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PETITIONER: M/s.  RAMNARAIN SONS (Pr.) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BOMBAY

DATE OF JUDGMENT: 05/12/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR 1141            1961 SCR  (2) 904  CITATOR INFO :  E          1962 SC1267  (7,10,11)  R          1963 SC 835  (21)  RF         1968 SC 761  (7)  RF         1970 SC 529  (7)  E          1973 SC 182  (12)  RF         1986 SC1695  (30)

ACT: Income  Tax--Assessment--Purchase  of shares  for  acquiring managing  agency  rights--Loss  incurred  in  sale  of  such shares--If of a capital nature.

HEADNOTE: The  appellants,  a  private limited  company,  carrying  on business  as brokers, managing agents and dealers in  shares and  securities  and  having as one  of  their  objects  the acquisition  of managing agencies,      purchased shares  of the  Dawn Mills at a rate much higher than the  market  rate for  obtaining  the  controlling voting  right  and  thereby acquired  the managing agency of the Mills.  Later on,  they sold-some  of  those  shares  and suffered  a  loss  of  Rs. 1,78,438.   The Income-tax Officer in assessing the  taxable income disallowed the loss and the Appellate 905 Assistant Commissioner on appeal confirmed that order.   The Income-tax  Appellate Tribunal held that the shares did  not become stock-in-trade of the appellants, but since the  loss incurred  was  incidental  to their  business  of  acquiring managing  agency,  it was allowable as a revenue  loss.   On reference,  the High Court held that the shares acquired  by the appellants were a capital asset and the loss suffered by the sale was of a capital nature. Held, that the High Court had taken the correct view of  the matter and the appeal must fail. The question whether a transaction is or is not an adventure of the nature of trade has-to be decided in the light of the intention  of the assessee judged by the legal  requirements associated with the concept of trade or business. Since  the shares in question were purchased by  the  appel- lants  with the intention of acquiring the  managing  agency and not in the course of their business as dealers in shares

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with  the intention of trading in those shares and what  was acquired  by such purchase was a capital asset in the  shape of  a managing agency, it could not be said  merely  because the  managing agency could be utilised for earning  profits, that  those  shares  were  stock-in-trade  of  their   share business. G.Venkataswami Naidu and Co. v. The Commissioner of  Income- tax,  [1959] Supp. 1 S.C.R. 464 and The Oriental  Investment Co., Ltd. v. The Commissioner of Income-tax, Bombay,  [1958] S.C.R. 49, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION; Civil Appeal No. 698 of 1957. Appeal  by special leave from the judgment and  order  dated August  2,  1956,  of the Bombay High  Court  in  Income-tax Reference No. 1 of 1956. A.   V.   Viswanatha  Sastri,  B.  A.  Palkhiwala   and   G. Gopalakrishnan, for the appellant. Hardyal Hardy and D. Gupta, for the respondent. 1960.   December 5. The Judgment of the Court was  delivered by SHAH, J.-The High Court of Judicature at Bombay answered the following two questions referred by the Income Tax Appellate Tribunal,  Bench "B", Bombay, under s. 66(1) of  the  Indian Income-Tax Act, 1922: (1)  Whether the acquisition of the managing agency 906 of the Dawn Mills Co., Ltd., was in the nature of a  it    n "business" carried on by the assessee company? (2)..If  the  answer  to  the  first  question  is  in   the affirmative,  whether  the  loss suffered  by  the  assessee of...company  of  Rs. 1,78,438 on purchase and sale  of  400 shares of the Dawn Mills Co., Ltd., being incidental to  its business  of acquiring the managing agency, was a loss of  a revenue nature?, as follows: (1)..Acquisition  of the managing agency was an  acquisition of a capital asset; (2)..The loss in respect of the 400 shares was of a  capital nature. Against  the  order  of  the  High  Court,  this  appeal  is preferred with special-leave. The  appellants  are a private  limited  company  registered under the Indian Companies Act, 1913, and carry on  business as  brokers,managing  agents  and  dealers  in  shares   and securities.   One  of the objects for which  the  appellants were  incorporated  was to acquire managing  agencies.   The appellants  also carried on business in shares of  different companies,  and  were assessed to income-tax as  dealers  in shares and securities. M/s.  Sassoon J. David, & Co., Ltd. were the managing agents of  the  Dawn Mills Ltd.-a public limited  company-and  they held  2,507  out  of  a total issue  of  3,200  shares.   On September  28,  1946,  the appellants  purchased  from  M/s. Sassoon J. David & Co., Ltd. 1,507 shares of the Dawn  Mills at the rate of Rs. 2,321-8-0 per share and having obtained a controlling  voting  right,  acquired  the  managing  agency rights  of  the Mills.  The remaining, one  thousand  shares were acquired from M/s.  Sassoon J. David & Co., Ltd. by the Directors  of the appellants at the rate of Rs.  1,500.   At the material time, the ruling market price of the shares  of the  Dawn  Mills  was Rs. 1,610.   In  December,  1946,  the appellants sold 400 out of the shares purchased by them, and

