Full Judgment Text
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PETITIONER:
RAJA BAHADUR KAMAKHYA NARAIN SINGH
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX BIHAR AND ORISSA
DATE OF JUDGMENT:
01/09/1969
BENCH:
SHELAT, J.M.
BENCH:
SHELAT, J.M.
VAIDYIALINGAM, C.A.
CITATION:
1971 AIR 794 1970 SCR (2) 163
1969 SCC (3) 791
CITATOR INFO :
RF 1986 SC1695 (35)
ACT:
Capital or Income-Purchase and sale of gold and shares-
Principles for deciding whether profit on transactions is
revenue or capital receipt-Question is of mixed fact and
law-High Court in reference not barred from going into
findings of Tribunal on such question on the ground that it
is one of fact and therefore final.
HEADNOTE:
The assessee inherited a vast estate consisting of
agricultural and other land as also Government securities
worth Rs. 40 lacs. In 1937 he attained majority and control
of the estate from the Court of Wards. In the accounting
year 1938-39 he sold some of these securities at a profit.
Thereafter he opened an account in the Imperial Bank of
India in the name of his wife and called it "account of 48
lacs floating in the share market." In September 1939 he
purchased shares worth Rs. 34.14 lacs out of the said fund
but sold them, again at a profit in the Years 1939’, 1940’
and 1941. The profits on the said sales of shares were
subjected to tax by the Income-tax Officer in the years
1939-40, 1940-41 and 1941-42. The Tribunal however held
that the asessee was not a dealer in shares anti’ held the
profits not to be taxable. Between June. and November 1940
the assessee purchased gold for Rs. 28.47,380/--from out of
the sale proceeds of the aforesaid shares. This gold was
sold ’at a profit in the accounting periods relevant t0 the
1945-46 and 1946-47 assessment years. With the sale
proceeds certain shares including 7,025 shares of Karanpura
Development Co. Ltd. were purchased, most of which were sold
at a profit. Certain Victory Bonds were purchased and
resold within two months. The Income-tax Officer subjected
the profits from the sales of gold and Karanpur shares to
tax in the assessment years 1945-46 and 1946-47. The
Tribunal on ,considering the whole pattern of transactions
from 1938 onwards came to the conclusion that the said’
profits were rightly taxed. The High Court upheld the view
of the Tribunal holding inter alia, that the findings were
of fact and not arrived at without evidence so that no
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interference was warranted in reference proceedings. The
assessee appealed.
HELD: (1) When a transaction is not in the ordinary
lines of an assessee’s business the facts must be properly
assessed to discover whether it was in the nature of trade.
The test often applied’ is--has the assessee made his shares
and securities the stock-in-trade of a business ? [171 G;
172 H]
(ii) Since in the present case the Tribunal had the
advantage of examining the assessee’s transactions during
the whole period i.e. right from 1938-39 to 1944-45 and thus
had more comprehensive picture of all the transactions,
there would be no bar to its coming to a conclusion
different from that arrived at in the earlier years. if the
acts and conduct of the assessee taken as a whole throughout
the period pointed to a different conclusion. [174 A--B]
(iii) On the facts and circumstances of the case,
however the finding of the Tribunal, concurred in by the
High Court, that the transactions in question were in the
nature of trading transactions, was not justified. [174
C--D]
164
(a) It is a notorious fact that in 1940 the fortunes of
the allies were none too bright. The conversion by the
assessee of his entire share holding into gold in that year
was consistent with his case that he did so because of the
nervousness engendered by the breaking out of the war, the
initial German victories, and the fall of France.. The fact
that the assessee did not invest all his cash would not
mean, ’as the Tribunal thought, that his case about the
purchases of go1d was not correct. [174 D--F]
The Tribunal also failed to give due significance. to
the fact that the assessee who started with the plan of
getting ’at least net 7% yield, put a very large part of his
funds into gold, an altogether sterile security, and
retained it for 4 years. The price of gold began to rise in
1941 and was at its peak in 1943. The fact that the
assessee did not sell his gold then but only in October 1944
when the price had fallen showed that it was only after the:
fortunes of war had turned in favour of the allies and
confidence restored that he felt it safe to invest his money
in income-beating securities. The further fact that he sold
practically the whole of his stock of gold in October 1944
instead of reselling it bit by bit after the price was
rising since 1942 was inconsistent with the hypothesis that
the object with which the go1d was purchased was to trade in
it. [174 G--H; 175 A--D]
(b) The fact that the account in the Imperial Bank
opened in 1939 was called "Rs. 48 lacs floating in the share
market" was given undue significance by the Tribunal.
