Full Judgment Text
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PETITIONER:
NEW ERA AGENCIES (PVT.) LTD., BOMBAY
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BOMBAY CITY 1,BOMBAY
DATE OF JUDGMENT:
28/11/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
BHARGAVA, VISHISHTHA
CITATION:
1968 AIR 811 1968 SCR (2) 483
ACT:
Indian Income-tax Act, 1922-Profit on sale of shares-Whether
capital accretion or revenue receipt.
HEADNOTE:
During the years 1942 to 1948 the dealings in shares of the
assessee included dealings in shares of Elphinstone Mills
and the profit and loss in the dealings of the Mills was
taken by the assessee to its revenue account. M was in
control of the assessee-company and he also purchased the
control and managing agency of the Mills, and in this
managing agency company the assessee was also a share
holder. From 1949 onwards the assessee did not sell the
shares of the Mills but added to its holding. In 1953, M
sold the entire shares in the Mills with him and under his
control including that with the assessee. Along with that M
got the vendee and the latter’s nominee appointed directors
and also got the resignation of the Managing agency-company
from the managing agency of the Mill. Out of the total sale
Price the assessee received certain amount which was in
excess of the cost price of the shares. The assessee did
not show the excess amount on the sale of these shares in
its profit and loss account but took it to the capital
reserve account and showed it as a capital reserve in its
balance-sheet. The assessee, in appeal, contended that (i)
the excess amount received was a capital accretion on the
sale of the shares and did not represent income from
business in shares; and (ii) the excess amount over and
above the market price was paid for the controlling interest
which was being transferred along with the shares.
HELD : The appeal must be dismissed.
(i) The profit made by the assessee on the sale of the
shares was its business income. During the years 1943-48
the profits and losses in these shares had been treated on
the same footing as the profit and losses in other shares of
the assessee. The circumstance that from 1949 onwards the
assessee had not sold the shares of the Mills, but had added
to its holding, was not in itself sufficient to reach an
inference that the assessee had treated its holding in the
shares an investment. During the years 1949-53 the shares
had slumped in price and this may be the reason why the
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assessee did not effect any sales during this period. It
was not unreasonable to think that the assessee who was a
dealer in shares was making further purchases and
accumulating its holding when the market was falling so as
to be in a position to sell the shares to its advantage when
a suitable opportunity occurred. There was no material on
the record to suggest that the main object of the assessee
in acquiring the shares was to give support to the Managing
Agents. When the managing agency was acquired, there was no
need to make any use of the holding of the assessee because
the assessee at that time had hardly any shares. Subsequent
to the acquisition of the managing agency, until it was
relinquished, the managing agency never felt its existence
either precarious or in need Of support. [488 D-H; 489 B-D]
484
Californian Copper Syndicate (Limited and Reduced) v.
Harris, 5 Tax Cas. 159, Commissioner of Taxes v. Melbourne
Trust Ltd., (19141 A.C. 1001, Rees Roturbo Development
Syndicate Ltd. v. Ducker, 13 Tax Cas, 366 and Venkataswami
Naidu & Co. v. Commissioner of Income-tax, 35 I.T.R. 594,
referred to.
(ii) No part of the amount received by the assessee could be
regarded as consideration for any other valuable right
excepting the price of the shares sold by it. No
controlling power was held by the assessee itself in the
Mills and it was not in a position to procure the
resignation of the Directors or bring about the appointment
of vendee’s nominees as Directors. Nor was it In a position
to call upon the Managing Agents to relinquish their
offices. All these things were possible to M because of
the influence and power he possessed. The part taken by
the assesses in the transaction with the vendee was
merelv a passive part, viz., keeping at the disposal of M
its holding in the Mills’ share, which it had held in its
business is a dealer in shares. Therefore, so far as
the assessee was concerned, what it parted with was the
shares which it held and what it received was the payment
for those shares. [491 D-F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2462 of
1966.
Appeal from the judgment and order dated April 21/22, 1964
of the Bombay High Court in Income-tax Reference No. 19 of
1961.
Sanat P. Mehta, J. B. Dadachanji and O. C. Mathur, for the
appellant.
B. Sen, T. A. Ramachandran, R. N. Sachthey and S. P.
Nayar, for the respondent.
