Full Judgment Text
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PETITIONER:
DALHOUSIE INVESTMENT TRUST COMPANY LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX (CENTRAL),CALCUTTA
DATE OF JUDGMENT:
22/11/1967
BENCH:
BHARGAVA, VISHISHTHA
BENCH:
BHARGAVA, VISHISHTHA
SHAH, J.C.
RAMASWAMI, V.
CITATION:
1968 AIR 761 1968 SCR (2) 353
CITATOR INFO :
RF 1986 SC1695 (33)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s. 2(4) Purchase
and sale of share when amounts to adventure in the nature of
Trade--Previous findings of Tribunal whether binding in
subsequent assessment years.
HEADNOTE:
The principal activity of the assessee was investment of its
capitals in shares and stocks. It changed its investments
by sale of its shares and stocks from time to time. The
assessee’s income was primarily derived from dividends on
shares and interest derived by it on the investments. The
assessee purchased the shares of a company when their prices
were falling by taking loan at interest and the return on
investment was not at all substantial. The assessee’s
explanation that the shares were, in fact, being held as
investment and were sold simply because the control of the
company went out of the hands of the Directors of the
assessee. was not accepted by the Tribunal.
HELD: The income derived by the assessee. from the sale
of these shares was revenue receipt and as such taxable
under the, Income-tax Act.
From the evidence about the course of dealings and
conduct of the assessee the conclusion followed that the
purchases of the shares were not for the purpose of keeping
controlling interest in that company, or for investment, but
shares were being purchased and sold for earning profit, so
that the transactions were an adventure in the nature of
trade in these shares. [359 A--B]
The acceptance by the Revenue, in the earlier years,
that the acquisitions and sales of shares were in the nature
of investments, was not binding in the proceeding for
assessment during subsequent years. [356 B C]
Bengal and Assam Investors Ltd. v. Commissioner of income-
tax,West Bengal, 59’ LT.R. 547 and Commissioner of
Income-tax v.Bai Shrinbai K. Kooka, 46 I.T.R. 86, referred
to.
Ram Narain Sons (P) Ltd. v. Commissioner of Income-tax,
Bombay. 41 I.T.R. 534, held inapplicable.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 581 to 584
of 1966.
Appeals by special leave from the judgment and order
dated March 26. 1964 of the Calcutta High Court in
Income-tax Reference No. 6 of 1961.
4. K. Sen, Bishan Narain, R.K. Chaudhuri and B.P.
Maheshwari, for the appellant (in all the appeals).
Niren De, Solicitor-General, T.A. Ramachandran, R. N.
Sachthey and S.P. Nayar, for the respondent (in all the
appeals)
354
The Judgment of the Court was delivered by
Bhargava, J. These appeals came up before this Court on the
17th April, 1967, when an order of remand was made by this
Court, asking the Income-tax Appellate Tribunal to submit a
further statement of the case. The question that has come
up. for consideration is :--
"Whether on the facts and circumstances of
the case, the
surplus derived by the assessee in the sale of
its shares and securities in the relevant
previous years was a revenue receipt and as
such taxable under the Income Tax Act."
The facts and circumstances under which the question was
referred by the Tribunal for the opinion of the High Court
are mentioned in that order of remand and need not be
repeated.
In the order of remand, it was pointed out that it was
not possible to find out from the statement of the case
whether the Tribunal accepted the explanation of the
assessee that, in the previous year relevant to the
assessment year 1953-54, the control of McLeod & Co. Ltd.
went out of the hands of the Directors of the assessee and
it was for this reason that the assessee sold the shares of
McLeod & Co. It was also pointed out further that the
Tribunal had not stated what was the object of the assessee
in buying 6,900 ordinary shares of McLeod & Co. It appeared
from the order of the Income-tax Officer that these shares
were purchased in a number of lots from the year 1948 to
1950, and it was also not stated as to what was the object
in buying other securities, and why did the assessee confine
its activities mostly to the shares of McLeod & Co. Ltd. and
the companies managed by McLeod & Co. Ltd. It was in the
light of these omissions that the Tribunal was asked to send
a supplementary statement. That supplementary statement has
now been received and the answer to the question has to
be given on the basis of the facts contained in the original
statement of the case as well as this supplementary
statement.