Properly viewed it only meant that the assessee wanted to
set apart this fund for transactions in shares and
securities and not mix up his other capital and the income
arising from his estate. [175 D--E]
(c) The sale of the. Victory Bonds within two months of
their purchase would not invest the transaction with the
stamp of trade or business they were only purchased to show
to the authorities that his estate had made a contribution
to the war effort. [175]
(d) The Karanpur shares were purchased by the assessee
with a view to getting control over the company’s management
by procuring 51% of its total shares. When that plan failed
he sold these shares. In these circumstances the
transaction could not be considered to be on revenue
account. [175 G--H; 176 D]
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Kishan Prasad & Co. Ltd. v.C.I.T., (1955) 27 I.T.R. 49
and C.I.T.v. National Finance Ltd. (1962) 44 I.T.R. 788,
’applied.
(e) The expression ’adventure in the nature of trade’
implies the existence of certain elements in the
transactions which in law would invest them with the
character of trade or business. The question therefore
whether a particular transaction is an adventure. in the
nature of trade is a mixed question of law and fact and the
court can review the Tribunal’s finding thereon. Therefore
in the present case the High Court was wrong in treating the
Tribunal’s decision as a finding of fact and refusing to
interfere on that ground. [171 A--C]
Venkataswami Naidu & Co. v.C.I.T., (1959) 35 I.T.R. 594,
603, 604 and Liquidators of Pursa Ltd. v.C.I.T., (1954) 25
I.T.R. 265, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 481 and
482 of 1966.
Appeals by special leave from the judgment and order,
dated April 15, 1963 of the Patna High Court in Misc.
Judicial Cases Nos. 342 and 346 of 1954.
165
S.T. Desai and D.N. Mukherjee, for the appellant (in
both the appeals).
Jagadish Swarup, Solicitor-General, S.K. Aiyar, R.N.
Sachthey and B.D. Sharma, for the respondent (in both the
appeals).
The Judgment of the Court was delivered by
Shelat, J. These two appeals, under special leave, arise
from two References to the High Court of Patna under s.
66(2) of the Income Tax Act, 1922 and relate to the
assessment years 1.945-46 and 1947. In the first appeal,
the question arising for determination is whether, on the
facts and circumstances of the case, the surplus receipt of
Rs. 13,43,469/-, realised as a result of the side of gold,
is assessable as income, or profits or gains for the
assessment year 1945-46 under s. 4(3) (vii) of the Act. In
the 2nd appeal, two questions arise for determination; one
relates to the surplus receipt of Rs. 33,481/- arising out
of the sale of some more gold, and the second relates to the
receipt of Rs. 88,522/- realised by the assessee as a
receipt as a result of sale of certain shares. All the three
questions raise the common problem whether the said
transactions in gold and shares were by way of realisation
of investment or were adventures in the nature of trade or
business.
The assessee was at all material times a landholder
deriving large income from agriculture, royalties of
minerals and income from forests forming part of his estate.
Prior to 1937, when he was a minor, his estate was under the
management of a Court of Wards. On attaining majority, the
estate, which included Government securities of the value
of about Rs. 40 lacs, was handed over to him on August 19,
1937. During the account year 1938-39 he sold the whole.
lot of these securities and realised Rs. 44,25,088/-, the
sale thus resulting in an excess of Rs. 4,55,305/-. This
excess amount was assessed as profit by the income-tax
officer for the assessment year 1939-40. But on appeal
against the assessment order, the Appellate Tribunal set
side that order on a finding that the said sale was by way
of a change in investment, and therefore, was not a
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transaction in the nature of trade or business. On March
23, 1939, the assessee opened an account in the Imperial
Bank of India initially with Rs. 46 lacs, which included the
said sale proceeds of Rs. 44 lacs ’and odd and to which on
March 27, 1939 he added Rs. 2.60 lacs. The account was
opened in the name of his wife and was called "Account of
Rs. 48 lacs floating in the share market’’’ In September
1939, the assessee purchased shares and debentures of the
value of Rs. 34.14 lacs from out of the funds in the said
account. He, however, sold certain shares for Rs.
