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PETITIONER: RAMESHWAR PRASAD BAGLA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

DATE OF JUDGMENT27/09/1972

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ HEGDE, K.S. REDDY, P. JAGANMOHAN DUA, I.D.

CITATION:  1973 AIR  182            1973 SCR  (2) 452  1973 SCC  (3) 575  CITATOR INFO :  R          1976 SC 772  (6)  RF         1977 SC2008  (16)

ACT: Indian  Income  Tax Act, 1922, Sec.  66(2)--Powers  of  High Court and Supreme Court not appellate but only advisory. Sec.  10, Sec. 12, (b) whether surplus realised on the  vale of  shares originally bought for the control of the  Company and  obtaining managing agency, is liable to tax as  capital gains or as profit on sale of shares.

HEADNOTE: The  appellant  assessee is a partner in A. &  Co.  Managing Agency of one  textile  Mill was assigned  by  the  Managing Agents (S. & Co.) to A.  &  Co. for consideration of  buying large number of shares and cash transferred in his favour by his  brother.   In 1946, the appellant  sold  43,700  shares resulting in the profit of Rs. 1,51,927.  Before the  income Tax Officer the appellant’s contention was that the  surplus was  in  the nature of capital gains.  The  I.T.O.  however, held  that the amount was liable to taxation u/s 10  of  the Act as profits on the sale of shares.  The tribunal remanded the  case  to the I.T.O. The appeal along  with  the  remand report  was placed before the Tribunal for  heading.   After carefully  considering  all the evidence the  Tribunal  held that the shares were purchased not as stock-in-trade but for securing  the  managing agency and control of  the  company. The Tribunal further held that the surplus on sale of shares is  not income which is liable to income tax under sec.  10. Thereafter, the Tribunal, on the High Court’s direction drew up a statement of case u/s 62 (2).  The High Court  reversed the findings of the Tribunal and held against the appellant. HELD  : There was enough material and evidence referred,  to by the Tribunal while recording its finding that the  shares in  question had been purchased by the assessee with a  view to  acquire the managing agency and control of  the  textile mill  and that the shares did not constitute  stock-in-trade of  the  assessee.   It is for the Tribunal  to  decide  the question of fact and the High Court in a reference u/s 66 of the  Act  cannot go behind the Tribunal’s finding  of  fact.

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The  High Court can only lay down the law applicable to  the facts of the case found by the Tribunal.  The High Court and the Supreme Court, in an appeal against the judgment of  the High  Court,  in  a  reference u/s 66 of  the  Act  are  not constituted  courts of appeal.  These courts  only  exercise advisory  jurisdiction  in such references.   Only  in  case where  the finding is not based on any relevant evidence  or is  based on conjectures or suspicion, a question of law  is raised  and  interference  with  the  finding  of  facts  is permissible.   The High Court was not justified  in  setting aside the finding of fact in the instant case. [457C] On  facts we are of the opinion that the profit made by  the sale of shares constituted capital gain chargeable to income tax  u/s 12 (b).  Indeed it was the prayer of  the  assessee himself in his letter dated March 30, 1949. Ramnarain  Sons (Pvt.) Ltd. v. Commissioner  of  Income-tax, [1961] 41 I.T.R. 534 relied on. 453

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1718  of 1969. Appeal  by special leave from the judgment and  order  dated February 20, 1967 of the Allahabad High Court in Misc.  Case No. 561 of 1963. Bhagirath Das, H. K. Puri, S. K. Hirajee and S. K.  Dhingra, for the appellant. S.  Mitra,  B.  D.  Sharma  and  R.  N.  Sachthey,  for  the respondent. The Judgment of the Court was delivered by KHANNA, J. This appeal by special leave is directed  against the  judgment  of Allahabad High Court  whereby  that  court answered the following two questions in a reference made  to it  under section 66(2) of the Indian Income Tax  Act,  1922 (hereinafter referred to as the Act) :               "(i)  Whether  there  was  material  for   the               finding  that  the  shares  in  question  were               purchased  by  the  assessee with  a  view  to               acquire the managing agency and the control of               the  company  or the  shares  constituted  his               stock-in-trade ?               (ii)  Even  if the shares in question did  not               constitute the stock-in-trade of the assessee,               whether the, profit made on the sale of shares               did not constitute capital gain chargeable  to               income tax under section 12-B of the Act ?" On the first question, the answer of the High Court was that there  was  no material for the finding that the  shares  in question  were  purchased  by the assessee with  a  view  to acquire the managing agency and control of the company.   It was  further held that the shares constituted the  stock-in- trade of the assessee.  In view of the above, the High Court held in answer to question No. (ii) that the profits made by the  sale  of  shares  could  not  constitute  capital  gain chargeable to income tax under section 12-B of the Act. The matter relates to assessment year 1947-48, the  relevant previous  year  for  which was the  Dassera  year  2002-2003 corresponding to the period from October 16, 1945 to October 5, 1946. Rameshwar Prasad Bagla, the assessee-appellant, is a partner of  firm  Agarwal & Co. having one-sixteenth  share  in  the firm.   Agarwal & Co. consisted of six groups  of  partners, viz.,  (1)  Morarka Group, (2) Khetan  Group,  (3)  Seksaria

