http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 13  

PETITIONER: THE COMMISSIONER OF INCOME TAX, DELHI ANDRAJASTHAN

       Vs.

RESPONDENT: M/S NATIONAL FINANCE LTD.

DATE OF JUDGMENT: 29/01/1962

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SHAH, J.C.

CITATION:  1963 AIR  835            1962 SCR  Supl. (2) 865  CITATOR INFO :  E          1970 SC1815  (4)  R          1971 SC 794  (20)

ACT:      Income  Tax-Capital  loss  or  trading  loss- Dealer in  spares-Acquisition  of  shares  to  get agency  of   company-Subsequent  sale   of  shares incurring loss-Whether trading loss-Application to Tribunal  dismissed   as  barred   by  limitation- Reference  to   High  Court   dismissed-Appeal  by Special   Leave   against   Tribunal’s   decision- Maintainability.

HEADNOTE:      The  respondent  was  a  company  dealing  in shares and  securities and  belonged to a group of companies all  controlled by  the same-persons. In the  year   of  account,   corresponding  to   the assessment year  1951-52, the  respondent sold the shares relating to Madhusudan Mills Ltd., which it had acquired  sometime earlier,  suffering a  loss for which it claimed a set-off against the profits in that  year. The  Income-tax Officer  found that the shares  in question had been purchased by J, a company belonging  to the  group, at a price which was almost  double the  current market price, that it was so done with a view to removing the sellers from their managing agency and to securing for the respondent the  purchasing and  selling agency  of the Mills,  and that after the purchase J achieved the purpose  in view  of its  controlling interest and the purchasing and selling agency of the Mills was given to the respondent, though the latter had done no  more than  give a  loan to J. It was also found that  soon after  the purchase the shares in question  came   into  the   possession   of   the respondent and  that when  the shares were sold it was not  in the  market but  at a  loss to another company belonging  to the  same group.  The Income tax Officer came to the conclusion that in getting the shares  the respondent  did not deal with them

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 13  

as stock-in-trade  but  was  acquiring  a  capital asset  of  an  enduring  nature.  Accordingly,  he disallowed the  claim holding  the loss  to be a a capital loss.  The  Appellate  Tribunal,  however, held in  favour of the respondent on the view that a distinction  must be made between the respondent company and J.      The  Commissioner  of  Income-tax  moved  the Tribunal for a reference to the High Court, but it was dismissed  on the  ground that  though it  was barred only by one day and there was no negligence on the  part of the Commissioner, the Tribunal had no power  to extend  time. An  application to  the High Court was also dismissed. The Commissioner of Income-tax then  applied for and got special leave to appeal against 866 the order  passed by the Tribunal. When the appeal came on  for hearing  in due course the respondent raised  an  objection  that  the  appeal  was  not maintainable because  no appeal  was filed against the order  of the  High Court,  and relied  on the decision in  Chandi Prasad  Chokani  v.  State  of Bihar, (1962) 2 S.C.R. 276. ^      Held,  that   the  appeal   was  maintainable because there  was no  question of  by-passing the order of  the High Court which only related to the correctness of the decision of the Tribunal on the question of  limitation which  was not the subject of the present appeal.      Held,  further,   that  there   were  special circumstances which justified the grant of special leave.      Baldev Singh  v. Commissioner  of  Income-tax (1960), 40 I.T.R. 605, applied.      Chandi Prasad  Chokhani  v.  State  of  Bihar (1962), 2 S.C.R. 276, distinghuished.      Held, also,  that, on  the facts,  the object was to  purchase a large block of shares at a much larger price  than the  market  value  to  acquire certain agencies  of a  profitable character, that the purchase  of the  shares by  J  was  merely  a device but  the controlling  interest was acquired by the  respondent, and  that the transaction must be regarded as one on the capital side.      Ramanarain Sons  (P.) Ltd. v. Commissioner of Income-tax,  (1961)  2  S.C.R.  904  and  Oriental Investment Co. Ltd. v. Commissioner of Income-tax, (1958) S.C.R. 49, applied.      Salomon v. Salomon & Co. Ltd. (1897) A.C. 22, distinguished.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION:  Civil  Appeal No. 559 of 1960.      Appeal by special leave from the judgment and order dated  May 1/14,  1957, of  the  Income  Tax Appellate  Tribunal  of  India  (Delhi  Bench)  in I.T.A. No. 2070 of 1956-57.      K.N. Rajagopal  Sastri and  D. Gupta, for the appellant.      Radhey Lal  Agarwal and  P.C. Agarwal for the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 13  

