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PETITIONER: NEW ERA AGENCIES (PVT.) LTD., BOMBAY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY CITY 1,BOMBAY

DATE OF JUDGMENT: 28/11/1967

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

CITATION:  1968 AIR  811            1968 SCR  (2) 483

ACT: Indian Income-tax Act, 1922-Profit on sale of shares-Whether capital accretion or revenue receipt.

HEADNOTE: During the years 1942 to 1948 the dealings in shares of  the assessee  included dealings in shares of  Elphinstone  Mills and  the  profit and loss in the dealings of the  Mills  was taken  by  the assessee to its revenue account.   M  was  in control  of the assessee-company and he also  purchased  the control  and  managing  agency of the  Mills,  and  in  this managing  agency  company  the assessee  was  also  a  share holder.   From  1949 onwards the assessee did not  sell  the shares  of the Mills but added to its holding.  In  1953,  M sold  the entire shares in the Mills with him and under  his control including that with the assessee.  Along with that M got the vendee and the latter’s nominee appointed  directors and also got the resignation of the Managing  agency-company from the managing agency of the Mill.  Out of the total sale Price  the  assessee received certain amount  which  was  in excess  of the cost price of the shares.  The  assessee  did not  show the excess amount on the sale of these  shares  in its  profit  and  loss account but took it  to  the  capital reserve  account and showed it as a capital reserve  in  its balance-sheet.  The assessee, in appeal, contended that  (i) the  excess amount received was a capital accretion  on  the sale  of  the  shares  and did  not  represent  income  from business  in  shares; and (ii) the excess  amount  over  and above the market price was paid for the controlling interest which was being transferred along with the shares. HELD : The appeal must be dismissed. (i) The profit made  by  the  assessee on the  sale  of  the shares was its business income.    During the years  1943-48 the profits and losses  in these shares had  been treated on the same footing as the profit and losses in other shares of the  assessee.  The circumstance that from 1949 onwards  the assessee had not sold the shares of the Mills, but had added to  its  holding, was not in itself sufficient to  reach  an inference  that the assessee had treated its holding in  the shares  an investment.  During the years 1949-53 the  shares had  slumped  in price and this may be the  reason  why  the

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assessee  did not effect any sales during this  period.   It was  not unreasonable to think that the assessee who  was  a dealer   in   shares  was  making  further   purchases   and accumulating  its holding when the market was falling so  as to be in a position to sell the shares to its advantage when a  suitable opportunity occurred.  There was no material  on the  record to suggest that the main object of the  assessee in acquiring the shares was to give support to the  Managing Agents.  When the managing agency was acquired, there was no need to make any use of the holding of the assessee  because the assessee at that time had hardly any shares.  Subsequent to  the  acquisition of the managing agency,  until  it  was relinquished,  the managing agency never felt its  existence either precarious or in need Of support. [488 D-H; 489 B-D] 484 Californian  Copper  Syndicate  (Limited  and  Reduced)   v. Harris,  5 Tax Cas. 159, Commissioner of Taxes v.  Melbourne Trust  Ltd.,  (19141  A.C. 1001,  Rees  Roturbo  Development Syndicate  Ltd. v. Ducker, 13 Tax Cas, 366 and  Venkataswami Naidu  & Co. v. Commissioner of Income-tax, 35  I.T.R.  594, referred to. (ii) No part of the amount received by the assessee could be regarded  as  consideration  for any  other  valuable  right excepting   the  price  of  the  shares  sold  by  it.    No controlling  power  was held by the assessee itself  in  the Mills  and  it  was  not  in  a  position  to  procure   the resignation of the Directors or bring about the  appointment of vendee’s nominees as Directors.  Nor was it In a position to  call  upon  the  Managing  Agents  to  relinquish  their offices.  All these things were possible to M because of the influence and power  he  possessed.  The part  taken  by the assesses in the transaction with the     vendee      was merelv  a passive part, viz., keeping at the disposal  of  M its  holding  in the Mills’ share, which it had held in  its business is a dealer     in  shares.  Therefore, so  far  as the  assessee  was concerned, what it parted  with  was  the shares  which it held and what it received was  the  payment for those shares. [491 D-F]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  2462  of 1966. Appeal  from the judgment and order dated April 21/22,  1964 of  the Bombay High Court in Income-tax Reference No. 19  of 1961. Sanat  P. Mehta, J. B. Dadachanji and O. C. Mathur, for  the appellant. B.   Sen,  T.  A.  Ramachandran, R. N. Sachthey  and  S.  P. Nayar, for the respondent. The Judgment of the Court was delivered by Ramaswami.   J. The appellant is a Private  Limited  Company controlled  by Mulraj Kersondas and his nominees.  It  is  a dealer in shares, both in forward and ready market.  In  the year   1942  Mulraj  Kersondas  obtained  control   of   the Elphinstone Spinning and Weaving Mills (hereinafter referred to  as  the  ’Elphinstone Mills’).   He  also  acquired  the managing agency of the Elphinstone Mills for a consideration of  Rs.  6  lakhs.  In 1943 Mulraj  Kersondas  assigned  the Managing  Agency to a Private Company’ known as  Chidambaram Mulraj & Co. Ltd. whose shareholders were Mulraj  Kersondas, his  nominees and the appellant.  During the years  1942  to 1948  the  dealings  in shares  of  the  appellant  included dealings in shares of Elphinstone Mills also and the  profit

