Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, NAGPUR
Vs.
RESPONDENT:
SUTLEJ COTTON MILLS SUPPLY AGENCY LTD.
DATE OF JUDGMENT25/07/1975
BENCH:
MATHEW, KUTTYIL KURIEN
BENCH:
MATHEW, KUTTYIL KURIEN
RAY, A.N. (CJ)
KRISHNAIYER, V.R.
FAZALALI, SYED MURTAZA
CITATION:
1975 AIR 2106 1976 SCR (1) 120
1975 SCC (2) 538
ACT:
Income-tax-Jurisdiction of a High Court in reference-
Scope of-A single adventure-Tests for determining whether in
the nature of business.
HEADNOTE:
The assessee acquired shares in a newly floated sister
concern and later sold a part of its stock at a profit. The
Income-tax officer assessed the profit to tax on the basis
that i was profit accruing to the assessee from an adventure
in the nature of business, and the order was confirmed by
the Appellate Assistant Commissioner. On appeal the
Appellate Tribunal held that the transaction was in the
nature of business adventure; that the assessee by its
Memorandum of Association was authorised to buy and sell
shares. that there was a specific resolution to buy and sell
shares. that the assessee included the profit on the sale of
shares in its profit and loss account without showing it in
any reserve account, that the shares were purchased from
borrowed funds and not with ready cash. that the sales were
not on account of any pressing necessity; that it kept the
profit in cash in a bank and that the assessee had in the
past dealt with shares as a business transaction.
On reference, the High Court held that there was no
provision in the Memorandum of Association which authorised
the carrying on or the business of purchasing and selling
shares; that the inclusion of the profit in the profit and
loss account was not conclusive of the question whether it
was capital asset or revenue receipt. that the nature and
character of the money should be determined by its inherent
character. that there was no evidence that the shares were
purchased out of borrowed funds; that a solitary transaction
could not be taken as conclusive of the fact that the sale
of shares was an adventure in the nature of trade and that
in any case the dominant intention of the assessee in
acquiring the shares was to boost the shares of a sister
concern and when once that was achieved the assessee started
selling the investments.
On appeal to this Court it was contended by the
respondent that the profit can be taxed only if the dominant
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intention of the assessee was to carry on an adventure in
the nature of business and not otherwise.
Allowing the appeal,
^
HELD: The Tribunal found, after taking into account all
the relevant circumstances, that the dominant intention of
the assessee was to make profit by resale of the shares and
not to make an investment. [134F]
(1) (a) The finding that loss or profit is a trading
loss or profit is primarily a finding of fact though in
reaching that finding the Tribunal has to apply the correct
test laid down by law. When the Tribunal has considered the
evidence on record and applied the correct test, there is no
scope for any interference with the finding of the Tribunal.
[134G]
C.I.T. v. Ashoka Marketing Co. [1972] 83 I.T.R. 439,
referred to.
(b) The whole conclusion of the High Court was based on
an unwarranted assumption of facts. The danger of falling to
recognise that the jurisdiction of the High Court in these
matters is only advisory and that conclusions of facts are
conclusions on which the High Court is to exercise the
advisory jurisdiction is illustrated by this case At no time
had the assessee a case that the shares were Purchased with
a view to help a sister concern. Nowhere in the statement of
the case or the supplementary statement of case prepared by
the Tribunal and filed in the High Court was there a finding
on the question. [134E; D]
127
(2) The tests for the purpose of ascertaining whether
profits made upon a sale of an article are taxable profits
are:
(i) if a transaction is in the assessee’s ordinary line
of business it is in the nature of trade. [131B-C]
(ii) it is not necessary, to constitute trade, that
there should be a series of transactions, both of purchase
and sale. A single transaction of purchase and sale outside
the assessee’s line of business may constitute an adventure
in the nature of trade; [131C-D]
Venkataswami Naidu & Co. v. C.l.T. [1959] 35 I.T.R.
594, followed.
I. R. v. Reinhold 34 T. C. 3891, 392 referred to.
(iii) where the purchase of any article or of any
capital investment is made without the intention to resell
at a profit the resale under changed circumstances would
only be a realisation of capital and would not stamp a
transaction with a business character. [131G]
C.I.T. v. P. K. N. Co. Ltd. [1966] 60 I.T.R. 65 (S.C.)
referred to.
