Full Judgment Text
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PETITIONER:
STAR COMPANY LIMITED
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA
DATE OF JUDGMENT:
07/08/1969
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
SHAH, J.C. (CJ)
RAMASWAMI, V.
CITATION:
1970 AIR 394 1970 SCR (1) 772
1969 SCC (2) 518
ACT:
Income-Tax--Loss arising in the ordinary course of
business---Assessee carrying on business of buying and
selling shares--Buying certain shares of a company at well
above market price as nominee of associate who acquired
management of company--Selling shares later to associate
at market price--Loss on transaction if in normal course of
business.
HEADNOTE:
The K company, who. were the managing agents of the F
Company, entered into an agreement on May 21, 1952, with the
M Company, whereby the entire share-holding of the K Company
consisting of certain preference and ordinary shares were to
be sold to the M Company or their nominees. The appellant
was a public limited company carrying on the business of
dealing in shares and securities. Some of the preference
shares were purchased, amongst others by the appellant at
Rs. 185 per share and for this purpose the appellant had to
overdraw on its bank account. The market price of the
preference shares at the time was about Rs. 119. After the
agreement was implemented, the M Company became the managing
agents, of the F Company.
On December 23, 1953, the appellant sold the preference
shares to the M Company thereby incurring a loss of Rs.
1,11,816. In its assessment to income-tax the appellant
claimed this loss as arising in the ordinary course of its
business. The Income-tax Officer and Appellate Assistant
Commissioner rejected the appellant’s claim on the ground
that the shares were purchased as a contribution to the
scheme of acquisition of the managing agency of the F
Company by the M Company. The Appellate Tribunal found
however that there was no evidence that the appellant had
been made a pawn in the scheme of acquisition of the
managing agency; but in view of the treatment of the loss by
the appellant as a loss in investment and not a loss on its
stock in trade in its own profit and loss account, the
tribunal held that the shares were not acquired in the
course of the appellant’s share dealing business and
therefore rejected its claim. The High Court, upon a
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’reference, also held against the appellant, ’but expressed
the opinion that the tribunal had not properly considered
the primary facts found by the Income-tax Officer and the
Appellate Assistant Commissioner which clearly showed that
the appellant, an associate of the M Company, had entered
into the transaction relating to preference shares at the
bidding of the M Company and for the purpose of helping
them.
In appeal to this Court it was contended (i) that the
High Court was not entitled to reverse the findings of fact
of the tribunal which were in favour of the appellant since
the department had not challenged these by means of
appropriate proceedings; and (ii) that where a question is
one of mixed ’facts and law, the facts as found by the
tribunal ran.st be accepted as correct; the tribunal had
negatived the finding that the preference shares were
acquired by the appellant as a pawn in the scheme of
transfer of the managing agency of the F Company and it was
not open to the High Court to come to the same conclusion by
not treating the findings of the Tribunal as final.
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HELD: Dismissing the appeal:
(i) The question which was referred to. the High Court
was couched in general terms and was not limited to or
circumscribed by the reasons which had been given by the
Tribunal against the appellant. The question of law on
which reference can be made must arise out of the order of
the Tribunal. Although certain reasons which had appealed
to the Incometax Officer and the Appellate Assistant
Commissioner were not accepted by the Tribunal, it had come
to the conclusion which was material for the disposal of
the appeal. namely,. that the loss in question was not a
loss that arose in the course of the appellant’s business in
share dealing. The question which was referred to the High
Court was framed in the light of this final conclusion and
it was not necessary for the department to apply for and
obtain a reference on a question arising from the reasons
given by the Tribunal in support of its conclusion in
favour of the department. [777 D-G]
(ii) Even if the conclusion of the High Court on the
facts relating to the appellant’s role in the scheme for
transfer of the managing agency to the M Company was not
taken into consideration, the question which was referred to
it had to be answered against the appellant. This was clear
on admitted and proved facts which had some extraordinary
features and led to the irresistible conclusion that
whatever the motives which entered into the appellant’s
acquisition of the shares, they were not bought and sold in
the ordinary course of the business of the appellant as a
dealer in shares. [778 F]
Commissioner of Income-tax, Bombay City Iv. Greaves
Cotton & Co. Ltd., 68 I.T.R. 200: and Oriental Investment
Co. P. Ltd. v. Commissioner of Income-tax, 72 I.T.R. 408;
referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1635 of
1968.
Appeal from the judgment and order dated May 7, 1965 of
the Calcutta High Court in Income-tax Reference No. 205 of
1961.
