S.K. Kapur, J.
1. The Income-tax Appellate Tribunal having declined the application of Messrs Delhi Beopar Mandal, New Delhi (hereafter referred to as the assessee) under Section 66(1) of the Indian Income-tax Act, 1922, this Court by order dated 9th January, 1962, directed the Tribunal under Section 6)6(2) of the said Act to refer the following three questions:--
'(1) Whether on a true construction of the agreement dated the 27th October, 1936, it was rightly held as a partnership agreement?
(2) Whether on a true construction of the agreement dated the 27th October, 1936 and the subsequent resolutions which were to be read as a part of the agreement, the land in question was to be held as stock-in-trade by the Beopar Mandal and continued to be so held as stock-in-trade?
(3) If the answer to questions 1 and 2 is in the affirmative, whether on the facts and in the circumstances of this case the alleged business of the assessee was not sterilised as a result of the passing of the scheme and in view of the relevant mandatory provisions of the United Provinces Town Improvement Act (VIII of 1919)?'
The assessment relates to the assessment year 1948-49, the relevant accounting year being the financial year ended on 31-3-1948. No application having been filed by the assessee for registration of the firm, the assessment was completed by the Income-tax Officer by applying the provisions of Section 23(5)(b) of the said Act. Between 8th April, 1936 and 8th May, 1936, Deshbandhu Gupta and Vidya Dhar purchased various plots of land totalling in all about 94 bighas. Between 8th May, 1936 and 13th May, 1936, 44 bighas more were purchased in the joint names of Deshbandhu Gupta and Ramkishan Dass. Again between 13th May 1936 and 5th June, 1936, further plots of land measuring in all 45 were purchased in the joint names of Deshbandhu Gupta and Vidya Dhar. The total purchases made, as mentioned above, were of 189 bighas and 5 biswas by 13 different transactions.
On 27th October, 1936, an agreement was entered into between Deshbandhu Gupta, Vidya Dhar, Ramkishan Dass, Narain Datt and Harish Chandra, which was described as a deed of partnership and the firm was given the name, 'The Delhi Beopar Mandal.' According to the said document, the land belonging to the parties was divided into 45 shares, the said five parties being entitled to 15, 15, 5, 5 and 5 shares each respectively. The duration of the partnership was fixed as 'until this plot of land or any other plots of land purchased are not disposed of after development or the partnership is dissolved by mutual agreement.' A provision was made to avoid dissolution of partnership on the death of a partner and a restriction was placed on the right of a partner to alienate his share to any stranger. Clause 4 reads--
'That it would always be open to the parties to this agreement to have such specified shares in all other purchases as are mutually agreed to by the parties.'
I have quoted this clause because of the emphasis laid by the learned counsel for the assessee on the same. The partners met on various occasions and passed resolutions regarding the affairs and business of the assessee. From the resolution passed on 20th April, 1937, it appears that a plot of land belonging to one Qabul adjoined the lands already purchased and with a view to making a composite unit the partners decided to purchase the same. They borrowed Rs. 30,000/- for the purpose Inter alia on the security of the said plot of land. By another resolution, being resolution No. 6 of the same date, it was resolved that 'a lay-out of the land be got prepared and the land be developed in such a way that It could be converted into a good colony'.
The resolution further provided that 'since the land has been purchased in the name of L. Deshbandhu, L. Vaidya Dhar and L. Ramkishan Dass, it should be mutated in the name of Beopar Mandal Society'. Subsequently, another resolution appears to have been passed in August 1937 inter alia suggesting an enquiry to be made whether the land had come under the Improvement Trust and also deciding 'that no other land should be purchased except the piece of land belonging to Qabul since it is lying in the middle of the Beopar Mandal's lands'. On 29th August, 1937, it was decided by another resolution that 'a co-operative so-society should be formed with the remaining amount and the friends and relatives should be co-opted so that a good colony should belong to our own men'.
From the resolution dated 10th February, 1938, which referred to the discussion between the Chairman of the Delhi Improvement Trust and Vidya Dhar and others, it appears that at one stage a proposal was made that the Trust should take over all the sanitary arrangements at the cost of assessee leaving it to develop the land. On 30th April, 1938, a notice was issued under Section 36 of the United Provinces Town Improvement Act, 1910, as extended to the Province of Delhi, notifying the framing of an improvement scheme which covered the land of the assessee as well. There was a long correspondence in respect of the land in question with the Chairman of the Delhi Improvement Trust and by letter dated 2nd May, 1938, Vidya Dhar called for a plan of the land which the Trust proposed to acquire in connection with the Shadipur Town Expansion Scheme.