(iv) a transaction is not necessarily in the nature of
trade because the purchase was made with the intention of
resale. [131H]
Jenkinson v. Freeland 39 T.C. 636 (C.A.); Radha Debi
Jalan v. C.l.T. [1951] 20 l.T.R. 176; India Nut Co. Ltd. v.
C.l.T. [1960] 39 I.T.R. 234. Sooniram Poddar v. C.l.T.
[1939] I.T.R. 470, 478-9; Ajax Products Ltd. v. C.l.T.
I.T.R. 297, 310; Gustad India v. C.l.T. [1957] 31 I.T.R. 92
and Mrs. Alexander v. C.l.T. [1952] 22 I.T.R. 379. 402.
referred to.
(v) a capital investment and resale do not lose their
capital nature merely because the resale was foreseen and
contemplated when the investment was made and the
possibility of enhanced value motivated the investment
[132B]
Leeming v. Jones 15 T. C. 333; Saroj Kumar Mazumdar v.
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C.l.T. [19591 37 I.T.R.. 242, 250-1; I. R. v. Fraser 24 T.
C. 498, 502. Jankiram Bhadur Rant v. C.I.T. [1965] 57 I.T.R.
21, referred to.
(vi) the accretion to capital does not become income
merely because the original capital was invested in the hope
and expectation that it would rise in value. [132D-E]
Leeming v. Jones 15 T.C. 333, referred to.
(vii) The intention to resell would, in conjunction
with the conduct of the assessee and other circumstances,
point to the business character of the transaction. [132F-G]
In the instant case, the assessee had been dealing in
shares. (i) In an earlier assessment year the assessee had
shown in its profit and loss account and the balance sheet a
loss in dealing of shares which showed that the assessee had
been buying and selling shares even though as an isolated
adventure in the nature of business. The debit on account of
devaluation of shares shown in the profit and loss account
was permissible only on the footing that the shares,
constituted the stock in-trade of the assessee, (ii) in view
of the resolution of the assessee authorising the director
to purchase and sell shares the view of the High Court that
the memorandum of association did not authorise the company
to acquire and sell shares had no relevance: (iii) the
finding that the shares were purchased with borrowed funds
on which the assessee was paying interest was a finding
supported by evidence. The Tribunal was correct in holding
that the assessee had not invested its funds with a view to
earn dividend: (iv) the Tribunal found that the shares were
not sold to liquidate the debts of the assessee as the
balance sheet showed that the proceeds were kept as cash in
bank. [133A-H]
128
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1877 of
1970.
From the judgment and order dated the 10th January,
1968 of the Madhya Pradesh High Court at Jabalpur in Misc.
Civil Case No. 221 of 1962.
V. S. Desai, B. B. Ahuja and S. P. Nayar, for the
appellant.
M. C. Chagla, B. Sen, A. K. Chitale, A. K. Verma,
Ravinder Narain J. B. Dadachanji and O.C. Mathur, for
respondent.
The Judgment of the Court was delivered by
MATHEW, J.-This is an appeal from the judgment of the
High Court of Madhya Pradesh in a reference made at the
instance of the assessee M/s. Sutlej Cotton Mills Supply
Agency Ltd. (hereinafter referred to as the ’assessee’) by
the Income Tax Appellate Tribunal (hereinafter referred to
as the ’Tribunal’) under s. 66(1) of the Indian Income Tax
Act. The question referred was:
Whether the inference of the Tribunal that the profit
of Rs. 2,13,150/- arising from the sale of 1,58,200 shares
of the Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd.,
is assessable as business profit is correct ?".
When the reference came up for hearing before the High
Court, the High Court found that although the Tribunal was
of the view that the question referred was a mixed question
of law and fact, it had not stated all the facts and
circumstances on which it based its conclusion that the
profit of Rs. 2,13,150/- was a business profit and so the
Court called for a supplementary statement of the case and a
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supplementary statement of the case was submitted to the
Court by the Tribunal.