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and loss in the dealings of Elphinstone, Mills was taken  by the appellant to its revenue account during these years.  At the  end of the year 1948 the appellant held 5,137  ordinary shares and 1131 preference shares of the Elphinstone  Mills. During the years subsequent to the year 1948, the  appellant did  not effect any sale in the Elphinstone  Mills’  shares, excepting a solitary transac- 485 tion of 160 shares in the year 1952.  On the other hand, the appellant  purchased  some  more shares  and  added  to  its holdings in the shares of the said mills.  Therefore, in the year 1953 the appellant held in all 8693 ordinary shares and 2117 preference shares of the Elphinstone Mills.  It appears that during the years from 1948 onwards there was a slump in the  price  of the shares of the Elphinstone Mills  and  the prices of the ordinary and preference shares on the material date  in 1953 were Rs. 37/- per ordinary share and Rs.  38/- per preference share. On September 25, 1953 Mulraj Kersondas wrote a letter to  K. D.  Jalan,  a well known businessman of Calcutta  making  an offer   of  sale  of  25,000  ordinary  shares  and   10,000 preference  shares of the Elphinstone Mills for a total  sum of  Rs. 45 lakhs.  He stated in that letter that the  shares offered  stood in the names of himself, his  family  members and his allied concerns.  The offer for sale was accompanied by a further offer that if the offer for sale was  accepted, Mulraj Kersondas would obtain the resignation of the present Directors  of  the  Elphinstone Mills  and  would  also  get appointed as Directors persons of the choice of K. D.  Jalan and  that  he would obtain the resignation  of  the  present Managing Agents of the Elphinstone Mills, viz.,  Chidambaram Mulraj  and  Co. Ltd.  It was further stated in  the  letter that the price to be paid, the ’transfer of the shares,  the resignation of the Directors and the appointment of the  new Directors   of  the  choice  of  the  purchaser,   and   the resignation   of   the   Managing  Agents   would   all   be simultaneous.   K. D. Jalan accepted the offer and paid  the sum  of Rs. 45 lakhs out of which Mulraj Kersondas paid  Rs. 10  lakhs  to Chidambaram Mulraj and Co. Ltd.  which  relin- quished  the Managing Agency at his instance.   The  balance was distributed at Rs. 80/- per ordinary share and Rs. 1501- per  preference share of the Elphinstone Mills  (as  against the  prevailing  market  price  of Rs.  37/-  and  Rs.  88/- respectively)  to the respective shareholders  whose  shares had been sold to K. D. Jalan.  In respect of its shares sold to  K.  D. Jalan, the appellant  received  Rs.  10,42,990/-, though  the  appellant recorded its total  receipts  as  Rs. 10,37,775/- and the discrepancy of Rs. 5,215/- has not  been explained.   The cost price of the shares to  the  appellant was Rs. 8,03,544/- and the profit on the sale was worked out in the appellant’s books at Rs. 2,34,231/-.  The  appellant, however,  did  not  show the surplus in its  Profit  &  Loss account  but  took  it to the capital  reserve  account  and showed it as a capital reserve in its balance sheet.  In the assessment of the appellant for the assessment wear 1954-55, the Income Tax Officer treated the amount of Rs.  2,34,231/- as  the income of the appellant from the sale of the  shares and brought the said amount to tax.  The appellant took  the matter in appeal to the Appellate Assistant Commissioner who accepted its contention that the said amount 486 represented  a  capital gain and did not form  part  of  the income  from the business of the appellant  and  accordingly allowed  its appeal.  Against the decision of the  Appellate Assistant Commissioner the Department appealed to the Income