5,75,723/- in October 1939, and then the rest of them in
1940 and 1941 realising Rs. 29,58,677/- and
166
Rs. 64,201/- respectively. The first sale fetched a proFit
of Rs. 1,17,064/- the second a profit of Rs. 25,133 and the
third a loss of Rs. 1,642/-. The income-tax officer brought
to tax the two surpluses in the assessments for the
assessment years 1940-41 and 1941-42. But the department
was again unsuccessful as the Tribunal once again held, on
the strength of the correspondence which had passed between
the assessee, his bankers axed his brokers in Calcutta, that
the only possible conclusion emerging from that
correspondence was that the assessee’s intention was not to
deal in shares and debentures, and that the said
transactions were a mere change in investment carried out of
a single scheme of earning a better yield from investments.
The Tribunal’s orders in respect of these assessments for
the assessment years 1939-40 to 1941-42 were made part of
the Statement of Case filed by the Tribunal be,fore the High
Court in the present References.
Between June 28, 1940 and November 9, 1940 the assessee
purchased 68,109 tolas of gold for Rs. 28,47,380/- from out
of the sale proceeds of the said shares. The gold so
purchased was kept in his family vaults at Padma, the seat
of his estate, for nearly 4 years. Between October 9, 1944
and October 20, 1944, he disposed of the bulk of the
gold, i.e. 55,494 tolas, for Rs. 36,80,174/-, the sale
resulting in a surplus of Rs. 13,43,469/-, which is the
subject-matter of the first appeal. The remaining quantity
of gold was sold of October 19, 1945, and that sale brought_
him an excess of Rs. 33,481/-, which is part of the
subject-matter of the second appeal.
In respect of these two surplus amounts, the assessee
contended that they were the result of a change in
investment and could not be said to be transactions in the
nature of trade or business. His case was that neither the
Government securities, nor the shares and debentures
purchased out of their sale proceeds, nor the gold were sold
and purchased by way of dealing in them, that at no time
they became his stock-in-trade for any business or
adventures in the nature of trade or business therein, that
the transactions were mere conversions from one investment
to another, depending upon the circumstances which prevailed
during the respective periods and that the sale of gold in
1944 and 1945 was occasioned partly due to the tide in the
second world war turning in favour of the ,allies and partly
due (a) to his having to pay Rs. 7 lacs by way of income-
tax, (b) expenses for the marriage of his younger brother,
(c) for payment of Rs. 6 lacs debt to one Gupta and (d) for
purchase of Victory Bonds worth Rs. 14 lacs and odd ’at the
instance of the Government authorities as contribution of
his estate to the war effort.
The Tribunal rejected the case that gold had been sold
for the reasons given by the assessee or as a change in
investment and
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167
held that: (1 ) conversion of shares into gold was not due
to any panic resulting from the war, (2) that there was no
pressing necessity for the sale of gold as alleged by him,
(3) that Victory Bonds were not by way of any war effort
since the assessee sold them away within a short time after
their purchase, and (4) that he sale proceeds of gold were
utilised in purchasing shares for which he borrowed an
additional amount of Rs. 5.10 lacs in 1945-46 against
gold. in this view the Tribunal confirmed the I.T.O.’s
decision that the two excess amounts were liable to income
tax in the two assessment years.
The sale proceeds of gold sold as aforesaid were utilised by
the assessee in purchasing 7(325 shares of Karanpura
Development Co. Ltd. for Rs. 2,37,267/- during the period
from December 8, 1944 to April 20, 1945 and shares of Bokaro
Ramgur Co. for Rs. 39,81,663/- purchased in 1945-46. Part
of the sale proceeds were ’also. utilised in purchasing the
said Victory Bonds. between November 8, 1945 and February
21, 1946, he sold 6950 of the Karanpura shares realising a
net surplus of Rs. 88,522/-, which the Income Tax Officer
treated as business profit and brought to tax for the
assessment year 1946-47.
As the Statement of Case by the Tribunal shows, the
Tribunal examined the assessee’s dealings since the time he
took over the said estate. The Tribunal noted that the said
shares were purchased from the said Rs. 48 lacs in the Bank
reserved ,for that purpose and that they were sold and
purchased at very short intervals. From these facts it held
that he must be considered to have launched a scheme in
dealing in shares, which conclusion, it thought, was
strengthened by the fact of the assessee having borrowed
Rs. 5.10 lacs for the said purpose. The Tribunal further
held that the complete picture of the said transactions over
a length of time had not ’been before the preceding Tribunal
when it passed the earlier orders for the assessment
years 1939-40 to 1941-42, and therefore, its conclusions
were not applicable to the transactions in question. It
consequently held the assessee to be a dealer in shares. As
regards the gold ,also, the Tribunal confirmed the orders of
the I.T.O. rejecting the assessee’s case that the gold
was purchased by him owing-to the war crisis and sold by
him on account of the pressing necessities alleged by him
and the change in the war situation then.