The material facts in the statement of the case were as
follows. The assessee is a public limited company and it is
controlled by the Birlas. the assessee applied for certain
shares of the Gwalior Rayon Silk Manufacturing (Weaving)
Company Limited (hereinafter referred to as the "Rayon
Company"), also a company controlled by the Birlas. This
company was floated on 25-8-1947 with a paid up capital of
Rs. 5 lakhs made up of 50,000 ordinary shares of Rs. 10/-
each. in the year ending 31-12-1951, the Rayon Company
issued certain new shares for paid up capital of Rs.
1,17,25,000/- made up as follows:
Rs.
7,60,000 Ordinary shares of Rs. 10/- each 76,00,000
fully paid up.
1 50,000 Ordinary shares of Rs.10/. each 3,75,000
with paid up at Rs. 2/8/- each.
1,50,000 6% preference shares of Rs. 100/- 37,50,000
each paid up at Rs 25/- each
(redeemable at par at the company’s
option after specified date by giving
one Year’s notice).
129
The assessee which was interested in the Rayon Company
and which had already purchased 1,000 ordinary shares,
subscribed for 3,49,000 shares of the new issue and paid Rs.
8,72,500/ as application money on the 25th and 21th
February, 1951, and paid Rs. 26,17,500/- as final call money
on 10-8-1951. These purchases were authorized by a
resolution of the assessee dated 7-2-1951. The assessee sold
a part of its stock viz., 1,58,200 shares at a profit of Rs.
2,13,150/-.
For the assessment year 1956-57 (accounting year ending
on 31-3-1956), the Income Tax Officer sought to assess the
amount on the basis that it was profit accruing to the
assessee from an adventure L in the nature of business. The
assessee contended that the amount re presented capital gain
as the shares were purchased by way of investment and that
the same cannot be taxed as revenue receipt. The Income Tax
Officer rejected the contention. the assessee filed in
appeal before the Appellate Assistant Commissioner. He
confirmed the order. The assessee then went up in appeal
before the Appellate Tribunal.
The Tribunal came to the conclusion, after considering
all the circumstances, that the transaction was in the
nature of a business ad venture and that profits were liable
to be taxed. The reasons which induced the Tribunal to come
to this conclusion were: The assessee was authorised by
clauses 12, 13, 28 and 29 of paragraph 3 of its Memorandum
of Association to buy and sell shares; there were specific
resolutions of the Company authorising a director of the
assessee to purchase and sell these shares; the assessee had
included the profit of Rs. 2,13,150/- in the profit and loss
account without taking it to any reserve account or
specifically set it apart for any other purpose; the
assessee had purchased the shares from borrowed funds and
not with money readily available to it; the assessee did not
make the sales on account of any pressing necessity to meet
existing liabilities but had in fact kept a part of the
sale-proceeds as liquid cash in the United Commercial Bank
Ltd.; the assessee had. in the past, dealt in shares as
business transaction and had claimed for the assessment year
1951-52 Rs. 1.29,214/- as loss on account of its dealing in
shares of M/s. Titagarh Paper Mills Ltd.; it also claimed
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Rs. 6,30,000/- as loss on account of devaluation of the
shares of M/s. Pilani Investment Corporation though that was
not allowed; there had recently grown a business practice of
investing large sums of money in shares in new ventures with
an eye on their appreciation for obtaining by sale
substantial pro fits in future.
The High Court, in its judgment, said that there was no
provision in clauses 10, 12, 13, 28 and 29 of paragraph 3 of
Memorandum of Association of the assessee which authorised
the carrying on of the business of purchasing and selling
shares, although some of these clauses did authorise the
assessee to acquire and sell shares in other similar
companies. that the inclusion of the profit of Rs.
