Full Judgment Text
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PETITIONER:
M/s. RAMNARAIN SONS (Pr.) LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, BOMBAY
DATE OF JUDGMENT:
05/12/1960
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION:
1961 AIR 1141 1961 SCR (2) 904
CITATOR INFO :
E 1962 SC1267 (7,10,11)
R 1963 SC 835 (21)
RF 1968 SC 761 (7)
RF 1970 SC 529 (7)
E 1973 SC 182 (12)
RF 1986 SC1695 (30)
ACT:
Income Tax--Assessment--Purchase of shares for acquiring
managing agency rights--Loss incurred in sale of such
shares--If of a capital nature.
HEADNOTE:
The appellants, a private limited company, carrying on
business as brokers, managing agents and dealers in shares
and securities and having as one of their objects the
acquisition of managing agencies, purchased shares of
the Dawn Mills at a rate much higher than the market rate
for obtaining the controlling voting right and thereby
acquired the managing agency of the Mills. Later on, they
sold-some of those shares and suffered a loss of Rs.
1,78,438. The Income-tax Officer in assessing the taxable
income disallowed the loss and the Appellate
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Assistant Commissioner on appeal confirmed that order. The
Income-tax Appellate Tribunal held that the shares did not
become stock-in-trade of the appellants, but since the loss
incurred was incidental to their business of acquiring
managing agency, it was allowable as a revenue loss. On
reference, the High Court held that the shares acquired by
the appellants were a capital asset and the loss suffered by
the sale was of a capital nature.
Held, that the High Court had taken the correct view of the
matter and the appeal must fail.
The question whether a transaction is or is not an adventure
of the nature of trade has-to be decided in the light of the
intention of the assessee judged by the legal requirements
associated with the concept of trade or business.
Since the shares in question were purchased by the appel-
lants with the intention of acquiring the managing agency
and not in the course of their business as dealers in shares
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with the intention of trading in those shares and what was
acquired by such purchase was a capital asset in the shape
of a managing agency, it could not be said merely because
the managing agency could be utilised for earning profits,
that those shares were stock-in-trade of their share
business.
G.Venkataswami Naidu and Co. v. The Commissioner of Income-
tax, [1959] Supp. 1 S.C.R. 464 and The Oriental Investment
Co., Ltd. v. The Commissioner of Income-tax, Bombay, [1958]
S.C.R. 49, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION; Civil Appeal No. 698 of 1957.
Appeal by special leave from the judgment and order dated
August 2, 1956, of the Bombay High Court in Income-tax
Reference No. 1 of 1956.
A. V. Viswanatha Sastri, B. A. Palkhiwala and G.
Gopalakrishnan, for the appellant.
Hardyal Hardy and D. Gupta, for the respondent.
1960. December 5. The Judgment of the Court was delivered
by
SHAH, J.-The High Court of Judicature at Bombay answered the
following two questions referred by the Income Tax Appellate
Tribunal, Bench "B", Bombay, under s. 66(1) of the Indian
Income-Tax Act, 1922:
(1) Whether the acquisition of the managing agency
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of the Dawn Mills Co., Ltd., was in the nature of a it n
"business" carried on by the assessee company?
(2)..If the answer to the first question is in the
affirmative, whether the loss suffered by the assessee
of...company of Rs. 1,78,438 on purchase and sale of 400
shares of the Dawn Mills Co., Ltd., being incidental to its
business of acquiring the managing agency, was a loss of a
revenue nature?,
as follows:
(1)..Acquisition of the managing agency was an acquisition
of a capital asset;
(2)..The loss in respect of the 400 shares was of a capital
nature.
Against the order of the High Court, this appeal is
preferred with special-leave.
The appellants are a private limited company registered
under the Indian Companies Act, 1913, and carry on business
as brokers,managing agents and dealers in shares and
securities. One of the objects for which the appellants
were incorporated was to acquire managing agencies. The
appellants also carried on business in shares of different
companies, and were assessed to income-tax as dealers in
shares and securities.
