JATIA INVESTMENT CO v. COMMISSIONER OF INCOME-TAX — 1992 DIGILAW 299 (CAL)

AJIT K. SENGUPTA, J. ( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1976-77 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that as the assessee was only investing funds in shares, it was not doing business ? ( 2 ) IF the answer to the above be in the affirmative, whether the Tribunal was justified in refusing registration to the firm on the ground that the assessee was doing no business ?"2. The brief facts obtaining in the case are that the business of the assessee-firm is said to be investment in shares and finance as per the objects mentioned in the deed of partnership. The deed of partnership was made on April 20, 1975, constituting a firm consisting of ten partners and admitting one minor to the benefits of partnership to start business: ( 3 ) IN respect of the previous year relevant to the assessment year 1976-77, the assessee-firm claimed registration under Section 185 of the Act for which Form No. 11 was filed in time. The Assessing Officer declined to allow the registration, as he came to the conclusion that there was no business carried on by the firm this year. He passed the order after obtaining the necessary direction under Section 144b from the Inspecting Assistant Commissioner who observed as follows :"the firm does not appear to be registered with the Registrar of Firms, there does not appear to be any bank account opened in the name of the firm, there is no trade licence to do any business. " ( 4 ) THE firm had not incurred any expenses like rent, electricity, etc. , which can ordinarily be called business expenses. The only transaction during the year appears to be purchases from three companies of shares worth Rs. 11,19,875 of certain companies controlled by the partners of the assessee-firm. Most of the partners of the assessee-firm have substantial interest in the companies which sold the shares. It is very strange that all the seven transactions of purchase had taken place on the same date, i. e. , April 23, 1975, and involved companies belonging to the same group in which the partners of the assessee-firm are substantially interested. Most of the partners of the assessee-firm have substantial interest in the companies which sold the shares. It is very strange that all the seven transactions of purchase had taken place on the same date, i. e. , April 23, 1975, and involved companies belonging to the same group in which the partners of the assessee-firm are substantially interested. There were no other transactions throughout the accounting year except the seven transactions on a single date. Even these transactions cannot be called either investment in shares or dealing in shares. Only the ownership of the shares held by some companies in the group had been changed to shares of some other companies in the same group presumably with a view to put up a show that there was business during the year. Accordingly, the seven transactions mentioned above can neither be categorised as investment in shares nor as dealing in shares. Business necessarily implies a profit motive and, in the instant case, this is singularly lacking. "business without profit is not business any more than a pickle is candy". Besides, business connotes an organised activity for the purposes of earning profit and it denotes a continuous and systematic exercise of the activity. The normal expenses incurred in the course of business are absent in this case and, taking into account the entire facts and circumstances of the case, it can undoubtedly be said that there was no business activity whatsoever during the accounting year. Without business, there is no profit and without profit there is no sharing of profits and, therefore, the conditions in the partnership deed with regard to the sharing of profits remain unfulfilled. ( 5 ) IT was observed from the profit and loss account and the balance-sheet of the assessee that the assessee borrowed Rs. 11,20,000 from Messrs. Gazanund Bisweswarlal and Co. , a proprietary concern of Shri Jagmohan Jatia, one of the partners of the present firm. The said money was invested by the assessee in shares as noted under : Date Shares of Purchased from No. of shares Value Rs . 23-4-1975 Indian Cardboard Industries Ltd. Praise Co. (P.) Ltd. 10,800 4,32,000 8,500 34,000 23-4-1975 Onkar Investments and Properties (P.) Ltd. 3,300 24,750 23-4-1975 Snow White Food Product Co. Ltd. 23-4-1975 Jatia Cotton Mills Ltd. Onkar Industries (P.) Ltd. 23-4-1975 Jatia Ind. P. Ltd. 4,000 2,40,000 23-4-1975 Eastern Paper Ind. 23-4-1975 Indian Cardboard Industries Ltd. Praise Co. (P.) Ltd. 10,800 4,32,000 8,500 34,000 23-4-1975 Onkar Investments and Properties (P.) Ltd. 3,300 24,750 23-4-1975 Snow White Food Product Co. Ltd. 23-4-1975 Jatia Cotton Mills Ltd. Onkar Industries (P.) Ltd. 23-4-1975 Jatia Ind. P. Ltd. 4,000 2,40,000 23-4-1975 Eastern Paper Ind. Ltd. 38,000 2,79,125 23-4-1975 Speciality Papers Ltd. 20,000 1,10,000 ( 6 ) AFTER examination and verification of the relevant books of account and records, the income-tax authorities came to the conclusion that Messrs. Gazanund Bisweswarlal and Co. did not have sufficient cash on that date to make available to the assessee-firm an amount of Rs. 11,20,000. Messrs. Gazanund Bisweswarlal and Co. is alleged to have advanced the sum to the assessee out of the amounts received by it from its debtors. But the income-tax authorities found that the alleged receipt, being the repayment of loans taken by Messrs. Jatia Investment Pvt. Ltd. , Praise Co. Pvt. Ltd. and Onkar Industries Pvt. Ltd. , could not be proved. The creditworthiness of these companies from whom supposedly the money was received by Gazanund Bisweswarlal and Co. could not also be established. The Assessing Officer, therefore, held that the amount in question constituted income from undisclosed sources of the assessee-firm and he also disallowed the interest credited to Messrs. Gazanund Bisweswarlal and Co. , a proprietary concern of a partner, amounting to Rs. 25,407. 