respondents. 867      1962. January  29. The  Judgment of the Court was delivered by      HIDAYATULLAH, J.-This  is an  appeal  against the order  of the  Income-tax Appellate  Tribunal, Delhi Bench,  dated May  1/14, 1957,  by which the tribunal, reversing  the order  of  the  Appellate Assistant Commissioner,  held that  a loss arising from the  sale of certain shares by the respondent Company was  a capital  loss.  Subsequent  to  the order  of   the  Tribunal   impugned   here,   the Commissioner of  Income-tax, New Delhi, who is the appellant before  us, had moved the Tribunal for a reference to  the High  Court on certain questions of law  said to  arise out  of the  order  of  the Appellate Tribunal.  That application was found to be barred  by one  day, and  since, under the law, the Tribunal  had no  jurisdiction to  extend  the time, the  application was  dismissed. Against the decision of the Tribunal, an application was filed in the High Court under s. 66(3) of the Income-tax Act; but the High Court dismissed the application, agreeing with the Tribunal that the application to the Tribunal  for a  reference was barred by time. The Commissioner  of Income-tax  then applied  for special leave  against the  order  passed  by  the Tribunal in  the appeal before it, and the present appeal, with special leave, has been filed.      Before we  examine the merits of the case, we shall deal  with a preliminary objection raised on behalf  of  the  respondent  that  the  appeal  is incomepetent, in  view of  the  decision  of  this Court in  Chandi Prasad Chokhani v. State of Bihar (1) where  it was  held that  this Court would not entertain an  appeal directly from an order of the Tribunal by  passing  the  decision  of  the  High Court, except  in very  exceptional circumstances. The appellant  relies upon  the decision  of  this Court in  Baldev Singh  v. Commissioner  of Income tax (2), and contends 868 that the exceptional circumstances existing in the latter case  and adverted to in the former, govern the present case.      The facts  relating  to  the  filing  of  the application  for   reference  together   with  the relevant dates are these: The Tribunal’s order was passed by  two learned  Members, who  signed their respective  orders   on   different   dates.   The Accountant Member signed his order on May 1, 1957, and the  Judicial Member,  on May  14,  1957.  The notice of  the order  was sent to the Commissioner of Income-tax,  New Delhi,  and reached his office by registered  post  on  July  15,  1957.  It  was received by  one Motilal  Pathak, a  clerk in  the office of  the Commissioner.  Motilal’s  affidavit shows that,  he suddenly fell ill, and had to take casual leave  for the  day.  He  returned  to  the office the  next day,  and dealt  with the  notice received from  the Tribunal. By a mischance, which is easy  to appreciate,  the  date  stamp  of  the receipt of the papers was affixed on the 16th, and bore that date instead of the real date, viz., the 15th,  on  which  the  papers  had  actually  been

