Full Judgment Text
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PETITIONER:
RAMESHWAR PRASAD BAGLA
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW
DATE OF JUDGMENT27/09/1972
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
HEGDE, K.S.
REDDY, P. JAGANMOHAN
DUA, I.D.
CITATION:
1973 AIR 182 1973 SCR (2) 452
1973 SCC (3) 575
CITATOR INFO :
R 1976 SC 772 (6)
RF 1977 SC2008 (16)
ACT:
Indian Income Tax Act, 1922, Sec. 66(2)--Powers of High
Court and Supreme Court not appellate but only advisory.
Sec. 10, Sec. 12, (b) whether surplus realised on the vale
of shares originally bought for the control of the Company
and obtaining managing agency, is liable to tax as capital
gains or as profit on sale of shares.
HEADNOTE:
The appellant assessee is a partner in A. & Co. Managing
Agency of one textile Mill was assigned by the Managing
Agents (S. & Co.) to A. & Co. for consideration of buying
large number of shares and cash transferred in his favour by
his brother. In 1946, the appellant sold 43,700 shares
resulting in the profit of Rs. 1,51,927. Before the income
Tax Officer the appellant’s contention was that the surplus
was in the nature of capital gains. The I.T.O. however,
held that the amount was liable to taxation u/s 10 of the
Act as profits on the sale of shares. The tribunal remanded
the case to the I.T.O. The appeal along with the remand
report was placed before the Tribunal for heading. After
carefully considering all the evidence the Tribunal held
that the shares were purchased not as stock-in-trade but for
securing the managing agency and control of the company.
The Tribunal further held that the surplus on sale of shares
is not income which is liable to income tax under sec. 10.
Thereafter, the Tribunal, on the High Court’s direction drew
up a statement of case u/s 62 (2). The High Court reversed
the findings of the Tribunal and held against the appellant.
HELD : There was enough material and evidence referred, to
by the Tribunal while recording its finding that the shares
in question had been purchased by the assessee with a view
to acquire the managing agency and control of the textile
mill and that the shares did not constitute stock-in-trade
of the assessee. It is for the Tribunal to decide the
question of fact and the High Court in a reference u/s 66 of
the Act cannot go behind the Tribunal’s finding of fact.
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The High Court can only lay down the law applicable to the
facts of the case found by the Tribunal. The High Court and
the Supreme Court, in an appeal against the judgment of the
High Court, in a reference u/s 66 of the Act are not
constituted courts of appeal. These courts only exercise
advisory jurisdiction in such references. Only in case
where the finding is not based on any relevant evidence or
is based on conjectures or suspicion, a question of law is
raised and interference with the finding of facts is
permissible. The High Court was not justified in setting
aside the finding of fact in the instant case. [457C]
On facts we are of the opinion that the profit made by the
sale of shares constituted capital gain chargeable to income
tax u/s 12 (b). Indeed it was the prayer of the assessee
himself in his letter dated March 30, 1949.
Ramnarain Sons (Pvt.) Ltd. v. Commissioner of Income-tax,
[1961] 41 I.T.R. 534 relied on.
453
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1718 of
1969.
Appeal by special leave from the judgment and order dated
February 20, 1967 of the Allahabad High Court in Misc. Case
No. 561 of 1963.
Bhagirath Das, H. K. Puri, S. K. Hirajee and S. K. Dhingra,
for the appellant.
S. Mitra, B. D. Sharma and R. N. Sachthey, for the
respondent.
The Judgment of the Court was delivered by
KHANNA, J. This appeal by special leave is directed against
the judgment of Allahabad High Court whereby that court
answered the following two questions in a reference made to
it under section 66(2) of the Indian Income Tax Act, 1922
(hereinafter referred to as the Act) :
"(i) Whether there was material for the
finding that the shares in question were
purchased by the assessee with a view to
acquire the managing agency and the control of
the company or the shares constituted his
stock-in-trade ?
(ii) Even if the shares in question did not
constitute the stock-in-trade of the assessee,
whether the, profit made on the sale of shares
did not constitute capital gain chargeable to
income tax under section 12-B of the Act ?"
On the first question, the answer of the High Court was that
there was no material for the finding that the shares in
question were purchased by the assessee with a view to
acquire the managing agency and control of the company. It
was further held that the shares constituted the stock-in-
trade of the assessee. In view of the above, the High Court
held in answer to question No. (ii) that the profits made by
the sale of shares could not constitute capital gain
chargeable to income tax under section 12-B of the Act.