2,13,150/- in the profit and loss account without taking it
into any reserve specifically was not conclusive of the
question whether it was a capital asset or a revenue
receipt; that the true nature and character of the moneys
received was to be determined not by the manner in which the
assessee treated it but by its inherent character, and, that
it was wholly immaterial
130
as to how the assessee treated the amount in question; and
that there was no evidence that the shares were purchased
out of borrowed funds as the assessee had a fixed deposit of
Rs. 31,75,000/- in the United Commercial Bank Ltd. and a
deposit of Rs. 8,76,008-2-0 in the current account of the
Bank. The High Court was of the view that the finding of the
Tribunal that the sale of shares in 1955 was made not on
account of any pressing necessity to meet existing
liabilities was based on materials placed before the
Tribunal. The Court, however, said: "It may be that, at that
time, the liabilities of the assessee company existed, but
it is quite another matter to say that it was obliged to
sell the shares in order to meet those liabilities." The
High Court was also of the view that the conclusion of the
Tribunal that the assessee had claimed Rs. 1,29,214/- as
loss on account of dealing in shares of M/s. Titagarh Paper
Mills Ltd. for the assessment year 1951-52 and that the
claim was allowed by the Income Tax officer must be accepted
as correct, but said that this solitary transaction cannot
be taken as conclusive of the fact that the sale of shares
in question here was an adventure in the nature of trade.
The main reason which impelled the High Court to hold that
the transaction was not an adventure in the nature of trade
was that the dominant intention of the assessee in acquiring
the shares was to boost the shares of a sister concern viz,
the Rayon Company, and thus render it assistance for setting
it up as a going concern and when that was accomplished, the
assessee started selling the investment which had in the
mean time enhanced in value.
The question which the Tribunal had to consider in the
appeal and which was referred to the High Court was a mixed
question of law and fact, namely. whether the profit from
sale of the shares in question was a revenue or a capital
receipt. The distinction between capital accretion and
income has been explained by Rowlatt, J. in Thew v. South
West Africa Cc. Ltd.(1). The learned judge said that for the
purpose of ascertaining whether profits made upon a sale of
an article are taxable profits. the question to be asked is:
"Is the article acquired for the purpose of trade ?. If it
is, the profit arising from its sale must be brought into
revenue account and that the profit is chargeable as capital
gains if the sale is of a capital asset, and as business
profit if the sale is in the course of business or the
transaction constitutes an adventure in the nature of trade.
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The line between capital sales and sales producing income
has been drawn by Lord Justice Clerk in Californian Copper
Syndicate v. Harris(2) in a passage which has become
classical:
"It is quite a well settled principle in dealing
with questions of assessment of income tax that where
the owner of an Ordinary Investment chooses to realise
it, and obtains a greater price for it than he
originally acquired it at, the enhanced price is not
profit....assessable to income tax. but it is equally
well established that enhanced values obtained from
realisation or conversion of securities may be so
assessable where what is done is not merely a
realisation or change of investments but an act done in
what is truly the carrying on, l I or carrying out, of
a business.... What is the line which
131
separates the two classes of-cases may he difficult to
define, and each case must be considered according to
its facts. the question to be determined being-Is the
sum of gain that ha been made a mere enhancement of
value by realising a security or is it a gain made in
an operation of business in carrying, out a scheme for
profit-making ?"
In the absence of any evidence of trading activity in
cases of purchase and resale of shares, it has been held
that profit arising from the resale is an accretion to the
capital. If a transaction is in the assessee‘s ordinary line
of business there can be no difficulty in holding that it is
in the nature of trade. But the difficulty arises where the
transacting is outside the assessee’s the of business and
then, it must depend upon the facts and circumstances of
each case whether the transaction is in the nature of a
trade.
It is not necessary to constitute trade that there
should be a series of transactions both of purchase and of
sale. A single transaction of purchase and sale outside the
assessee’s line of business may constitute an adventure in
the nature of trade. Neither repetition nor continuity of
similar transactions is necessary to constitute a
transaction an adventure in the nature of trade. If there is
repetition and continuity, the assessee would be carrying on
a business and the question whether the activity is an
adventure in the nature of trade can hardly arise. A
transaction may be regarded as isolated although a similar
transaction may have taken place a fairly long time before
[see 1. R. v. Reinhold(1)].
The principles underlying the distinction between a
capital sale and an adventure in the nature of trade were
examined by this Court In Venkataswami Naidu & Co. v.
