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PETITIONER: JUGGILAL KAMLAPAT, KANPUR

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, LUCKNOW

DATE OF JUDGMENT: 31/07/1969

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) RAMASWAMI, V. GROVER, A.N.

CITATION:  1970 AIR  529            1970 SCR  (1) 720  1969 SCC  (2) 376

ACT:     Income-tax--Dealing    in    shares--Whether     capital investment or trading activity.

HEADNOTE:     The  assessee  firm  used  to  promote  companies.    It purchased  all the shares of a Company at the  ruling  rates with borrowed money and very soon thereafter disposed of all of them at a profit.  Before the Income-tax authorities  the assessee  claimed that it had taken over the shares  with  a view  to secure the managing agency of that Company and  had thereafter  distributed the shares to its  allied  concerns, that the transaction was only to facilitate acquisition of a capital asset and the profit realised from the sale of  such a  capital investment was a capital gain.  It was, found  by the Departmental authority and the Tribunal that the  shares were  not merely ’distributed to the assessee’s  associates, but  that,  some  of  the shares were  sold  to  its  allied concerns and others to strangers, through brokers, in  small lots and at a profit.  Also, the interest which the assessee had to pay for the amount borrowed for purchasing the shares was  debited in its revenue account and was  claimed  before the Income-tax authorities as a revenue allowance.     The   assessee  also  purchased  shares  of  two   other Companies  which  were its allied  concerns,  and  commenced selling them soon after at a profit.  It was claimed  before the   Income-tax   authorities,  with   respect   to   these transactions  that when a part of the new issue  of  capital of those two Companies was not taken over by the public, the assessee,  as  the  financiers of those two  companies  took over  the shares, that the  were in the nature of a  capital investment and the shares were sold on account of ’financial embarrassment’ and not with the object of earning income and so  the profit realised by the sale did not  attract  income tax.   The Departmental authorities and the  Tribunal  found that  the first lot of shares in one of these two  Companies was  purchased  in  January,  1945  and  the  firm  went  on purchasing and selling the shares of that Company thereafter from February, 1945 and hence, there could not have been any ’financial  embarrassment’.   As regards the shares  in  the

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second  company  they were purchased in February,  1945  and sold  in August, 1945.  The sales were all  through  brokers and at a profit.     On  the question whether the total profits  realised  by the assessee was a capita1 gain or revenue income,     HELD: Whether a transaction is or is not an adventure in the nature of trade is a mixed question of law and fact:  in each  case,  the  legal effect of the  facts  found  by  the Tribunal on which the tax-payer could be treated as a dealer or an investor in shares has to be determined. [724 C-D]     In  the  present case, on the facts found, there  was  a well planned scheme for earning profit.  Therefore, all  the transactions   were  impressed  with  the  character  of   a commercial  transaction  entered into with a  view  to  earn profits  and  were not capital investments  and  hence  were liable to tax [724 D; 725 A-B] 721      Ram  Narain   Sons (P)  Ltd. v.C. 1.  T.,  Bombay,   41 I.T.R.  534, (S. C.) explained.

JUDGMENT:     CIVIL APPELLATE JURISDICTION:  Civil Appeal No. 1953  of 1968.     Appeal  by  special leave from the  judgment  and  order dated  September  17, 1962 of the Allahabad  High  Court  in Misc. I.T. Application No. 167 of 1955.     A.K.  Sen,  G.L.  Sanghi  and  B.R.  Agarwal,  for   the appellant.     Jagdish  Swarup,  Solicitor-General,  S.K.  lyer,   R.N. Sachthey and B.D. Sharma, for the respondent.     The Judgment of the Court was delivered by     Shah,  Ag.  C.J.   In  proceedings  for  assessment   to incometax  for  the  year 1946-47, the  appellant  firm  was assessed  to  tax in respect of an amount  of  Rs.  3,99,587 received  by it as profit on sale of shares.  The.  plea  of the   firm that  the amount  was "capital gain" and  was  on that  account  not taxable was rejected.In the view  of  the Income-tax  Officer  the profit arose from "a  well  planned business  activity in which the assessee had fully  utilised its   resources".   The  Appellate  Assistant   CommiSsioner affirmed  the  decision  of  the  Income-tax  Officer.   The Income-tax Appellate Tribunal dismissed the appeal filed  by the firm.     The  Tribunal,  amongst others, referred  the  following question to the High Court of Allahabad for opinion:                   "Whether the surplus realised by the  sale               of  the  shares of  Aluminium  Corporation  of                             India  Ltd., J.K. Investment Trust and   Raymond               Woollen  Mills amounting in aggregate  to  Rs.               3,99,587  or any part thereof was the  revenue               income of the assessee liable to tax under the               Income Tax Act, 1922 ?" The  High  Court answered the question in  the  affirmative. The firm has appealed to this Court with special leave.    In 1944 the firm  purchased  50,000  ordinary  shares  of Raymond  Woollen Mills Ltd. (hereinafter  called  "Raymond") for  Rs. 69,75,255.  The firm paid Rs. 7,00,000 on  November 4,1944 and the balance on December 6, 1944.  The transaction was financed with the aid of a loan of Rs. 70 lakhs borrowed from the Hindustan Commercial Bank Ltd.  The firm sold those shares  through brokers between November 23, 1944 and  April 2,   1946  and  realised  Rs.  72,42,200,  the   transaction

