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PETITIONER: SARDAR INDRA SINGH AND SONS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,WEST BENGAL.

DATE OF JUDGMENT: 23/09/1953

BENCH: SASTRI, M. PATANJALI (CJ) BENCH: SASTRI, M. PATANJALI (CJ) DAS, SUDHI RANJAN BOSE, VIVIAN HASAN, GHULAM BHAGWATI, NATWARLAL H.

CITATION:  1953 AIR  453            1954 SCR  167  CITATOR INFO :  E&D        1959 SC 928  (8)

ACT:  Income-tax,  Act (XI of 1922), s. 10-Income-Sale  of  shares  and  securities-Company carrying on business  as  financiers  and  promoters of companies-Income from sale of  securities-  Whether assessable-Tests.

HEADNOTE: The question whether surplus arising from the sale of shares and securities is assessable as profits or gains or is  only an  appreciation  of  capital  arising  from  a  change   of investment  depends on whether the sales which produced  the surplus  were  so  connected with the  carrying  on  of  the assessee’s  business that it could be fairly said  that  the surplus is the profits and gains of the business. 168 It  is not necessary that the surplus should  have  resulted from  such  a course of dealing in securities as  by  itself would amount to the carrying on of a business of buying  and selling  securities.  It would be enough if such sales  were effected  in the usual course of carrying on  the  business, or,  in other words, if the realisation of securities  is  a normal stop in carrying on the assessee’s business. Punjab  Co-operative Bank Ltd. v.  Income-tax  Commissioner, Lahore (67 I.A. 464) followed. Where  one of the objects of a company was to carry  on  the business  of financiers and to purchase, acquire,  and  sell stock, shares, business concerns and other undertakings  and the company held a large number of shares in other companies and was realising its holdings and acquiring new shares, and it  was engaged in financing and promoting the  business  of other companies: Held,  that the sale of investments and the making of  fresh investments  was directly connected with the carrying on  of the  company’s business and profits made by the  company  by sale of shares and securities were assessable to income-tax.

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JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 40 of 1952. Appeal  from the Judgment and Order dated the the 15th  May, 1950,  of the High Court of Judicature at Calcutta  (Harries C. J. and Sinha J.) in its Special Jurisdiction (Income-tax) in Income-tax Reference No. 7 of 1949. N.   C.  Chattejee  (R.   P.  Khosla,  with  him)  for   the appellant. C. K. Daphtary, Solicitor- General for India (G.  N.  Joshi, with him) for the Commissioner of Income-tax. 1953.   September  23.   The  Judgment  of  the  Court   was delivered by PATANJALI  SASTRI C.J.-This is an appeal from a judgment  of the  High  Court  of  Judicature  at  Calcutta  answering  a question referred to it by the Income-tax Appellate Tribunal under section 66 of the Indian Income-tax Act, 1922. The  appellant is a private limited company incorporated  in the year 1935 under the Indian Companies                             169 Act with the following objects, among others, set out in the memorandum of association: To  carry  on  and  undertake  any  business,   transaction, operation  or  work  commonly carried on  or  undertaken  by bankers,   capitalists,   promoters,   financiers,   conces- sionaires,   contractors,  merchants,   managers,   managing agents, secretaries and treasurers. To  purchase  or  otherwise acquire,  and  to  sell......... stock, share......... business concerns and undertakings. To  invest  and  deal with the moneys  of  the  company  not immediately  required for the company’s business  upon  such securities  and in such manner as may from time to  time  be determined. The  company  held  a  large  number  of  shares  in   other incorporated  companies  and  was  realising  some  of   its holdings  and  acquiring  large blocks of  shares  in  other companies.   In the return for the assessment  year  1938-39 the company showed a loss of Rs. 3,22,221 as a result of the sales of shares and securities during the previous year  and this  was allowed as a business loss in the  computation  of its profits.  In the assessment for the years 1939-40, 1940- 41  and  1941-42,  however, the  company  claimed  that  the surplus   resulting   from   similar   sales   during    the corresponding  account years was not taxable income as  such surpluses  resulted  from a mere change of  investments  and was, therefore, a capital gain.  The income-tax  authorities rejected  this claim and taxed the surplus in each of  those years as the profits and gains of the company’s business  of dealing  in  shares.  On appeal,  the  Income-tax  Appellate Tribunal  confirmed the assessment orders but on some-  what different  grounds.   After an elaborate  analysis  of  such transactions   from  the  commencement  of   the   company’s business, the Tribunal came to the following conclusion: "From the foregoing particulars it is clear that the company has  been  financing  and promoting the  business  of  other companies.   For this purpose, it had to vary  its  holdings from  time  to time, quite a number of shares  held  by  the company have been of a speculative character.  To hold these investments and to finance 170 several  companies  (managed  or  otherwise)  the  appellant company had to resort to obtaining loans and overdrafts.  It is,  therefore,  clear  that shares  were  acquired  by  the appellant company in the ordinary course of its business and they became its stock-in-trade.  The profit on sale of these

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shares  did  not  essentially  arise  out  of  the  sale  of investment  of any surplus funds.  It is,  therefore,  clear that the sale of investments and making of fresh investments are   linked  up  with  the  business  of  the  company   as financiers, inasmuch as investing and realising its holdings when  finance were needed is part of the normal business  of the  company......... There is ample evidence to  show  that the company did in fact carry on the business of financiers, which is one of the objects mentioned in clause 3 (1) of the memorandum  of association.  The evidence pertaining to  the financial  transactions of the company, during the  relevant accounting  years,  to  which  we  have  referred,   clearly establishes that the realisation of profits on investment is directly  referable  to  the carrying on  of  the  company’s business as financiers." In  this  view, the Tribunal considered  it  unnecessary  to decide whether the profits are taxable as profits and  gains of the company from the business of dealing in shares. On  application  by the company the  Tribunal  referred  the following question to the High Court for its decision : On  the facts and circumstances of the case, is the  surplus realised  by  the  company  on  the  sales  of  shares   and securities a taxable income ? The court answered the question in the affirmative but  gave leave to the company to appeal to this court. The  principle applicable in all such cases is well  settled and the question always is whether the sales which  produced the  surplus were so connected with the carrying on  of  the assessee’s  business that it could fairly be said  that  the surplus  is the profits and gains of such business.   It  is not necessary that the surplus 171 should  have  resulted  from such a  course  of  dealing  in securities as by itself would amount to the carrying on of a business  of  buying and selling securities.   It  would  be enough  if such sales were effected in the usual  course  of carrying on the business or, in the words used by the  Privy Council  in  Punjab  Co-operative Bank  Ltd.  v.  Income-tax Commissioner, Lahore(1), if the realisation of securities is a  normal  step  in carrying  on  the  assessee’s  business. Though  that case arose out of the assessment of  a  banking business,  the  test  is  one  of  general  application   in determining   whether  the  surplus  arising  out  of   such transactions is a capital receipt or a trading profit.   The question  is  primarily one of fact and there  are  numerous cases  falling on either side of the line  but  illustrating the  same  principle.  On the facts found in regard  to  the nature and course of the company’s business, there can be no doubt  that the present case falls on the Revenue’s side  of the line. Agreeing  with the High Court that there was ample  material upon  which  the  Appellate Tribunal  could  arrive  at  the conclusion which they did, we dismiss the appeal with costs. Appeal dismissed. Agent for the appellant: S. C. Banerjee. Agent for the respondent: G. H. Rajadhyaksha.