The Judgment of the Court was delivered by
Ramaswami. J. The appellant is a Private Limited Company
controlled by Mulraj Kersondas and his nominees. It is a
dealer in shares, both in forward and ready market. In the
year 1942 Mulraj Kersondas obtained control of the
Elphinstone Spinning and Weaving Mills (hereinafter referred
to as the ’Elphinstone Mills’). He also acquired the
managing agency of the Elphinstone Mills for a consideration
of Rs. 6 lakhs. In 1943 Mulraj Kersondas assigned the
Managing Agency to a Private Company’ known as Chidambaram
Mulraj & Co. Ltd. whose shareholders were Mulraj Kersondas,
his nominees and the appellant. During the years 1942 to
1948 the dealings in shares of the appellant included
dealings in shares of Elphinstone Mills also and the profit
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and loss in the dealings of Elphinstone, Mills was taken by
the appellant to its revenue account during these years. At
the end of the year 1948 the appellant held 5,137 ordinary
shares and 1131 preference shares of the Elphinstone Mills.
During the years subsequent to the year 1948, the appellant
did not effect any sale in the Elphinstone Mills’ shares,
excepting a solitary transac-
485
tion of 160 shares in the year 1952. On the other hand, the
appellant purchased some more shares and added to its
holdings in the shares of the said mills. Therefore, in the
year 1953 the appellant held in all 8693 ordinary shares and
2117 preference shares of the Elphinstone Mills. It appears
that during the years from 1948 onwards there was a slump in
the price of the shares of the Elphinstone Mills and the
prices of the ordinary and preference shares on the material
date in 1953 were Rs. 37/- per ordinary share and Rs. 38/-
per preference share.
On September 25, 1953 Mulraj Kersondas wrote a letter to K.
D. Jalan, a well known businessman of Calcutta making an
offer of sale of 25,000 ordinary shares and 10,000
preference shares of the Elphinstone Mills for a total sum
of Rs. 45 lakhs. He stated in that letter that the shares
offered stood in the names of himself, his family members
and his allied concerns. The offer for sale was accompanied
by a further offer that if the offer for sale was accepted,
Mulraj Kersondas would obtain the resignation of the present
Directors of the Elphinstone Mills and would also get
appointed as Directors persons of the choice of K. D. Jalan
and that he would obtain the resignation of the present
Managing Agents of the Elphinstone Mills, viz., Chidambaram
Mulraj and Co. Ltd. It was further stated in the letter
that the price to be paid, the ’transfer of the shares, the
resignation of the Directors and the appointment of the new
Directors of the choice of the purchaser, and the
resignation of the Managing Agents would all be
simultaneous. K. D. Jalan accepted the offer and paid the
sum of Rs. 45 lakhs out of which Mulraj Kersondas paid Rs.
10 lakhs to Chidambaram Mulraj and Co. Ltd. which relin-
quished the Managing Agency at his instance. The balance
was distributed at Rs. 80/- per ordinary share and Rs. 1501-
per preference share of the Elphinstone Mills (as against
the prevailing market price of Rs. 37/- and Rs. 88/-
respectively) to the respective shareholders whose shares
had been sold to K. D. Jalan. In respect of its shares sold
to K. D. Jalan, the appellant received Rs. 10,42,990/-,
though the appellant recorded its total receipts as Rs.
10,37,775/- and the discrepancy of Rs. 5,215/- has not been
explained. The cost price of the shares to the appellant
was Rs. 8,03,544/- and the profit on the sale was worked out
in the appellant’s books at Rs. 2,34,231/-. The appellant,
however, did not show the surplus in its Profit & Loss
account but took it to the capital reserve account and
showed it as a capital reserve in its balance sheet. In the
assessment of the appellant for the assessment wear 1954-55,
the Income Tax Officer treated the amount of Rs. 2,34,231/-
as the income of the appellant from the sale of the shares
and brought the said amount to tax. The appellant took the
matter in appeal to the Appellate Assistant Commissioner who
accepted its contention that the said amount
486
represented a capital gain and did not form part of the
income from the business of the appellant and accordingly
allowed its appeal. Against the decision of the Appellate
Assistant Commissioner the Department appealed to the Income
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Tax Appellant Tribunal which allowed the appeal. set aside
the order of the Appellate Assistant Commissioner and
restored that of the Income Tax Officer. Thereafter, at the
instance of the appellant the Income Tax Appellate Tribunal
stated a case to the High Court under s. 66(1) of the Indian
Income Tax Act. 1922 on the following question of law :
"Whether on the facts ind in the
circumstances of the case the sum of Rs.
2,34.230/- was the income of the assessee ?"
