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PETITIONER: ORIENTAL INVESTMENT CO. (P) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BOMBAY

DATE OF JUDGMENT: 10/09/1968

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

CITATION:  1969 AIR  460            1969 SCR  (2)  46  CITATOR INFO :  RF         1970 SC 394  (7)

ACT: Indian  Income  Tax Act, 1922, s. 66(1)-Mixed  questions  of fact and law-What are-Jurisdiction of High Court in  dealing with  such  questions  is  the  same  as  in  dealing   with questions of law-Appropriate farm for such questions.

HEADNOTE: For  the  assessment years 1940-41 to 1943-44  the  assessee company  claimed to be an investor in shares and  properties and not a dealer. The contention was rejected by the Income- tax  Officer, the Appellate Assistant Commissioner  and  the Tribunal.  The company then applied to the Tribunal under s. 66(1)  of  the Income tax Act, 1922 for a reference  of  the following  questions  of  law for the opinion  of  the  High Court:  (i) whether on the facts and in the circumstances of the  case the assessee company can rightly be treated  as  a dealer  in  investments and properties ?  (ii)  whether  the profits  and  losses  arising  from  the  sale  of   shares, securities and immovable properties of the assessee  company can  be taxed as business profits.  The Tribunal refused  to make  the  reference  and  the  High  Court  dismissed   the application under s. 66(2). On appeal by special leave  this Court   held  that  the  question  as  to  what   were   the characteristics of the business of dealing in shares or that of  an  investor was a mixed question of law and  fact.   It remanded  the  case  to the High  Court  for  directing  the Tribunal  to  state a case under s. 66(2) on  the  following questions:    (i)  whether there are any  materials  on  the record to support the finding of the Income tax Officer that the assessee company was a dealer in shares., securities and immovable  property during the assessment year  in  question (ii) whether the profits and losses arising from the sale of shares, securities and immovable properties of the  assessee company  can  be treated as business property  ?   On  these questions being referred to the High Court by the  Tribunal, the  High Court decided them against the  assessee  company. The company again appealed to this Court.  It was  contended on behalf of the appellant that the  questions as framed  by this.  Court  did  not reflect  the  real  controversy  ’and

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therefore   the  questions  as  originally  framed  in   the company’s  application under s. 66(1) should be referred  to the  High Court in a fresh statement of case to be  made  by the Tribunal.     HELD:  (i)  The questions framed by this Court  and  the form  in  which they were framed seemed to assume  that  the questions  involved were questions of fact for it is only in regard to a question of fact that the question can  properly be  framed "as to whether there was material to support  the said  finding".   This  Court  had  itself  held  that   the questions involved in the present case were mixed  questions of  law  and fact. Therefore the questions  framed  by  this Court  were  not appropriate and did not  reflect  the  real controversy   between   the  parties.   It   was   therefore appropriate  that  the  questions  should  be  modified   as suggested by the appellant in its petition under s. 66(1) to the High Court. [53 G--54 B]     (ii)  The proper construction of statutory  language  is always  a  matter  of law and therefore  the  claim  of  the assessee  that the profits and losses arising from the  sale of shares securities etc. cannot be treated as profits      47 of  a business involves the application of law to the  facts found  in  the setting of the particular case.   In  dealing with  findings  on such questions of law and fact  the  High Court must no. doubt accept the findings of the. Tribunal on the  primary questions of fact; but it is open to  the  High Court  to  examine  whether the Tribunal  had  ’applied  the relevant  legal principles correctly or not in reaching  its final  conclusion; and  in that sense, the scope of  enquiry and  the  extent of the jurisdiction of the  High  Court  in dealing with such points is the same as in dealing with pure questions of law. [53 B-D] G. Venkataswami Naidu & Co. v.C.I.T., 35 I.T.R. 594,  relied on.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 651 to. 655 of 1967.     Appeals from the judgment and order dated March 2,  1966 of the Bombay High Court in Income-tax Reference No,. 73  of 1962. S.T.   Desai,  D.  Dwarkadas  and  S.S.  Javali,   for   the appellant..     C.K. Daphtary, Attorney-General, R. Gopalakrishnan, R.N. Sachthey  and  B.D.  Sharma for the respondent  in  all  the appeals. The Judgment of the Court was delivered by     Ramaswami,  J. These appeals are brought by  certificate from  the judgment of the Bombay High Court dated  March  2, 1966 in Income Tax Reference No. 73 of 1962.     The  appellant company, hereinafter called the  assessee company, was incorporated on July 29, 1924, as an investment company, the objects of which are set out in el. III of  the memorandum of association and more particularly in sub-cls.. 1,  2,  15 and 16 of that clause.  The assessment  years  in question are 1943-44 to 1948-49, excepting the year 1947-48. According  to  its  petition made in  the  High  Court,  the assessee company dealt with its assets as follows:                     "The petitioner company purchased during               the period 1st July, 1925 to 30th June,  1928,               shares  of the value of Rs. 1,86,47,789  major               portion  of which was comprised of  shares  in