12 and debited the same in the profit and loss account of the assessee-firm. ( 7 ) IT was found by the Assessing Officer that the assessee-firm utilised the amount of Rs. 11,19,875 as set out earlier and all these shares were purchased on the same date, i. e. , on April 23, 1975. There was no sale transaction whatsoever nor any purchase on any other day during the entire previous year. Accordingly, the Assessing Officer held that these seven transactions on a single day did not constitute any business. We have already extracted the observations of the Inspecting Assistant Commissioner in his order under Section 144b of the Act in pursuance whereof the Assessing Officer held that there was no business carried on by the assessee-firm. ( 8 ) THE Tribunal, in its turn, did not find that the assessee was doing any business and, accordingly, the appeal against the order of refusal of registration was dismissed. ( 8 ) THE Tribunal, in its turn, did not find that the assessee was doing any business and, accordingly, the appeal against the order of refusal of registration was dismissed. According to the Tribunal, the firm made only investments this year in purchase of some shares on a single day. According to Clause (1) of the recital in the deed of partnership setting forth the objects, the firm is only "to take or otherwise acquire and hold shares in any company Or body corporate" and no intention is evident to sell or dispose of shares for making any gain. Holding any shares or property by itself does not constitute any business or adventure in the nature of trade. ( 9 ) WE have heard the rival submissions. The learned advocate for the assessee argued that investment is the business of the assessee-firm and there is no reason for refusing registration. The acquisition of shares of a single company does not militate against such claim. ( 10 ) THE Bombay High Court in the case of Bhogilal H. Patel v. CIT [1969] 74 ITR 692, held that the purchase of two plots of land by the assessee was only an investment of capital and the profits earned on resale were an accretion to capital and not profit from business or any adventure in the nature of trade. The question before the High Court was--whether the Tribunal misdirected itself in law or acted without any legal evidence in holding that the purchase and sale of the two plots in question Constituted a venture in the nature of trade. The court answered that it was not a venture in the nature of trade. ( 11 ) THE Andhra Pradesh High Court in the case of P. J. Udani v. CIT [1967] 63 ITR 766, held that although it is well-settled that an event of single transaction of purchase and sale may constitute an adventure in the nature of trade provided that the transactions bear the essential elements of trade, the onus is on the Department to prove the intention of the assessee to make profit and on facts and there was no material to show that the transaction was an adventure in the nature of trade. Accordingly, the attempt to tax the gain as taxable income was negatived by the court. Accordingly, the attempt to tax the gain as taxable income was negatived by the court. ( 12 ) THE Madras High Court in the case of Ajax Products Ltd. v. CIT [1961] 43 ITR 297, has dealt with a similar question. The court held that the existence of an intention to sell at a profit even at the time of the purchase may be a relevant factor in deciding whether the transaction of purchase and sale constituted an adventure in the nature of trade, but it is neither conclusive nor decisive in proving that the purchase and the subsequent sale together constituted an adventure in the nature of trade. The proved absence of an intention to sell when a given property was purchased and was subsequently sold has, however, a much higher probative value in deciding whether the purchase and the subsequent sale together constituted an adventure in the nature of trade. If there is no intention to sell when the property was purchased, the purchase and sale become independent transactions. The purchase by itself would not constitute an adventure in the nature of trade. If it is an investment, thesubsequent sale will not make either the purchase or the sale or both taken together an adventure in the nature of trade. The court has also referred, in the course of its judgment, to the decision of the Calcutta High Court in the case of Radha Debi Jalan v. CIT [1951] 20 ITR 176 and quoted a passage from that judgment delivered by Chakravorthi J. (at page 309):". . . . it is not correct to state broadly that a purchase, not for the purpose of holding the commodity purchased permanently but with its disposal at a profit in contemplation, can, in every case, be regarded as an indication or as evidence