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PETITIONER: RAJA BAHADUR VISHESHWARA SINGHAND OTHERS.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BIHARAND ORISSA

DATE OF JUDGMENT: 15/12/1960

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

CITATION:  1961 AIR 1062            1961 SCR  (3) 287

ACT: Income  Tax-Purchase and sale of shares and securities  with surplus money-Such transactions, if amount to investment  or business  in shares-Test-Excess sale proceeds-If  amount  to business profit or mere accretion to capital-Indian  Income- tax Act, 1922 (11 of 1922), s. 66(2).

HEADNOTE: The appellant used to invest his cash surplus in shares  and securities and maintained an account book called Book No.  1 relating thereto.  During the period from 1930 to 1941-42 he purchased  a large number of shares and securities which  by the  accounting year 1941-42 were of a value Rs. 1491  lacs. He  sold  certain  shares and securities  of  the  value  of several  lacs  and made certain amount of  profit  on  those sales.   In  1940 the appellant borrowed a large  amount  of money from his brother, the Maharaja of Darbhanga and opened a  new  account  named account No.  2  which  contained  all entries regarding shares purchased and sold out of the money borrowed from the Maharaja.  In the assessment year  1944-45 to 1948-49 the profits made by the (1) [1961] 3 S.C.R. 279. 288 appellant  from  purchase  and sale of  shares  amounted  to several  lacs  and the Income-tax Officer held those  to  be liable  to  income-tax as business profits.   The  Appellate Assistant  Commissioner upheld the assessments but  excluded the  profits for the years 1944-45.  On appeal by  both  the parties the Appellate Tribunal held on the evidence that the appellant  was  to  be regarded as a dealer  in  shares  and securities  and  therefore the profits  were  assessable  to income-tax.   The  High  Court  stated  the  following   two questions under s. 66(2) of the Income-tax Act and  answered them in the affirmative:- "(1)  Whether  in the circumstances of the  case,  there  is material  to support the finding of the  Appellate  Tribunal that the assessee was a dealer in shares and securities with respect to each of the account and, therefore, liable to  be taxed? (2)Whether  having regard to the finding of the  Appellate Tribunal  in respect of 1941-42 assessment, it- was open  to

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the Appellate Tribunal in the present case to hold that  the profits and transactions of sale and purchase of shares  and securities amounted to profits of business and so liable  to be taxed?" On  appeal  by special leave the appellant  contended  inter alia, that being a Zamindar the buying and selling of shares was not his normal activity and he did not carry on any such business  but his purchases and sales were in the nature  of investments  of his surplus monies and therefore the  excess amounts received by sales were capital receipts being merely surplus and not profits. Held, that on the materials produced and on the facts proved the  appellant must be held to have been  rightly  assessed. The  principle applicable to such transactions is that  when an owner of an ordinary investment chooses to realise it and obtains  a higher price for it than the original price  paid by  him,  the enhanced price is not a profit  assessable  to income tax, but where as in the present case what is done is not  merely a realisation or a change of investment  but  an act done in what is truly the carrying on of a business  the amount recovered as appreciation will be assessable. G.Venkataswami Naidu & Co. v. The Commissioner of Income- tax, [1959] Supp. 1 S.C.R. 464, Oriental Investment  Company Ltd.  v. The Commissioner of Income-tax, [1958]  S.C.R.  49, Raja  Bahadur  Kamakshya  Narain Singh  v.  Commissioner  of Income-tax,  Bihar  and  Orissa, (1943) L.R.  70  I.A.  180, discussed. The  substantial nature of the transactions, the  manner  in which the books were maintained, the magnitude of the shares purchased  and sold and the ratio between the purchases  and sales and the holding justified tile Tribunal to come to the conclusion  that  the  appellant was dealing  in  shares  as business.   The  High Court could not interfere  with  those findings  and  it  rightly answered  the  questions  in  the affirmative. There is no such thing as res judicata in income-tax matters 289 and it was quite open to the Appellate Tribunal to give  the finding that it did.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 137 to  141 of 1958. Appeals  by special leave from the judgment and order  dated April  26, 1956 of the Patna High Court in  Misc.   Judicial Cases Nos. 362 to 366 of 1955. A.   V. Viswanatha Sastri, S. K. Majumdar and I.  N. Shroff, for the appellants Nos. 2 to 4 (In all the appeals). Hardayal Hardy and D. Gupta, for the respondent (In all  the appeals). 1960.  December 15.  The Judgment of the Court was delivered by KAPUR,  J.-The  assessee who is the  appellant  has  brought these  five  appeals against the judgment and order  of  the High  Court of Patna by which it answered the two  questions stated  under s. 66(2) of the Indian Income-tax Act  against the  appellant and in favour of the Commissioner of  Income- tax. The  appellant  is the son of the  late  Maharajadhiraja  of Darbhanga  and  the brother of the  present  Maharaja.   The father  died in 1929 and the appellant was given by  way  of maintenance  the  Estate of Rajnagar.  He was also  given  a yearly allowance of Rs. 30,000 which was later raised to Rs.

