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PETITIONER: DALHOUSIE INVESTMENT TRUST COMPANY LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX (CENTRAL),CALCUTTA

DATE OF JUDGMENT: 22/11/1967

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1968 AIR  761            1968 SCR  (2) 353  CITATOR INFO :  RF         1986 SC1695  (33)

ACT: Indian  Income-tax Act, 1922 (11 of 1922), s. 2(4)  Purchase and sale of share when amounts to adventure in the nature of Trade--Previous  findings  of Tribunal  whether  binding  in subsequent assessment years.

HEADNOTE: The principal activity of the assessee was investment of its capitals  in shares and stocks.  It changed its  investments by  sale  of its shares and stocks from time to  time.   The assessee’s  income was primarily derived from  dividends  on shares  and interest derived by it on the  investments.  The assessee purchased the shares of a company when their prices were  falling by taking loan at interest and the  return  on investment  was  not  at all  substantial.   The  assessee’s explanation  that  the shares were, in fact, being  held  as investment  and were sold simply because the control of  the company  went  out  of the hands of  the  Directors  of  the assessee. was not accepted by the Tribunal.     HELD: The income derived by the assessee. from the  sale of  these  shares was revenue receipt and  as  such  taxable under the, Income-tax Act.     From  the  evidence  about the course  of  dealings  and conduct  of  the assessee the conclusion followed  that  the purchases of the shares were not for the purpose of  keeping controlling interest in that company, or for investment, but shares were being purchased and sold for earning profit,  so that  the  transactions were an adventure in the  nature  of trade in these shares. [359 A--B]     The  acceptance  by the Revenue, in the  earlier  years, that the acquisitions and sales of shares were in the nature of  investments,  was  not binding  in  the  proceeding  for assessment during subsequent years. [356 B  C] Bengal  and Assam Investors Ltd. v. Commissioner of  income- tax,West  Bengal,   59’  LT.R.  547  and   Commissioner   of Income-tax  v.Bai Shrinbai K. Kooka, 46 I.T.R. 86,  referred to.     Ram Narain Sons (P) Ltd. v. Commissioner of  Income-tax, Bombay. 41 I.T.R. 534, held inapplicable.

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 581 to  584 of 1966.     Appeals  by  special leave from the judgment  and  order dated  March  26.  1964 of the  Calcutta   High   Court   in Income-tax Reference No. 6 of 1961.     4.  K.  Sen,  Bishan Narain,  R.K.  Chaudhuri  and  B.P. Maheshwari, for the appellant (in all the appeals).     Niren De, Solicitor-General, T.A. Ramachandran,  R.   N. Sachthey  and  S.P. Nayar, for the respondent  (in  all  the appeals) 354 The Judgment of the Court was delivered by Bhargava, J.  These appeals came up before this Court on the 17th April, 1967, when an order of remand was made by   this Court, asking the Income-tax Appellate Tribunal to submit  a further  statement of the case.  The question that has  come up. for consideration is :--                   "Whether on the facts and circumstances of               the case, the               surplus derived by the assessee in the sale of               its  shares  and securities  in  the  relevant               previous  years was a revenue receipt  and  as               such taxable under the Income Tax Act." The  facts  and circumstances under which the  question  was referred  by the Tribunal for the opinion of the High  Court are  mentioned  in  that order of remand  and  need  not  be repeated.     In  the order of remand, it was pointed out that it  was not  possible  to find out from the statement  of  the  case whether  the  Tribunal  accepted  the  explanation  of   the assessee  that,  in  the  previous  year  relevant  to   the assessment  year 1953-54, the control of McLeod &  Co.  Ltd. went  out of the hands of the Directors of the assessee  and it was for this reason that the assessee sold the shares  of McLeod  &  Co.   It was also pointed out  further  that  the Tribunal had not stated what was the object of the  assessee in buying 6,900 ordinary shares of McLeod & Co. It  appeared from  the order of the Income-tax Officer that these  shares were  purchased  in a number of lots from the year  1948  to 1950,  and it was also not stated as to what was the  object in buying other securities, and why did the assessee confine its activities mostly to the shares of McLeod & Co. Ltd. and the  companies managed by McLeod & Co. Ltd.  It was  in  the light of these omissions that the Tribunal was asked to send a supplementary statement.  That supplementary statement has now been received  and  the  answer to  the question has  to be given on the basis of the facts contained in the original statement  of  the  case  as  well  as  this   supplementary statement.     The relevant facts which emerge out of these  statements of the case are that the principal activity of the  assessee was  investment  of its capital in shares  and  stocks.   It changed  its  investments by sale of its shares  and  stocks from time to time.  The income of the Company was  primarily derived from dividends on shares and interest received by it on  the  investments.   These  activities  were  covered  by Clauses (1), (3) and (4) of  the Memorandum of  Association. The activity mentioned as the object in Clause (2) is:               "to  acquire,hold, sell and  transfer  shares,               stocks,  Debentures, ’Debenture Stocks,  Bond,               obligations and