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Tax  Appellant Tribunal which allowed the appeal. set  aside the  order  of  the  Appellate  Assistant  Commissioner  and restored that of the Income Tax Officer.  Thereafter, at the instance of the appellant the Income Tax Appellate  Tribunal stated a case to the High Court under s. 66(1) of the Indian Income Tax Act. 1922 on the following question of law :                "Whether   on   the   facts   ind   in    the               circumstances  of  the  case the  sum  of  Rs.               2,34.230/- was the income of the assessee ?" On the direction of the High Court, the Tribunal submitted a supplementary  statement  of  the  case  and  referred   the following additional questions of law                "(2).   Whether  on  the  facts  and  in  the               circumstances  of the case, the amount of  Rs.               10,42,990/-  received  by  the  assessee,   as               allotted by Mulraj Kersondas out of the sum of               Rs.  45 lakhs received by him from Shri K.  D.               Jalan represents exclusively the price of  the               shares  or includes therein any  consideration               for  the procuring of the resignation  of  the               present    Directors,   for   obtaining    the               appointment of the Directors, of the choice of               Shri  K. D. Jalan and for the  resignation  of               the present managing agents of the Mills.                (3).      If so, what in view thereof  should               be taken as the sale price  of  each  of   the               ordinary  shares  and each fo  the  preference               shares sold by the assessee in calculating its               income arising therefrom ?" By its judgment dated April 21, 1964 the High Court answered the first two questions against the appellant and held  that in  view  of  the answer to the second  question  the  third question did not survive and therefore need not be answered. The present appeal is brought to this Court on a certificate granted  by  the  High Court under s. 66(A)  of  the  Indian Income Tax Act, 1922. The  distinction  between  investment  and   stock-in-trade, between fixed capital and circulating capital is well-known. -  In Californian Copper Syndicate (Limited and Reduced)  v. Harris(1) Lord Justice Clerk observed :                "It  is  quite a well  settled  principle  in               dealing with questions of assessment of Income               Tax,  that  where  the owner  of  an  ordinary               investment chooses to realise                (1)  5 Tax Cas. 159, 165-66.                487                 it, and obtains a greater price for  it than               he  originally  acquired it at,  the  enhanced               price is not profit in the sense of Schedule D               of  the Income Tax Act of 1842  assessable  to               Income  Tax.   But it is equally  well  estab-               lished  that  enhanced  values  obtained  from               realisation or conversion of securities may be               so  assessable,  where  what is  done  is  not               merely a realisation or change of  investment,               but an act done in what is truly the  carrying               on,  or  carrying out, of  a  ’business.   The               simplest   case  is  that  of  a   person   or               association  of  persons  buying  and  selling               lands or securities speculatively, in order to               make gain, dealing in such investments -,is  a               business, and thereby seeking to make profits.               There  are many companies which in their  very               inception  are formed for such a purpose,  and               in these cases it is not doubtful that.  where