The relevant facts which emerge out of these statements
of the case are that the principal activity of the assessee
was investment of its capital in shares and stocks. It
changed its investments by sale of its shares and stocks
from time to time. The income of the Company was primarily
derived from dividends on shares and interest received by it
on the investments. These activities were covered by
Clauses (1), (3) and (4) of the Memorandum of Association.
The activity mentioned as the object in Clause (2) is:
"to acquire,hold, sell and transfer shares,
stocks, Debentures, ’Debenture Stocks, Bond,
obligations and
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355
securities issued or guaranteed by any company
constituted or carrying on business in British
India and in the United Kingdom or in any
colony, or dependency or possession thereof or
in any foreign country and Debenture Stocks,
Bonds, obligations and securities, issued or
guaranteed by any Government, Sovereign,
Ruler, Commissioners, public body or authority
supreme, Municipal’ Local or otherwise whether
at home or abroad."
In the supplementary statement, the Tribunal has recorded
the finding that, in its opinion, the purchases and sales of
the shares in question were in pursuit of this clause (2) in
the Memorandum of Association. The Tribunal has further
stated that the assessee had not placed any evidence as to
the object behind the acquisition of the shares of McLeod &
Co. Ltd and the shares of companies managed by McLeod & Co.
Ltd., nor had the Income-tax Officer ascertained the object
behind such acquisitions. The Tribunal was also unable to
find out why the assessee had more or less confined its
activities mostly to the shares of McLeod & Co.. Ltd. and
the companies managed by McLeod & Co. Ltd. The facts
proved showed that, in the account year relevant to the
assessment year in question, 21,046 shares were held by
the Kanoria group, including 6,977 shares in McLeod & Co.
Ltd. held by the assessee. Mr. C.L. Kanoria resigned his
office as Director of McLeod & Co. Ltd. on 17th March, 1952,
and the approval of the Government to his resignation was
given by the Central Government on 16th October, 1952.
Thereafter, Sri C.L. Bajoria joined the Directorate of
McLeod & Co. Ltd. 6,900 shares. were sold by the assessee to
Sri C.L. Bajoria or his nominees on 27th May, 1952, at a
time when Sri C.L. Kanoria had already sent in his
resignation from the office of Director, but the resignation
had not yet been accepted by the Government. It has also,
been found that Sri C.L. Bajoria acquired 12,440 shares in
all. including 6,900 shares purchased from the assessee; but
there was no material on the record to prove that his group
obtained a controlling interest in McLeod & Co. Ltd. as a
result of acquisition of’ these shares. As a fact, it was
held that after the resignation of Sri C.L. Kanoria, Messrs
C.L. Bajoria and Baijnath Jalan, both ; of M/s. Soorajmull
Nagarmull, became Directors of McLeod & Co. Ltd. These are
the principal facts on the basis of which it has to be
determined whether the sale of these shares by the assessee
resulted in a revenue receipt or in a capital gain.
It appears to us that the facts and circumstances in
this case can lead to. no other conclusion, except that
these shares were purchased and sold by the assessee with
the motive of earning a profit by such purchases and sales
and not with the object of investing its capital in these
shares in order to derive
356
income from that investment. It is true that the principal
business of the assessee was to invest capital and to derive
income from dividends on shares and interest on other
investments; but at the same time, the object contained in
the Memorandum of Association of the assessee Company
clearly showed that one of the objects was also to deal in
shares, stocks, debentures, etc., by acquiring, holding,
selling and transferring them. In the years prior to the
assessment year, the case put forward by the assessee that
the various acquisitions and sales of shares were in the
nature of investments was accepted by The Department but
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such a decision given in the earlier years is not binding in
the proceedings for assessment during subsequent years.