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Group, (4) 454 Poddar Group, (5) Bagla Group, and (6) Kantilal  Nahalchand. The Bagla Group consisted of the assessee and his brother. M/s E. D. Sassoon & Co. Ltd. were the managing agents of the India United Mills Ltd.  The latter is a public limited com- pany  and  was  engaged in the manufacture  of  textiles  in Bombay.  Large blocks of ordinary and deferred shares in the India United Mills Ltd. were held by M/s E. D. Sassoon & Co. Ltd.  and its associates.  In 1943 there  were  negotiations between  M/s.   E.  D. Sassoon & Co. Ltd.  and  one  of  the partners of Agarwal & Co. Those negotiations resulted in  an agreement  dated  January  26, 1945 under which  M/s  E.  D. Sassoon  & Co. Ltd. agreed to assign the managing agency  of the  India  United Mills Ltd. to Agarwal & Co.  with  effect from  December 1, 1943.  The consideration for the  sale  of managing  agency  was Rs. 57,80,000/-.  Agarwal &  Co.  also agreed  to  purchase 16,80,000 ordinary shares of  the  face value  of  Rs. 10/- each and twenty lac deferred  shares  of rupee  one  each of the India United Mills Ltd.   The  total issued shares of the India United Mills Ltd. were twenty lac ordinary  shares  of Rs. 10/- each and  fifty  lac  deferred shares  of  rupee one each.  The price for this big  lot  of shares  was fixed at Rs. 3,37,20,000 calculated at the  rate of  Rs.  16/8/- for an- ordinary shares and Rs.  3/-  for  a deferred share. At  the time when the above mentioned large block of  shares of  the India United Mills Ltd. was agreed to  be  acquired, Agarwal  &  Co. was not in a position to pay  for  five  lac ordinary shares involving an outlay of Rs. 82,50,000.  Those five  lac shares were purchased by Ramkumar Shivchandrai  of Poddar  Group of partners in Agarwal & Co. to the extent  of three  lac  shares.   The  remaining  two  lac  shares  were purchased  by  Khetan Group of partners.   The  two  Groups, viz.,  Poddar and Khetan Groups held the five lac shares  on behalf  of Agarwal & Co. till 1944.  The understanding  with Poddar  and  Khetan Groups was that those  shares  would  be taken up by the partners of Agarwal & Co. at the same price. In January 1945 the aforesaid five lac ordinary shares  were taken  over by Agarwal & Co. from Poddar and Khetan  Groups. The  assessee appellant was entitled with reference  to  his holding  in  Agarwal & Co. to 31,250 shares,  i.e.  one-six- teenth  out of the five lac shares.  The assessee’s  brother was  likewise entitled to an equal number of shares  out  of those five lac shares.  The assessee’s brother  relinquished his  rights  in  the said 31,250 shares  in  favour  of  the assessee, as a result of which the assessee obtained  62,500 shares in the India United Mills Ltd.  The shares were  paid for  at  the rate of Rs. 16/8/- per share  in  1945.   These shares  had  earlier  stood in the  name  of  Bombay  ’Trust Corporation  which was a company formed by Sasoon Group of companies.  After the managing agency of the India United 455 Mills Ltd. had been taken over by Agarwal & Co. on  December 1,  1943,  those shares were transferred between  March  and August  1944  in  the name of various  persons  residing  in Jaipur.  Those persons transferred the said shares in favour of the assessee on January 30, 1945.  The assessee  borrowed rupees  ten lacs from Agarwal & Co. in order to pay for  the price of those shares. Out  of  62,500  shares acquired by the  assessee,  he  sold 43,700  shares during the period from April 3, 1946 to  July 19, 1946 in seven lots.  The rest of the shares remained  in the  possession  of the assessee during the  relevant  year. The  sale  of  43,700 shares resulted in  a  profit  of  Rs.