On the direction of the High Court, the Tribunal submitted a
supplementary statement of the case and referred the
following additional questions of law
"(2). Whether on the facts and in the
circumstances of the case, the amount of Rs.
10,42,990/- received by the assessee, as
allotted by Mulraj Kersondas out of the sum of
Rs. 45 lakhs received by him from Shri K. D.
Jalan represents exclusively the price of the
shares or includes therein any consideration
for the procuring of the resignation of the
present Directors, for obtaining the
appointment of the Directors, of the choice of
Shri K. D. Jalan and for the resignation of
the present managing agents of the Mills.
(3). If so, what in view thereof should
be taken as the sale price of each of the
ordinary shares and each fo the preference
shares sold by the assessee in calculating its
income arising therefrom ?"
By its judgment dated April 21, 1964 the High Court answered
the first two questions against the appellant and held that
in view of the answer to the second question the third
question did not survive and therefore need not be answered.
The present appeal is brought to this Court on a certificate
granted by the High Court under s. 66(A) of the Indian
Income Tax Act, 1922.
The distinction between investment and stock-in-trade,
between fixed capital and circulating capital is well-known.
- In Californian Copper Syndicate (Limited and Reduced) v.
Harris(1) Lord Justice Clerk observed :
"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
(1) 5 Tax Cas. 159, 165-66.
487
it, and obtains a greater price for it than
he originally acquired it at, the enhanced
price is not profit in the sense of Schedule D
of the Income Tax Act of 1842 assessable to
Income Tax. But it is equally well estab-
lished 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 investment,
but an act done in what is truly the carrying
on, or carrying out, of a ’business. The
simplest case is that of a person or
association of persons buying and selling
lands or securities speculatively, in order to
make gain, dealing in such investments -,is a
business, and thereby seeking to make profits.
There are many companies which in their very
inception are formed for such a purpose, and
in these cases it is not doubtful that. where
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they make a gain by a realisation the gain
they make is liable to be assessed for Income
Tax.
What is the line which separates the two
classes of cases may be 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 has 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
The principle stated in this case was approved in
Commissioner of Taxes v. Melbourne Trust Ltd., (1) in Rees
Roturbo Development syndicate Ltd., v. Ducker-(2) and in
Venkataswami Naidu and Co. v. Commissioner of Income-tax(3).
With regard to the first question, Mr. Sanat P. Mehta
appearing on behalf of the appellant argued that the sum of
Rs. 2,34,230/- was a capital accretion on the sale of shares
and did not represent income from the business in shares of
the appellant. It was stated that though the appellant was
a dealer in shares it was not acquiring the shares of
Elphinstone Mills as its stock-in-trade. The argument was
put forward that the appellant was a controlled concern of
Mulraj Kersondas and it was a shareholder also of the
Managing Agency Company and therefore it was interested in
the Managing Agency. The appellant had purchased the shares
of the Elphinstone Mills not with a view to deal with them
as a dealer in shares but with a view to support the
Managing Agents of the Elphinstone Mills. In our opinion
there is no justification for the argument put forward on
behalf of the appellant. It is admitted that the
appellant is a dealer in shares
(1) [1914] A.C. 1001. (2) 13 Trax Case. 366.
(3) 35 I.T.R. 594.
488
and that it had actually dealt with the shares of
Elphinstone Mills during its ’business from the years 1943
to 1948. The appellant had carried forward its profits and
losses in the entire share business carried on by it to its
revenue account including the business in the Elphinstone
Mills shares. During the years from 1943 to 1948 the
appellant purchased shares of the Elphinstone Mills and also
sold them. It is true that at the end of the year 1948 the
appellant was possessed of as many as 5137 ordinary shares
and 1131 preference shares of the Elphinstone Mills but it
is also apparent that in 1944 the appellant had sold 2,000
shares and in 1947 and 1948 the appellant had sold 1,000
shares in each year. During all these years the profits and
losses in these shares have been treated on the same footing
as the profits and losses in other shares by the appellant.
