Full Judgment Text
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PETITIONER:
RAJA BAHADUR VISHESHWARA SINGHAND OTHERS.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BIHARAND ORISSA
DATE OF JUDGMENT:
15/12/1960
BENCH:
KAPUR, J.L.
BENCH:
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1961 AIR 1062 1961 SCR (3) 287
ACT:
Income Tax-Purchase and sale of shares and securities with
surplus money-Such transactions, if amount to investment or
business in shares-Test-Excess sale proceeds-If amount to
business profit or mere accretion to capital-Indian Income-
tax Act, 1922 (11 of 1922), s. 66(2).
HEADNOTE:
The appellant used to invest his cash surplus in shares and
securities and maintained an account book called Book No. 1
relating thereto. During the period from 1930 to 1941-42 he
purchased a large number of shares and securities which by
the accounting year 1941-42 were of a value Rs. 1491 lacs.
He sold certain shares and securities of the value of
several lacs and made certain amount of profit on those
sales. In 1940 the appellant borrowed a large amount of
money from his brother, the Maharaja of Darbhanga and opened
a new account named account No. 2 which contained all
entries regarding shares purchased and sold out of the money
borrowed from the Maharaja. In the assessment year 1944-45
to 1948-49 the profits made by the
(1) [1961] 3 S.C.R. 279.
288
appellant from purchase and sale of shares amounted to
several lacs and the Income-tax Officer held those to be
liable to income-tax as business profits. The Appellate
Assistant Commissioner upheld the assessments but excluded
the profits for the years 1944-45. On appeal by both the
parties the Appellate Tribunal held on the evidence that the
appellant was to be regarded as a dealer in shares and
securities and therefore the profits were assessable to
income-tax. The High Court stated the following two
questions under s. 66(2) of the Income-tax Act and answered
them in the affirmative:-
"(1) Whether in the circumstances of the case, there is
material to support the finding of the Appellate Tribunal
that the assessee was a dealer in shares and securities with
respect to each of the account and, therefore, liable to be
taxed?
(2)Whether having regard to the finding of the Appellate
Tribunal in respect of 1941-42 assessment, it- was open to
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the Appellate Tribunal in the present case to hold that the
profits and transactions of sale and purchase of shares and
securities amounted to profits of business and so liable to
be taxed?"
On appeal by special leave the appellant contended inter
alia, that being a Zamindar the buying and selling of shares
was not his normal activity and he did not carry on any such
business but his purchases and sales were in the nature of
investments of his surplus monies and therefore the excess
amounts received by sales were capital receipts being merely
surplus and not profits.
Held, that on the materials produced and on the facts proved
the appellant must be held to have been rightly assessed.
The principle applicable to such transactions is that when
an owner of an ordinary investment chooses to realise it and
obtains a higher price for it than the original price paid
by him, the enhanced price is not a profit assessable to
income tax, but where as in the present case what is done is
not merely a realisation or a change of investment but an
act done in what is truly the carrying on of a business the
amount recovered as appreciation will be assessable.
G.Venkataswami Naidu & Co. v. The Commissioner of Income-
tax, [1959] Supp. 1 S.C.R. 464, Oriental Investment Company
Ltd. v. The Commissioner of Income-tax, [1958] S.C.R. 49,
Raja Bahadur Kamakshya Narain Singh v. Commissioner of
Income-tax, Bihar and Orissa, (1943) L.R. 70 I.A. 180,
discussed.
The substantial nature of the transactions, the manner in
which the books were maintained, the magnitude of the shares
purchased and sold and the ratio between the purchases and
sales and the holding justified tile Tribunal to come to the
conclusion that the appellant was dealing in shares as
business. The High Court could not interfere with those
findings and it rightly answered the questions in the
affirmative.
There is no such thing as res judicata in income-tax matters
289
and it was quite open to the Appellate Tribunal to give the
finding that it did.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 137 to 141
of 1958.
Appeals by special leave from the judgment and order dated
April 26, 1956 of the Patna High Court in Misc. Judicial
Cases Nos. 362 to 366 of 1955.
A. V. Viswanatha Sastri, S. K. Majumdar and I. N. Shroff,
for the appellants Nos. 2 to 4 (In all the appeals).
Hardayal Hardy and D. Gupta, for the respondent (In all the
appeals).
1960. December 15. The Judgment of the Court was delivered
by
KAPUR, J.-The assessee who is the appellant has brought
these five appeals against the judgment and order of the
High Court of Patna by which it answered the two questions
stated under s. 66(2) of the Indian Income-tax Act against
the appellant and in favour of the Commissioner of Income-
tax.
The appellant is the son of the late Maharajadhiraja of
Darbhanga and the brother of the present Maharaja. The
father died in 1929 and the appellant was given by way of
maintenance the Estate of Rajnagar. He was also given a
yearly allowance of Rs. 30,000 which was later raised to Rs.
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48,000. From 1929, the appellant invested his cash surplus
in shares and securities, the account of which was entered
in what is called Account Book No. 1. From the year 1930
onwards up to the year 1941-42 the appellant purchased a
large number of shares and securities which by the
accounting year 1941-42 were of the value of Rs. 14.91 lacs.