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355               securities issued or guaranteed by any company               constituted or carrying on business in British               India  and  in the United Kingdom  or  in  any               colony, or dependency or possession thereof or               in  any foreign country and Debenture  Stocks,               Bonds,  obligations and securities, issued  or               guaranteed   by  any  Government,   Sovereign,               Ruler, Commissioners, public body or authority               supreme, Municipal’ Local or otherwise whether               at home or abroad." In  the supplementary statement, the Tribunal has   recorded the finding that, in its opinion, the purchases and sales of the shares in question were in pursuit of this clause (2) in the  Memorandum  of Association.  The Tribunal  has  further stated  that the assessee had not placed any evidence as  to the object behind the acquisition of the shares of McLeod  & Co. Ltd and the shares of companies managed by McLeod &  Co. Ltd., nor had the  Income-tax Officer ascertained the object behind  such acquisitions.  The Tribunal was also unable  to find  out  why the assessee had more or  less  confined  its activities  mostly to the shares of McLeod & Co..  Ltd.  and the  companies  managed  by McLeod &  Co.  Ltd.   The  facts proved  showed that, in the account  year  relevant  to  the assessment  year in question, 21,046 shares  were   held  by the  Kanoria group, including 6,977 shares in McLeod  &  Co. Ltd.  held by the assessee.  Mr. C.L. Kanoria  resigned  his office as Director of McLeod & Co. Ltd. on 17th March, 1952, and  the approval of the Government to his  resignation  was given  by  the  Central Government  on  16th  October, 1952. Thereafter,   Sri  C.L. Bajoria joined  the  Directorate  of McLeod & Co. Ltd. 6,900 shares. were sold by the assessee to Sri  C.L.  Bajoria or his nominees on 27th May, 1952,  at  a time  when  Sri  C.L.  Kanoria  had  already  sent  in   his resignation from the office of Director, but the resignation had  not yet been accepted by the Government.  It has  also, been  found that Sri C.L. Bajoria acquired 12,440 shares  in all. including 6,900 shares purchased from the assessee; but there was no material on the record to prove that his  group obtained  a controlling interest in McLeod & Co. Ltd.  as  a result  of acquisition of’ these shares.  As a fact, it  was held that after the resignation of Sri C.L. Kanoria,  Messrs C.L.  Bajoria and Baijnath Jalan, both ; of M/s.  Soorajmull Nagarmull, became Directors of McLeod  & Co. Ltd.  These are the  principal  facts  on the basis of which it  has  to  be determined whether the sale of these shares by the  assessee resulted in a revenue receipt or in a capital gain.       It  appears to us that the facts and circumstances  in this  case can lead to. no other  conclusion,  except   that these  shares were purchased and  sold by the assessee  with the  motive  of earning a profit by such purchases and sales and  not  with the object of investing its capital in  these shares in order to  derive 356 income  from that investment. It is true that the  principal business of the assessee was to invest capital and to derive income   from  dividends  on shares and  interest  on  other investments;  but at the same time, the object contained  in the  Memorandum  of  Association  of  the  assessee  Company clearly  showed that one of the objects was also to deal  in shares,  stocks,  debentures, etc., by  acquiring,  holding, selling  and  transferring them. In the years prior  to  the assessment  year, the case put forward by the assessee  that the  various acquisitions and sales of shares were  in   the nature  of  investments was accepted by The  Department  but