S. Ray, R.K. Choudhury and B.P. Maheshwari, for the
appellant.
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Jagdish Swarup, Solicitor-General, S.C. Manchanda,
R.N. Sachthey and B.D. Sharma, for the respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by certificate from a
judgment of’ the Calcutta High Court answering the
following question referred to it in the negative and
against the assessee:
"Whether on the facts and in the
circumstances of the case, the loss of Rs.
1,11,816/- suffered by the assessee on the
sale of shares of Fort William Jute Company
Limited was a loss that arose in its share
dealing business."
The assessee is a public limited company. It Carries on,
inter alia, business of dealing in shares and securities.
The profits
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and losses arising from transactions in shares in the
ordinary course of the assessee’s business have always been
treated as profits or losses of the share dealing
business. During the assessment year 1954-55, relevant
accounting period being the financial year 1953-54 the
assessee suffered a loss of Rs. 1,11,816 on the sale of
1,575 preference shares of Fort William Jute Company Ltd.
These shares were purchased on May 22, 1952 at the rate of
Rs. 186 per share from Mugneeram Bangur & Co. and were sold
on December 23, 1953 at the rate of Rs. 115/- per share to
the same company.
The background in which these transactions took place
may be noticed. Kettlewell Bullen & Co. were the managing
agents of Fort William Jute Co. Ltd. On May 21, 1952 an
agreement was entered into between Kettlewell Bullen & Co.
and Mugneeram Bungur & Co. according to which the entire
holdings of Kettlewell Bullen & Co. in the managed company
(Fort William Jute Co. Ltd.) consisting of 6,920 tax-free
cumulative preference shares and 600 ordinary shares were to
be sold to Mugneeram Bangur & Co. or their nominees at the
agreed price of Rs. 185/-’ per preference share and Rs.
400/- per ordinary share. Pursuant to .this agreement
Kettlewell Bullen & Co. issued a circular letter to all
shareholders of Fort William Jute Co. Ltd informing them of
the terms of the agreement and pointing out that Kettlewell
Bullen & Co. would tender resignation from the office of the
managing agents with effect from July 1, 1952. It was
stated in this letter "the purchase price of each ordinary
share was Rs. 400/- and of each preference share Rs. 185/-.
It was further condition of the agreement that M/s.
Mugneeram Bangur & Co. would offer to all shareholders of
the company (ordinary and preference) to purchase their
shares at the same price on the terms hereinafter referred
to". It was intended that M/s. Bangur Brothers Ltd. would be
appointed managing agents.
At the time of the agreement, namely, May 21, 1952 the
market price of the preference shares ranged between Rs.
119/- and Rs. 122 per share but the shares were purchased
by the assessee on May 22, 1952 at the rate of Rs. 186/-
per share. A large part of the preference shares of Fort
William Jute Co. Ltd. were transferred to three Companies by
Mugneeram Bangur & Co. who had to take over 8,617 preference
shares in terms of the agreement. The Companies to which
these shares were transferred were (1) Manwar Textile Agency
Ltd; (2) Union Co. Ltd., and (3) Star Co. Ltd.--the
assessee. M/s. Bangut Bros., were appointed as the
managing agents of Fort William Jute Company for a period
of ten years with effect from July 1, 1952. The total number
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of preference shares of Fort William Jute Company Ltd.
which were acquired by the assessee from Mugnee-
775
ram Bangur & Co. was 1,670. One lot of 1,620 shares was
purchased on May 22, 1952 at Rs. 186/- per share and the
second lot of 50 shares was purchased at Rs. 184/- on May
27, 1952. For the acquisition of these shares the assessee
had to overdraw on its Bank account. On December 23, 1953,
1,575 shares were sold to Mugneeram Bangur & Co. at Rs.
115/- per share resulting in a loss of Rs. 1,11,816 which
was included in the loss of Rs. 1,30,152/- debited to the
profit and loss account under the head "loss on sale of
investment". The assessee claimed this as a loss arising in
the ordinary course of its business.
The Income-tax Officer and the Appellate Assistant
Commissioner rejected the assessee’s claim on the ground
that the shares were purchased as a contribution to the
scheme of acquisition of the managing agency of the Fort
William Jute Co. Ltd. by Mugneeram Bangur & Co. or its
nominee. The loss, therefore, did not arise in the course
of the assessee’s normal business of dealing in shares. The
Appellate Tribunal found that there was no evidence that
the assessee had been made a pawn in the scheme of
acquisition of the managing agency of Fort William Jute Co.