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48,000.  From 1929, the appellant invested his cash  surplus in  shares and securities, the account of which was  entered in  what  is called Account Book No. 1. From the  year  1930 onwards  up  to the year 1941-42 the appellant  purchased  a large   number  of  shares  and  securities  which  by   the accounting year 1941-42 were of the value of Rs. 14.91 lacs. During this period the appellant sold shares and  securities in the accounting years 1936-37 and 1939-40 of the value  of 1.48  lacs  and  1.69 lacs respectively.   He  made  certain amount  of  profits on these sales but under orders  of  the Commissioner  of  Income-tax in the former case and  of  the Income-tax Tribunal in the latter case, these sums were  not assessed to income-tax.  In the 290 accounting years 1942-43 to 1946-47 the appellant  purchased and  sold  some  shares and  securities.   The   entries  in Account No. 1 stood as follows:-   Total value of    Total cost of      Total cost of shares   shares  &  securities  shares and    and  securities  sold cost at the            securities pur   during the year.   beginning of the    chased during the      year.             year. 1350 Fs.  Rs. 14.66 lacs      Nil         Rs. 4.68 lacs 942-43                                    (13 items) 1351 Fs.  Rs. 9.98 lacs      Rs. 2.37 lacs.   Rs. 416 lacs 1943-44                      (4 items)         (12 items)                               Rs. 3-05 lacs.  Rs. 069 lacs 1352 FS.    Rs. 8.20 lacs     (2 items) and     (3 items) 1944-45                       other call money. 1353 Fs.     Rs. 10.52 lacs      Nil        Rs. 1.03 lacs      1945-46             (3 items) 1354 Fs.   Rs. 9.50 lacs      Rs. 15 83 lacs.  Rs. 3.39 lacs 1946-47                      ( 9items)            (2 items) and  in  all these years the appellant  made  profits  which varied  from Rs. 2,56,959 in the accounting year  194243  to Rs. 33,174 in the accounting year 1946-47. On  July 16, 1940, the appellant arranged an overdraft  with the  Mercantile  Bank  of India and  actually  withdrew  Rs. 10,000  for  the purchase of shares.  But  his  brother  the Maharaja  advanced to him without interest Rs. 10  lacs  and thus  the overdraft was paid off.  A new Account was  opened in the books of the appellant named No. 2 Investment Account which  contained all entries in regard to  shares  purchased and   sold  from  out  of  the  money  borrowed   from   the Maharajadhiraj.   In this account entries of  the  different years were as follows:- 292 was held not to. be taxable.  Thus in the second period  the assessee was held not to be carrying on  any trade.  In  the third period, i.e., the assessment years 1944-45 to  1948-49 the profits made by the appellant from purchase and sale  of shares were as  follows:- 1944-45...Rs.2,62,000 and odd 1945-46...Rs.3,95,000 and odd 1946-47...Rs.1,57,000 and odd 1947-48...Rs.1,33,000 and odd 1948-49...Rs.  76,000 and odd The Income-Tax Officer held these to be liable to income-tax as  business  profits.  On appeal  the  Appellate  Assistant Commissioner excluded the profits for the years 1944-45  and 1945-46 but for the years 1946-47 to 1948-49 the assessments were  upheld.   Both  parties  appealed  to  the   Appellate Tribunal.  It held on the evidence that the appellant was to be  regarded  as  a  dealer in  shares  and  securities  and therefore  the profits were assessable to  income-tax.   The