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such a decision given in the earlier years is not binding in the   proceedings  for assessment during  subsequent  years. The  particular  shares  no,in question.  it  appears,  were purchased   between  31st  March,1948 and 31st March,  1952. The  earliest  purchases in March.1948 were  at  an  average price  of  Rs. 267-13-0 per share.  In the  next  two  years ended  31st  March, 1949 and 31st  March,  1950.the  average purchase  price  was Rs. 201-8-0 and  Rs.  182-10-0.and  the last purchase in the year ended 31st March, 1952 was at  the rate  of Rs. 128-14-0.  On 1st April. 1952,  the  assessee’s total holding of shares in McLeod & Co. Ltd. was 6,977 at  a total  cost of Rs./4,29,587-4-0 out of the total holding  of shareS, including shares in other companies, of the value of Rs. 17,58,741-4-0.Thus, on that date, the holdings in McLeod &  Co. Ltd.  formed the major part of the share holdings  of the  assessee.  It  is  significant  that  the  shares  were purchased  during  a  period when  their  market  price  was continuously  falling.  The earliest purchases in  the  year ended 31st March, 1948 were at an average price Rs.  267-13- 0, while in the last of these three years ended  31st  March 1952, the average price was Rs. 128-14-0.  The largest block of  4,757  shares was purchased in the  year   ended    31st March,  1950,  when  the average  price  was  Rs.  182-10-0. The  assessment order of the Income-tax Officer  also  shows that   the  shares  were not only  purchased  in  a  rapidly falling  market, but, in order to make these  purchases  the assessee  had  taken  loans amounting to about Rs. 8 lacs at interest  varying  from 31/2% to 5 %.   The  dividend  being declared was at a very low rate, so that the return on  this investment, after taking into account the interest paid  and super-tax to be paid, came to a very small percentage. being less  than  1%.   This circumstance  that  the  shares  were purchased  at a time when their prices were falling and  the return on investments was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased  as an  investment  to earn income from dividends and  that  the purchases  of these  shares were with the object of  selling them  subsequently  at a profit.  The shares were  in  fact, sold at considerable profit subsequently and that is how the question  of charging that profit to tax as revenue  receipt has arisen.  The explanation sought to be given by  the 357 assessee  that  the  shares were, in  fact,  being  held  as investment  and  were  sold simply because  the  control  of McLeod & Co. Ltd. went out of the hands of the Directors  of the   assessee  has  not  been  proved,  according  to   the supplementary  statement  of  the  case  submitted  by   the Tribunal.  In fact, the Tribunal was not satisfied that even the  purchasers,  viz., the Bajoria group  on  buying  these shares from the assessee acquired a controlling interest  in McLeod  &  Co.  Ltd. or in the  companies  managed  by  that Company.   The object of the sale as given by  the  assessee has therefore, remained unproved, whereas the fact that  the purchases  of the shares were made at a time when they  were not  expected to give a good return as investment  and  were actually  sold  at a very good profit leads to  the  reverse inference  that the purchases and  sales  of   these  shares were an adventure in the nature of trade. Even the  sequence of events does not bear out the contention of the  assessee. Sri  C.L. Kanoria first resigned on 17th March, 1952 and  he sold his shares while his resignation was still pending  for approval by the Government.  The sale took place on 27th May 1952, at a time when the resignation not having received the approval   of  the Government, the control of McLeod  &  Co.