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             they  make  a gain by a realisation  the  gain               they make is liable to be assessed for  Income               Tax.                What  is  the line which  separates  the  two               classes  of cases may be difficult to  define,               and each case must be considered according  to               its  facts;  the  question  to  be  determined               being.  Is the sum of gain that has been  made               a  mere  enhancement of value by  realising  a               security, or is it a gain made in an operation               of  business  in  carrying out  a  scheme  for                             profit-making The   principle  stated  in  this  case  was   approved   in Commissioner  of Taxes v. Melbourne Trust Ltd., (1) in  Rees Roturbo  Development  syndicate Ltd., v. Ducker-(2)  and  in Venkataswami Naidu and Co. v. Commissioner of Income-tax(3). With  regard  to  the first question,  Mr.  Sanat  P.  Mehta appearing on behalf of the appellant argued that the sum  of Rs. 2,34,230/- was a capital accretion on the sale of shares and did not represent income from the business in shares  of the appellant.  It was stated that though the appellant  was a  dealer  in  shares it was not  acquiring  the  shares  of Elphinstone  Mills as its stock-in-trade.  The argument  was put  forward that the appellant was a controlled concern  of Mulraj  Kersondas  and  it was a  shareholder  also  of  the Managing  Agency Company and therefore it was interested  in the Managing Agency.  The appellant had purchased the shares of  the Elphinstone Mills not with a view to deal with  them as  a  dealer  in  shares but with a  view  to  support  the Managing  Agents of the Elphinstone Mills.  In  our  opinion there  is no justification for the argument put  forward  on behalf  of  the    appellant.   It  is  admitted  that   the appellant is a dealer in shares (1) [1914] A.C. 1001.                 (2) 13 Trax Case. 366. (3)  35 I.T.R. 594. 488 and   that  it  had  actually  dealt  with  the  shares   of Elphinstone  Mills during its ’business from the years  1943 to 1948.  The appellant had carried forward its profits  and losses in the entire share business carried on by it to  its revenue  account including the business in  the  Elphinstone Mills  shares.   During  the years from  1943  to  1948  the appellant purchased shares of the Elphinstone Mills and also sold them.  It is true that at the end of the year 1948  the appellant  was possessed of as many as 5137 ordinary  shares and  1131 preference shares of the Elphinstone Mills but  it is  also apparent that in 1944 the appellant had sold  2,000 shares  and  in 1947 and 1948 the appellant had  sold  1,000 shares in each year.  During all these years the profits and losses in these shares have been treated on the same footing as the profits and losses in other shares by the  appellant. An  alternative argument was presented by Mr. Sanat P  Mehta that  at least from the year 1948 the holding in the  shares of  the Elphinstone Mills was regarded by the appellant  not as a stock-in-trade but as an investment.  It was  contended that  the circumstance that the appellant had been a  dealer in  shares for some years did not preclude it from being  an investor in shares in subsequent years.  It is no doubt true that a person who has been a dealer in shares in some  years can  be  an investor in shares in subsequent years.   It  is also  true  that it is possible for a dealer  in  shares  to convert  a part of its stock-intrade into investment.   But, as  has  been observed by the Appellate  Tribunal  there  is nothing in the books of the appellant or in its  resolutions to show that it had changed its attitude towards the  shares