The matter relates to assessment year 1947-48, the relevant
previous year for which was the Dassera year 2002-2003
corresponding to the period from October 16, 1945 to October
5, 1946.
Rameshwar Prasad Bagla, the assessee-appellant, is a partner
of firm Agarwal & Co. having one-sixteenth share in the
firm. Agarwal & Co. consisted of six groups of partners,
viz., (1) Morarka Group, (2) Khetan Group, (3) Seksaria
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Group, (4)
454
Poddar Group, (5) Bagla Group, and (6) Kantilal Nahalchand.
The Bagla Group consisted of the assessee and his brother.
M/s E. D. Sassoon & Co. Ltd. were the managing agents of the
India United Mills Ltd. The latter is a public limited com-
pany and was engaged in the manufacture of textiles in
Bombay. Large blocks of ordinary and deferred shares in the
India United Mills Ltd. were held by M/s E. D. Sassoon & Co.
Ltd. and its associates. In 1943 there were negotiations
between M/s. E. D. Sassoon & Co. Ltd. and one of the
partners of Agarwal & Co. Those negotiations resulted in an
agreement dated January 26, 1945 under which M/s E. D.
Sassoon & Co. Ltd. agreed to assign the managing agency of
the India United Mills Ltd. to Agarwal & Co. with effect
from December 1, 1943. The consideration for the sale of
managing agency was Rs. 57,80,000/-. Agarwal & Co. also
agreed to purchase 16,80,000 ordinary shares of the face
value of Rs. 10/- each and twenty lac deferred shares of
rupee one each of the India United Mills Ltd. The total
issued shares of the India United Mills Ltd. were twenty lac
ordinary shares of Rs. 10/- each and fifty lac deferred
shares of rupee one each. The price for this big lot of
shares was fixed at Rs. 3,37,20,000 calculated at the rate
of Rs. 16/8/- for an- ordinary shares and Rs. 3/- for a
deferred share.
At the time when the above mentioned large block of shares
of the India United Mills Ltd. was agreed to be acquired,
Agarwal & Co. was not in a position to pay for five lac
ordinary shares involving an outlay of Rs. 82,50,000. Those
five lac shares were purchased by Ramkumar Shivchandrai of
Poddar Group of partners in Agarwal & Co. to the extent of
three lac shares. The remaining two lac shares were
purchased by Khetan Group of partners. The two Groups,
viz., Poddar and Khetan Groups held the five lac shares on
behalf of Agarwal & Co. till 1944. The understanding with
Poddar and Khetan Groups was that those shares would be
taken up by the partners of Agarwal & Co. at the same price.
In January 1945 the aforesaid five lac ordinary shares were
taken over by Agarwal & Co. from Poddar and Khetan Groups.
The assessee appellant was entitled with reference to his
holding in Agarwal & Co. to 31,250 shares, i.e. one-six-
teenth out of the five lac shares. The assessee’s brother
was likewise entitled to an equal number of shares out of
those five lac shares. The assessee’s brother relinquished
his rights in the said 31,250 shares in favour of the
assessee, as a result of which the assessee obtained 62,500
shares in the India United Mills Ltd. The shares were paid
for at the rate of Rs. 16/8/- per share in 1945. These
shares had earlier stood in the name of Bombay ’Trust
Corporation which was a company formed by Sasoon Group of
companies. After the managing agency of the India United
455
Mills Ltd. had been taken over by Agarwal & Co. on December
1, 1943, those shares were transferred between March and
August 1944 in the name of various persons residing in
Jaipur. Those persons transferred the said shares in favour
of the assessee on January 30, 1945. The assessee borrowed
rupees ten lacs from Agarwal & Co. in order to pay for the
price of those shares.
Out of 62,500 shares acquired by the assessee, he sold
43,700 shares during the period from April 3, 1946 to July
19, 1946 in seven lots. The rest of the shares remained in
the possession of the assessee during the relevant year.
The sale of 43,700 shares resulted in a profit of Rs.
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1,80,220 to the assessee. The sale proceeds were thereafter
utilised by the assessee for purchasing shares of Swadesh
Mills Ltd., Kanpur.