During this period the appellant sold shares and securities
in the accounting years 1936-37 and 1939-40 of the value of
1.48 lacs and 1.69 lacs respectively. He made certain
amount of profits on these sales but under orders of the
Commissioner of Income-tax in the former case and of the
Income-tax Tribunal in the latter case, these sums were not
assessed to income-tax. In the
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accounting years 1942-43 to 1946-47 the appellant purchased
and sold some shares and securities. The entries in
Account No. 1 stood as follows:-
Total value of Total cost of Total cost of shares
shares & securities shares and and securities sold
cost at the securities pur during the year.
beginning of the chased during the
year. year.
1350 Fs. Rs. 14.66 lacs Nil Rs. 4.68 lacs
942-43 (13 items)
1351 Fs. Rs. 9.98 lacs Rs. 2.37 lacs. Rs. 416 lacs
1943-44 (4 items) (12 items)
Rs. 3-05 lacs. Rs. 069 lacs
1352 FS. Rs. 8.20 lacs (2 items) and (3 items)
1944-45 other call money.
1353 Fs. Rs. 10.52 lacs Nil Rs. 1.03 lacs
1945-46 (3 items)
1354 Fs. Rs. 9.50 lacs Rs. 15 83 lacs. Rs. 3.39 lacs
1946-47 ( 9items) (2 items)
and in all these years the appellant made profits which
varied from Rs. 2,56,959 in the accounting year 194243 to
Rs. 33,174 in the accounting year 1946-47.
On July 16, 1940, the appellant arranged an overdraft with
the Mercantile Bank of India and actually withdrew Rs.
10,000 for the purchase of shares. But his brother the
Maharaja advanced to him without interest Rs. 10 lacs and
thus the overdraft was paid off. A new Account was opened
in the books of the appellant named No. 2 Investment Account
which contained all entries in regard to shares purchased
and sold from out of the money borrowed from the
Maharajadhiraj. In this account entries of the different
years were as follows:-
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was held not to. be taxable. Thus in the second period the
assessee was held not to be carrying on any trade. In the
third period, i.e., the assessment years 1944-45 to 1948-49
the profits made by the appellant from purchase and sale of
shares were as follows:-
1944-45...Rs.2,62,000 and odd
1945-46...Rs.3,95,000 and odd
1946-47...Rs.1,57,000 and odd
1947-48...Rs.1,33,000 and odd
1948-49...Rs. 76,000 and odd
The Income-Tax Officer held these to be liable to income-tax
as business profits. On appeal the Appellate Assistant
Commissioner excluded the profits for the years 1944-45 and
1945-46 but for the years 1946-47 to 1948-49 the assessments
were upheld. Both parties appealed to the Appellate
Tribunal. It held on the evidence that the appellant was to
be regarded as a dealer in shares and securities and
therefore the profits were assessable to income-tax. The
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appellant applied for a case to be stated under s. 66(1) of
the Income-tax Act. This application was dismissed but the
High Court made an order under s. 66(2) of the Income-tax
Act to state a case on two questions of law. The questions
were as follows:
(1)...Whether in the circumstances of the
case, there is material to support the finding
of the Appellate Tribunal that the assessee
was a dealer in shares and securities with
respect to each of the accounts and,
therefore, liable to be taxed?
(2)...Whether, having regard to the findings
of the Appellate Tribunal in respect of
1941/42 assessment, it was open to the
Appellate Tribunal in the present case to hold
that the profits and the transactions of sale
and purchase of shares and securities amounted
to profits of business and so liable to be
taxed ?
The High Court held that the facts and circumstances which
the Tribunal took into consideration in arriving at the
finding were the material before the Tribunal to support the
finding and the first question
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was answered in the affirmative and therefore against the
appellant. In regard to the second question the answer was
again in the affirmative and against’, the appellant who has
come to this Court by special leave.
It was argued on behalf of the appellant that he was not
carrying on the business of buying and selling shares but
his purchases and sales were in the nature of investments of
his surplus monies and therefore the excess amounts received
by sales were capital receipts being merely surplus and not
profits. It was also submitted that the appellant being a
zamindar the buying and selling of shares was not his normal
activity; that he had a large income and it was his surplus
income which he was investing in buying the shares and
whenever he found it profitable he converted his holdings
and securities and for a number of years from 1931-32 he had
been buying shares but he did not sell them; that the very
nature of investments was such that they had to be
constantly changed so that the monies invested may be used
to the best advantage of the investor; and that the sales
were really for the purpose of reemploying the monies that
he had invested to his best advantage.
Counsel for the appellant relied upon certain cases in
support of his submission that the first question raised was
of a wider amplitude and that it had been erroneously
restricted by the High Court and that its true import was
the same as of the questions which were raised in the
following cases decided by this Court. He relied on G.
