company. It was incorporated in June, 1967. The objects of the company were to carry on business of engineering and building contractors besides manufacturing of mosaic and other types of tiles and other building materials. The objects also included buying, selling, manufacturing, repairing and letting out on hire and dealing in all plants, machineries, appliances and things capable of being used in any business. At the nascent stage, the company thought of manufacturing mosaic tiles. The preliminaries in this behalf, however, took some time. While the blue prints and preliminaries were going on to start the tile factory, the assessee purchased a bulldozer for rupees two lakhs during the accounting year ended on 30th June,1969. The bulldozer was acquired after taking loan from various financing institutions. After purchasing it, it was let out to M/s. Hyderabad Investment Trust Ltd., Hyderabad, on a monthly hire charge of Rs. 12,000. This hiring was for six months only. The sum of Rs. 72,000 received by the assessee is the bone of contention in these references. The ITO accepted the stand of the assessee that the said sum was income from business and had to be taxed as such. The assessee, being aggrieved by the order of assessment in other respects, filed an appeal to the AAC. While hearing the appeal, the AAC held that the sum of Rs. 72,000 could not be treated as income from business but had to be treated as income from ‘‘other sources” and assessed accordingly. According to him, all the elements of carrying on of business in regard to the hiring of the bulldozer were wanting. The assessee, being aggrieved by the order of the AAC in regard to the income from the hiring of the bulldozer, filed an appeal to the Tribunal. The latter, however, endorsed the view of the AAC and dismissed the appeal. Hence, these references before us under s.

256(1) of the IT Act at the instance of the assessee.

The facts found by the Tribunal are that there were no facts before the Tribunal which could point out that the bulldozer was acquired as a commercial asset by the company. According to the AAC and the Tribunal, the company had been floated to start a mosaic tile factory at Patna and to do other construction work. By the end of the accounting year, even the land had not been allotted to the assessee by the Industrial Development Authority. The Tribunal, however, found that the assessee-company had certain money in its possession and this money was utilised along with some borrowed money in purchasing a bulldozer which was let out on hire to another company. One of the facts found by the Tribunal was rather significant. It found as follows : ‘‘From the circumstances of this case, it appears that the bulldozer acquired is a prudent investment for the period when the company did not need its capital as the starting of the factory was taking some time.”

The Tribunal observed that the hiring of the bulldozer was not an adventure in the nature of trade as the company was merely to get hire charges and that all expenses towards maintenance of the bulldozer were to be borne by the Hyderabad company. It may be stated that the bulldozer was hired for a short time and, in fact, the assessee sold it in the accounting year ended on 30th June, 1979. Upon those findings of facts, Mr. K. N. Jain, learned counsel for the assessee, contended that the Tribunal had erred in holding that the hiring of the bulldozer was not an adventure in the nature of trade. The entire controversy veers round the expression ‘‘adventure in the nature of trade”. Sec. 14 lays down the heads of income chargeable to income- tax. It provides that all income, for the purposes of charging income-tax and computation of total income, shall be classified under various heads in six categories. Category D is ‘‘profits and gains of business or profession”. The expression ‘‘business” in ordinary parlance means any trading activity accompanied by regularity of transactions intended for the purpose of making profit. The word ‘‘business” has been used from time to time with varying connotation. It means the state of being busily engaged in anything about which one is busy; function, occupation; stated occupation, profession or trade; trade, commercial transactions or engagements (see the Shorter Oxford English Dictionary, 2nd edition, page 239). In general, a single transaction is not taken as business. The expression ‘‘business”, however, has been given an extended meaning in the IT Act. It has been stated in s. 2(13) of the Act that ‘‘business” includes any trade or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It thus means that trade, commerce or manufacture is ‘‘business” but some activity short of trade, commerce or manufacture may also be included within the expression ‘‘business”. Any adventure in the nature of trade, commerce or manufacture shall also constitute ‘‘business” The concept of repetitiveness of activity is thus given up. A solitary transaction, though not trade or commerce, if it partakes of some of the elements of trade or commerce, would be termed as an adventure in the nature of trade or commerce. In G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC) : TC12R.297, the Supreme Court was seized of the question of interpreting the expression ‘‘adventure in the nature of trade”. The provision equivalent to s. 2(14) of the IT Act, 1961, was s. 2(4) of the 1922 Act and was in identical terms. The Supreme Court observed as follows : ‘‘When s. 2(4) of the IT Act refers to an adventure in the nature of trade, it clearly suggests that the transaction in question cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not only by all of them; and so even an isolated transaction can satisfy the description of an adventure in the nature of trade provided at least some of the essential features of trade are present in the isolated or single transaction.”

(Emphasis, italicised in print, supplied)

The question thus, is, what will stamp a transaction as an adventure in the trade or commerce. Whether aparticular transaction is an adventure in the nature of trade or not must be decided on the circumstances of each case. Decided cases, unless the facts are exactly identical, cannot lay down any guideline for deciding when a transaction amounts to an adventure in the nature of trade. In Sultan Brothers Pvt. Ltd. vs. CIT (1964) 51 ITR 353 (SC), it has been observed by the Supreme Court as follows : ‘‘Whether a particular letting is business has to be decided in the circumstances of each case. We do not think that the cases cited lay down a test for deciding when a letting amounts to a business. We think each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner.”