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of  the  Elphinstone  Mills from the year  1948.   The  only circumstance  pointed out by the appellant is that from  the year  1949 onwards the appellant had not sold the shares  of the Elphinstone Mills but on the other hand had added to its holding.  But this circumstance in itself is not  sufficient to  reach  an inference that the appellant had  treated  its holding  in the shares as investment.  It is  apparent  that during the years 1949-53 the shares of the Elphinstone Mills had  Slumped  in price and this may be the  reason  why  the appellant  did not effect any sales during this period.   It was  pointed out that during this period the  appellant  had also  made further purchases of the shares.  But it  is  not unreasonable  to think that the appellant, who was a  dealer in shares was making further purchases and accumulating  its holding  when  the  market  was falling so as  to  be  in  a position to sell the shares to its advantage when a suitable opportunity occurred.  The argument was further stressed  on behalf of the appellant that it had purchased the shares  of the  Elphinstone Mills with a view to support  the  Managing Agents  of  the  Mills since the  appellant  itself  had  an interest  in  the Managing Agency Company, being one of  its shareholders.  It  was therefore contended that the  holding of the appellant in the shares of Elphinstone Mills must  be treated as a holding on capital account and the sale thereof must also be 489 regarded  as on capital account.  We do not think  there  is any  warrant  for  this argument.  As  pointed  out  by  the Appellate  Tribunal  there is no material on the  record  to suggest  that the main object of the appellant in  acquiring the  shares of the Elphinstone Mills was to give support  to the  Managing  Agents.   The  conductor  the  appellant   in disposing  of  large number of shares of  Elphinstone  Mills during  the years 1943-48 is not consistent with the  theory that  the appellant was acquiring shares for the purpose  of supporting  the Managing Agents.  There is also  nothing  on the  record  to show that during the years 1949-53  when  no sales were effected it was necessary to conserve the holding in the shares of the, Elphinstone Mills because the Managing Agency was in any way threatened.  It also appears that  act the time when the Managing Agency was acquired there was  no need to make any use of the holding of the appellant in  the shares  of  the Elphinstone Mills because the  appellant  at that  time  had  hardly  any  shares.   Subsequent  to   the acquisition of the Managing Agency until it was relinquished in 1953 there is nothing on the record of the proceedings to show  that  at  any time the Managing Agency  had  felt  its existence  either  precarious  or in need  of  support.   We therefore  reject  the  argument of the  appellant  on  this aspect  of  the case and hold that the profit  made  by  the appellant on the sale of the shares was its business  income and  the  first question was rightly answered ’by  the  High Court against the appellant and in favour of the Income  Tax Department. We proceed to consider the next question, viz., whether  the entire  amount  of  Rs.  10,42,990/-  which  the   appellant received for its ordinary and preference shares  represented exclusively   the  price  of  the  shares  or   whether   it constituted a composite payment for the price of the  shares and  certain  other  valuable  rights.   The  case  of   the appellant  is  that the transaction entered into  by  Mulraj Kersondas with K. D. Jalan which involved the sale of 25,000 ordinary   shares  and  10,000  preference  shares  of   the Elphinstone Mills was not merely a transaction for the  sale of  the  shares.  The offer which Mulraj Kersondas  made  on

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September  25, 1953 consisted of four items, viz.,  (1)  the sale of 25,000 ordinary shares and 10,000 preference shares, (2)  procuring the resignations of the present Directors  of the  Elphinstone  Mills,  (3) securing  the  appointment  of persons  of  the choice of K. D. Jalan as Directors  of  the Mills,  and  (4) obtaining the resignation  of  the  present Managing Agents of the Elphinstone Mills.  It was  contended for the appellant that the consideration of Rs. 45 lakhs for this  offer was a composite consideration for all  the  four items.  After the offer was accepted by K. D, Jalan and  the payment of Rs. 45 lakhs was made by him to Mulraj Kersondas, the latter appropriated Rs. 10 lakhs of the consideration to one  of  the four items, viz.,  relinquishment  of  Managing Agency.    He  paid  the  amount  to  the  Managing   Agents Chidambaram Mulraj and Co. Ltd. 490 Deducting  the  amount  of  Rs.  10  lakhs  from  the  total consideration  of Rs. 45 lakhs, the balance of Rs. 35  lakhs was  distributed  by  Mulraj  Kersondas  among  the   25,000 ordinary  shares  and  10,000  preference  shares.   It  was pointed out for the appellant that at the material time when the  transaction  had  gone  through_the  market  price  for Elphinstone Mills shares was Rs. 37/- per ordinary share and Rs.  88/-  per preference share, but when  Mulraj  Kersondas distributed  Rs. 35 lakhs among the ordinary and  preference shares each ordinary share was paid at the rate of Rs.  80/- and each preference share was paid at the rate of Rs. 1501-. According to the appellant therefore the excess amount  paid by the purchaser over and above the market price was paid by him   for   the  controlling  interest  which   was   ’being transferred  along  with the shares.  In  other  words,  the contention of the appellant was that the profit on the  sale of  the shares made by the appellant must be  calculated  on the  basis of what it got for the sale-price of  the  shares only  and  not  on the basis  of  the  entire  consideration received  by it which was a composite payment  received  for the price of the shares and for parting with the controlling interest.  We are unable to accept this argument as correct. It may be that in the total disposal of the entire block  of shares in favour of K. D. Jalan the latter may have acquired certain   amount  of  controlling  power  apart  from   mere acquisition  of shares.  It is also conceivable that  Mulraj Kersondas,  in  going  through the transaction  with  K.  D. Jalan,  might have given to K. D. Jalan not only the  shares but also certain other advantages.  But the question must be examined  from the view-point of the appellant and  what  we have  to see is what the appellant parted with and what  the appellant  got  in return.  It should be  noticed  that  the appellant   itself  had  no  controlling  interest  in   the Elphinstone  Mills.   It was not the Managing Agent  of  the Elphinstone  Mills  and  its holding in the  shares  of  the Elphinstone  Mills  was only to the extent of  13  per  cent which could not give it any controlling power.  Mr. Sanat P. Mehta said that though the appellant had not a  sufficiently large  holding  to give it any controlling power, it  was  a member  of the Mulraj Kersondas group and it was working  in close  concert  with Mulraj Kersondas who  had  considerable Controlling  power  and interest.  It was  argued  that  the transaction  entered  into by Mulraj Kersondas  with  K.  D. Jalan,  although  entered into by  Mulraj  Kersondas  alone, should be treated as the transaction on behalf of the entire group of Mulraj Kersondas including the appellant.  What was therefore being offered by Mulraj Kersondas to ’K.  D. Jalan was  an  offer  on behalf of the entire group  which  had  a built-in  power which it was proposing to transfer to K.  D.