Venkataswami Naidu & Co. v. The Commissioner of Income-tax
(1), Oriental Investment Co., Ltd. v. The Commissioner of
Income-tax, Bombay (2). In the former case the assessee
purchased four plots of land adjacent to the mills of which
he was the Managing Agent. On various dates and about five
years later sold them to the mills in which he realized
about Rs. 43,000 in excess of his purchase price. This was
treated by the Income-tax authorities as purchase with a
view to sell at a profit. The question referred was whether
there was material for the
(1) [1959] Supp. 1 S.C.R. 646.
(2) [1958] S.C.R. 49.
294
assessment of that amount as income arising from an
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adventure in the nature of trade. The High Court held that
that was the nature of the transaction. On appeal this
Court held that before the Tribunal could come to the
conclusion that it was an adventure in the ’nature of trade,
it had to take into consideration the legal requirements
associated with the concept of the trade or business and
that such a question was a mixed question of law and fact.
It was also held that where a person invests money in land
intending to hold it and then sells it at a profit it is a
case of capital accretion and not profit derived from an
adventure in the nature of trade but if a purchase is made
solely and exclusively with the intention to resell it at
profit and the purchaser never had any intention to hold the
property for himself there would be a strong presumption
that the transaction is in the nature of trade but that was
also a rebuttable presumption. The purchase in the absence
of any rebutting evidence was held to fall in the latter
category, i.e., adventure in the nature of trade. In the
Oriental Investment case(1) the assessee was an investment
company. It had purchased certain shares and sold them and
qua those shares it claimed to be treated as an investor and
not a dealer on the ground that it did not carry on any
business in the purchase and sale of shares. The assessee’s
applications for reference to the High Court-were rejected
on the ground that no question of law arose out of the order
of the Tribunal. It was held that the question whether the
assessee’s business amounted to dealing in shares and in
properties or was merely an investment was a mixed question
of law and fact and the legal effect of the facts found was
a question of law and this Court ordered the case to be
stated on two questions that it framed. One of the
questions was similar to the first question in the present
case but the second question was a wider one, i.e., whether
the profits and losses arising from the sale of shares etc.
could be taxed as business profits.
The question which the High Court had to answer
(1) [1958] S.C.R. 49.
295
in the present case was a narrow one and the answer to that
on the material before the Court was rightly given in the
affirmative. But even if the question is taken to be wider
in amplitude, on the materials produced and on the facts
proved the appellant must be held to have been rightly
assessed. Counsel for the appellant argued that the amounts
received by him in the accounting years were in the nature
of capital accretions and therefore not, assessable. In
support, Counsel for the appellant relied on the following
cases:-Raja Bahadur Kamakshya Narain Singh v. The
Commissioner of Income-Tax, Bihar & Orissa (1) where Lord
Wright observed that profits realised by the sale of shares
may be capital if the seller is an ordinary investor
changing his securities but in some instances it may be
income if the seller of the shares is an investment company
or an insurance company. The other cases relied upon were
Californian Copper Syndicate Limited v. Harris (2); Cooper
v. Stubbs (3); Leeming v. Jones (4) and Edwards v. Bairstow
& Harrison (5). ....It is not necessary to discuss these
cases because..the principle applicable to such transactions
is that...when an owner of an ordinary investment chooses to
realise it and obtains a higher price for it than he
originally acquired it at, the enhanced price is not a
profit assessable to income tax but where as in the present
case what is done is not merely a realisation or a change of
investment but an act done in what is truly the carrying on
of a business the amount recovered as appreciation will be
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assessable.
In July 1948 the appellant had borrowed, though without
interest, a large sum of money to the extent of about Rs.
10,00,000, no doubt from his brother. He started a new
account calling it No. 2 Investment Account. For the
assessment years under appeal shares purchased and sold were
of a large magnitude ranging from Rs. 4.68 lacs to Rs. 69
thousands in what is called the first account and from Rs.
9,64,000 or even if Port Trust Debentures are excluded
(1) [1943] L.R.70 I.A. 180,194. (2) [1904] 5 T.C. 259.
(3) [1925] 10 T.C. 29, 57. (4) [1930] 15 T.C. 333
(5)..[1955] 36 T.C. 207.
296
Rs. 3,60,000 to Rs. 30,000. The magnitude and the frequency
and the ratio of sales to purchases and total holdings was
evidence from which the Income-tax Appellate Tribunal could
come to the conclusion as to the true nature of the
activities of the appellant. The principle which is
applicable to the present case is what we have said above
and on the evidence which was before the Tribunal, i.e., the
substantial nature of the transactions, the manner in which
the books had been maintained, the magnitude of the shares
purchased and sold and the ratio between the purchases and
sales and the holdings, if on this material the Tribunal
came to the conclusion that there was material to support
the finding that the appellant was dealing in shares as a
business, it could not be interfered with by the High Court
and in our opinion it rightly answered the question against
the appellant in the affirmative.
The second question is wholly unsubstantial. There is no
such thing as res judicata in income-tax matters. The
Appellate Tribunal has placed in a tabulated form the
activities of the appellant showing the buying and selling
and the magnitude of holdings and it cannot be said
therefore that it was not open to the Appellate Tribunal to
give the finding that it did.
In our opinion the High Court rightly held against the
appellant. The appeals are therefore dismissed with costs.
One hearing fee in this Court.
Appeals dismissed.
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