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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. 773     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 774 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