Ltd. by Mugneeram Bangur & Co. or that the shares were
acquired by the assessee to relieve the latter of the load
of their shares in pursuance of that scheme. The Tribunal
was further of the view that even if Mugneeram Bangur & Co.
had a controlling interest in the assessee firm by having a
majority of the shares in it no such inference could
necessarily by raised that the assessee did not purchase the
shares of Fort William Jute Co. Ltd. as a measure of its own
activity as a dealer in shares. The Tribunal, however,
held that the shares were not acquired in the course of
the assessee’s share dealing business for the reason that
in the profit and loss account for the year ending March 31,
1954 the assessee had made a distinction between its
transactions as a dealer and as an investor in shares. The
Tribunal found that while the profit on sale of shares out
of its stock in trade had been shown and described as such
in the profit and loss account, the loss on sale of
investment had been shown in the profit and loss account as
a loss in investment. From the treatment of the loss given
by the assessee in its own profit and loss account the
Tribunal came to the conclusion that the shares of Fort
William Jute Co. Ltd., were acquired by the assessee as a
measure of investment and not as stock in trade of the
assessee’s share dealing business.
The High Court, while dealing with the question which
had been referred at the instance of the assessee, was of
the opinion that the Tribunal had not properly considered
the primary facts which had been found by the Income-tax
Officer and the Appellate
776
Assistant Commissioner. It proceeded to refer to some of
the proved and admitted facts which were:
(1) The profits and loss account
relating to the sale of shares showed that the
transactions in Fort William Jute Co. shares
stood apart from the other transactions. While
the other transactions were of a few thousand
rupees only rising to nearly 30,000 in one
case the transaction in Fort William Jute Co.
shares involved the payment of nearly Rs.
3,00,000.
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(2) These shares were acquired in one
lot from Mugneeram Bangur & Co. and sold back
to the same concern in one lot which was
altogether unusual.
(3) The shares in question were
purchased by the assessee one day after the
agreement was entered into between Kettlewell
Bullen & Co. and Mugneeram Bangur & Co.
(4) The preference shares of the face
value of Rs. 100/- were purchased at Rs.
186/- per share on May 22, 1952 when on the
previous day the quotation in the market was
Rs. 119/- per share only. Taking the overall
picture the High Court felt that there could
be only one inference that the assessee--an
associate of Mugneeram Bangur & Co.-had
enttred into the transaction relating to
preference shares at the bidding of the
Bangurs, for the purpose of helping them. It
was observed that the Tribunal was wrong in
holding that there was no evidence that
these associates had been made pawns in the
transaction. The conclusion of the High Court
was "on the facts and circumstances of the
case it is impossible to hold that the
assessee bought shares in the ordinary course
of business or would have bought them but to
help Mugneeram Bangur & Co. in their scheme of
acquisition of the managing agency rights".
It appears that the High Court was not
impressed with the view of the Tribunal that
on the basis of entries in the profit and
loss account it could be held that the share
transactions in question related to the
capital account, the shares having been
acquired as a measure of investment.
The first contention raised on behalf of the assessee,
which is the appellant before us, is that the High Court
was not entitled to reverse the findings of fact of the
Appellate Tribunal since
777
the department had not challenged the same by means of
appropriate proceedings for reference of a question
challenging those findings. It is pointed that the Tribunal
had come to the conclusion that there was no evidence to
show that the assessee had been made a pawn in the scheme
of acquisition of the managing agency of Fort William Jute
Co. by Mugneeram Bangur & Co. or that the preference shares
had been acquired by the assessee pursuant to that
scheme. It is submitted that the Tribunal had thus
reversed the view which had commended itself to the
Income-tax Officer and the Appellate Assistant Commissioner
and to that extent the Tribunal’s decision was in favour
of the assessee and could not be reversed or set aside by
the High Court in the absence of any reference at the
instance of the department. It is noteworthy that the
question which was referred is couched in general terms and
was not limited to. or circumscribed by the reasons which
had been given by the Tribunal against the assessee The
question of law on which reference can be made must arise
out of the order of the Tribunal. The order which was made
in the present case was in favour of the department and
against the assessee. It is true that certain reasons which
had appealed to the Income tax Officer and the Appellate
Assistant Commissioner were, not accepted by the Appellate
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Tribunal but it had come to the following conclusion which
was material for the disposal of the appeal :--
"We accordingly uphold the view taken by
the authorities below that the loss of Rs.