C.l.T.(2), where this Court said that the character of a
transaction cannot be determined solely in the application
of any abstract rule, principle or test but must depend upon
all the facts and circumstances of the case. Ultimately, it
is a matter of first impression with Court whether a
particular transaction is in the nature of trade or not it
has been said that a single plunge may be enough provided it
is shown to the satisfaction of the Court that the plunge is
made in the waters of the trade; but mere purchase/sale of
shares-if that is all that is involved in the plunge-may
fall short of anything in the nature of trade. Whether It is
in the nature f trade will depend on the facts and
circumstances.
Where the purchase of any article or of any capital
investment, for instance, shares. is made without the
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intention to resell at a profit. a resale under changed
circumstances would only be a realisation of capital and
would not stamp the transaction with a business character
[see C.l.T. v. P.K.N. Co., Ltd.(3)].
Where a purchase is made With the intention of resale,
it depends upon the conduct of the assessee and the
circumstances of the case whether the venture is on capital
account or in the nature of trade. A transaction is not
necessarily in the nature of trade because the purchase
132
was made with the intention of resale [see Jenkinson v.
Freeland(1); Radha Debi Jalan v. C.l.T.(2); India Nut Co.
Ltd. v. C.l.T.(3); M/s. Sooniram Poddar v. C.l.T.(4); Ajax
Products Ltd. v. C.l.T.(5); Gustad Irani v. C.l.T.(5); and
Mrs. Alexander v. C.l.T.(7);].
A capital investment and resale do not lose their
capital nature merely because the resale was foreseen and
contemplated when the investment was made and the
possibility of enhanced values motivated the investment [see
Leeming v. Jones(8) and also the decisions of this Court in
Saroj Kumar Mazumdar v. C.l.T.(9) and Janki Ram Bhadur Ram
v. C.I.T.(10)].
In I. R. v. Fraser(11) Lord Norman said:
"The individual who enters into a purchase of an
article or commodity may have in view the resale of it
at a profit, and yet it may be that this is not the
only purpose for which he purchased the article or the
commodity nor the only purpose to which he might turn
it if favourable opportunity for sale does not occur.
An amateur may purchase a picture with a view to its
resale at a profit, and yet he may recognise at the
time or afterwards that the possession of the picture
will give him aesthetic enjoyment if he is unable
ultimately, or at his chosen time, to realise it at a
profit .... "
An accretion to capital does not become income merely
because the original capital was invested in the hope and
expectation that it would rise in value. if it does so rise,
its realisation does not make it income. Lord Dunedin said
in Leeming v. Jones(8) at p. 360:
"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 a concern in the
nature of trade in respect of his investments, but per
se it leads to no conclusion whatever."
This Court laid down in Venkataswami Naidu & Co. v.
C.l.T.(12) that the dominant or even sole intention to
resell is a relevant factor and raises a strong presumption,
but by itself is not conclusive proof, of an adventure in
the nature of trade.
The intention to resell would, in conjunction with the
conduct of the assessee and other circumstances, point to
the business character of the transaction.
In the light of the principles above referred to, it is
necessary to examine whether the Tribunal had approached the
question from the right perspective, viz., whether on the
basis of its finding on questions of fact, the inference
that the transaction was an adventure in the nature of trade
was justified.
133
The Tribunal relied on the following circumstances for
coming to the conclusion. The assessee has been dealing in
shares from 1951 to 1953. For the assessment year 1951-52,
the assessee claimed a sum of Rs. 1,29,214/- which was shown
in the profit and loss account and the balance sheet of the
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company for the year ending 31-3-1951 as a loss in the
dealing of shares of M/s. Titagarh Paper Mills Ltd. This
claim was allowed by the Income Tax officer. According to
the Tribunal, this would show that the assessee had been
buying and selling shares even though as an isolated
adventure in the nature of business The High Court has not
upset this finding, but has only said that this is an
isolated transaction. That apart, in the same year, a sum of
Rs. 6,30,000/- was debited to the profit and loss account on
devaluation of the shares of M/s. Pilani Investment
Corporation. Such a debit was permissible only on the
footing that the shares constituted the stock in Trade of
the assessee. It is no doubt true that the Department did
not allow this claim. But that was on the basis that the
claim that the shares leave fallen in value was not proved
to the satisfaction of the Income Tax officer, and not on
the basis that the shares were not held as stock in trade as
the High Court wrongly thought. The Tribunal also referred
to the resolutions- passed by the assessee authorising one
of its directors to purchase and sell the shares in the
Rayon Company The finding of the High Court that the clauses
of the Memorandum o Association viz., clauses 10, 12, 13, 28
and 29 and not authorize the company to acquire and sell
shares as business has no relevance in view of the aforesaid
resolution of the assessee and of the fact that it had been
dealing in shares in a commercial spirit as is evident from
its claim for loss in dealings in the shares of M/s.