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 13  

received. Relying  upon the  date stamp, everybody took it  for granted  that limitation would expire on the 60th day, counting time from July 16, 1957. The application  was filed  on  the  last  day  of limitation  on  that  supposition.  Actually,  the application was  barred by  a day.  The Income-tax Tribunal, therefore,  dismissed the application on December 4, 1957. The decision of the Tribunal was unsuccessfully challenged  before the  High Court. It is  evident that  the decision  of the Tribunal was quite  correct, and the Tribunal had no option but to  dismiss the  application,  since  the  law gives no  jurisdiction to  the Tribunal  to extend limitation, as  is done  under s.  5 of the Indian Limitation Act.      This Court then granted special leave against the order of the Tribunal passed in the appeal 869 before it,  and the question is whether the appeal should be  heard or  the leave revoked, in view of the decision in Chokhani’s case (1). In Chokhani’s case (1),  the attempt  was to bypass the decision of the  High Court  on a  question referred to the High Court  for decision and also another decision of the High Court that no other point of law arose from the  order of  the Tribunal. It was held that this Court  would not  allow the  High Court to be by-passed, and that an appeal from the decision of the Tribunal in the circumstances was incompetent. A similar  view was  again expressed  in two other cases,  viz.,   Indian  Aluminium   Co.  Ltd.   v. Commissioner of  Income-tax  (2)  and  Kanhaiyalal Lohia v.  The Commissioner  of Income-tax  (3). In all the  three cases,  reliance was  placed by the appellants therein  upon  the  decisions  of  this Court  in   Dhakeswari  Cotton   Mills,  Ltd.   v. Commissioner of Income-tax (4) and Baldev Singh v. Commissioner of  Income-tax (5) It was pointed out in the  judgments of this Court that the two cases relied  upon   were   decided   on   the   special circumstances existing  there. In the first, there was a  question of  breach of  the  principles  of natural  justice,   which  could   not  be  raised otherwise than by an appeal with the special leave of this  Court. In the second case, it was pointed out that  limitation was lost by the party through no fault  of his,  inasmuch as a letter was unduly delayed in  post. In  our opinion,  in the present case also,  special circumstances  which justified the grant  of special leave in Baldev Singh’s case (5),   exist.   There   was   a   combination   of circumstances which  led  to  the  filing  of  the application  a  day  late,  but  in  circumstances showing that  the  default  was  not  due  to  any negligence on  the part  of  the  Commissioner  of Income-tax. The  receipt of  the notice on July 15 is admitted; but the affixing of the date stamp on the 16th was due to the failure of the 870 clerk to  deal with the notice on the 15th because he fell  ill and  had to  leave the  office. It is common knowledge  that  date  stamps  are  altered every day  in the  office, and this is done mostly by a  very junior  employee. The  affixing of  the date stamp on the 16th and the notice consequently

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 13  

bearing that date went unnoticed, and relying upon the date  stamp, the  appeal was  filed, though on the last  day of  limitation but  within time.  In these circumstances,  it is  difficult to say that the Commissioner  of Income-tax  was negligent and the negligence,  if any,  on the part of the clerk in affixing  a wrong  date stamp  is excusable, if one considers his illness and his absence from the office on  the 15th.  In our  opinion,  this  case comes within  the rule  of Baldev Singh’s case (1) and an  appeal  direct  to  this  Court  from  the Tribunal’s  order  is  justified  by  the  special circumstances. By  this appeal, no decision of the High Court can be said to be bypassed, because the decision  of   the  High   Court  related  to  the correctness of the decision of the Tribunal on the question of  limitation, which  is not  a question which is sought to be raised in an indirect way by the present  appeal. We,  therefore, overrule  the preliminary objection.      The assessee  Company is the National Finance Ltd., New  Delhi. It  is a  public limited Company which was incorporated in 1943. It deals in shares and securities and also as financiers. The present case arises  from a  deal in  3,000 shares  of the Madhusudan Mills  Ltd., Bombay,  by  the  assessee Company. In  the year  of account, May 1, 1949, to April 30,  1950, corresponding  to the  assessment year, 1951-52,  the assessee  Company  sold  these shares suffering a loss of Rs. 5,48,712-8-0, which it claimed  as one  on the  sale of  its stock-in- trade. The  Income-tax Officer  and the  Appellate Assistant Commissioner  held it  to be  a  capital loss. The 871 Appellate  Tribunal,  Delhi  Bench,  reversed  the decision, and  held  in  favour  of  the  assessee Company. The  only  question  in  this  appeal  is whether the decision of the Tribunal is right.      The assessee  Company belongs  to a  group of Companies controlled  by one  Lala Yodh Raj Bhalla and certain  persons associated  with him.  It  is convenient to  describe these persons as the ’Yodh Raj Bhalla group’. These Companies are (1) Jaswant Sugar Mills  Ltd., (2)  Jaswant Straw Boards Ltd., (3)   National    Finance   Ltd.,   (4)   National Construction and Development Corporation Ltd., (5) Ganesh Finance Corporation Ltd., and (6) Raghunath Investment Trust  Ltd. The interrelation of these. Companies  is   very  intimate,   and   they   are practically owned  by the ’Yodh Raj Bhalla group’. To understand  this, the following analysis of the shareholdings   of   these   Companies   must   be sufficient:           (1) Jaswant Sugar Mills Ltd.               2,00,000 shares                  (i)   Jaswant  Straw  Board  Ltd. 44,845                      (ii)  National  Finance  Ltd. 67,390           (iii)National Construction and                     Development  Corporation  Ltd.                47,800 _______                                              1,60,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 13  