By an order dated April 2, 1959, the High Court referred
that statement of Case back to the Tribunal under s. 66(4)
directing it to consider further all the materials before it
and file a supplementary Statement of Case as the High Court
found the Statement factually incorrect in certain respects.
The Tribunal accordingly sent a supplementary Statement of
Case on April 23, 1960.
After setting out the assessees transactions of the sale of
Government securities in 1938-39, the purchase of shares
from
168
their sale proceeds, their sale in 1939-40 and 1940-41, the
purchase of gold ’and its sale, the Tribunal once again
rejected the assessee’s claim that those transactions were
conversions of one investment to another made for a better
return or that the gold was sold in October 1944 for
pressing necessities alleged by the assessee. Regarding the
purchase and sale of shares, the Tribunal stated that the
assessee purchased shares of the value of Rs. 37 lacs and
odd in1945-46, that those were shares of two, concerns only,
Bokaro, and Ramgur Co. Ltd. and Karanpura Development Co.
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Ltd. and that as the latter company’s shares were of the
value of Rs. 2,37,267/- only, the ’bulk of the amount of Rs.
37 lacs and odd went into the purchase of the shares of
Bokaro: and Ramgur Co.. Ltd. The Tribunal noted that the
sale of Karanpura shares resulted in a net profit of Rs.
88,522/-, that in respect of the Karanpura shares there
was correspondence showing that his brokers had advised
him to acquire 51% of the company’s share holding as he
desired to obtain control over its management, that for
doing so he wanted to obtain founders’ shares (each of which
shares carried 3 votes per share), that a compromise was
proposed in a suit he had filed as the lessor of the mines
leased out to the company, that M/s. Bird & Co., the
managing agents of that company, were not willing to. sell
him shares representing the unissued capital of the company
on terms proposed by the assessee and that ultimately he
failed to obtain majority of shares which only could have
enabled him to obtain control over the company’s management.
But the Tribunal found that "the assessee was attempting to
obtain control of the company not by purchasing of shares in
the market, but by issue of shares by the company in order
to settle the dispute between the company and the assesses
These negotiations finally failed." It finally held that
having perused the correspondence and having regard to the
circumstances, the purchase of Karanpura shares was not in
pursuance of a scheme to obtain control over the company by
acquiring 51% of the votes therein.
The High Court, after hearing the: References, held that
though the Tribunal had in the earlier assessments held that
the assessee’s transactions in shares, securities and gold
did not amount to transactions in the nature of trade or
business, and therefore, the assessee could not be treated
as a dealer- in those articles. There was no bar to the
revenue coming to a different conclusion, though to do so
it must have some new materials and facts before it. It
further held that the present Tribunal could a/so arrive at
such a conclusion having regard to: (a) the frequency of
transactions of purchase and sale of shares, (b) the short
interval between purchase and sale of shares, (c) the fact
of Rs. 48 lacs in the assessee’s wife’s account having been
ear-marked for shares transactions, (d) his borrowing Rs.