of an intention to trade. " ( 13 ) THE same principle had been laid down by Lord Dunedin in Jones v. Leeming [1930] AC 415 (HL) as follows (at page 423) :"'the fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever. ' 'that was quoted with approval by the Supreme Court in Saroj Kumar Mazumdar v. CIT. ' 'that was quoted with approval by the Supreme Court in Saroj Kumar Mazumdar v. CIT. " ( 14 ) IN all these cases, the courts have observed that the intention of making profits must be there to turn a transaction into an adventure in the nature of trade and, while taxing the accretion to the investment. made, there must be proof of such intention having been expressed. In the present case, the very objects of the firm as contained in the recital do not go beyond the acquisition of shares in any company or body corporate or acquiring and holding immovable properties. The acquisition itself, without any indication or manifestation of intention to dispose of , or dealing in the same for earning profits and actually having no disposal of the same during the previous year, cannot be interpreted that the intention of making profit was there. In the absence of a profit motive in the adventure, mere holding of shares or property cannot constitute a business. ( 15 ) ACCEPTING deposits or borrowing money from others is the third object as contained in the deed of partnership, while to lend money to other persons, firms, etc. , has been enumerated as the second object of the firm. As indicated earlier, the income-tax authorities did not find any transaction whatsoever of money having been lent this year. The alleged borrowing of Rs. 11,20,000 from Gazanund Bisweswarlal and Co. was found to be a fake transaction, as the flow of cash could not be proved having regard to the sources of the lending concern. The ultimate source is alleged to be the three different companies, whose creditworthiness as well as availability of necessary funds could not be established. The Tribunal has upheld the treatment of this amount of Rs. 11,20,000 as the lower authorities had done. ( 16 ) AT this stage, it would be appropriate to make it clear that, as the question of assessability of Rs. 11,20,000 as income from other sources is not before us in the present reference, we refrain from expressing our view on this issue. The facts, as found by the Tribunal, on this question have been discussed as the same have a bearing on the questions before us. 11,20,000 as income from other sources is not before us in the present reference, we refrain from expressing our view on this issue. The facts, as found by the Tribunal, on this question have been discussed as the same have a bearing on the questions before us. ( 17 ) REVERTING to our main issue, it is seen that no object of the firm was found to have been translated into action culminating in the earning of any income by the firm during the year under consideration. The formation of a partnership firm by a deed of partnership followed by some paper transactions and claiming registration after filing the return of income might be a device to reduce the income of some other person and where the device is obvious, no further evidence, direct or circumstantial, is necessary. As held by the Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. it would be the duty of the court in every such case to get behind the smoke screen and discover the true state of affairs. The court is not to be satisfied with the form and leave alone the substance of the transaction. In the present case, a partnership was constituted followed by some transactions between interested and closely connected parties where the directors and the partners were common and the whole affair completed a circuit of ingenious devices. The Tribunal, in our opinion, has rightly held that this transaction did not constitute a business and, where there was no business, the claim for registration could not be a tenable one, even in terms of Section 4 of the Partnership Act. A partnership is the "relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". Where the profit motive is not explicit or where no business is carried on, the very foundation of the agreement is lacking. Holding of shares by any means showing on the face as if some monetary transactions had taken place but actually lessening the burden of statutory taxing liability, in real terms or otherwise, of some parties closely related to the partners of the firm cannot be accepted and endorsed as a reflection of any business having been carried on. Holding of shares by any means showing on the face as if some monetary transactions had taken place but actually lessening the burden of statutory taxing liability, in real terms or otherwise, of some parties closely related to the partners of the firm cannot be accepted and endorsed as a reflection of any business having been carried on. ( 18 ) WE do not find any infirmity in the order of the Tribunal in rejecting the claim for registration. The Tribunal has not omitted to consider any relevant fact nor has it considered any fact which was not relevant. There was no error in deriving the conclusion as drawn by the Tribunal in the present case. ( 19 ) FOR the reasons aforesaid, question No. 1 is answered in the affirmative and against the assessee ; and, accordingly, question No. 2 is also answered in the affirmative and against the assessee.