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resulting in a net profit of Rs. 2,66,945.  Between  January 26,  1945  and  April 5, 1946 the  firm  also  purchased  67 debentures,  5,582  preference shares  and  18,576  ordinary shares of the Aluminium Corporation 722 Ltd.--(hereinafter     called    "Aluminium")    for     Rs. 8,57,480.Except  2118 preference shares, the entire  lot  of shares   with   the  debentures was sold  for  Rs.  7,05,957 between February 1, 1945 and August 13, 1945.  Adjusting the cost  of shares left on hand the firm realised a net  profit of  Rs. 60,278 in that transaction. The firm also  purchased 290   "A"   Class   shares   of   J.K.   Investment.   Trust Ltd.--(hereinafter called "J. K. Trust") on February 4, 1945 for  Rs. 1,45,000 and sold the same on August 22,  1945  for Rs.  2,17,264, the transaction resulting  in a  net   profit of Rs. 72,364.     Before  the  departmental authorities the  firm  claimed that  it had taken over the entire share capital  issued  by Raymond  with a view to secure its managing ’agency and  had thereafter distributed the shares of Raymond to the  various associates  of  the firm, and the transaction being  one  to facilitate  acquisition of a capital asset being  a  capital investment,  the profit realised by sale of the  shares  was not  liable  to be assessed to income-taX.   The  firm  also claimed  that  when a part of the new issue  of  capital  of Aluminium  was  not taken over by the public,  the  firm  as financiers  of the, J.K. Group of Industries took  over  the shares  and  the debentures not subscribed within  the  time allowed.   This transaction, it was contended, was  also  of the nature of capital investment.  It was explained that the shares were sold on account of "financial embarrassment" and not  with  the  object of earning  income,  and  the  profit realised   by  the  sale  did  not  attract  tax.    Similar contentions  were also raised in respect of the  shares   of J.K.   Trust.   The departmental  authorities  rejected  the contentions.  The Tribunal agreed with them.     From  the ,facts found by the Tribunal it is clear  that for  purchasing  the  Raymond shares,  the   firm  paid  Rs. 7,00,000   on November 4, 1944, and the balance on  December 6,  1944, .and commenced selling the shares on November  23, 1944.  The contention that the shares were only  distributed to the "allied concerns" is contrary to the findings of  the Tribunal.   Some of the shares were sold through brokers  to outsiders.   It is a significant circumstance that the  firm parted with all the Raymond shares by April 2, 1946 and  did not  retain a single share after that date. It is true  that some  of  the shares were held by J.K. Industries  Ltd.  and other  J.K.  concerns.  But the transfer even  to  the  J.K. concerns was in ’all cases for a profit.  Within a few  days after  purchasing  the  Raymond shares,  the  "firm  started unloading  them".  and the shares were  never  sold  without making profit.  The interest paid for the loan borrowed from the  Hindustan  Commercial  Bank  Ltd.  for  financing   the purchase of Raymond shares was debited in the accounts as  a revenue  expenditure,  and it was claimed as  a  permissible allowance. The firm used to promote Companies. 723 One of its activities was to finance "sister concerns" known as J.K. Industries. The Case of the firm that the shares had to  be  sold  on account of  "financial  embarrassment"  was plainly untrue. The Tribunal was, in our judgment, right  in inferring  that  the  "purchase ’and sale of  shares  was  a business  activity   which  was continuous", and  since  the firm  "had  entered upon a well-planned scheme  for  earning profit and that in furtherance and execution of that  profit