In the case of G. Venkataswami Naidu & Co. vs. CIT (supra), the Supreme Court observed at page 610: ‘‘We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.”

The facts in the case of G. Venkataswami Naidu & Co. (supra) were that the assessee-firm, as managing agent, acquired land by purchase. After a year of the purchase, the firm sold the lands to a company, Janardana Mill Ltd., Coimbatore, of which the assessee was the managing agent. The sale brought about a profit of Rs. 43,887. On those facts, peculiar to that case, the Tribunal found that the excess of sale price over the purchase price was not a capital accretion but was a gain in an adventure in the nature of business and was, therefore, taxable. The point in controversy in that case was somewhat different from the one before us in the sense that in that case the assessee was contending that the profit of Rs. 43,887 was capital accretion and thus not liable to tax. The Revenue, on the other hand, was contending that the profit was income from an adventure in the nature of trade. The Tribunal and the High Court accepted the stand of the Revenue that it was income from an adventure in the nature of trade. This was challenged by the assessee before the Supreme Court. The Supreme Court observed that when s. 2(4) referred to an adventure in the nature of trade, it clearly suggested that the transaction cannot properly be regarded as trade or business and that the activity is allied to transactions that constitute trade or business but may not be trade or business itself. It observed that even an isolated transaction can satisfy the description of an adventure in the nature of trade. Gajendragadkar, J. observed at page 608 : ‘‘Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application, due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents trade, but it may not be true if summer represents an adventure in the nature of trade, because, when the section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade.” His Lordship, however, stated that it was impossible to evolve any formula which may be of guidance in determining the character of isolated transactions which come before Courts in tax proceedings. One test, however, for determining whether a single transaction was in the nature of an adventure in the nature of trade or not would be whether the transaction was gone through with the intention to earn profit. In laying down the law, Gajendragadkar, J. relied on IRC vs. Fraser (1942) 24 Tax Cases 498. In that case, a woodcutter bought through an agent for resale whisky in bond for £407. Nearly three years thereafter, the whisky was sold at a profit of £1,131. That was the assessee’s sole dealing in whisky. He had no special knowledge of the trade and he did not take delivery of the whisky nor did he have it blended and advertised. Even so, it was held that the transaction was an adventure in the nature of trade. On the facts of that case, it was held that the single transaction was an adventure in the nature of trade.

7. Another decision of the Supreme Court in P. M. Mohammed Meerakhan vs. CIT (1969) 73 ITR 735 (SC) : TC12R.383 may also be usefully referred to. Here again, the assessee had acquired a large chunk of land. After plotting it, he sold the greater part thereof retaining some for himself. The transaction brought in some profit. This was once again a solitary trans- action of purchase of landed property culminating in profit to the assessee. The Revenue contended that the profit was income from an adventure in the nature of trade. Ramaswami, J., relying upon the cases of Martin vs. Lowry (1926) 11 Tax Cases 297 (HL) : TC12R.569, Rutledge vs. IRC (1929) 14 Tax Cases 490 : TC12R.572 and IRC vs. Fraser (1942) 24 Tax Cases 498, held that the activity of the assessee was an adventure in the nature of trade. Ramaswami J. also emphasised that in judging the character of a transaction, several factors have been treated as significant in deciding cases. The decision in G. Venkataswami Naidu & Co. vs. CIT (supra) was approved by Ramaswami J. of the Supreme Court. His Lordship also observed as follows at page 742 : ‘‘As we have already said it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved.”

8. It is unnecessary to refer to other judicial authority to resolve the tangle before us. On a resume of the decision of the Supreme Court referred to earlier and to the English decisions—fully considered in the decision of the Supreme Court—the following principles emerge : l. An adventure in the nature of trade need not be business itself. Any activity akin to business may be taken to be adventure in the nature of trade. A single transaction may also constitute adventure in the nature of trade. There need not be regularity or repetitiveness in the activity. Whether a transaction is in the nature of trade and commerce must be decided on the facts and circumstances of each case. No hard and fast rules can be laid down in that behalf.

The activity alleged/claimed to be adventure in the nature of trade need not be allied to the already existing activity of the assessee. The activity or the transaction said to be adventure in the nature of trade must be with the object of earning profit.