035      (i.e. over 80 per cent)           (2) Jaswant Straw Board Ltd.               6,176 shares.           (i) National Finance Ltd.          4,783           (ii) National Construction and                Development Corporation Ltd.    500                                              _____ __      5,200 odd      (or nearly 84 per cent) 872           (3) National Finance Ltd. (assessee               Company) 50,000 shares.                 Ganesh Finance Corporation                                               Ltd. 48,000      (or over 96 per cent)           (4) National Construction and Develop-               ment Corporation Ltd. 1,30,504               shares.                 Ganesh Finance Corporation                                               Ltd. 1,30,500      (almost all)           (5) Ganesh Finance Corporation                Ltd. 50,000 shares.                     Raghunath Investment Trust                     Ltd. 49,795      (99.6 per cent of the capital)           (6) Raghunath Investment Trust Ltd.               10,000 shares.           (i)     Mr.      Yodh     Raj     Bhalla 1,500           (ii)             Mrs.             Bhalla 1,000           (iii) Mr.  N. C.  Malhotra (brother  in- law)  1,000           (iv)  Mr.   Ram  Prasad  (father-in-law) 1,000           (v)   Mr.    Dina    Nath    (Secretary) 1,000           (vi)     National      Finance      Ltd. 3,499           (vii)    Mr.     Piyare     Lal     Saha 1 ------- 9,000                                                (90 per cent). The resulting  position may be stated thus: Ganesh Fiance  Corporation   Ltd.  practically  owns  the assessee Company  and  National  Construction  and Development Corporation Ltd., Raghunath Investment Trust Ltd.  practically owns  the  Ganesh  Finance Corporation Ltd.,  and  ’Yodh  Raj  Bhalla  group’ practically owns Raghunath Investment Trust Ltd. 873 Jaswant Sugar  Mills Ltd.  is practically owned by Jaswant Straw  Board Ltd.,  National Finance Ltd., and   National    Construction   and   Development Corporation Ltd., and Jaswant Straw Board Ltd., is practically owned  by National  Finance Ltd.,  and National Construction  and Development Corporation