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making  scheme they sold the shares at the  opportune  time" and  that "the sale of the shares was not merely on  account of pecuniary embarrassment" as claimed, the profit  realised by   the  firm  by  the  sales  of  shares  could   not   be characterised  as a casual receipt, nor could it be  treated as accretion to a capital asset.     Strong  reliance  was,  however, placed  on  a  somewhat obscure  statement in the order of the  Appellate  Assistant Commissioner’                  "In  the  case  of  Raymond  Woollen  Mills               shares  it  is  clear beyond  doubt  that  the               purchase  of  the  shares  was  a  first  rate               business deal and that it was motivated by the               desire   and  intention   to   acquire    the,               Managing Agency of the Mills.  If this is  not               an  operation in the scheme of  profit-making,                             it  is not known  what  will constitut e such  a               transaction." Apparently  there  is a typographical error  in  the  second clause  of  the first sentence, and the word  "not"  has  by inadvertence been omitted; otherwise in the context in which it occurs the clause has no meaning whatever.  In any  event as  rightly pointed out by the High Court the reasons  given by  the  Tribunal  and the conclusion  recorded  by  it  are inconsistent with the finding that the shares were purchased with the sole  object  of  acquiring  the Managing Agency of the  Raymond  Woollen  Mills and not with  a  view  to  make profits.     Counsel  for  the  firm invited  our  attention  to  the decision  of  this  Court  in Ramanarain Sons  (P)  Ltd.  v. Commissioner  of  Income-tax, Bombay(1) in  support  of  his contention that a transaction for purchasing shares with the object of acquiring the managing agency of a Company will be regarded as capital investment and not a business in  share. In  Ramnarain  Sons’  case(1) the appellant  Company  was  a dealer in shares and securities and also carried on business ’as  managing  agents  of other companies. With  a  view  to acquire  the  managing agency of a  company,  the  appellant Company purchased from the managing agents a large block  of shares  at a rate approximately 50% above the ruling  market rate.   Two months later the appellant Company sold a  small lot out of those shares at a loss and claimed the loss as a (1) 41 I.T.R. 534. 724 trading  loss.   It was found in that case by  the  Tribunal that  the  intention  of purchasing the shares  was  not  to acquire  them as part of the stock-in-trade  of  tax-payer’s business in shares, but to facilitate the acquisition of the managing  agency of the Company which was in fact  acquired, and on that account loss incurred by the sale of a small lot could  be  regarded only as a loss of capital  nature.   The Court  observed in that case that the circumstance that  the tax-payer  had  borrowed loans at interest to  purchase  the shares or that it was a dealer in shares and was  authorised by its memorandum of association to deal in shares was of no effect.  On a review of the evidence the Tribunal held  that the  shares were purchased with the object of acquiring  the managing agency and with that view the High Court agreed.     Whether  a transaction is or is not an adventure in  the nature  of trade is question of mixed law and fact: in  each case the legal effect of the facts found by the Tribunal  on which  the  tax-payer  could be treated as a  dealer  or  an investor  in shares, has to be determined.  In  the  present case  the  transaction  since the inception  appears  to  be

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impressed  with  the character of a  commercial  transaction entered  with a view to earn profit.  Large block of  shares was  purchased at the ruling rates with borrowed money,  and soon  thereafter the shares were disposed of at a profit  in small lots.  Some of the shares were sold through brokers to strangers. The story of the firm that some or all the shares were  merely "distributed" to its associates is not  proved. The  interest  which  the firm had to  pay  for  the  amount borrowed for purchasing the shares was acted in the  revenue account and was claimed as a revenue allowance.     It was not the case of the firm that Aluminium and  J.K. Trust  shares  were purchased for  .acquiring  the  managing agency.  It  was  claimed that the shares  were  taken  over because the public did not accept those shares.  It was  one of  the objects of the firm to finance its  allied  concerns and in taking over shares which the public did not subscribe the  firm  was ’acting in the course of its  business.   The firm  commenced  selling  the shares soon  after  they  were purchased.    Aluminium  shares  were   purchased    between January 26, 1945 and April 5, 1946 (except a few which  were retained)  and  sold at profit.  Whereas the first  lot  was purchased  on January 26, 1945, the first sale was  made  on February  1,  1945.  It could not be said that this  was  an investment in shares independent of the trading activity  of the  firm.   The  story that the shares had to  be  sold  on account  of financial difficulties is plainly belied by  the circumstance  that the firm went on purchasing  and  selling the  Aluminium shares.  J.K. Trust shares were purchased  on February  14,  1945  and  were  sold  on  August  22,  1945. Aluminium shares as well as J.K. Trust shares were sold at a profit 725 and through brokers.  These transactions were ,also  stamped with  the character of commercial transactions entered  into with a profit motive and were not transactions in the nature of  capital  investments.  The answer recorded by  the  High Court is therefore correct. The appeal fails and is dismissed with costs. V.P.S.                                     Appeal dismissed. 726