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appellant applied for a case to be stated under s. 66(1)  of the Income-tax Act.  This application was dismissed but  the High  Court made an order under s. 66(2) of  the  Income-tax Act to state a case on two questions of law.  The  questions were as follows:               (1)...Whether  in  the  circumstances  of  the               case, there is material to support the finding               of  the Appellate Tribunal that  the  assessee               was  a  dealer in shares and  securities  with               respect   to   each  of  the   accounts   and,               therefore, liable to be taxed?               (2)...Whether,  having regard to the  findings               of  the  Appellate  Tribunal  in  respect   of               1941/42   assessment,  it  was  open  to   the               Appellate Tribunal in the present case to hold               that the profits and the transactions of  sale               and purchase of shares and securities amounted               to  profits  of business and so liable  to  be               taxed ? The  High Court held that the facts and circumstances  which the  Tribunal  took into consideration in  arriving  at  the finding were the material before the Tribunal to support the finding and the first question 293 was  answered in the affirmative and therefore  against  the appellant.  In regard to the second question the answer  was again in the affirmative and against’, the appellant who has come to this Court by special leave. It  was  argued on behalf of the appellant that he  was  not carrying  on the business of buying and selling  shares  but his purchases and sales were in the nature of investments of his surplus monies and therefore the excess amounts received by sales were capital receipts being merely surplus and  not profits.   It was also submitted that the appellant being  a zamindar the buying and selling of shares was not his normal activity; that he had a large income and it was his  surplus income  which  he  was investing in buying  the  shares  and whenever  he found it profitable he converted  his  holdings and securities and for a number of years from 1931-32 he had been  buying shares but he did not sell them; that the  very nature  of  investments  was  such  that  they  had  to   be constantly  changed so that the monies invested may be  used to  the best advantage of the investor; and that  the  sales were  really for the purpose of reemploying the monies  that he had invested to his best advantage. Counsel  for  the  appellant relied upon  certain  cases  in support of his submission that the first question raised was of  a  wider  amplitude and that  it  had  been  erroneously restricted  by the High Court and that its true  import  was the  same  as  of the questions which  were  raised  in  the following  cases  decided by this Court.  He  relied  on  G. Venkataswami  Naidu & Co. v. The Commissioner of  Income-tax (1),  Oriental Investment Co., Ltd. v. The  Commissioner  of Income-tax,  Bombay  (2).  In the former case  the  assessee purchased four plots of land adjacent to the mills of  which he was the Managing Agent.  On various dates and about  five years  later  sold them to the mills in  which  he  realized about Rs. 43,000 in excess of his purchase price.  This  was treated  by  the Income-tax authorities as purchase  with  a view to sell at a profit.  The question referred was whether there was material for the (1) [1959] Supp. 1 S.C.R. 646. (2) [1958] S.C.R. 49. 294 assessment  of  that  amount  as  income  arising  from   an