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             the  Sassoon Group of Mills.  During the  year               ended 30th June, 1929, the petitioner  company               promoted  two companies known as  Loyal  Mills               Ltd., and Hamilton Studios Ltd. and took  over               all  their  shares of the value of  Rs.  101/2               lacs.   In  the  year  1930,  the   petitioner               company  purchased  shares  of  Rs.  1,33,930.               During  the period of 9 years from  Ist  July,               1930,  to 30th July, 1939, no purchases.  were               made   with  the exception of a few shares  of               Loyal Mills Ltd. taken over from the staff  of               E.D.  Sassoon  & Co. Ltd.,  who  retired  from               service.  In the year ended  30th  June, 1940,               reconstruction  scheme  of the  Appollo  Mills               Ltd. 48 took  place  under which debentures held by  the  petitioner company  in the Appollo. Mills Ltd., were redeemed  and  the proceeds were .reinvested in the new issue of shares made by the Appollo Mills Ltd.  Out of the purchases of the value of Rs.  2,794  made by the petitioner company during  the  year ended 30th June, 1941, Rs. 2,000 was the value of shares  of the  Loyal Mills. Ltd., taken over from the retiring  staff. In  the year ended 30th June, 1943, the  petitioner  company took  over  from  the David Mills Co. Ltd.,  shares  of  the Associated Building Co., of the value of Rs. 56,700.   After this  there were no purchases at all to this date  excepting purchases. of the value of Rs. 34,954 during the year  ended 30th June, 1946." The sales are contained in paragraph 3(b) which states:                     "In  relation to the purchases  made  by               the  petitioner  company as  stated  above  no               appreciable  sales of shares were made  during               the period 29th July, 1924 to 30th June, 1942,               the sales made in the year  ended  30th  June,               1929,  of the value of Rs.  1,29,333  included               shares of the value of Rs. 45,000 in the Loyal               Mills  Ltd., sold to the members of the  staff               and   shares  of  the  value  of  Rs.   83,833               representing sterling investments handed  over               to the creditors of the petitioner company  in               part repayment of the loan taken from them  in               the year ended 30th June, 1931, shares of  the               value of Rs. 7,48,356 were handed over to  the               creditors in payment  of the loan granted’  by               them.   From the year ended 30th  June,  1943,               E.D. Sassoon & Co. Ltd., started relinquishing               the  managing  agencies of the  various  mills               under their agency and the shares held by  the               petitioner  company  in the Sassoon  Group  of               Mills  were  handed  over  to  the  respective               purchasers. of the mills agencies." Prior  to 1940 the assessee company made a claim every  year being  treated  as a dealer in investments   and  properties but   this  contention  was  repelled  by  the  Income   Tax authorities  and  upto  the  assessment  year  1939-40   the assessee   company   was assessed on the basis of  being  an investor but it appears that for the assessment years  1940- 41,  1941-42 and 1942-43 the Income Tax department  accepted the plea of the assessee company and treated it as a  dealer in   shares,  securities  and   immovable   properties   and assessed  it  on that basis.  For these years  and  for  the assessment year 1943-44 the assessee company made its return in that basis. But after the return had been  filed for  the year  1943-44, the assessee company withdrew its return  and