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thereby suffered a loss of Rs. 1,78,438.  The loss  suffered by the appellants in the year of account January 1, 1946, to December 31, 1946, by sale of shares including 400 shares of the 907 Dawn Mills was Rs. 1,92,834.  Crediting Rs. 1,05,907  earned as profit in certain other share transactions, the net  loss suffered  in the share transactions in the year  of  account amounted to Rs. 86,927.  The appellants valued their  shares at  the end of the year of account, at cost or market  price whichever was lower.  By this method of valuation, the books of  account of the appellants showed a loss of Rs.  7,97,792 which  included a loss of Rs. 7,04,000 on the  valuation  of the  Dawn Mills shares held by the appellants at the end  of the year of account. In  the  income-tax  assessment for the  year  1947-48,  the appellants  claimed Rs. 86,927 as loss on sales in trade  in shares  and Rs. 7, 97,792 as loss on valuation of  stock-in- trade.   The Income Tax Officer, Companies’  Circle  III(1), Bombay,  disallowed the loss suffered by the  appellants  in the sale of the Dawn Mills shares, because in his view those shares  were purchased by way of capital-investment and  the loss  suffered  by sale thereof could not be  allowed  as  a trading  loss.   He also held that the appellants  were  not entitled to depart from the method adopted in earlier  years and  to  value the closing stock of shares in  the  year  of account  at cost or market price whichever was lower and  to claim  the  difference  between  the  opening  and   closing valuation  as  a  trading  loss.   The  Appellate  Assistant Commissioner  confirmed that order.  In appeal,  the  Income Tax Appellate Tribunal held that the managing agency of  the Dawn Mills was acquired by the appellants as a part of their business  activity and the shares of the Mills  having  been purchased in the regular course incidental to their business of  acquiring the managing agency, the loss on the  sale  of those shares was allowable as a revenue loss; but the shares of  the  Dawn  Mills were not,  the  stock-in-trade  of  the appellants’ business and they were not entitled to treat the difference between the purchase price and the value at close of   the   year  of  those  shares,  as  a   trading   loss. Accordingly,  the Tribunal allowed Rs. 1,78,438 as  loss  on sale of 400 shares of the Dawn Mills., but did not allow Rs. 7,04,000  as loss arising out of the valuation of  the  Dawn Mills shares at the 908 end  of  the  year of account.  On the  application  of  the Commissioner  of  Income Tax, the Tribunal referred  to  the High Court the questions set out hereinbefore.  In the  High Court,  the  appellants  took out a  notice  of  motion  for directing the Tribunal to refer certain questions which  the appellants  claimed arose out of the order of  the  Tribunal and which the Tribunal did not refer. The High Court agreed with the opinion of the Tribunal  that the shares of the Dawn Mills were not the stock-in-trade  of the  appellants and that those shares were purchased by  the appellants with the object of acquiring the managing agency. The  High Court, however , held that the shares acquired  by the appellants formed a capital asset and the loss  suffered by  sale of 400 out of those shares in the year  of  account being a capital loss, was not in the computation of income a permissible deduction.  The High Court dismissed the  notice of motion taken out by the appellants. In  considering  whether  a  transaction is  or  is  not  an adventure  in  the  nature of trade,  the  problem  must  be approached  in  the light of the intention of  the  assessee