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1,80,220 to the assessee.  The sale proceeds were thereafter utilised  by the assessee for purchasing shares  of  Swadesh Mills Ltd., Kanpur. The assessee did not disclose the profit of Rs. 1,80,220  in the turn.  In response to a notice issued by the income  tax officer,  the assessee wrote letter dated March 30, 1949  in the course of which he stated :               "I  have  already  brought  to  your  honour’s               notice in the course of assessment proceedings               and  would like to confirm that I had  certain               share  transaction  in which  there  has  been               appreciation to the tune of Rs. 1,51,927/1/11.               Since it is common ground that the assessee is               not  dealing  in shares as business  the  said               appreciation  in  capital  should  have   been               normally  disclosed  as capital  gain  in  the               return but I regret that the amount could  not               be  shown, so the return already filed may  be               treated as amended accordingly." The   amount  of  Rs.  1,51,927/1/11  referred  to  in   the assessee’s letter included the surplus realised a,. a result of the sale of 43,700 shares of the India United Mills Ltd. The  income  tax officer rejected the plea of  the  assessee that  the  profit made by the sale of 43,700 shares  of  the India United Mills Ltd. was not profit liable to be taxed as such, but was only capital gain.  In the previous year  with which  we  are  not concerned, the  assessee  had  not  been treated as a dealer in shares.  The income tax officer  held the  assessee to be a dealer in shares during  the  relevant year  on  the ground ’that the assessee  had’  entered  into share  transactions on a very extensive scale.   The  income tax  officer  accordingly  brought to tax  the  sum  of  Rs. 1,80,220 under section 10 of the Act as profits on the  sale of  shares.  On appeal the Appellate Assistant  Commissioner held that 62,500 shares were stock-in-trade.  The finding of the  income  tax  officer was  substantially  upheld.   Some relief  was  granted  by reducing the  taxable  income.   On further appeal by the assessee 456 to  the  Income  Tax  Appellate  Tribunal,  the  matter  was remanded  to  the income tax officer on May  1,  1954.   The income tax officer thereafter submitted a report on June 12, 1956.  The appeal along with the remand report of the income tax officer was put up before the Tribunal for hearing.  The Tribunal,  as per order dated September 26, 1956, held  that the  excess realised from the sale of shares was not  income which  was  liable  to  income  tax.   In  coming  to   this conclusion the Tribunal observed,,:               Agarwal & Co. as a result of an agreement with               the Sassoons.  Agarwal & Co. was interested in               the  managing agency of some mills also  which               came   to  them  as  a  result  of  the   same               agreement.   We  think  that  on  the facts               produced  the  purchase of the shares  by  the               assessee was not with a view to deal in  those               shares but with a view to obtain the  managing               agency  and  control of the company.   It  may               also be noted here that if the price ruling at               the time of the transfer was to be taken  into               account,  perhaps,  there is no  profit.   The               profit has been shown as the transfer is  made               at   the  price  at  which  the  shares   were               originally  sold  by the Sassoons.   We  think               that on the facts before the Income-tax autho-               rities the assessee’s holding of shares in the

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             India  United Mills Ltd. was not the  purchase               of a stock in trade as held by the Department.               We  accept  the assessee’s appeal  and  direct               that the excess realised on the sale of  these               shares  is  not  income  which  is  liable  to               income-tax." An  application  was  thereafter  filed  on  behalf  of  the respondent  for stating a case to the High Court.  but  that application  was rejected.  The respondent  then  approached the  High  Court under section 66(2) of the Act.   The  High Court thereupon directed the Tribunal to draw up a statement of  case and refer the questions reproduced earlier  to  the High  Court.   After the questions were referred,  the  High Court  gave  answers to the questions, as mentioned  at  the commencement of this judgment. We  have heard Mr. Bhagirath Das on behalf of the  appellant and Mr. Sukumar Mitra on behalf of the respondent and are of the  opinion that the judgment of the High Court  cannot  be sustained.   The  question  with which the  High  Court  was concerned was whether there was material before the Tribunal for arriving at the finding that the shares in question  had been  purchased by the assessee with a view to  acquire  the managing  agency and control of the India United Mills  Ltd. Perusal  of  the judgment of the High Court shows  that  the High Court did not discuss this 457 aspect  of  the  matter.  On the contrary,  the  High  Court proceeded straightaway to deal with the matter as if it  had itself  to arrive at an independent finding on the point  as to whether the shares in question had been purchased by  the assessee  with  a view to acquire the  managing  agency  and control of the company.  This approach of the High Court was wholly  erroneous and not warranted by law.  It is  for  the Tribunal to decide questions of fact, and the High Court  in a reference under section 66 of the Act cannot go behind the Tribunal’s  findings of fact.  The High Court can  only  lay down the law applicable to the facts found by the  Tribunal. The  High Court and the Supreme Court, in an appeal  against the  judgment of the High Court given in a  reference  under section 66 of the Act, are not constituted courts of  appeal against  the  order  of the  Tribunal.   These  courts  only exercise advisory jurisdiction in such references.  The High Court  in  a  reference under section 66  of  the  Act  can, however,  go into the question as to whether the  conclusion of the Tribunal on a question of fact is based upon relevant evidence.   If  the High Court finds that there is  no  such evidence  to  support the finding of fact of  the  Tribunal, this  circumstance would give rise to a question of law  and can be agitated in a reference.  It is also well established that when a Tribunal acts on material which is irrelevant to the  enquiry or considers material which is partly  relevant and  partly irrelevant or bases its decision partly on  con- jectures,  surmises and suspicions and partly  on  evidence, then  in  such a situation an issue of law  arises  and  the finding of the Tribunal can be interfered with.  The finding may  also  be  interfered  with if it  be  found  to  be  so unreasonable  that no person acting judicially and  properly instructed as to the relevant law could have arrived at  it. None  of the circumstances justifying interference with  the finding  of fact of the Tribunal has been shown to exist  in this  case.   In the absence of any such  circumstance,  the High Court in our view was not justified in interfering with the finding of fact of the Tribunal.  The fact that the High Court  on appreciation of evidence would have arrived  at  a conclusion  of fact different from that of the Tribunal  did