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filed  a revised return on March 7, 1944, contending that it was not  a 49 dealer  but  merely an investor.  Along with the  return  it filed a letter dated March 6, 1944 in which it stated:                      "The  return of Total Income which  was               submitted  with the Company’s letter  of  25th               May  1943 was prepared in conformity with  the               ruling of the Income-tax Officer in the  1940-               41  assessment   that the  company was  to  be               assessed  as a dealer in  Investments.   Since               that return was submitted the Central Board of               Revenue  has  decided that the Company  is  an               Investment Holding Company, and accordingly an               amended  Return of Total Income under  Section               22(  1 )  of  the  Indian Income-tax   Act  is               submitted herewith on which the assessment for               1943-44  may be based, as on  this  particular               question the company obviously cannot have one               status for Excess Profits Tax and another  for               Income-taX." It  was  contended  by the assessee company  that  it  never carried  on any business in the purchase or sale of  shares, securities or properties-  In support of this contention the assessee  company relied on the order of the Central   Board of  Revenue  dated August 18, 1943 passed under s. 26(1)  of the  Excess  Profits  Tax  Act.   The  Income.  Tax  Officer rejected the plea and held that the investments were held by the  assessee company as the stock-intrade of  its  business which it carried on during the previous year and also in the preceding  years.  The assessee company took the  matter  in appeal    to  the  Appellate  Assistant   Commissioner   who dismissed  the  appeal and upheld the order of  the   Income Tax  Officer.   The  assessee  thereafter  appealed  to  the Income  Tax Appellate Tribunal and the same contentions were urged  on  behalf of the assessee  company.   The  Appellate Tribunal  rejected the assessee’s claim that it was  showing itself  as  a dealer in  shares,  securities  and  immovable properties under a misapprehension and without  appreciation of  the correct facts.  The Appellate Tribunal held that  in the case of the assessee company not only the Memorandum  of Association  gave  the  power  to the  company  to  deal  in investments  but  the case of the company all along  in  the past  was  that  it  was  a  dealer  in   investments    and properties.   Consequently,  the  Tribunal  held  that   the assessee  company  was a dealer in  shares,  securities  and properties and  dismissed  the appeals.  Thus the grounds on which  the  case  was  decided against the assessee  company were  (1)  that the assessee claimed to. be a dealer  or  an investor according as it incurred losses or made profits and (2) that because of the objects contained in the  memorandum of association and because of its assertion made in the past as being a dealer the assessee company could not be held  to be  an investor.  The assessee company then applied  to  the Appellate  Tribunal  under s. 66(1) of the Income  Tax  Act, 1922, 50 hereinafter  called  the  ’Act’  for  a  reference  of   the following  questions  of  law for the opinion  of  the  High Court:                     "(i)  Whether on the facts and  in   the               circumstances of the case the assessee company               can   rightly  be  treated  as  a  dealer   in               investments and properties; and                   (ii)   Whether  the  profits  and   losses

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             arising   from the sale of shares,  securities               and  immovable  properties  of  the   assessee               company  can  be taxed  as business profits." The  application was rejected by the Appellate Tribunal   on the  ground  that  no question  of law arose   out  of   its order.  The assessee company then made an application  under s. 66(2) of the Act to the Bombay High Court which dismissed the  application  by  its order dated June  15,  1952.   The assessee company thereupon obtained special leave to  appeal to this Court.  The appeal was allowed by this Court by  its judgment dated May 22, 1957 and the order of the Bombay High Court dated June 15, 1952 was set aside.  It was pointed out by this Court that the Appellate Tribunal in arriving at its finding that the assessee was a dealer and not an  investor, had relied on two basic facts, viz., the objects set out  in the Memorandum of Association  and  the  previous  assertion made  by  the  assessee  company that it  was  a  dealer  in investments  and properties and not merely an investor.   It was observed that merely because the company had within  its objects the dealings. in investments, shares and  properties the  circumstance did not give it the characteristics  of  a dealer  in shares.  The circumstance, though relevant,   was not   conclusive.   It  was pointed out in the  judgment  of this   Court  that  the  question  as  to.  what  were   the characteristics of the business of dealing in shares or that of an investor was a mixed question of fact and law and what was  the legal effect of the facts found by  the   Appellate Tribunal. and whether as a result thereof the assessee could be  termed a dealer or an investor was itself a question  of law.    Accordingly  the  Court  formulated  the   following two  .questions  of law as arising out of the order  of  the Tribunal:                     "(  1 ) Whether there are any  materials               on  the record to support the finding  of  the               Income  Tax Officer that the assessee  company               was   a  dealer  in  shares,  securities   and               immovable  property  during   the   assessment               year in question?                    (2)   Whether  the  profits  and   losses               arising from the   sale of shares,  securities               and  immovable  properties of    the  assessee               company can be taxed as business profits. ?" The  case  was  therefore remanded to  the  High  Court  for directing  the  Appellate Tribunal to state a  case  on  the aforesaid  questions of law under s. 66(2) of the  Act.   In accordance with the direc- 51 tion  of this Court the Appellate Tribunal made a  statement of  the  case  on June 12/13, 1962.   The  reference   being Income-tax  Reference No. 73 of 1962 was heard by  the  High Court  which  by its judgment dated March 2,  1966  answered both  the  questions. against the assessee  company  and  in favour of the Commissioner of Income Tax.     On behalf of the assessee company Mr. S.T. Desai  argued that  the  question  whether the assessee  company   was   a dealer  dealing in investments and properties or whether  it was  a  mere  investor will have to be judged  on  a  proper scrutiny  of the transactions themselves considered  in  the light  of the Circumstances in which the transactions  ’both of  purchase  and sale had .been brought about.   If  it  is found on an examination of the transactions themselves  that the  essential  characteristics  of  the  business  of   the assessee  were of dealing in shares and   investments,   the assessee will undoubtedly be taken as a dealer.  If, on  the other hand, the characteristics revealed by the transactions