The assessee did not disclose the profit of Rs. 1,80,220 in
the turn. In response to a notice issued by the income tax
officer, the assessee wrote letter dated March 30, 1949 in
the course of which he stated :
"I have already brought to your honour’s
notice in the course of assessment proceedings
and would like to confirm that I had certain
share transaction in which there has been
appreciation to the tune of Rs. 1,51,927/1/11.
Since it is common ground that the assessee is
not dealing in shares as business the said
appreciation in capital should have been
normally disclosed as capital gain in the
return but I regret that the amount could not
be shown, so the return already filed may be
treated as amended accordingly."
The amount of Rs. 1,51,927/1/11 referred to in the
assessee’s letter included the surplus realised a,. a result
of the sale of 43,700 shares of the India United Mills Ltd.
The income tax officer rejected the plea of the assessee
that the profit made by the sale of 43,700 shares of the
India United Mills Ltd. was not profit liable to be taxed as
such, but was only capital gain. In the previous year with
which we are not concerned, the assessee had not been
treated as a dealer in shares. The income tax officer held
the assessee to be a dealer in shares during the relevant
year on the ground ’that the assessee had’ entered into
share transactions on a very extensive scale. The income
tax officer accordingly brought to tax the sum of Rs.
1,80,220 under section 10 of the Act as profits on the sale
of shares. On appeal the Appellate Assistant Commissioner
held that 62,500 shares were stock-in-trade. The finding of
the income tax officer was substantially upheld. Some
relief was granted by reducing the taxable income. On
further appeal by the assessee
456
to the Income Tax Appellate Tribunal, the matter was
remanded to the income tax officer on May 1, 1954. The
income tax officer thereafter submitted a report on June 12,
1956. The appeal along with the remand report of the income
tax officer was put up before the Tribunal for hearing. The
Tribunal, as per order dated September 26, 1956, held that
the excess realised from the sale of shares was not income
which was liable to income tax. In coming to this
conclusion the Tribunal observed,,:
Agarwal & Co. as a result of an agreement with
the Sassoons. Agarwal & Co. was interested in
the managing agency of some mills also which
came to them as a result of the same
agreement. We think that on the facts
produced the purchase of the shares by the
assessee was not with a view to deal in those
shares but with a view to obtain the managing
agency and control of the company. It may
also be noted here that if the price ruling at
the time of the transfer was to be taken into
account, perhaps, there is no profit. The
profit has been shown as the transfer is made
at the price at which the shares were
originally sold by the Sassoons. We think
that on the facts before the Income-tax autho-
rities the assessee’s holding of shares in the
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India United Mills Ltd. was not the purchase
of a stock in trade as held by the Department.
We accept the assessee’s appeal and direct
that the excess realised on the sale of these
shares is not income which is liable to
income-tax."
An application was thereafter filed on behalf of the
respondent for stating a case to the High Court. but that
application was rejected. The respondent then approached
the High Court under section 66(2) of the Act. The High
Court thereupon directed the Tribunal to draw up a statement
of case and refer the questions reproduced earlier to the
High Court. After the questions were referred, the High
Court gave answers to the questions, as mentioned at the
commencement of this judgment.
We have heard Mr. Bhagirath Das on behalf of the appellant
and Mr. Sukumar Mitra on behalf of the respondent and are of
the opinion that the judgment of the High Court cannot be
sustained. The question with which the High Court was
concerned was whether there was material before the Tribunal
for arriving at the finding that the shares in question had
been purchased by the assessee with a view to acquire the
managing agency and control of the India United Mills Ltd.
Perusal of the judgment of the High Court shows that the
High Court did not discuss this
457
aspect of the matter. On the contrary, the High Court
proceeded straightaway to deal with the matter as if it had
itself to arrive at an independent finding on the point as
to whether the shares in question had been purchased by the
assessee with a view to acquire the managing agency and
control of the company. This approach of the High Court was
wholly erroneous and not warranted by law. It is for the
Tribunal to decide questions of fact, and the High Court in
a reference under section 66 of the Act cannot go behind the
Tribunal’s findings of fact. The High Court can only lay
down the law applicable to the facts found by the Tribunal.