M/s. Sassoon J. David, & Co., Ltd. were the managing agents
of the Dawn Mills Ltd.-a public limited company-and they
held 2,507 out of a total issue of 3,200 shares. On
September 28, 1946, the appellants purchased from M/s.
Sassoon J. David & Co., Ltd. 1,507 shares of the Dawn Mills
at the rate of Rs. 2,321-8-0 per share and having obtained a
controlling voting right, acquired the managing agency
rights of the Mills. The remaining, one thousand shares
were acquired from M/s. Sassoon J. David & Co., Ltd. by the
Directors of the appellants at the rate of Rs. 1,500. At
the material time, the ruling market price of the shares of
the Dawn Mills was Rs. 1,610. In December, 1946, the
appellants sold 400 out of the shares purchased by them, and
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thereby suffered a loss of Rs. 1,78,438. The loss suffered
by the appellants in the year of account January 1, 1946, to
December 31, 1946, by sale of shares including 400 shares of
the
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Dawn Mills was Rs. 1,92,834. Crediting Rs. 1,05,907 earned
as profit in certain other share transactions, the net loss
suffered in the share transactions in the year of account
amounted to Rs. 86,927. The appellants valued their shares
at the end of the year of account, at cost or market price
whichever was lower. By this method of valuation, the books
of account of the appellants showed a loss of Rs. 7,97,792
which included a loss of Rs. 7,04,000 on the valuation of
the Dawn Mills shares held by the appellants at the end of
the year of account.
In the income-tax assessment for the year 1947-48, the
appellants claimed Rs. 86,927 as loss on sales in trade in
shares and Rs. 7, 97,792 as loss on valuation of stock-in-
trade. The Income Tax Officer, Companies’ Circle III(1),
Bombay, disallowed the loss suffered by the appellants in
the sale of the Dawn Mills shares, because in his view those
shares were purchased by way of capital-investment and the
loss suffered by sale thereof could not be allowed as a
trading loss. He also held that the appellants were not
entitled to depart from the method adopted in earlier years
and to value the closing stock of shares in the year of
account at cost or market price whichever was lower and to
claim the difference between the opening and closing
valuation as a trading loss. The Appellate Assistant
Commissioner confirmed that order. In appeal, the Income
Tax Appellate Tribunal held that the managing agency of the
Dawn Mills was acquired by the appellants as a part of their
business activity and the shares of the Mills having been
purchased in the regular course incidental to their business
of acquiring the managing agency, the loss on the sale of
those shares was allowable as a revenue loss; but the shares
of the Dawn Mills were not, the stock-in-trade of the
appellants’ business and they were not entitled to treat the
difference between the purchase price and the value at close
of the year of those shares, as a trading loss.
Accordingly, the Tribunal allowed Rs. 1,78,438 as loss on
sale of 400 shares of the Dawn Mills., but did not allow Rs.
7,04,000 as loss arising out of the valuation of the Dawn
Mills shares at the
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end of the year of account. On the application of the
Commissioner of Income Tax, the Tribunal referred to the
High Court the questions set out hereinbefore. In the High
Court, the appellants took out a notice of motion for
directing the Tribunal to refer certain questions which the
appellants claimed arose out of the order of the Tribunal
and which the Tribunal did not refer.
The High Court agreed with the opinion of the Tribunal that
the shares of the Dawn Mills were not the stock-in-trade of
the appellants and that those shares were purchased by the
appellants with the object of acquiring the managing agency.
The High Court, however , held that the shares acquired by
the appellants formed a capital asset and the loss suffered
by sale of 400 out of those shares in the year of account
being a capital loss, was not in the computation of income a
permissible deduction. The High Court dismissed the notice
of motion taken out by the appellants.