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are   those’  peculiar  to  mere  investments   in   shares, securities and properties, the finding of the Court must  be that the assessee is an investor and the profits made by  it are only excess obtained on realisations of the  investments and  not liable to be  taxed.  According to Mr. S.T.  Desai, neither  the  Memorandum  of Association  nor  the  previous assertions  made  by  the assessee company  either  under  a misconception or even deliberately will not have  the effect of changing the legal nature of the transactions as revealed by  the  transactions themselves and  the  circumstances  in which the transactions have taken place.  In support of this argument  reference was made on behalf of the  appellant  to the statements  of  the transactions, Annexures ’E’ and  ’F’ of  the  statement of the case  and  detailed  explanations, statements  M-1 and M-2.  The substance of the  argument  of the  appellant was that (1 ) most of the shares,  securities and  properties  acquired by the assessee company  were  the properties of E.D. Sassoon & Co. and the family of Sassoons; (2) a large block of shares held by the company consisted of the shares of the Sassoon Group of Mills and the’ block  was held  all along since its acquisition before the  year  1930 until E.D. Sassoon and Co. and the Sassoons continued  to be interested in the said Group of Mills and they were realised by  sale  only  when E.D. Sassoon &  Co.  and  the  Sassoons decided  to relinquish their interest in the said  Group  of Mills,  and  (3) neither the mode of  acquisition  of  these shares.  and  properties nor the mode and  manner  of  their disposal  have  any of the  distinctive  characteristics  of business dealings.     On the questions actually formulated by this Court  upon which  the  Appellate Tribunal has made a statement  of  the case  it  is not possible for us to entertain  the  argument advanced  by  Mr.  S.T.  Desai.  It  was  contended  on  the contrary by the Attorney-General 52 that upon the questions actually referred, the answers  must be  against the asses.see company.  It was said  that  there were   at  least  two materials on  record  to  support  the finding of the Appellate Tribunal that the  assessee-company was a dealer in shares,  securities and immovable properties during  the assessment year in question.  The first is  that in  its own memorandum dated October 2, 1942,  the  assessee company  contended’  that  it was a  dealer  in  shares  and investments  and set out various reasons in support  of  its contention.   The second circumstance is that el. 3  of  the Memorandum  of  Association gave the power to  the  assessee company  to  deal with investments.  The contention  of  the Attorney  General was that there was material on the  record to  support the finding of the Appellate Tribunal  that  the assessee-company  was  a dealer in  shares,  securities  and immovable  properties and the questions, as already  framed, were  rightly answered by the High Court in the  affirmative and  against  the  assessee  company.   In  answer  to  this contention   Mr.   S.T.  Desai  submitted  that   the   real controversy  in  this  case  is not  reflected  in  the  two questions framed by this Court in its judgment dated May 22, 1957.  It was argued that the two questions up.on which  the assessee  company applied for a reference under s. 66(1)  of the Act were properly framed and were questions arising  out of  the order  of  the  Appellate Tribunal.  Mr. S.T.  Desai urged  that  we should  modify  the questions  in  a  manner suggested  by the assessee company in the application  under s. 66(1) of the Act and ask the Appellate Tribunal to make a fresh  statement of the case.  In our opinion, the  argument put forward on behalf of the appellant  is  well rounded and