The particular shares no,in question. it appears, were
purchased between 31st March,1948 and 31st March, 1952.
The earliest purchases in March.1948 were at an average
price of Rs. 267-13-0 per share. In the next two years
ended 31st March, 1949 and 31st March, 1950.the average
purchase price was Rs. 201-8-0 and Rs. 182-10-0.and the
last purchase in the year ended 31st March, 1952 was at the
rate of Rs. 128-14-0. On 1st April. 1952, the assessee’s
total holding of shares in McLeod & Co. Ltd. was 6,977 at a
total cost of Rs./4,29,587-4-0 out of the total holding of
shareS, including shares in other companies, of the value of
Rs. 17,58,741-4-0.Thus, on that date, the holdings in McLeod
& Co. Ltd. formed the major part of the share holdings of
the assessee. It is significant that the shares were
purchased during a period when their market price was
continuously falling. The earliest purchases in the year
ended 31st March, 1948 were at an average price Rs. 267-13-
0, while in the last of these three years ended 31st March
1952, the average price was Rs. 128-14-0. The largest block
of 4,757 shares was purchased in the year ended 31st
March, 1950, when the average price was Rs. 182-10-0.
The assessment order of the Income-tax Officer also shows
that the shares were not only purchased in a rapidly
falling market, but, in order to make these purchases the
assessee had taken loans amounting to about Rs. 8 lacs at
interest varying from 31/2% to 5 %. The dividend being
declared was at a very low rate, so that the return on this
investment, after taking into account the interest paid and
super-tax to be paid, came to a very small percentage. being
less than 1%. This circumstance that the shares were
purchased at a time when their prices were falling and the
return on investments was not at all substantial while loans
had been taken to purchase these shares strongly points to a
conclusion that the shares could not have been purchased as
an investment to earn income from dividends and that the
purchases of these shares were with the object of selling
them subsequently at a profit. The shares were in fact,
sold at considerable profit subsequently and that is how the
question of charging that profit to tax as revenue receipt
has arisen. The explanation sought to be given by the
357
assessee that the shares were, in fact, being held as
investment and were sold simply because the control of
McLeod & Co. Ltd. went out of the hands of the Directors of
the assessee has not been proved, according to the
supplementary statement of the case submitted by the
Tribunal. In fact, the Tribunal was not satisfied that even
the purchasers, viz., the Bajoria group on buying these
shares from the assessee acquired a controlling interest in
McLeod & Co. Ltd. or in the companies managed by that
Company. The object of the sale as given by the assessee
has therefore, remained unproved, whereas the fact that the
purchases of the shares were made at a time when they were
not expected to give a good return as investment and were
actually sold at a very good profit leads to the reverse
inference that the purchases and sales of these shares
were an adventure in the nature of trade. Even the sequence
of events does not bear out the contention of the assessee.
Sri C.L. Kanoria first resigned on 17th March, 1952 and he
sold his shares while his resignation was still pending for
approval by the Government. The sale took place on 27th May
1952, at a time when the resignation not having received the
approval of the Government, the control of McLeod & Co.
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Ltd. group of companies was still with the Kanoria group.
The resignation was accepted on 16th October, 1952, about
five months after the sale of the shares. There is no
evidence. to show that, as a result this sale. the control
in the McLeod & Co. group of companies passed to the
Bajoria group though M/s. C.L. Bajoria and Baijnath Jalan
did subsequently loin the Directorate of McLeod & Co. Ltd.
On these facts, it is not possible to hold that the Tribunal
was incorrect in recording it5 conclusion that the sale of
these shares by the assessee was not the result of control
of the McLeod & Co. Ltd. passing from the. hands of Kanoria
group to the Bajoria group. In fact the Kanoria group was
holding a majority 21,046 shares out of 40,000 shares in
McLeod & Co. Ltd. even at the time when these shares were
sold on 27th May, 1952. The assessee thus having failed to
prove the object of the sale of these shares, the inference
that the shares were sold with the sole object of earning
profit is justified.