He was informed that there was no proposal to acquire any land and by letter dated28th July, 1938, Vidya Dhar made a proposal 'to build according to the lay-out of the Trust' and wanted further to know what arrangementswould be made for the supply of filtered water and electricity etc. The request to providefacilities for developing the area was repeated by Deshbandhu Gupta by letter dated 10thJune, 1939. In the meantime, however, the assessee was engaged in disposing of some ofits holdings and during the year 1938-39 it sold 15 bighas of land for about Rs. 18,000/-.Again in the year 1942-43, 13 bighas of land were sold for Rs. 25,500/-. Ultimately, it wasdecided to acquire some of the land belonging to the assessee and by an award dated 4th February, 1948, the special Land Acquisition Collector determined the compensation for the land acquired at Rs. 18,536/-. After allowing a deduction of Rs. 3,867/- out of the said amount ofRs. 18,536/-, the balance of Rs. 14,669/- was brought to tax as business income in the handsof the assessee for the said assessment year 1948-49.
This assessment was challenged before the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal, but the assessee did not succeed. Three contentions were raised by the assessee before the Income-tax Appellate Tribunal--
(1) The land was purchased by the three original purchasers with a view to build their own houses and gardens and only such land as was not required by the said three persons was to be allotted to friends and relations at cost. The excess realised as a result of the compensation awarded was, therefore, an accretion to the capital.
(2) The compulsory acquisition of land did not amount to sale but was a compensation for the loss of an asset and, therefore, not a trading receipt.
(3) The assessee did not own any land which continued to be held in the names of the three original purchasers and, therefore, it could not be taxed on the surplus.
The Tribunal decided--
(1) The intention of the parties clearly appeared from the deed of partnership and various other circumstances, including the number of transactions of sale and purchase entered into by the assessee, and the purchase of land was in the course of carrying on business. Order in other words, the transactions of purchase and sale of land were a part of the trading activity of the assessee;
(2) the land was held by the assessee as a stock-in-trade;
(3) the acquisition of the plots was made with a view to selling them and realising profits; and
(4) the fact that the money was received as a result of compulsory acquisition did not make any difference.
2. It is in the light of the above circumstances and findings that we have been called upon to answer the three questions referred to us.
3. So far as the first question is concerned, the perusal of the document dated 27th October, 1936, clearly shows that it was a partnership. 'Partnership' is defined by section 4 of the Indian Partnership Act as '.... therelation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. The document shows that the partnership was constituted with a view to disposing of the plots of land mentioned therein and, as a matter of fact, the duration of the partnership was fixed as 'until this plot of land or any other plots of land purchased are not disposed of after development......'. The learned counsel forthe assessee laid emphasis on the fact that the share of profits or losses was not fixed, which according to him, was a necessary condition of a partnership.
I regret I am unable to agree because the interest of each partner in the partnership property was fixed, as mentioned already, and that would determine the interest of the partners in profits and losses. The learned counsel then contended that Clause 4 of the document permitted the acquisition of future properties with different interests therein. That may, at the most, be an agreement to enter into furture partnerships with respect of the properties acquired subsequently, but Clause 4 is certainly not destructive of the existence of a partnership with respect to the property in question. This question, therefore, must be answered in the affirmative and against the assessee.
4. Coming now to the second question the Tribunal has placed reliance on various factors, as mentioned above, leading to the conclusion that the land was a stock-in-trade of the assessee. The facts found by the tribunal may be summed up as under:--
(1) The assessee entered into a regular partnership with a view to realise profit as a part of scheme of profit-making.
(2) If the assessee had any idea of building residential houses with large gardens as alleged it would not have submitted a plan which contemplates a number of building plots.
(3) The assessee sold some plots and purchased a number of other plots and the various transactions entered into were regular business transactions in landed property
(4) The intention of the parties to the said partnership deed was to develop the land with a view to making a profit.
(5) The partners did not have surplus funds and for the purchase of plots they even borrowed money.
5. From the above facts I think the Tribunal rightly concluded that the land in question was held by the assessee as a stock-in-trade. The second question, therefore, must also be answered in the affirmative and against the assessee.
6. There then remains the third question. The learned counsel for the assessee referred to the various decisions of the Supreme Court and High Courts as also some decisions by English Courts and relying on those decisions contended that the compensation was for sterilisation of the entire assets left with the assessee and was, therefore, a capital receipt. I have not found it necessary to refer to those decisions in view of the fact that admittedly those cases deal with the compensation for sterilisation of the profit-earning apparatus, or for impairment of a trading structure or destruction of a capital asset. The latest decision by the Supreme Court on this point is reported in Commissioner of Income-tax, Madras v. Chari and Chari Ltd., Madras : [1965]57ITR400(SC) . In Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax, Calcutta : [1964]53ITR261(SC) , their Lordships of the Supreme Court observed:
'It may be broadly stated that what is received for loss of capital is a capital receipts what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction.'
It was further observed :
'It cannot be said as a general rule, that what is determinative of the nature of the receipt is extinction or compulsory cessation of an agency or office. Nor can it be said that compensation received for extinction of an agency may always be equated with price received on sale of goodwill of a business. The test applicable to contracts for termination of agencies is: what has the assessee parted with in lieu of money or moneys worth received by him which is sought to be taxed? If compensation is paid for cancellation of a contract of agency, which does not affect the trading structure of the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt; where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensating the loss is capital.'