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as  we  shall presently point out, it is  necessary  in  the interest  of  justice that we should  modify  the  questions framed by this Court on the last occasion and call upon  the Appellate Tribunal to make a fresh statement of the case. There  is  no doubt that the jurisdiction conferred  on  the High  Court by s. 66(1) of the Act is limited  to  entertain references  involving questions of law.  If, fo.r  instance, the point raised on reference relates to the construction of a   document  of   title   or  interpretation  of   relevant provisions  of a statute, it is a pure question of law.   In dealing with it, the High Court may have due regard for  the view  taken by the Tribunal, but its decision would  not  be lettered  by that view.  In some cases, the point sought  to be raised in a reference may turn out to be a pure  question of  fact and if that be so, the finding of fact recorded  by the Appellate ’Tribunal must be regarded as conclusive in  a proceeding  under  ’s.  66(1).   But it  would  be  open  to challenge  the  conclusion of fact drawn  by  the  Appellate Tribunal on the ground that it is not supported by any legal evidence or material or that the conclusion of fact drawn by the  Appellate Tribunal ’is perverse and is not  ration,ally possible.  It is within these narrow limits that the 53 conclusions  of  fact  by  the  Appellate  Tribunal  can  be challenged      under s. 66(1).  Such conclusions can  never be  challenged  on     the ground that  they  are  based  on misappreciation  of  evidence.  There is, however,  a  third class of cases in which the assessee or   the department may seek to challenge the correctness of the conclusion  reached by  the Tribunal on the ground that it is a conclusion on  a question of mixed’ law and fact.  Such a conclusion is    no doubt  based  upon the primary evidentiary  facts,  but  its ultimate form is determined by the application  of  relevant legal  principles.   To  put  it  differently,  the   proper construction of statutory language is always a matter of law and  therefore the claim  of the assessee that  the  profits and losses arising from the sale of  shares, securities etc. cannot  be taxed as profits  of  a  business   involves  the application of law to the facts found in the setting of  the particular   case.   In  dealing  with  findings  on    such questions of mixed law and fact the High Court must no doubt accept the findings of the Tribunal on the primary questions of fact; but it is open to the High Court to examine whether the   Tribunal   had applied the relevant  legal  principles correctly or not in reaching,  its final conclusion; and  in that  sense,  the scope of enquiry and   the extent  of  the jurisdiction  of  the  High Court in  dealing  with     such points  is the same as in dealing with pure points  of  law. (See  the decision of this Court in G. Venkataswami Naidu  & Co.   v.C.I.T.(1)).  On the last occasion it was pointed out by  this   Court  that  the question  as  to  what  are  the characteristics  of  the business in shares or  that  of  an investor  is a mixed question of fact   and law.  To put  it differently, the question  as to what is the   legal  effect of the facts found by the Tribunal and whether as a   result the  assessee can be treated as a dealer or an  investor  is itself  a  question of law.  The final  conclusion   of  the Tribunal  can, therefore, be challenged on the  ground  that the relevant legal   principles have been mis-applied by the Tribunal  in reaching its decision on the point; and such  a challenge  is  open  under  s. 66( 1 )    because  it  is  a challenge  on a ground of law.  It is because the   question involved  in this case was not a question of pure  fact  but was a mixed question of fact and law that this Court allowed the  appeal on the last occasion and set aside the  judgment

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of  the Bombay High Court dated June 15, 1952  and  directed the Appellate   Tribunal to state a case, but owing possibly to  some  mistake  or   inadvertence  the  actual  questions framed  by this Court (quoted    at page 676 of  32  I.T.R.) and  the form in which the questions    were framed by  this Court  seem  to assume that  the   questions   involved  are questions of fact.  The reason is that it is only in  regard to  a  finding  of fact that the question  can  be  properly framed "as to whether there was material to support the said finding".    We  are accordingly of the  opinion  that   the questions   actually   framed  by this  Court  on  the  last occasion are not appropriate and (1) 35 I.T.R. 594 54 do  not reflect  the real controversy between  the  parties. It  is therefore, expedient in the interest of justice  that the   questions  should  be modified  as  suggested  by  the assessee  company in its .petition under s. 66( 1 )  of  the Act to the High Court  and  the Appellate Tribunal should be asked to make a fresh statement of the case.     For  these reasons we allow these appeals and set  aside the  judgment of the Bombay High Court dated March  2,  1966 and direct the Appellate Tribunal to make a fresh  statement of the case on the following questions of law:                      "( 1 ) Whether on the facts and in  the               circumstances of the case the assessee company               can   rightly  be  treated  as  a  dealer   in               investments and properties; and                     (2)  whether  the  profits  and   losses               arising  from the sale of  shares,  securities               and  immovable  properties  of  the   assessee               company can be taxed as business profits." After  the  Appellate Tribunal has made a statement  of  the case  the  High  Court  will dispose  of  the  reference  in accordance  with law.  The appellant must pay the  costs  of this  appeal  in  this Court to the respondent.   We  should like  to  add that we have not considered whether  the  High Court has in its judgment reached the correct conclusion  on what  the  High  Court assumed were  ’the  questions  to  be decided  by  it.  We are setting aside the judgment  of  the High  Court only on the ground that the enquiry made by  the High  Court was, .on the view taken by us, not competent  on the questions as framed at present.  We therefore express no opinion  on  the merits of the dispute.  We trust  that  the Tribunal  will  make  the fresh  reference  with  the  least practicable delay. G.C.                                       Appeals allowed. 45