In considering whether a transaction is or is not an
adventure in the nature of trade, the problem must be
approached in the light of the intention of the assessee
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having regard to the "legal requirements which are
associated with the concept of trade or business". The
inference on this question raised by the Tribunal on the
facts found is of mixed law and fact and is open to
challenge before the High Court on a reference under s. 66
of the Income Tax Act G. Venkataswami Naidu & Co. v. The
Commissioner of Income Tax (1). It was held in The Oriental
Investment Co., Ltd. v. The Commissioner of Income Tax,
Bombay (2), that the question whether the appellants’
transactions amounted to dealing in shares and properties or
to investment, is a mixed question of law and fact, and that
the legal effect of the facts found by the Tribunal on which
the assessee could be treated as a dealer or an investor, is
a question of law. The Tribunal held that the shares of the
Dawn Mills purchased by the appellants did not become their
stock-in-trade. But they held that the transaction
(1) [1959] SUPP. S.C.R. 646.
(2) [1958] S.C.R. 49.
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having been effected in the regular course of the business
of the appellants, viz., the acquisition of managing
agencies, the loss resulting from the sale of shares was
incidental to that business and was a revenue loss. It is
not easy to appreciate the process by which this conclusion
was reached. The shares were purchased for the purpose of
acquiring the managing agency of the Dawn Mills; they were
not purchased in the course of the appellants’ business as
dealers in shares. By purchasing the shares which
facilitated acquisition of the managing agency, a capital
asset was acquired and merely because the managing agency
could be utilised for earning profit, the acquisition of the
shares which led to the acquisition of the managing agency
could not, in the absence of an intention to trade in those
shares, be regarded as acquisition of stock-in-trade of the
share business. The appellants had undoubtedly purchased
the shares of the Dawn Mills with money borrowed at
interest, but that circumstance by itself does not evidence
an intention to trade in the shares. Nor is the fact that
the appellants are dealers in hares and their Memorandum of
Association authorises them to carry on business in shares
of any importance in the circumstances of this case. The
appellants by entering the shares of the Dawn Mills in their
statement of shares in which trading transactions were
carried on could not alter the real character of the
acquisition. The appellants were undoubtedly dealers in
shares; but the transaction in the Dawn Mills shares was ex
facie not a business transaction. The current market rate
at the date of purchase was Rs. 1,610 per share whereas the
appellants acquired the shares at the rate of Rs. 2,321-8-0
per share. Even assuming that the appellants acquired the
entire block of 2,507 shares. from M/s. Sassoon J. David &
Co., Ltd.-the shares transferred to the names of the
Directors being held by them merely as nominees of the
appellants-the price per share was considerably in excess of
the prevailing market rate. The only reason for entering
into the transaction which could not otherwise be regarded
as a prudent business transaction, was the
910
acquisition of the managing agency. If the purpose of the
acquisition of a large block of shares at a price which
exceeded the current market price by a million rupees was
the acquisition of the managing agency, the inference is
inevitable that intention in purchasing shares was not to
acquire them as part of the trade of the appellants in
shares. The Tribunal found that the Dawn Mills’ shares were
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acquired by the appellants for obtaining the managing agency
of the Mills. The agency was acquired by virtue of the vot-
ing power which the appellants obtained having purchased a
very large block of shares, and for acquiring the managing
agency, the appellants did not pay any distinct
consideration. The managing agency is manifestly the source
of profit of the appellants; but the shares purchased and
the managing agency acquired were both assets of a capital
nature and did not constitute stock-in-trade of a trading
venture. If the shares were acquired for obtaining control
over the managing agency of the Dawn Mills, the fact that
the acquisition of the shares was integrated with the
acquisition of the managing agency did not affect the
character of the acquisition of the ;hares. Subsequent
disposal of some out of the shares by the appellants could
also not convert what was a capital acquisition into an
acquisition in the nature of trade.
The High Court was therefore right in holding that the
acquisition of the managing agency was an acquisition of a
capital asset and the loss incurred by sale of the 400
shares was of a capital nature. The High Court was also
right in dismissing the notice of motion for an order
directing the Tribunal to refer the questions suggested by
the appellants. If the acquisition of the shares was not
acquisition of a stock-intrade, but of a capital asset, the
appellants, by valuing the shares at cost or market price
whichever was lower, could not bring the difference between
the purchase price and the valuation made by them into their
trading account.
The appeal therefore fails and is dismissed with costs.
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