The High Court and the Supreme Court, in an appeal against
the judgment of the High Court given in a reference under
section 66 of the Act, are not constituted courts of appeal
against the order of the Tribunal. These courts only
exercise advisory jurisdiction in such references. The High
Court in a reference under section 66 of the Act can,
however, go into the question as to whether the conclusion
of the Tribunal on a question of fact is based upon relevant
evidence. If the High Court finds that there is no such
evidence to support the finding of fact of the Tribunal,
this circumstance would give rise to a question of law and
can be agitated in a reference. It is also well established
that when a Tribunal acts on material which is irrelevant to
the enquiry or considers material which is partly relevant
and partly irrelevant or bases its decision partly on con-
jectures, surmises and suspicions and partly on evidence,
then in such a situation an issue of law arises and the
finding of the Tribunal can be interfered with. The finding
may also be interfered with if it be found to be so
unreasonable that no person acting judicially and properly
instructed as to the relevant law could have arrived at it.
None of the circumstances justifying interference with the
finding of fact of the Tribunal has been shown to exist in
this case. In the absence of any such circumstance, the
High Court in our view was not justified in interfering with
the finding of fact of the Tribunal. The fact that the High
Court on appreciation of evidence would have arrived at a
conclusion of fact different from that of the Tribunal did
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not warrant interference with the finding of the Tribunal.
The Tribunal in arriving at the conclusion that the purchase
of the shares in question by the assessee was with a view to
obtain the managing agency and control of the India United
Mills Ltd. and that those shares were not purchased as
stock-in-trade referred to a number of circumstances. It
was found by the Tribunal that the shares in question were
out of the lot sold by Sassoons to Agarwal & Co. It was also
found that the shares had been transferred to the assessee
at the original price at which these shares had been sold by
the Sasoons and not at the price which was prevailing at the
time of transfer. The Tribunal further
458
found that 62,500 shares represented the portion of the
assessee in the total number of shares originally purchased
by Agarwal & Co. In the light of those findings, the
Tribunal recorded its conclusion in the paragraph which has
been reproduced earlier. The above conclusion of the
Tribunal, in our opinion, was based upon relevant material
and could not be interfered with in a reference under
section 66 of the Act.
The High Court in arriving at the conclusion that the shares
in question had been purchased not with a view to obtain the
managing agency but as a stock-in-trade has referred to the
fact that the assessee took loan for the purchase of those
shares and subsequently transferred 43,700 shares out of
62,500 shares. This circumstance as observed by this Court
in the case of Ramnarain Sons (Pr.) Ltd. v. Commissioner of
Income Tax(1) would not by itself go to show that the
purchase of shares was not to facilitate the acquisition of
the managing agency. In that case the appellant company was
a dealer in shares and securities and carried on business as
managing agents for some companies. In order to acquire the
managing agency of a textile-mill, the appellant company
purchased from Sassoon David and Co., who were the managing
agents thereof, 1,507 shares of the mill at Rs. 2,321-8-0
per share at a time when the market price of the shares was
Rs. 1,610. The remaining 1,000 shares of the mill held by
Sassoon David and Co. were acquired by the directors of the
appellant company. Two months later the appellant company
sold 400 of those shares at a loss of Rs. 1,78,438. The
said loss was claimed as a trading loss. Question arose in
this context whether the purchase of shares could be
regarded as acquisition of stock-in-trade. Dealing the
above question, this Court observed
"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 shares
and their memorandum of association authorises
them to carry on business in shares of any
importance in the circumstances of the case."
(1) [1961] 41 I.T.R. 534.
459
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It was further observed :
"Subsequent disposal of some out of the shares
by appellants could also not convert what was
a capital question into an acquisition in the
nature of trade."
We are, therefore, of the view that the answer given by the
High Court to question No. (1) was not correct. In our
opinion, there was. material for tile finding that the
shares in question had been purchased by the assessee with a
view to acquire the managing agency and control of the India
United Mills Ltd. and that the shares did not constitute the
stock-in-trade of the assessee.
So far as the second question is concerned, we find that it
is the common case of the parties that if the shares in
question are held to be not stock-in-trade of the assessee,
in that case the profits made on the sale of those shares
would-constitute capital gain chargeable to income tax under
section 12-B of the Act. Indeed, this is what was prayed
for by the assessee in his letter dated March 30, 1949.
Looking to the facts also, we are of the opinion that the
profit made on the sale of those shares constituted capital
gain chargeable to income tax under section 12-B of the Act.
We would answer question No. (ii) accordingly.
We, therefore, accept the appeal, set aside the judgment of
the High Court and discharge the answers given by it to the
questions referred and substitute the answers indicated
above. The appellant shall be entitled to his costs of this
Court as well as those in the High Court.
S.B.W. Appeal allowed.
12-L498SupCI/73
460