5.10 lacs ’against gold for purchase
169
of shares, and lastly, the fact that the Tribunal this time
had before it a more complete picture of the assessee’s
transactions over a length of period which its predecessor
had not when it dealt with the assessments for the
assessment years 1939-40 to 1941-42. The High Court
further held that there was fresh material, namely, that
when the gold was sold, its sale proceeds were again
invested in shares and the fact that though Victory Bonds
were purchased in January 1945 they were sold after an
interval of two months only. The High Court, in this view,
concluded that "the Appellate. Tribunal, therefore had
before it fresh materials for coming to a conclusion
contrary to the one come by its predecessors in the
previous orders." It rejected the assessee’s case: (a)
that he had converted one investment into another, i.e. from
shares and securities to gold, because of the worsening of
the war situation after the fall of France in 1940, (b) that
when the war situation improved in 1944 and with that the
price of gold began to fail he once again converted his
investment from gold to shares, i.e., from an unproductive
investment into one which could give him an adequate yield,
and (c) that he had sold gold because of pressing
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necessities. The first contention was held unsustainable
because even after purchasing gold the assessee had
retained considerable cash; the second was rejected on the
ground that the assessee had sold gold not because of the
allied victory in sight but because he found the gold
unprofitabIe by reason of the fall in its price and the
third was rejected as the assessee had failed to make_good
the pressing necessities alleged’ by him. The High Court
further held that the findings given by the Appellate
Tribunal were all findings of fact and as they could not be
said to have been arrived at without any evidence they
could not be interfered with in a Reference under s. 66(2),
and answered the questions as to the two surplus amounts of
Rs. 13 lacs and odd and Rs. 33 thousand ’and odd as liable
to assessment. In regard to the excess of Rs. 88,522/_
resulting from the sale of’ Karanpura shares, the High Court
agreed with the Tribunal that that amount also was rightly
brought to tax. It held that the finding of the Tribunal
that the purchase of these shares was not in pursuance of a
scheme to obtain control in the company and that the
assessee’s scheme for that purpose was to acquire shares
representing the unissued capital of the company was one of
fact with which also it had no jurisdiction to interfere.
Counsel for the appellant disputed the correctness
of the High Court’s judgment and contended: (1 ) that it
was in error in declining to go into the correctness of the
findings of the Tribunal by merely stating that they were
findings of fact, (2) that the question whether a particular
item was a trading profit or capital accretion depended on
the intention on the part of the assessee at the time of
the transaction in question and which had
Sup CI/70--12
170
to be arrived at by an inference from established facts and
was, therefore, a mixed question of fact and law, (3) that
on the facts and circumstances, the Tribunal, and following
it the High Court, was in error in treating the gold and
the Karanpura shares as the stock-in-trade of the assessee
for his alleged trading activities, (4) that the onus of
proving that the activities of the assessee amounted to
activities in the nature of trade or business was on the
department and particularly so,, as the Tribunal in the
earlier assessments had come to a contrary conclusion, and
(5) that the facts and circumstances as accepted by the
Tribunal in its Statement of Case showed that the purchases
of gold and share were made without any intention at that
time to resell them at profit, and that therefore, the
subsequent sales thereof would not stamp those transactions
with the character of trade or business in them.
Since these appeals arise out of References under s.
66(2), we cannot exercise any wider power of interference
than that permitted to the High Court under the Act. That
was not disputed by Mr. Desai. But in support of his
contention that this was a case’ where the High Court could
and should have interfered with the Tribunal’s findings he
cited a number of decisions. It is not necessary to go into
all these decisions as the principles on which such
interference can be made and the scope of power under s. 66
to do so are by now well established. That the question,
whether an assessee carries on business or whether certain
transactions are in the course of business or whether they
amount to adventures in the nature of trade or business, is
a mixed question of fact and law is well-settled. The
decision in Venkataswami Naidu & Co. v.C. 1. T.(1) is an
instance in point where this Court observed that the
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expression ’adventure in the nature of trade’ appearing in
the definition of ’business’ implies the existence of
certain elements in the .adventure which in law would
invest it with the character of trade and that renders the
question whether a transaction ’is in the nature of trade a
mixed question of law and fact and the High Court in such a
case would interfere if the Tribunal had misdirected itself
in law of ’also Liquidators of Pursa Ltd. rs. C.I.T.)(2).
But to distinguish a question of fact and a question of law
is not always easy, for, sometimes there is a common area
between the two and though a mere question of fact can be
turned into one of law, care should be taken against a
finding of a mixed question of fact and law being given the
unassailability which the Act confers on a pure finding of
fact. The case of Sree Menakshi Mills Ltd. v.C. 1. T.(3)
holds that where an ultimate finding on an issue is an
inference to be drawn from facts found, on application
of a principle of law, there is a mixed question of law and
fact and such an inference in such a
(1) (1959) 35 I.T.R. 594 at 603 to 604. (2) (1954) 25
I.T.R. 265. (3) (1957) 31 I.T.R. 28.
171
case is a question of law open to review by the court. On
the other hand, when the final determination of the issue
does not involve any application of a principle of law, an
inference is a pure inference of fact drawn from the other
basic facts. Such an inference can be attacked only if
there is no evidence to support it, or, if it is perverse.
Since the expression ’adventure in the nature of trade’
implies the existence of certain elements in the
transactions which in law would invest them with the
character of trade or business and the question on that
account becomes a mixed question of law and fact, the Court
can review the Tribunal’s finding if it has misdirected
itself in law.