1,11,818/- incurred on the sale of 1,575
preference shares of Fort William Jute Co.
Ltd. was not a loss that arose in course
of the appellant’s business in share
dealing though for different reasons".
The question which was referred was framed in the light of
the final conclusion and in our judgment it was not
necessary for the department to apply for and obtain a
reference on a question arising from the reasons given by
the Tribunal in support of its conclusion in favour of the
department.
It has next been contended on behalf of the appellant
that where a question is one of mixed facts and law the
facts as found by the Tribunal must be accepted as correct.
The Tribunal had negatived the finding of’ the Income-tax
Officer and the Appellate Assistant Commissioner that the
preference shares had been acquired by the assessee as a
pawn in the scheme of transfer of the managing agency of
Fort William Jute Co. Ltd. It
was, therefore, not open to the High Court to come to the
same conclusion by not treating the finding of the Appellate
Tribunal
778
as final. Our attention has been invited to the
observations in Commissioner of Income-tax, Bombay City Iv.
Greaves Cotton & Co. Ltd. (1) that it is not open to the
High Court in a reference under s. 66(1) of the Income-tax
Act, 1922 to embark upon a re-appraisal of the evidence and
to arrive at findings of fact contrary to those of the
Tribunal. The finding of fact will be defective in law if
there is no vidence to support it or if the finding is
unreasonable or perverse, but it is not open to a party to
challenge such a finding unless reference has been made of a
specific question concerning that finding. In Oriental
Investment Ca. P. Ltd. v. Commissioner of Income-tax(2) it
has been reiterated that in dealing with findings on
questions of mixed law and fact, the High Court must accept
the findings of the Tribunal on the primary question of fact
as final although it is open to the High Court to examine
whether the Tribunal had applied the relevant legal
principles correctly. It is argued that the High Court has
not characterised the aforesaid finding of the Appellate
Tribunal as perverse or arbitrary and once that finding is
accepted there would be no justification for holding that
the assessee had been made a pawn in the matter of the
scheme of transfer of the managing agency of Fort William
Jute Co. Ltd. by Mugneetare Bangut & Co. or Bangut Brothers
Ltd. In any case there were several facts which showed
that the assessee was not privy or party to the aforesaid
scheme. It did not acquire any interest in the managing
agency nor was it a subsidiary or associate of Mugneeram
Bangut group of concerns. The assessee was connected with
the Bangurs only to the extent that out of its four
Directors two of the Directors were Bangurs.
In our opinion even if the conclusion of the High Court
on the point mentioned above is not taken into consideration
the question which was referred had to be answered against
the assessee. On admitted and proved facts there can be no
manner of doubt that the assessee did not acquire the
preference shares in the ordinary course of business. These
facts may be restated as follows :--
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(1) The market rate of the preference
shares remained constant at the figure of Rs.
119/- between April 16, 1952 and May 21, 1952.
(2) On May 21, 1952 the agreement
between Mugneeram Bangur & Co. and
Kettlewell Bullen & Co. was entered into for
purchasing the entire holding of the managing
agency company in the managed company.
(1) 68 I.T.R. 200. (2) 72 I.T.R. 408.
779
(3) On May 22, 1952, 1,620 shares were
acquired by the assessee from Mugneeram
Bangur & Co. at the rate of Rs. 186/- per
share. 50 more shares were acquired on May
27, 1952 at Rs. 184/- per share. The shares
were obviously acquired at a price which was
very much higher than the market price which
prevailed only a day before they were
purchased by the assessee.
(4) Out of 1,670 shares taken over by the
assessee from Mugneeram Bangur & Co. 1,575
were sold back to the same company at the rate
of Rs. 115/- per share.
(5) The profit and loss account for the
assessment year 1954-55 showed that the
dealings in other shares of comparatively much
lesser value than the shares in question. The
profits and losses which had been made and
incurred on account of the other shares were
also comparatively of minimal nature.
(6) The shares of Fort William Jute Co.
Ltd., were purchased by the assessee by
obtaining an overdraft from a Bank.
All the above facts and circumstances which have some
extraordinary features lead to the irresistible conclusion
that whatever the motives which entered into the acquisition
of the shares, they were certainly not bought and sold in
the ordinary course of business of the assessee as a dealer
in shares. The answer to the question must, therefore, be
in the negative and against the assessee and it was
rightly so returned by the High Court.
The appeal fails and it is dismissed with costs.
R.K.P.S. Appeal dismissed.
780