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 13  

Ltd.  Thus,   the  entire  group  is  owned  by  a consortium, and there is no doubt about it.      The shares  of  Madhusudan  Mills  Ltd.  were acquired in  the following  circumstances: In July 1948, Mr.  Yodh Raj  Bhalla, who was in a position by reason  of his  holdings in these six Companies to influence  decisions of the Board of Directors, arranged to  purchase 26,547  shares of  the Mills from Messrs.  Bhadani Brothers, Ltd., who were the managing agents of the Mills. This block of shares represented about  80 per cent of the total issued capital of the Mills, The purchase was made at Rs. 400 per  share, when  the price in the market, was about Rs.  250 per  share. Out  of  the  remaining shares which  were on  the market  200 shares were purchased at Rs. 252-8-0 per share, which was then the quoted price. Now, these shares were purchased by Jaswant Sugar Mills Ltd., but the money for the purchase of  the shares  was obtained by borrowing it  from   some  of   the  other  concerns.  These Companies,  as   has  been   shown   above,   were completely under  the control  of ’Yodh Raj Bhalla group’. The  arrangement  for  the  money  was  as follows:      Rs.  14,75,000-  borrowed  from  the  assesee Company.      Rs. 5,00,000-  from National Construction and                     Development Corporation Ltd.      Rs. 55,00,000- from the  assessee Company but                     advanced  by   Ganesh  Finance                     Corporation Ltd. 874 The shares were registered as follows:      10,500    shares registered  in the  name  of                the             assessee Company.      5,400     shares in  the name of the National                Construction    and     Development                Corporation Ltd.,  and the  balance                in the  names of  the  nominees  of                Jaswant  Sugar  Mills  Ltd.,  which                meant, largely,  persons  belonging                to the ’Yodh Raj Bhalla group’.      On October  9,  1949,  the  assessee  Company purchased 15,547  shares at Rs. 400 per share from Jaswant Sugar  Mills Ltd.,  and the amount paid by the assessee  Company  was  adjusted  towards  the purchase price  and the  balance was  paid. On the same day, the remaining 11,000 shares were sold by Jaswant Sugar  Mills Ltd. to National Construction and Development  Corporation Ltd.,  at Rs. 400 per share. Thus, on that date Jaswant Sugar Mills Ltd. ceased to  have any  connection with  the  present matter. It  may be pointed out that on the date on which  the   two  transactions   took  place,  the priceruling in  the market  was about Rs. 217-8-0. Before Jaswant  Sugar Mills  Ltd. parted  with the shares,  they.   had  appointed  a  new  Board  of Directors of  the Madhusudan Mills Ltd., and these new Directors also belonged to the same group. The managing agency  of Messrs.  Bhadani Brothers Ltd. was terminated,  and on  the same day on which the shares were  purchased from these managing agents, the  assessee   Company  was   appointed  as   the purchasing and  selling agent  of the  Mills.  The assessee Company  made enormous  profit  from  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 13  

acquisition of these shares by way of dividend and commission as the purchasing and selling agent. In October and  November, 1948  they,  however,  sold 6,525 shares  to  Dalmia    Cement  and  Marketing Company Ltd.  at Rs.  400 per  share. These shares subsequently came back to the same group; but 875 that is not a matter with which we are immediately concerned.      On April  7, 1949,  4,500 shares were sold by the assessee  Company to  the National  Investment Trust Ltd.  at Rs.  181 per  share resulting  in a loss of Rs. 8,80,000, and on June 1, 1949, another block of  3,000 shares  was sold  to the  National Investment Trust  Ltd.,  at  Rs.  180  per  share, resulting in  a loss  of Rs.  5,86,312. We are not concerned with  the loss  arising from  the  first sale which  was considered in the assessment year, 1950-51, and  in respect  of which  a reference is pending in  the  High  Court  of  Punjab.  We  are concerned  with   the  loss  in  the  second  year relating to  the assessment year, 1951-52. In that year, the  loss on  the sale  of  the  shares  was sought to be set off against the profits made, and the loss  practically cancelled  the profits.  The shares which  were sold by the assessee Company on the two occasioning were sold to one Amrit Bhushan (a relative  of Mr. Yodh Raj Bhalla) who sold then the same  day to Messrs. National Investment Trust Ltd., at the slender profits of 8 annas per share, which was brokerage. Thus, at the beginning and at the end,  though numerous  transactions had  taken place, the  shares continued to be the property of the ’Yodh  Raj  Bhalla  group’.  The  question  is whether the  loss on the sale of the shares be set off against  the profits  in the year in which the sales and profits were respectively made.      The assessee  Company was  assessed  for  the assessment  year,   1950-51,  by   the  Income-tax Officer, Meerut.  In that  year, the  loss of  Rs. 8,78,062-8-0 arising  from the  sale of  Rs. 4,520 shares  of  Madhusudan  Mills  Ltd.  was  set  off against the  profits of  the assessee Company. The case of  the assessee  Company for  the assessment year, 1951-52,  was considered  by the  Income-tax Officer, Central  Circle V, New Delhi, to whom the cases of the other Companies above named were also transferred. By looking into the 876 affairs of these Companies, he came to learn, that the shares  of  the  Madhusudan  Mills  Ltd.  were purchased at  a price, which was almost double the current market  price, by  the  ’Yodh  Raj  Bhalla group, and  were transferred  at the same price to the assessee  Company. He found that this was done with a  view to removing Messrs. Bhadani Brothers, Ltd. from  their managing  agency and  to securing for  the   assessee  Company  the  purchasing  and selling agency  of the  Mills. On  the date of the purchase  from  Messrs.  Bhadani  Brothers,  Ltd., Jaswant Sugar  Mills Ltd. achieved this purpose in view  of   their  controlling   interest.  Bhadani Brothers, Ltd.  ceased to  be the  managing agents from that  date, and  the purchasing  and  selling agency of  the Madhusudan Mills, Ltd. was given to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 13  