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adventure in the nature of trade.  The High Court held  that that  was  the nature of the transaction.   On  appeal  this Court  held  that  before the Tribunal  could  come  to  the conclusion that it was an adventure in the ’nature of trade, it  had  to take into consideration the  legal  requirements associated  with  the concept of the trade or  business  and that  such a question was a mixed question of law and  fact. It  was also held that where a person invests money in  land intending  to hold it and then sells it at a profit it is  a case  of  capital accretion and not profit derived  from  an adventure  in the nature of trade but if a purchase is  made solely  and exclusively with the intention to resell  it  at profit and the purchaser never had any intention to hold the property  for  himself there would be a  strong  presumption that the transaction is in the nature of trade but that  was also a rebuttable presumption.  The purchase in the  absence of  any  rebutting evidence was held to fall in  the  latter category,  i.e., adventure in the nature of trade.   In  the Oriental  Investment case(1) the assessee was an  investment company.  It had purchased certain shares and sold them  and qua those shares it claimed to be treated as an investor and not  a  dealer on the ground that it did not  carry  on  any business in the purchase and sale of shares.  The assessee’s applications  for reference to the High Court-were  rejected on the ground that no question of law arose out of the order of the Tribunal.  It was held that the question whether  the assessee’s  business  amounted to dealing in shares  and  in properties or was merely an investment was a mixed  question of law and fact and the legal effect of the facts found  was a  question  of law and this Court ordered the  case  to  be stated  on  two  questions  that  it  framed.   One  of  the questions  was similar to the first question in the  present case but the second question was a wider one, i.e.,  whether the profits and losses arising from the sale of shares  etc. could be taxed as business profits. The question which the High Court had to answer (1)  [1958] S.C.R. 49. 295 in the present case was a narrow one and the answer to  that on  the material before the Court was rightly given  in  the affirmative.  But even if the question is taken to be  wider in  amplitude,  on the materials produced and on  the  facts proved  the  appellant  must be held to  have  been  rightly assessed.  Counsel for the appellant argued that the amounts received  by him in the accounting years were in the  nature of  capital  accretions and therefore not,  assessable.   In support,  Counsel for the appellant relied on the  following cases:-Raja   Bahadur   Kamakshya  Narain   Singh   v.   The Commissioner  of Income-Tax, Bihar & Orissa (1)  where  Lord Wright observed that profits realised by the sale of  shares may  be  capital  if  the seller  is  an  ordinary  investor changing  his  securities but in some instances  it  may  be income if the seller of the shares is an investment  company or  an insurance company.  The other cases relied upon  were Californian  Copper Syndicate Limited v. Harris (2);  Cooper v. Stubbs (3); Leeming v. Jones (4) and Edwards v.  Bairstow & Harrison (5). ....It  is  not necessary to  discuss  these cases because..the principle applicable to such transactions is that...when an owner of an ordinary investment chooses to realise  it  and  obtains  a higher price  for  it  than  he originally  acquired  it  at, the enhanced price  is  not  a profit assessable to income tax but where as in the  present case what is done is not merely a realisation or a change of investment but an act done in what is truly the carrying  on of  a business the amount recovered as appreciation will  be

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assessable. In  July  1948 the appellant had  borrowed,  though  without interest,  a large sum of money to the extent of  about  Rs. 10,00,000,  no  doubt from his brother.  He  started  a  new account  calling  it  No. 2  Investment  Account.   For  the assessment years under appeal shares purchased and sold were of  a large magnitude ranging from Rs. 4.68 lacs to  Rs.  69 thousands  in what is called the first account and from  Rs. 9,64,000 or even if Port Trust Debentures are excluded (1) [1943] L.R.70 I.A. 180,194.     (2) [1904] 5 T.C. 259. (3) [1925] 10 T.C. 29, 57.           (4) [1930] 15 T.C. 333 (5)..[1955] 36 T.C. 207. 296 Rs. 3,60,000 to Rs. 30,000.  The magnitude and the frequency and  the ratio of sales to purchases and total holdings  was evidence from which the Income-tax Appellate Tribunal  could come  to  the  conclusion  as to  the  true  nature  of  the activities  of  the  appellant.   The  principle  which   is applicable  to the present case is what we have  said  above and on the evidence which was before the Tribunal, i.e., the substantial nature of the transactions, the manner in  which the  books had been maintained, the magnitude of the  shares purchased  and sold and the ratio between the purchases  and sales  and  the holdings, if on this material  the  Tribunal came  to the conclusion that there was material  to  support the  finding that the appellant was dealing in shares  as  a business, it could not be interfered with by the High  Court and in our opinion it rightly answered the question  against the appellant in the affirmative. The  second question is wholly unsubstantial.  There  is  no such  thing  as  res judicata in  income-tax  matters.   The Appellate  Tribunal  has  placed in  a  tabulated  form  the activities  of the appellant showing the buying and  selling and  the  magnitude  of  holdings  and  it  cannot  be  said therefore that it was not open to the Appellate Tribunal  to give the finding that it did. In  our  opinion  the High Court rightly  held  against  the appellant.  The appeals are therefore dismissed with  costs. One hearing fee in this Court. Appeals dismissed. 297