This conclusion is further strengthened by the conduct
of the assessee as found by the Tribunal in subsequent
years. In the year ended 31st March, 1955, the assessee
again purchased a large number of shares of McLeod & Co.
Ltd. These purchases were made between 23rd August, 1954 and
29th September, 1954. The first purchases were made at a
rate of Rs. 150/- per share. and the purchases were
continued even in the month of September when the rate rose
to nearly Rs. 250/- per share. This purchase of shares of
McLeod & Co. Ltd. in the account year 1954-55. when there
was a rising market and when the control was no longer with
the Kanoria group and having already passed to the
358
Bajoria group, clearly shows that the Tribunal was not wrong
in inferring that the purchases of shares of McLeod & Co.
Ltd. were not for the purpose of keeping controlling
interest in that Company or for investment, but that the
shares were being purchased and sold for earning profit, so
that the transactions were an adventure in the nature of
trade in these shares of McLeod & Co. Ltd.
In this connection, Mr. A.K. Sen, learned counsel for
the appellant drew our attention to the following view
expressed in the remand order :--
"We are unable to answer the question
referred because the mere fact that an
investment company periodically varies its
investments does not necessarily mean that the
profits resulting from such variation is
taxable under the Income-tax Act. Variation of
its investments must amount to dealing in
investments before such profits can be taxed
as income under the Income-tax Act."
Reliance was also. placed on the observations of this
Court in Bengal and Assam Investors Ltd. v. Commissioner of
Income-tax, West Bengal(1), which were quoted in the remand
order and are as follows :--
"It seems to us that, on principle before
dividends on shares can be assessed under
section 10, the assessee, be it an individual
or a company or any other entity, must carry
on business in respect of shares; that is to
say, the assessee must deal in those shares.
It is evident that if an individual person
invests in shares for the purpose of earning
dividend, he is not carrying on a business.
The only way he can come under section 10 is
by converting the shares into stock-in-trade,
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i.e., by carrying on the business of dealing
in stocks and shares as did the assessee in
Commissioner of Income Tax v. Bai Shirinbai K.
Kooka(2)’’.
It was urged that, in this case, the Tribunal has recorded
no finding at all that the shares in McLeod & Co. Ltd. which
were sold by the assessee were converted by it into
stock-in-trade, nor has it been held that the variation of
its investments by the assessee amounted to dealings in
investments. The facts that we found above show that, so
far as the shares of McLeod & Co. Ltd. and the allied
companies which were sold by the assessee and the income
from which has been taxed as revenue income are concerned,
the assessee, in fact, dealt with them as stock-in-trade. It
(1) 59 I.T.R. 547. (2) 46 I.T.R. 86.
359
is true that in the account books they were never shown as
such; but we have indicated how the evidence and the
material in this case lead to the conclusion that the shares
were in fact purchased even initially not as investments,
but for the purpose of sale at profit and that they were
actually sold with the purpose of earning profit, so that
the transactions amounted to an adventure in the nature of
trade.
Learned counsel also referred ,to the decision of this
Court in Ram Narain Sons (Pr.) Ltd. v Commissioner of
Income-tax, Bombay(1) to urge that the principal
consideration in determining whether income from sale of
shares is revenue income or capital gain, is to find out
what was the purpose of purchase of those shares, and, if
the purpose was investment, the fact that. in varying the
investment, the sale of those shares resulted in a profit
will not. make that profit revenue income. The principle is
perfectly’ correct, but is not applicable to. the case
before us on the finding mentioned by us above that even
the initial purchase of these shares by the assessee was not
for the purpose of investment for earning income from
dividends, but was with a view to earn profit by resale of
those shares.
In these circumstances we hold that the High Court was
right in arriving at the conclusion that, on the facts and
circumstances of the present case, the income derived by the
assessee from the sale of its shares and securities in the
relevant previous years was revenue receipt and as such
taxable under the Income-tax Act. The appeals fail and are
dismissed with costs. One hearing fee.
Y.P. Appeals dismissed.
(1) 41 I.T.R. 534.
360