It is fairly clear that where a person in selling his
investment realises an enhanced price, the excess over his
purchase price is not profit assessable to tax But it would
be so, if what is done is not a mere realisation of the
investment but an act done for making profits. The
distinction between the two types of transactions is not
always easy to make The distinction whether the transaction
is of one kind or the other depends on the question whether
the excess was an enhancement of the value by realising a
security or a gain in an operation of profit making. If the
transaction is in the ordinary line of the ’assessee’s
business there would hardly be any difficulty in concluding
that it was a trading transaction, but where it is not, the
facts must be properly assessed to discover whether it was
in the nature of trade. The surplus realised on the sale of
shares, for instance, would be capital if the assessee is an
ordinary investor realising his holding; but it would be
revenue, if he deals with them as an adventure in the nature
of trade. The fact that the original purchase was made with
the intention to resell if an enhanced price could be
obtained is by itself not enough but in conjunction with the
conduct of the assessee and other circumstances it may point
to the trading character of the transaction. For instance,
an ’assessee may invest his capital in shares with the
intention to resell them if in future their sale may bring
in higher price. Such an investment, though motivated by a
possibilty of enhanced value, does not render the investment
a transaction in the nature of trade. The test often
applied is, has the assessee made his shares and securities
the stock-in-trade of a business.
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Though the assessee was at the material time a
landholder of a large estate, that fact by itself would not
mean that his transactions in shares, securities and bullion
cannot be transactions in the nature of trade. They had,
therefore, to be examined in the light of all the facts
and circumstances to ascertain whether they had been entered
into in pursuit of a trading activity. The first relevant
,fact iS that the assessees occupation was that of a
landholder, having, on attaining majority, a considerable
amount of money available for raising income therefrom. The
transactions
172
in question were obviously not in the line of any business
or trade carried on by him. Since the Tribunal came to a
conclusion as regards the nature of the assessee’s
transactions different from that arrived at earlier, it
would be useful to tabulate them at one place. So
tabulated, they are as follows:
(1) Sale of Government securities in 1938-
39 which
realised Rs. 44.25 lacs;
(2) Opening of an account with this and
certain other amounts totaling Rs. 48 lacs in
the Imperial Bank;
(3) Purchase out of these funds, shares
and debentures of the value of Rs. 34.14 lacs
in September 1939;
(4) Sale in October 1939, i.e., within a
month, of some of these shares bringing him
Rs.. 5.75 lacs;
(5) Sale of the bulk of the shares in 1940
bringing in Rs. 29.58 lacs;
(6) Sale of the remaining shares in 1941
resulting in a small deficit;
(7) Purchase of 68,109 tolas of gold in
June 1940 for Rs. 28.47 lacs;
(8) Sale of the bulk of the gold, i.e.,
55,495 tolas in October 1944 resulting in a
surplus of Rs. 13 lacs and odd;
(9) Sale of the remaining gold in October
1945 resulting in a surplus cf Rs.. 33,481/-;
(10) Purchase of Karanpura shares between
December 1944 and April 1945 of the
value of Rs. 2,37,267/-;
(11 ) Purchase of Victory Bonds in January
1945 of Rs. 14 lacs, and sale thereof in March
1945;
(12) Borrowing Rs. 5.10 lacs against gold in
1945-46;
(13) Purchase of Bokaro Ramgur shares in
1945-46 for Rs. 39.81 lacs and
(14) Sale of Karanpura shares in 1945-46
bringing in a surplus of Rs. 88,000 and odd.
As already stated, though these transactions were not in the
line of any trade of business carried on by the assessee,
nonetheless, if they possess the characteristics of
adventures in the nature of trade, the profits resulting
therefrom would be liable to tax. But in an enquiry on the
question whether these transactions were in the nature of
trade or business, it would not be altogether irrelevant
173
to notice that in 1938-39, when the assessee sold the
Government securities, he sold the entire lot and invested
the bulk of their sale proceeds in shares and debentures,
i.e., as much as Rs. 34 lacs. The same features is present
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also in his purchase of gold in 1940 and its disposal in
1944 and 1945 using its sale proceeds in buying shares,
which, it must be remembered, were of two companies only.