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Jalan in the scheme proposed by Mulraj Kersondas who was the representative  of  the group.  It was therefore  argued  on behalf of the appellant that it would not be correct to  say that the appellant had not parted with anything 491 more   than  the  block  of  its  shares  in   the   present transaction.  It is not possible to accept this argument put forward  on behalf of ,the appellant.  There is  nothing  on the  record  of  the case to support  the  theory  that  the transaction with K. D. Jalan was not a transaction by Mulraj Kersondas himself but a transaction of the entire group.  As appears from the letter of Mulraj Kersondas dated  September 25, 1953, the offer was on behalf of Mulraj Kersondas alone. Ms  letter to the Managing Agents was a direction given  ’by him asking them to do certain things to suit his convenience and,  as  it  appears from the  record,  the  direction  was promptly obeyed by them.  As pointed out by the High  Court, the circumstances of the case indicate that Mulraj Kersondas was  by reason of his influence and power, in a position  to command  obedience  of  his wishes  from  his  nominees  and associates  concerned.   When Mulraj  Kersondas  decided  to enter into a transaction for the sale of the shares to K. D. Jalan  he called upon the appellant to keep at his  disposal the  holding  which the appellant had in its shares  of  the Elphinstone  Mills.   No controlling power was held  by  the appellant itself in the Elphinstone Mills and it was not  in a position to procure the resignation of the Directors or to bring about the appointment of the persons of the choice  of K. D. Jalan as Directors.  Nor was it in a position to  call upon  the Managing Agents to relinquish their  office.   All these  things  were, however, possible to  Mulraj  Kersondas because of the influence and power which he possessed.   The part  taken by the appellant in the transaction with  K.  D. Jalan  was  merely  a  passive part  viz.,  keeping  at  the disposal  of  Mulraj Kersondas its  holding  in  Elphinstone Mills  shares which it had held in its business as a  dealer in  shares.  So far as the appellant is concerned,  what  it parted  with  was  the  shares which it  held  and  what  it received  was  the  payment for those  shares.   It  follows therefore that the entire sum received by the appellant from Mulraj Kersondas was the price of the shares disposed of  by Mulraj  Kersondas and consequently the whole of  the  excess over  the  cost price of the shares was the  profit  of  the appellant.   We accordingly hold that no part of the  amount of  Rs.  10,42,990/- received by the appellant  from  Mulraj Kersondas  can  be regarded as consideration for  any  other valuable right excepting the price of the shares sold by it. Me  second  question was therefore rightly answered  by  the High Court against the appellant. For  the reasons expressed we hold that the judgment of  the High  Court is right and this appeal must be dismissed  with costs. Y.P.                        Appeal dismissed. 492