9. What then are the facts before us which are to be appreciated from “the businessman’s approach”. The assessee was a company. The objectives were varied as stated earlier in paragraph 3. It included buying, selling, manufacturing, repairing and letting out; on hire and dealing in plants, machineries and appliances. It had undertaken a project to set up a factory for the manufacture of mosaic tiles and other kinds of tiles. While steps were being taken to set up the factory, the company was possessed of some capital which was lying idle. The company, therefore, after raising some loan purchased a bulldozer and let it out on hire to Hyderabad Investment Trust Ltd. on a monthly rental of Rs. 12,000. The bulldozer was ultimately sold during the asst. yr. 1972-73. The company thus earned some income from the leasing out of the bulldozer. It is true that the purchase of the bulldozer had nothing to do with the manufacture of tiles but so was the situation in the case of IRC vs. Fraser (supra) where a wood-cutter bought and sold whisky and earned profit thereon. The assessee, wood-cutter, neither had the knowledge of the trade nor did he have it blended and advertised, yet it was held that the income from sale of whisky was an adventure in the nature of trade. The company had been floated to earn profit. While the tiles factory could become critical, the company decided to make the best use possible of its resources instead of keeping it as a dead asset. It, therefore, purchased a bulldozer and leased it out. The idea obviously was to earn some profit out of the funds at their disposal. There was no idea of retaining the bulldozer for an indefinite period. If the facts showed that the idea was to retain it for indefinite duration, the acquisition of the bulldozer could not have been capital accretion but that was not so. The assessee sold the bulldozer in asst. yr. 1973-74 at a point of time when the mosaic tiles factory had taken complete shape. In my view, therefore, in the special facts and circumstances of the case, the leasing out of the bulldozer constituted an adventure in the nature of trade.

10. Learned senior standing counsel, IT Department, contended that income from leasing cannot be held to be income from business as the person leasing has no stake in the fortunes of the lessee. The lessor is only entitled to a fixed sum and therefore, income from leasing was not income from business. Reliance was placed by him in this connection on CIT vs. H.D. Agrawala & Sons (1987) 65 CTR (Pat) 234 (FB) : (1988) 169 ITR 617 (Pat)(FB), a Full Bench decision of this court to which I was also a party. The decision of the Full Bench proceeds upon the authority of a decision of the Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. vs. CIT (1969) 74 ITR 7 (SC). In New Savan Sugar case, the entire factory had been leased out. The lessor retained no control over the factory. In that situation, the Supreme Court held that it was a lease of the entire business and not of a commercial asset only. The rental income of the lessor-assessee was, therefore, not income from ‘‘Business” but was income from ‘‘Other sources”. That decision was followed by the Full Bench in CIT vs. H. D. Agrawala & Sons (supra).

In that case, the entire coal mine had been leased out by the assessee. The instant case, however, is entirely different. The entire business of the assessee had not been leased out. It was only a commercial asset acquired through unutilised capital which was leased out. The present case, therefore, stands on a footing entirely different from that of New Savan Sugar & Gur Refining Co. Ltd. (supra) and CIT vs. H. D. Agrawala & Sons (supra). The cases relied upon by learned counsel for the Revenue were cases where the entire business had been leased out. In the instant case, only a commercial asset had been leased out. That marks a significant distinction between the cases relied upon by learned senior standing counsel and the present case. The present case would fall within the ambit of CEPT vs. Shri Lakshmi Slik Mills Ltd. (1951) 20 ITR 451 (SC), where a part of the factory’s dyeing plant had been leased out temporarily as the assessee had no need for it at that point of time. Their Lordships of the Supreme Court observed as follows at page 459 : ‘‘We are therefore of the opinion that it was a part of the normal activities of the assessee’s business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it.”

11. The expanse of Shri Lakshmi Silk Mills Limited case (supra) was explained by the Supreme Court itself in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) : TC12R.111 in the following words :

‘‘It should be noted that in that case the respondent company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war.” It was explained once again in the case of New Savan Sugar and Gur Refining Co. Ltd. case (supra), where the Supreme Court observed that in the case of Lakshmi Silk Mills Ltd. (supra), only a part of the machinery was let out on lease and that too only for a short period. The present case must be governed by the case of Lakshmi Silk Mills Ltd. (supra) and not by that of New Savan Sugar & Gur Refining Co. Ltd. (supra). The proposition that rental income from leasing is not income from business is too wide a proposition to be accepted. Leasing of machinery has become quite common in these days. It is now a well-established form of activity for earning profit. It cannot be contended that leasing out of an equipment and the income derived therefrom is not business or income from business. Income from leasing out of machinery must be held to be income from ‘‘Business” on the authority of CEPT vs. Shri Lakshmi Silk Mills Ltd. (supra). It is true that in the instant case the assessee had not commenced its business of production of mosaic tiles. That, however, could not make much difference as the tile factory was passing through a period of gestation. While some assets were lying idle, the assessee thought of making the best use out of them. In my view, this was an activity of the nature of business and hence it was an adventure in the nature of trade/commerce.

For all these reasons, I have failed to find substance in the submission urged by senior standing counsel. In my concluded opinion, the income from leasing out of the bulldozer, was income from an adventure in the nature of the IT Act. The income of assessee from leasing the bulldozer must be assessed as such. It was not income from ‘‘Other sources”. It could not be assessed as such.

It is thus, clear that the income derived from the hiring of bulldozer was assessable under the head ‘‘Buniness” and ‘‘Other sources”. The question referred to this Court by the Tribunal must answered accordingly in favour of the assessee and against the Revenue with costs. Hearing fee Rs. 250 payable by the Revenue to the assessee.

KRISHNA BALLABH SINHA, J. :

I agree.

[Citation : 172 ITR 84]