An alternative argument was presented by Mr. Sanat P Mehta
that at least from the year 1948 the holding in the shares
of the Elphinstone Mills was regarded by the appellant not
as a stock-in-trade but as an investment. It was contended
that the circumstance that the appellant had been a dealer
in shares for some years did not preclude it from being an
investor in shares in subsequent years. It is no doubt true
that a person who has been a dealer in shares in some years
can be an investor in shares in subsequent years. It is
also true that it is possible for a dealer in shares to
convert a part of its stock-intrade into investment. But,
as has been observed by the Appellate Tribunal there is
nothing in the books of the appellant or in its resolutions
to show that it had changed its attitude towards the shares
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of the Elphinstone Mills from the year 1948. The only
circumstance pointed out by the appellant is that from the
year 1949 onwards the appellant had not sold the shares of
the Elphinstone Mills but on the other hand had added to its
holding. But this circumstance in itself is not sufficient
to reach an inference that the appellant had treated its
holding in the shares as investment. It is apparent that
during the years 1949-53 the shares of the Elphinstone Mills
had Slumped in price and this may be the reason why the
appellant did not effect any sales during this period. It
was pointed out that during this period the appellant had
also made further purchases of the shares. But it is not
unreasonable to think that the appellant, who was a dealer
in shares was making further purchases and accumulating its
holding when the market was falling so as to be in a
position to sell the shares to its advantage when a suitable
opportunity occurred. The argument was further stressed on
behalf of the appellant that it had purchased the shares of
the Elphinstone Mills with a view to support the Managing
Agents of the Mills since the appellant itself had an
interest in the Managing Agency Company, being one of its
shareholders. It was therefore contended that the holding
of the appellant in the shares of Elphinstone Mills must be
treated as a holding on capital account and the sale thereof
must also be
489
regarded as on capital account. We do not think there is
any warrant for this argument. As pointed out by the
Appellate Tribunal there is no material on the record to
suggest that the main object of the appellant in acquiring
the shares of the Elphinstone Mills was to give support to
the Managing Agents. The conductor the appellant in
disposing of large number of shares of Elphinstone Mills
during the years 1943-48 is not consistent with the theory
that the appellant was acquiring shares for the purpose of
supporting the Managing Agents. There is also nothing on
the record to show that during the years 1949-53 when no
sales were effected it was necessary to conserve the holding
in the shares of the, Elphinstone Mills because the Managing
Agency was in any way threatened. It also appears that act
the time when the Managing Agency was acquired there was no
need to make any use of the holding of the appellant in the
shares of the Elphinstone Mills because the appellant at
that time had hardly any shares. Subsequent to the
acquisition of the Managing Agency until it was relinquished
in 1953 there is nothing on the record of the proceedings to
show that at any time the Managing Agency had felt its
existence either precarious or in need of support. We
therefore reject the argument of the appellant on this
aspect of the case and hold that the profit made by the
appellant on the sale of the shares was its business income
and the first question was rightly answered ’by the High
Court against the appellant and in favour of the Income Tax
Department.
We proceed to consider the next question, viz., whether the
entire amount of Rs. 10,42,990/- which the appellant
received for its ordinary and preference shares represented
exclusively the price of the shares or whether it
constituted a composite payment for the price of the shares
and certain other valuable rights. The case of the
appellant is that the transaction entered into by Mulraj
Kersondas with K. D. Jalan which involved the sale of 25,000
ordinary shares and 10,000 preference shares of the
Elphinstone Mills was not merely a transaction for the sale
of the shares. The offer which Mulraj Kersondas made on
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September 25, 1953 consisted of four items, viz., (1) the
sale of 25,000 ordinary shares and 10,000 preference shares,
(2) procuring the resignations of the present Directors of
the Elphinstone Mills, (3) securing the appointment of
persons of the choice of K. D. Jalan as Directors of the
Mills, and (4) obtaining the resignation of the present
Managing Agents of the Elphinstone Mills. It was contended
for the appellant that the consideration of Rs. 45 lakhs for
this offer was a composite consideration for all the four
items. After the offer was accepted by K. D, Jalan and the
payment of Rs. 45 lakhs was made by him to Mulraj Kersondas,
the latter appropriated Rs. 10 lakhs of the consideration to
one of the four items, viz., relinquishment of Managing
Agency. He paid the amount to the Managing Agents
Chidambaram Mulraj and Co. Ltd.
490
Deducting the amount of Rs. 10 lakhs from the total
consideration of Rs. 45 lakhs, the balance of Rs. 35 lakhs
was distributed by Mulraj Kersondas among the 25,000
ordinary shares and 10,000 preference shares. It was
pointed out for the appellant that at the material time when
the transaction had gone through_the market price for
Elphinstone Mills shares was Rs. 37/- per ordinary share and
Rs. 88/- per preference share, but when Mulraj Kersondas
distributed Rs. 35 lakhs among the ordinary and preference
shares each ordinary share was paid at the rate of Rs. 80/-
and each preference share was paid at the rate of Rs. 1501-.