the assessee  Company, though it had, on that day, done no  more than  give a  loan to  Jaswant Sugar Mills Ltd.  In the  assessment year,  1951-52, the loss of  Rs. 5,86,312-8-0  on the  sale  of  3,000 shares was, therefore, disallowed holding it to be a  capital  loss.  The  order  of  the  Income-tax Officer, Central Circle V, New Delhi was confirmed on appeal by the Appellate Assistant Commissioner. On further  appeal by  the assessee  Company,  the Income-tax Appellate Tribunal, Delhi, reversed the order of the Appellate Assistant Commissioner, and held that the loss was a trading loss.      Whether a  particular loss  is a trading loss or a  loss on the capital side undoubtedly depends upon the facts of each case. But it has been held, over and  over again, that the question is not one of pure  fact, and  that a  mixed question of fact and law  is always involved. The cases to which we shall make  a reference  presently, have laid down this  proposition,   and  those  cases  have  also indicated how  the matter  is to  be viewed in the context of facts. In Commissioner of Income-tax v. Ramnarain Sons  Ltd. (1), the Company was a dealer in shares 877 and also  carried on  the  business  of  acquiring managing agencies  of other Companies. The Company the acquired the managing agency of a Textile Mill from Messrs.  Sassoon J.  David and  Co. Ltd., and also agreed as part of the same transaction to buy 2,507 shares  of  the  Mills.  1,507  shares  were purchased at  Rs. 2,321-8-0  per  share,  and  the remaining 4,000 shares were purchased at Rs. 1,500 per share.  These shares were quoted on the market at Rs.  1,610. Later,4,000  shares were  sold at a loss of  Rs. 1,78,000  This was shown in the books of  the   Company  as   a  busines  loss  but  was disallowed, as  the shares were not held to be the stock-in-trade of  the business  of the Company as share dealers. On a reference to the High Court of Bombay, a  Divisional Bench upheld the view of the Tribunal. Chagla,C. J., in delivering the judgment of the  Court, observed  that  a  managing  agency being an  asset of  an enduring nature, the way to look at  the matter  was to  enquire what was, the primary intention  in acquiring  the  shares.  The learned Chief  Justice then referred to a judgment of this Court reported in Kishan Prasad & Co. Ltd. v. Commissioner  of Income-tax  (1), where  it was observed:           "It  seems   that  the   object  of  the      assessee Company  in buying shares was purely      to obtain  the managing  agency of  the third      mill which  no doubt would have been an asset      of an  enduring nature and would have brought      them profits but there was from the inception      no intention  whatever on  the  part  of  the      assessee Company to re-sell the shares either      at a profit or otherwise deal in them." The learned  Chief  Justice  then  considered  the argument that  a block  of shares might have to be bought, if at all, at a higher price, and observed as follows:           "A  dealer  in  shares  may  succeed  in      getting a  large number  of shares at a price