The transactions thus are not diversified nor are gradual
according to the opportunities offered by fluctuating market
prices, but are in bulk and almost at a time, which
ordinarily are not the characteristics of the dealings of a
person carrying on trade or business in them. Thus, in
1938-39 all Government securities were sold and the bulk of
their sale proceeds, i.e. Rs. 34 lacs and odd, used in the
purchase of shares. The same was the case when gold was
bought ’and sold. Furthermore, when a person trades in
shares and debentures, he does not ordinarily buy shares of
two companies only, except when a particular script has the
possibility of giving an unusual or a certain profit. There
was nothing on record to show, nor did the Tribunal find,
that that was the case with the shares of either of the two
companies whose shares the assessee purchased in such large
quantity. Prima facie these transactions would appear in
the nature of investments and their conversion into what the
assessee believed to be better investments as the
circumstances changed from time to time.
In support of his contention that these transactions
were not in the nature of trade or business, the assessee
had relied on the correspondence between him on the one hand
and his bankers and brokers on the other, which had
satisfied the Tribunal previously with reference to the
assessment years 1939-40 to 1941-42. That correspondence
lends support to the assessee’s case inasmuch as he had
there in clearly instructed his brokers to invest the sale
proceeds of the said Government securities in such a way as
to give him an annual yield of net 7%. There can be no
doubt that Government securities were sold accordingly and
shares of certain companies were purchased from their sale
proceeds in accordance with the advice of his brokers and
bankers. When it was found that certain shares so purchased
were not Likely to yield the percentage he desired, they
were sold within hardly a month from their purchase. The
circumstances in which these transactions were brought
’about, would disclose, as was held by the previous Tribunal
in the case of the earlier assessments, that the assessee’s
intention then was to change his investments from Government
securities into shares and debentures which, he was advised,
would procure him a better yield. This conclusion is
consistent with his sale of the entire lot of Government
securities ’at ’a time, his going in for shares with their
sale proceeds and the sale in October 1939 of certain
shares which were found incapable of giving the return he
desired.
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Since the present Tribunal had the advantage of
examining the assessee’s transactions during the whole of
the period, i.e., right from 1938-39 to 1944-45 and thus
have a more comprehensive picture of all the transactions,
there would be no bar to its coming to a conclusion
different from that arrived at in the earlier years, if the
acts and conduct of the assessee taken as a whole throughout
the period pointed to ,a different conclusion as both the
Tribunal and the High Court have said. But the only new
materials pointed out by the Tribunal from which a different
conclusion could be arrived at were (1) the sale of gold in
1944 and 1945, (2) the purchase of the said shares from its
sale proceeds, and (3) the sale of Karanpura shares.
The question, therefore, the Tribunal had before it
was, whether when the assessee purchased the gold he did so
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with the intention to deal in it. The Tribunal held, and
the High Court concurred with it, that the assessee’s
transactions showed that they were in the nature of trading
transactions. Two facts, however, throw considerable doubt
on the validity of that conclusion and neither the Tribunal
nor the High Court seems to have weighed them with the
consideration which they demand. The first fact is that in
1940 he converted his entire share-holding into gold, a fact
consistent with his case that he did so because of the
nervousness engendered by the breaking out of the Second
World War, the initial German victories and the fall of
France. The Tribunal did not countenance this case for it
thought that if that was so, the assessee would have
invested the other cash lying with him also in gold, and
secondly because according to it the war panic started in
1942 and not in 1940. We do not think that this was an
accurate ’approach. The fact that the assessee did not
invest all his cash cannot mean, as the Tribunal thought,
that his case about the purchase of gold was not correct.
The war had commenced in 1939 and it is a notorious fact
that in 1940 the fortunes of the allies were none too
bright. The fact was that the assessee sold his entire
share-holding and applied their sale proceeds and also a
further amount of Rs. 13 lacs and odd obtained ,from his
lessees, M/s Anderson Wright & Co., into. gold. The second
fact, whose significance does not also seem to have been
adequately apprehended, was that the assessee, who started
with the plan of getting at least net 7% yield, put a very
Large part of his funds into gold, an altogether sterile
security, and retained that gold in his family vaults ,for
nearly 4 years. The Tribunal had before it the gold prices
current during the years 1940 to 1944. These indicate that
the gold price remain steady at Rs. 42 per tola all
throughout 1940. There was, however, an upward trend
noticeable from about the end of 1941 which went up to Rs.