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not warrant interference with the finding of the Tribunal. The Tribunal in arriving at the conclusion that the purchase of the shares in question by the assessee was with a view to obtain  the managing agency and control of the India  United Mills  Ltd.  and  that those shares were  not  purchased  as stock-in-trade  referred to a number of  circumstances.   It was  found by the Tribunal that the shares in question  were out of the lot sold by Sassoons to Agarwal & Co. It was also found  that the shares had been transferred to the  assessee at the original price at which these shares had been sold by the Sasoons and not at the price which was prevailing at the time of transfer.  The Tribunal further 458 found  that  62,500 shares represented the  portion  of  the assessee in the total number of shares originally  purchased by  Agarwal  &  Co.  In the light  of  those  findings,  the Tribunal recorded its conclusion in the paragraph which  has been  reproduced  earlier.   The  above  conclusion  of  the Tribunal,  in our opinion, was based upon relevant  material and  could  not  be interfered with  in  a  reference  under section 66 of the Act. The High Court in arriving at the conclusion that the shares in question had been purchased not with a view to obtain the managing agency but as a stock-in-trade has referred to  the fact  that the assessee took loan for the purchase of  those shares  and  subsequently transferred 43,700 shares  out  of 62,500 shares.  This circumstance as observed by this  Court in the case of Ramnarain Sons (Pr.) Ltd. v. Commissioner  of Income  Tax(1)  would  not by itself go  to  show  that  the purchase of shares was not to facilitate the acquisition  of the managing agency.  In that case the appellant company was a dealer in shares and securities and carried on business as managing agents for some companies.  In order to acquire the managing  agency  of a textile-mill, the  appellant  company purchased from Sassoon David and Co., who were the  managing agents  thereof, 1,507 shares of the mill at  Rs.  2,321-8-0 per share at a time when the market price of the shares  was Rs.  1,610.  The remaining 1,000 shares of the mill held  by Sassoon David and Co. were acquired by the directors of  the appellant  company.  Two months later the appellant  company sold  400  of those shares at a loss of Rs.  1,78,438.   The said loss was claimed as a trading loss.  Question arose  in this  context  whether  the  purchase  of  shares  could  be regarded  as  acquisition of  stock-in-trade.   Dealing  the above question, this Court observed               "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 shares               and their memorandum of association authorises               them  to  carry on business in shares  of  any               importance in the circumstances of the case."               (1)   [1961] 41 I.T.R. 534.               459

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             It was further observed :               "Subsequent disposal of some out of the shares               by appellants could also not convert what  was               a capital question into an acquisition in  the               nature of trade." We are, therefore, of the view that the answer given by  the High  Court  to question No. (1) was not  correct.   In  our opinion,  there  was.  material for tile  finding  that  the shares in question had been purchased by the assessee with a view to acquire the managing agency and control of the India United Mills Ltd. and that the shares did not constitute the stock-in-trade of the assessee. So far as the second question is concerned, we find that  it is  the  common case of the parties that if  the  shares  in question are held to be not stock-in-trade of the  assessee, in  that case the profits made on the sale of  those  shares would-constitute capital gain chargeable to income tax under section  12-B of the Act.  Indeed, this is what  was  prayed for  by  the assessee in his letter dated  March  30,  1949. Looking  to the facts also, we are of the opinion  that  the profit made on the sale of those shares constituted  capital gain chargeable to income tax under section 12-B of the Act. We would answer question No. (ii) accordingly. We, therefore, accept the appeal, set aside the judgment  of the High Court and discharge the answers given by it to  the questions  referred  and substitute  the  answers  indicated above.  The appellant shall be entitled to his costs of this Court as well as those in the High Court. S.B.W.                      Appeal allowed. 12-L498SupCI/73 460