Titagarh Paper Mills Ltd. and devaluation of shares of M/s.
Pilani Investment Corporation on the basis that they had
fallen in value.
Secondly, the Tribunal said that from 1947 to 1956, no
dividend had been declared by the Rayon Company and that the
money which went into the purchase of these shares was
borrowed by the assessee. In other words, the view of the
Tribunal was, it was with borrowed funds that the assessee
purchased the shares. It is no doubt true that there was no
evidence to show that the money was specifically borrowed
for the purpose of buying shares. But there was evidence
before the Tribunal for its finding that the liabilities of
the assessee exceeded its assets. The finding, therefore,
that the shares were purchased with borrowed funds on which
the assessee was paying interest, was a finding supported by
evidence. The reasoning of the Tribunal that it is most
improbable that the assessee would be investing borrowed
money on which interest would have to be paid in shares
which yielded no dividend, was correct. We cannot say that
this was not a relevant circumstance for the Tribunal to
take into consideration for coming to the conclusion that
the transaction was an adventure in the nature of business.
Looking into all the circumstances, the Tribunal negatived
the case of the assessee that it had invested its funds with
a view to earn dividend.
The case of the assessee throughout was that the
purchase of the shares was by way of investment and the sale
was forced by necessity because the creditors were pressing
for repayment of the loan. The
134
Tribunal found that the shares were not sold to liquidate
the debts of the assessee as the balance sheet as on 21-3-
1956 showed that the proceeds were kept is liquid cash in
the United Commercial Bank Ltd.
As already stated, the main reason why the High Court
came to a different conclusion. is stated as follows in the
judgment :
" .. Undoubtedly, there are some elements which
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are contra-indicative of investment but there are
other considerations which detract from their value as
elements indicating an adventure in the nature of
trade, the main being, that the assessee company, which
is controlled by the Birlas, purchased the shares with
a view to assisting a sister company controlled by the
same persons, and not to embark upon a venture in the
nature of trade."
At no time had the assessee a case that the shares were
purchased with a view to help a sister company controlled by
the Birlas. No such case was set up by the assessee either
before the Income Tax officer or the Appellate Assistant
Commissioner; nor was it urged before the Appellate
Tribunal. Nowhere in the statement of case or the
supplementary statement of case prepared by the Tribunal and
filed in the High Court was there any finding on the
question. The whole conclusion of the High Court is based on
unwarranted assumption of facts which must have been taken
from the argument of the assessee before the High Court. The
danger of failing to recognize that the jurisdiction of the
High Court in these matters is only advisory and that
conclusion of facts are conclusions on which the High Court
is to exercise the advisory jurisdiction is illustrated by
this case.
Mr. Chagla for the respondent contended that the only
question to be asked and answered is : What was the dominant
intention of the assessee when it purchased the shares ? If
the dominant intention was to carry on an adventure in the
nature of business, the profit can be taxed. Otherwise not.
In other words, the question is whether the assessee
purchased the shares in a commercial spirit with a view to
make profit by trading in them. The Tribunal found, after
taking in- to account all the relevant circumstances that
the dominant intention of the assessee was to make profit by
resale of the shares and not to make an investment.
The finding that loss or profit is a trading loss or
profit is primarily a finding of fact, though in reaching
that finding the Tribunal has to apply the correct test laid
down by law When we see that the Tribunal has considered the
evidence on record and applied the correct test there is no
scope for interference with the finding of the Tribunal (see
C. 1. T. v. Ashoka Marketing Co.(l).
We do not think that the High Court was right in
interfering with the judgment of the Tribunal. In the result
we reverse the judgment of the High Court and allow the
appeal with costs.
P.B.R. Appeal allowed.
135