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 13  

    less than 878      the  market   price  if   the  seller  is  in      difficulties and  wants to  get  rid  of  his      shares and  to get liquid assets. But we have      not heard  of a dealer in shares purchasing a      large number of shares at a higher value than      the  market  value.  The  other  circumstance      which is  equally strong in this case is that      the shares were purchased for the acquisition      of the  managing agency.  Therefore the  real      object of  the assessee company was not to do      business in  these shares, not to make profit      out of these shares, but to acquire a capital      asset out  of which  it would  earn  managing      agency commission and make profit." Messrs. Ramnarain  and Sons. Ltd. then appealed to this Court,  and the  decision of  the Bombay High Court was  upheld. The  Judgment of  this Court is reported  in   Ramnarain  Sons   (Pr.)   Ltd.   v. Commissioner of  Income-tax (1).  It was laid down by  this  Court  that  in  considering  whether  a transaction was  or was  not an  adventure in  the nature of trade, the problem must be approached in the light of the intention of the assessee, having regard  to   the  "legal  requirements  which  are associated with the concept of trade or business". Dealing with  the price  above  the  market  price which was paid in that case, it was observed:           "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 acquisition of      the 879      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  the intention  in purchasing      the shares was not to acquire them as part of      the trade of the appellants in shares." The above two decisions are merely the application of a  principle of  long standing,  which has been stated  over  and  over  again  in  the  past.  In Oriental Investment  Co. Ltd.  v. Commissioner  of Income-tax (1), that principle was reiterated, and it was  that the  object for  which a  company was formed  did   not  invest   the  deal   with   the characteristics of  a trade  in shares,  but  that other circumstances  along with  that fact must be considered to  find  out  the  real  object  of  a particular venture.      Before we  deal with  the present  case,  one other case  of  this  Court  may  be  noticed.  In Rajputana Textiles  v. Commissioner  of Income-tax (2), the  converse conclusion  was reached. There,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 13  

on the facts and circumstances of the case, it was held that  a  particular  deal  in  shares  was  a commercial venture  and had  all the attributes of an adventure in the nature of trade. In that case, the transaction  was not  a single or an undivided one with a slump payment, because for the managing agency, Rs. 12,50,000 were paid separately and for the shares,  a sum  of Rs. 83,98,000 was paid. The two acquisitions  being different,  the profit  on the sale  of some  of the shares was considered to be a gain on the revenue side.      There is  no doubt, whatever, that the shares of the  Madhusudan Mills  Ltd. were  acquired at a price considerably  higher than  the market price. In fact,  that the  price paid  was almost double. Such a  deal, from the business point of view, was not prudent, unless the purchaser stood to gain in some 880 other way.  It was  contended before  us that this was a  speculative deal in the hope that the price of the  shares would  firm  up  when  the  textile industries  would   revive.  If   this   was   the intention, then  it might  possibly be argued that the purchasers  miscarried in  their calculations, and suffered  a loss  in a  business  transaction. But, was  this the  intention of  the Directors of Jaswant Sugar  Mills Ltd.  ? Those  who  sold  the shares were  not only  in possession of the shares but also  of the managing agency of the Madhusudan Mills Ltd.,  and the intention of the Directors of Jaswant Sugar Mills Ltd. was to remove the sellers from their  position as managing agents and to get the entire  benefit of  such or other agencies for themselves. The  assessee Company  has urged  that might have  been the  intention  of  they  Jaswant Sugar Mills  Ltd. but  not of the assessee Company which had,  on that  day, merely  given a  loan to Jaswant  Sugar   Mills  Ltd.   Curiously   enough, however, the immediate benefit of the deal was the acquisition of  the selling  and purchasing agency of the  Mills, and that was obtained not in favour of Jaswant  Sugar Mills  Ltd. but  of the assessee Company, even though on July 15, 1948 (the date of purchase)  the   assessee  Company   had  obtained registration of  10,5000 shares by way of security in its  own name.  Why the  assessee  Company  was favoured in  this way  is  not  far  to  seek.  It mattered not  whether  Jaswant  Sugar  Mills  Ltd. acquired that  agency or the assessee Company; the benefit thereof went to the same group of persons. The transaction  of sale  of the  shares was  also made within  three months  of their  purchase, and the assessee  Company not  only bought  the 10,500 shares which  stood in its name but 15,547 shares, which gave  the  assessee  Company  a  controlling voice in  the affairs  of the  Mills. The assessee Company  continued   to  retain  the  selling  and purchasing  agency,  which  was  very  profitable. Indeed, on its investment in the first year of Rs. 14 lakhs odd, it 881 made a  profit of about Rs. 7 lakhs. The question, therefore, would  be whether  the assessee company in purchasing  the shares merely wished to deal in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 13  