7. The broad test in a case like the present is that where profit accrues from the sale of any capital investment or a capital asset there is an accretion to the capital for the sale proceeds represent capital in another form; where, on the other hand, the sale is in the course of business, the profit is on the revenue account. If it were a sale of land which, as discussed above, was a stock-in-trade in the hands of the assessee, it would, undoubtedly, be revenue income. There are decisions in line with Glenboig Union Fireclay Co., Ltd. v. I. R. Commrs. (1921) 12 Tax Cas 427, where the statutory compensation received was held by the House of Lords to be a capital receipt. In that case also the House of Lords treated the fireclay as a capital asset. The decisions, on the other hand, in Johnson v. Try, (W. S.), Ltd. (1946) 27 Tax Cas 167, and Shadbolt v. Salmon Estate, Ltd. (1943) 25 Tax Cas 52, indicate that the result in the case of a company in whose hands the asset sterilised was a trading asset would have been different.
In Try's case (1946) 27 Tax Cas 167 compensation awarded under the Restriction of Ribbon Development Act, 1935, was held to be a trading receipt in the hands of such a company. In the Salmon Estate case (1943) 25 Tax Cas 52 a similar conclusion was arrived at with regard to compensation paid for the withdrawal of building plots from certain scheme. Different considerations arose in a line of several decisions such as I. R. Commrs. v. Newcastle Breweries, Ltd. (1925) 12 Tax Cas 927. Newcastle Breweries case (1925) 12 Tax Cas 927 dealt with a sum awarded by the War Compensation Court to the assessees as compensation for the requisitioning of part of their stock-in-trade, that is, rum. The compensation was held by the House of Lords to be of the nature of circulating capital and a trading receipt.
The present case does not deal with the sterilisation of a profit earning machinery or the acquisition of a capital asset but with the acquisition of a stock-in-trade. The stock-in-trade was intended to be sold at some time by the assessee in the carrying on of its business. Its acquisition caused it to be dealt with rather sooner than later; but along the same channel down which it was always intended that it should pass from the assessee's possession, namely, by sale. Both the land and the sum paid for its acquisition were, therefore, of the nature of circulating capital and the sum in question a trading receipt. In this view it does not to my mind make any difference whether the stock-in-trade was acquired or sold by the assessee in the exercise of its volition.
Under Section 10 of the Indian Income-tax Act, 1922, tax payable is by an assessee under the head 'profits and gains of business' in respect of the profits and gains of any business carried on by him. It appears to me to be futile to suggest that a profit arising as a result of acquisition is not profit of a business carried on by the assessee. The learned counsel for the assessee placed considerable reliance on the decision of this Court in Commissioner of Income-tax, Punjab v. Sham Lal Narula , and particularly the following observations :--
'Requisition' is the term used where the title in the property remains unaffected, but the title-holder is deprived of its use for a time. If compensation is paid for an act of 'acquisition', such a sum would be in the nature of capital receipt, and, on the other hand, if compensation is for deprivation of user on account of the act of requisitioning, the 'compensation', being for loss of profits, becomes a revenue receipt. The compensation paid for the land would, therefore, constitute a capital asset, but compensation paid on requisitioning would be in the nature of a revenue receipt. Certain compensations may be of composite quality, and in that case, it has to be determined what portion represents a capital receipt and what a revenue receipt. Instances are not wanting where the term 'interest' is employed as a basis of calculation for arriving at a capital sum and, therefore, despite the use of the term 'interest' the sum received is not exigible as tax; and yet, there may be another class of cases where 'interest' represents income, which is taxable.'
This decision according to the learned counsel, waters down the Bench decision of this Court in Raj Kishen Prem Chandra v. Commissioner of Income-tax . I do not agree. Raj Kishen Prem Chandra Jain's case does not appear to have been brought to the notice of the learned Judges dealing with Sham Lal Narula's case , and for the obvious reason because in the latter case the learned Judges were dealing with the interest paid to a person whose land had been acquired under Section 34 of the Land Acquisition Act and were not concerned with the problem arising before us. Raj Kishan Prem Chandra Jain's case , is a clear authority for the proposition that excess of compensation in such circumstances as obtain in this case would be a revenue receipt. The payment here was in no sense a return of capital. It was a realisation of a portion of the stock-in-trade; may be, rather at an earlier stage.
Mr. Andley said that the acquisition completely exhausted the land in the hands of the assessee. That again would make no difference, for even the last bit of stock-in-trade continues to be the stock-in-trade and consequently the compensation received therefor would be realisation in the revenue account. The answer for the third question must, in the circumstances, be that the sum was rightly brought to tax, and, therefore, against the assessee.
8. Having regard however to the circumstances of the case, there will be no order as to costs.
A.N. Grover, J.
9. I agree.