According to the appellant therefore the excess amount paid
by the purchaser over and above the market price was paid by
him for the controlling interest which was ’being
transferred along with the shares. In other words, the
contention of the appellant was that the profit on the sale
of the shares made by the appellant must be calculated on
the basis of what it got for the sale-price of the shares
only and not on the basis of the entire consideration
received by it which was a composite payment received for
the price of the shares and for parting with the controlling
interest. We are unable to accept this argument as correct.
It may be that in the total disposal of the entire block of
shares in favour of K. D. Jalan the latter may have acquired
certain amount of controlling power apart from mere
acquisition of shares. It is also conceivable that Mulraj
Kersondas, in going through the transaction with K. D.
Jalan, might have given to K. D. Jalan not only the shares
but also certain other advantages. But the question must be
examined from the view-point of the appellant and what we
have to see is what the appellant parted with and what the
appellant got in return. It should be noticed that the
appellant itself had no controlling interest in the
Elphinstone Mills. It was not the Managing Agent of the
Elphinstone Mills and its holding in the shares of the
Elphinstone Mills was only to the extent of 13 per cent
which could not give it any controlling power. Mr. Sanat P.
Mehta said that though the appellant had not a sufficiently
large holding to give it any controlling power, it was a
member of the Mulraj Kersondas group and it was working in
close concert with Mulraj Kersondas who had considerable
Controlling power and interest. It was argued that the
transaction entered into by Mulraj Kersondas with K. D.
Jalan, although entered into by Mulraj Kersondas alone,
should be treated as the transaction on behalf of the entire
group of Mulraj Kersondas including the appellant. What was
therefore being offered by Mulraj Kersondas to ’K. D. Jalan
was an offer on behalf of the entire group which had a
built-in power which it was proposing to transfer to K. D.
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Jalan in the scheme proposed by Mulraj Kersondas who was the
representative of the group. It was therefore argued on
behalf of the appellant that it would not be correct to say
that the appellant had not parted with anything
491
more than the block of its shares in the present
transaction. It is not possible to accept this argument put
forward on behalf of ,the appellant. There is nothing on
the record of the case to support the theory that the
transaction with K. D. Jalan was not a transaction by Mulraj
Kersondas himself but a transaction of the entire group. As
appears from the letter of Mulraj Kersondas dated September
25, 1953, the offer was on behalf of Mulraj Kersondas alone.
Ms letter to the Managing Agents was a direction given ’by
him asking them to do certain things to suit his convenience
and, as it appears from the record, the direction was
promptly obeyed by them. As pointed out by the High Court,
the circumstances of the case indicate that Mulraj Kersondas
was by reason of his influence and power, in a position to
command obedience of his wishes from his nominees and
associates concerned. When Mulraj Kersondas decided to
enter into a transaction for the sale of the shares to K. D.
Jalan he called upon the appellant to keep at his disposal
the holding which the appellant had in its shares of the
Elphinstone Mills. No controlling power was held by the
appellant itself in the Elphinstone Mills and it was not in
a position to procure the resignation of the Directors or to
bring about the appointment of the persons of the choice of
K. D. Jalan as Directors. Nor was it in a position to call
upon the Managing Agents to relinquish their office. All
these things were, however, possible to Mulraj Kersondas
because of the influence and power which he possessed. The
part taken by the appellant in the transaction with K. D.
Jalan was merely a passive part viz., keeping at the
disposal of Mulraj Kersondas its holding in Elphinstone
Mills shares which it had held in its business as a dealer
in shares. So far as the appellant is concerned, what it
parted with was the shares which it held and what it
received was the payment for those shares. It follows
therefore that the entire sum received by the appellant from
Mulraj Kersondas was the price of the shares disposed of by
Mulraj Kersondas and consequently the whole of the excess
over the cost price of the shares was the profit of the
appellant. We accordingly hold that no part of the amount
of Rs. 10,42,990/- received by the appellant from Mulraj
Kersondas can be regarded as consideration for any other
valuable right excepting the price of the shares sold by it.
Me second question was therefore rightly answered by the
High Court against the appellant.
For the reasons expressed we hold that the judgment of the
High Court is right and this appeal must be dismissed with
costs.
Y.P. Appeal dismissed.
492