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Ltd.  group of companies was still with the  Kanoria  group. The  resignation was accepted on 16th October,  1952,  about five  months  after  the sale of the shares.   There  is  no evidence.  to show that, as a result this sale. the  control in  the  McLeod  & Co. group of   companies  passed  to  the Bajoria  group though M/s. C.L. Bajoria and  Baijnath  Jalan did subsequently loin the Directorate of McLeod  & Co.  Ltd. On these facts, it is not possible to hold that the Tribunal was incorrect in recording it5 conclusion that the sale   of these  shares by the assessee was not the result of  control of the McLeod & Co. Ltd. passing from the. hands of  Kanoria group  to the Bajoria group.  In fact the Kanoria group  was holding  a  majority 21,046 shares out of 40,000  shares  in McLeod  & Co. Ltd. even at the time when these  shares  were sold on 27th May, 1952.  The assessee thus having failed  to prove the object of the sale of these shares, the  inference that  the shares were sold with the sole object  of  earning profit is justified.     This  conclusion is further strengthened by the  conduct of  the  assessee  as found by the  Tribunal  in  subsequent years.  In   the year ended 31st March, 1955,  the  assessee again  purchased  a large number of shares of McLeod  &  Co. Ltd. These purchases were made between 23rd August, 1954 and 29th  September,  1954. The first purchases were made  at  a rate  of  Rs.  150/-  per  share.  and  the  purchases  were continued even in the month of September when the rate  rose to  nearly Rs. 250/- per share. This purchase of  shares  of McLeod  & Co. Ltd. in the account year 1954-55.  when  there was a rising market and when the control was no longer  with the Kanoria group and having already passed to the 358 Bajoria group, clearly shows that the Tribunal was not wrong in inferring that the purchases of shares  of McLeod  &  Co. Ltd.  were  not  for  the  purpose  of  keeping  controlling interest   in  that Company or for investment, but that  the shares were being purchased and sold for earning profit,  so that  the transactions were an adventure in the   nature  of trade in these shares of McLeod & Co. Ltd.     In  this connection, Mr. A.K. Sen, learned  counsel  for the  appellant  drew  our attention to  the  following  view expressed  in the remand order :--                   "We  are  unable to  answer  the  question               referred   because  the  mere  fact  that   an               investment  company  periodically  varies  its               investments does not necessarily mean that the               profits  resulting  from  such  variation   is               taxable under the Income-tax Act. Variation of               its  investments  must amount  to  dealing  in               investments  before such profits can be  taxed               as income under the Income-tax Act." Reliance  was  also.  placed on the  observations  of   this Court in Bengal and Assam Investors Ltd. v. Commissioner  of Income-tax, West Bengal(1), which were quoted in the  remand order and are as follows :--               "It  seems  to us that,  on  principle  before               dividends  on  shares can  be  assessed  under               section 10, the  assessee, be it an individual               or  a company or any other entity, must  carry               on  business in respect of shares; that is  to               say,  the assessee must deal in those  shares.               It  is  evident that if an  individual  person               invests in shares for the  purpose of  earning               dividend,  he is not carrying on  a  business.               The  only way he can come under section 10  is               by converting the shares into  stock-in-trade,

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             i.e.,  by carrying on the business of  dealing               in  stocks and shares as did the  assessee  in               Commissioner of Income Tax v. Bai Shirinbai K.               Kooka(2)’’. It  was urged that, in this case, the Tribunal has  recorded no finding at all that the shares in McLeod & Co. Ltd. which were  sold  by  the  assessee  were  converted  by  it  into stock-in-trade,  nor has it been held that the variation  of its  investments  by the assessee amounted  to  dealings  in investments.   The facts that we found above show  that,  so far  as  the  shares of McLeod & Co.  Ltd.  and  the  allied companies  which were sold by the assessee  and  the  income from  which has been taxed as revenue income are  concerned, the assessee, in fact, dealt with them as stock-in-trade. It (1) 59 I.T.R. 547.    (2) 46 I.T.R. 86. 359 is  true that in the account books they were never shown  as such;  but  we  have  indicated how  the  evidence  and  the material in this case lead to the conclusion that the shares were  in fact purchased even initially not  as  investments, but  for  the purpose of sale at profit and that  they  were actually  sold with the purpose of earning profit,  so  that the  transactions amounted to an adventure in the nature  of trade.     Learned  counsel also referred ,to the decision of  this Court  in  Ram Narain Sons (Pr.)  Ltd.  v   Commissioner  of Income-tax,   Bombay(1)   to   urge   that   the   principal consideration  in  determining whether income from  sale  of shares  is revenue  income  or capital gain, is to find  out what  was the purpose of purchase of those shares,  and,  if the  purpose was investment, the fact that. in  varying  the investment,  the sale of those shares resulted in  a  profit will not. make that profit revenue income.  The principle is perfectly’  correct,  but  is not applicable  to.  the  case before  us  on the finding mentioned by us above  that  even the initial purchase of these shares by the assessee was not for  the  purpose  of investment  for  earning  income  from dividends, but was with a view to  earn profit by resale  of those shares.     In  these circumstances we hold that the High Court  was right  in arriving at the conclusion that, on the facts  and circumstances of the present case, the income derived by the assessee  from the sale of its shares and securities in  the relevant  previous  years was revenue receipt  and  as  such taxable  under the Income-tax Act. The appeals fail and  are dismissed with costs.  One hearing fee. Y.P.                  Appeals dismissed. (1) 41 I.T.R. 534. 360