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having   regard  to  the  "legal  requirements   which   are associated  with  the concept of trade  or  business".   The inference  on  this question raised by the Tribunal  on  the facts  found  is  of  mixed law and  fact  and  is  open  to challenge  before the High Court on a reference under s.  66 of  the  Income Tax Act G. Venkataswami Naidu & Co.  v.  The Commissioner of Income Tax (1).  It was held in The Oriental Investment  Co.,  Ltd. v. The Commissioner  of  Income  Tax, Bombay  (2),  that  the  question  whether  the  appellants’ transactions amounted to dealing in shares and properties or to investment, is a mixed question of law and fact, and that the legal effect of the facts found by the Tribunal on which the assessee could be treated as a dealer or an investor, is a question of law.  The Tribunal held that the shares of the Dawn Mills purchased by the appellants did not become  their stock-in-trade.  But they held that the transaction (1) [1959] SUPP.  S.C.R. 646. (2) [1958] S.C.R. 49. 909 having  been effected in the regular course of the  business of  the  appellants,  viz.,  the  acquisition  of   managing agencies,  the  loss resulting from the sale of  shares  was incidental  to that business and was a revenue loss.  It  is not easy to appreciate the process by which this  conclusion was  reached.  The shares were purchased for the purpose  of acquiring  the managing agency of the Dawn Mills; they  were not  purchased in the course of the appellants’ business  as dealers   in  shares.   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 hares and their Memorandum  of Association  authorises them to carry on business in  shares of  any importance in the circumstances of this  case.   The appellants by entering the shares of the Dawn Mills in their statement  of  shares  in which  trading  transactions  were carried  on  could  not  alter the  real  character  of  the acquisition.   The  appellants were undoubtedly  dealers  in shares; but the transaction in the Dawn Mills shares was  ex facie  not a business transaction.  The current market  rate at the date of purchase was Rs. 1,610 per share whereas  the appellants acquired the shares at the rate of Rs.  2,321-8-0 per  share.  Even assuming that the appellants acquired  the entire block of 2,507 shares. from M/s.  Sassoon J. David  & Co.,  Ltd.-the  shares  transferred  to  the  names  of  the Directors  being  held  by them merely as  nominees  of  the appellants-the price per share was considerably in excess of the  prevailing market rate.  The only reason  for  entering into  the transaction which could not otherwise be  regarded as a prudent business transaction, was the 910 acquisition  of the managing agency.  If the purpose of  the acquisition  of  a large block of shares at  a  price  which exceeded  the current market price by a million  rupees  was the  acquisition of the managing agency,   the inference  is inevitable  that intention in purchasing shares was  not  to acquire  them  as  part of the trade of  the  appellants  in shares.  The Tribunal found that the Dawn Mills’ shares were

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acquired by the appellants for obtaining the managing agency of the Mills.  The agency was acquired by virtue of the vot- ing  power which the appellants obtained having purchased  a very  large block of shares, and for acquiring the  managing agency,   the   appellants   did  not   pay   any   distinct consideration.  The managing agency is manifestly the source of  profit of the appellants; but the shares  purchased  and the  managing agency acquired were both assets of a  capital nature  and did not constitute stock-in-trade of  a  trading venture.  If the shares were acquired for obtaining  control over  the managing agency of the Dawn Mills, the  fact  that the  acquisition  of  the shares  was  integrated  with  the acquisition  of  the  managing agency  did  not  affect  the character  of  the acquisition of  the  ;hares.   Subsequent disposal  of some out of the shares by the appellants  could also  not  convert what was a capital  acquisition  into  an acquisition in the nature of trade. The  High  Court  was therefore right in  holding  that  the acquisition  of the managing agency was an acquisition of  a capital  asset  and  the loss incurred by sale  of  the  400 shares  was  of a capital nature.  The High Court  was  also right  in  dismissing  the notice of  motion  for  an  order directing  the Tribunal to refer the questions suggested  by the  appellants.  If the acquisition of the shares  was  not acquisition of a stock-intrade, but of a capital asset,  the appellants,  by valuing the shares at cost or  market  price whichever was lower, could not bring the difference  between the purchase price and the valuation made by them into their trading account. The appeal therefore fails and is dismissed with costs. 911