65 towards the end of 1942. By the middle of 1943 the gold
price had risen to Rs. 90 and even more. In October 1944,
when the assessee sold
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a large bulk of his gold holding the price was at Rs. 68 per
tolaIf the idea of the assessee in purchasing the gold was
to trade in it, he would not have waited for 4 years without
disposing of a particle of it. The price was on the upward
trend in 1941 and reached the climax in 1943 when he could
have sold the gold and made considerable gain. The fact
that he did not do so and waited until October 1944 the war
fortunes were turning in favour of’ the allies, that
confidence had gradually been regained by trading circles
and that that was why he thought that it was no longer
necessary for him to retain the ,gold any further and could
safely invest his money in income-bearing securties. The
further fact that he sold practically the whole of his stock
of gold in October 1944 instead of selling it bit by bit
when the price was rising since about the end of 1942 is
inconsistent with the hypothesis that the object with which
the gold was purchased was to trade in it.
Regarding share transactions, we think that the
Tribunal placed undue emphasis on the fact that when he
opened the bank account in March 1939 with the sale proceeds
of Government securities, he did so, firstly, in the name of
his wife ’and, secondly, called that account as one of "Rs.
48 lacs floating in the share’ market". The first had no
particular significance and the second properly viewed only
meant that he wanted to set apart this fund for transactions
in shares and securities and not mix up his other capital
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and the income arising from his estate. The name he gave’ to
this account cannot for that reason only render his dealing
with that account into trading transactions if otherwise,
they were not.
Similarly, the Tribunal was unduly impressed by the fact
that he sold away the Victory Bonds within about two months
from their purchase. The correspondence produced by the
assessee clearly shows that he had bought those Bonds at the
pressure of the then Commissioner. The Bonds were not
likely to fetch him the yield he desired. His purchase of
them had thus served the purpose, viz., his showing to the
authorities that his estate had made a war contribution.
The sale by him of those Bonds would not affect the
Government or its war effort. The fact that he sold’ them
soon after the purchase would not invest it with the stamp
of’ trade or business in Victory Bonds.
As regards the Karanpura shares, the correspondence
between him and the company and the advice he had from his
brokers referred to in the Statement of Case show that the
assessee did at one time entertain the idea of obtaining
control over the company’s management by procuring 51% of
its total shares. He could do so by purchasing shares in
the open market and also, by other means. He purchased
7,025 shares in the market but that ,was clearly not enough.
There was at that time litigation going on_
176
between him and the company and he seems to have hit upon
the idea that he would compromise his suit if the managing
agents of the company were to sell him shares representing
its unissued capital at prices offered by him. The object
of his offer was that he would not have to pay the market
price of the shares which was 3 times more than the one
offered ’by him. The company did not agree and his move for
compromise ,failed. According to him, there was, therefore,
no useful purpose for retaining those shares and he sold
6,950 shares leaving only 75 shares with him. On these
facts the Tribunal was not right in concluding that the
shares which the assessee purchased from the market were not
for the purpose of acquiring the major share-holding in the
company and that the control over the company was to be
obtained only by purchasing shares representing the unissued
capital. Both the purchase of shares and the move to obtain
shares representing the unissued capital were part of the
same design and if the latter ’failed, his purchase of
7,025 shares would obviously not bring him nearer his
object. Furthermore, the bulk of the sale proceeds of gold
went into the purchase of Bokaro. Ramgur shares which
remained with him till the assessment years in question. The
profits made on the sale of shares, acquired with the
intention of obtaining control over the company’s management
and not for dealing in them, would be on the capital and not
revenue account. (see Kishan Prasad & Co. Ltd. v.C.I.T.(1)
and C.I.T. v. National Finance Ltd. (2). The Statement of
Case itself set out facts which were consistent with the
assessee’s case.
In our view the Tribunal misdirected itself in applying
the law to the facts ,found by it both in the matter of gold
and shares, and the High Court would have been entitled to
interfere with its findings instead of holding that it
could not do so as the findings were findings of fact. The
questions involved being mixed questions of fact and law,
the hypothesis on which the High Court acted that the
findings were purely findings of fact and therefore ’were
unassailable was in our view not correct.
The appeals, therefore, will have to be allowed and the
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answers given by the High Court set aside. We hold that
the two questions referred to the High Court should have
been answered in assessee’s favour and we do s0
accordingly. The respondent will pay to the appellant costs
of these appeals but only one hearing fee.
(3.C. Appeal allowed.
(1) (1955) 27 I.T.R. 49. (2) (1962) 44 I.T.R. 788.
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