shares  as  stock-in-trade,  or  was  acquiring  a capital asset of an enduring nature. This question is not one of fact, pure and simple, hut one of an inference in  law from the proved circumstances of the case.      The  Income-tax  Officer,  in  deciding  this question against the assessee Company, pointed out numerous circumstances,  which showed clearly that this was  not a  mere purchase of shares as shares by  a   speculator,  who,   buying  a  big  block, sometimes pays slightly more than the market rate. Bhadani Brothers  Ltd., owned  not only the shares but also  the managing  agency, and  it is obvious that they  would not  part with the shares without charging for the managing agency. The price of Rs. 400 per  share was  so out  of proportion  to  the market price  that it  indicated, by  itself,  the acquisition  of   something  more  than  the  mere shares. According  to the  Income-tax officer, the real intention  was to  acquire lucrative agencies of the  Mills, and  this intention, whether it was held by  Jaswant Sugar  Mills Ltd. Or the assessed Company or  both, was of the same body of persons. The Appellate  Assistant Commissioner endorsed the view of  the Income-tax  officer; but the Tribunal made  a   distinction  between   one  Company  and another, and  that distinction  has  been  pressed upon us  by the assessee Company. Relying upon the well-known  case  of  Salomon  v.  Salomon  &  Co. Ltd.(1), it was argued before us that each company must be  viewed as a separate entity, and that the intention of  one company  could not be attributed to another company, even though the proprietorship of the  companies might  be same. As a proposition affecting companies, it cannot be gainsaid; but we are not  concerned with  a theoretical question as to the  assesee Company  being  a  separate  legal entity, but with the 882 question whether  a particular  loss made  by  the assessee Company  is a  capital or a revenue loss. The two Companies, i. e., jaswant Sugar Mills Ltd. and the  assessee Company,  were directed  by  the same set  of persons, and the facts show that even though  Jaswant   Sugar  Mills   Ltd.  temporarily acquire  the   shares,  they   conferred  all  the benefits of  the  acquisition  upon  the  assessee Company from  the very  first  day.  The  assessee Company also  ultimately came  into possession  of all the  shares along  with another Company, which was also directed by the same persons, and Jaswant Sugar Mills  Ltd. went  out of  the picture within three months.  In these  circumstances, it is easy to see  that the  interposition of  Jaswant  Sugar Mills Ltd.  was merely  a  device  to  secure  the benefit of  the English  case, to  which  we  have referred. It was never intended that Jaswant Sugar Mills Ltd.  would hold  the shares or the benefits arising from the acquisition of a block of shares, giving to  the holder  a  decisive  voice  in  the affairs of  Madhusudan Mills Ltd. That controlling interest was  acquired by  the  ‘Yodh  Raj  Bhalla group’ for  the benefit  of the  assessee Company, and it  was an  acquisition of  an interest  of an enduring nature.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 13  

    Reference was  made, in  this connection,  to the  transactions   with  the  Dalmia  Cement  and Marketing Co.  Ltd. in  which the  latter paid the same price namely, Rs. 400 per share. Perhaps, the Dalmia Company  was after the controlling interest in its own way, and it is significant to note that within a  short time,  those  shares  again  found their  way   in  the  hands  of  the  same  group. Similarly, the  shares changed  hands even  within this group through the agency of Amrit Bhushan, no doubt a broker but also a relative of Mr. Yodh Raj Bhalla, who profited only to the extent of 8 annas per share, and bought and sold the shares from one Company to  mother on  the same day. All this show that the affairs of there Companies were centrally arranged, and the 883 intention was  to benefit  the assessee Company by the acquisition  of a  large block  of shares at a very much  later  prices  than  obtaining  in  the market,  to   acquire  certain   agencies   of   a profitable character.      In our  opinion,  this  transaction  must  be regarded as  one on  the capital side. Shares were never treated  as part of the stock-in-trade. They were not  sold in  the market,  but were sold at a loss to  another Company  belonging  to  the  same group, with  the obvious  intention of setting off the losses  against the  profits, thus  cancelling the profits, and saving them from taxation.      In the  result, the  appeal is  allowed, with costs on the respondent.                                    Appeal allowed.