Dalhousie Investment Trust Company Ltd v. Commissioner Of Income-Tax (Central), Calcutta

DALHOUSIE INVESTMENT TRUST COMPANY LTD. COMMISSIONER OF INCOME·TAX (CENTRAL), CALCUTTA November 22, 1967 [J. C. SHAH, V. RAMASWAMI AND V. BHAGRAVA, JJ.] Indian Income"'ax A.ct, 1922 (11 of 1922), s. 2(4) Purchase and sale of share when. amounts to adventure in the nature of Trade-Previous findillgs of Tribunal whether blndillg in subsequent assessment years. c The principal activity of the assessee was investment of its capitals in shares and stocks. It changed its investments by sale of its shares and stocks from time to time. The assessee's income was primarily derived from dividends on shares and interest derived by it on the Investments. The assessee purchased the shares of a company V>hen their prices were falling by taking loan at lnterest and the return on investment was not at all substanti"1. The assessee's explanation that the shares were, in fact, being held as investment and \\'-ere sold simply because the. co111:rol of the D company went out of the hands of the Directors of the ass-esscc, was not accepted by the Tribunal. HELD : The incJme derived by the 1 asscssce from tlie sale of these -shares was revenue n~ceipt and as such taxable under the lncon1c·tax Act. From the evidence about the course of dealings and conduct of the as.sessee, the conclusion followed that the purchases of the shares were E not for the purf)ose of keeping controlling interest in that company, or for investment, but shares were being pµrchased and sold for earning profit, so that the transactions were an adventure in the nature of trade in these shares. [359 A-Bl The acceptance by the Reveoue, in the earlier.years, that the acquisi·c tions and sales of shares were in the nature of invesunents, was not bind-ing in the proceeding for assessment during subsequent years. [356 B-C] Bengal and Assam Investors Ltd. v. Commissioner of Inco1ne-tax, West Bengdl, 59 I.T.R. 547 and Commissioner of Jnc.on1e.tax v. Bai Shrinbai K. Kooka, 46 I. T.R. 86, referred to. Ram Narain Sons (P) Ltd. \', Commissioner of Income-tax, Bombay, 41 l.T.R. 534, held inapplicable. CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 581 to G 584 of 1966. Appeals by special leave from the judgment and order dated March 26, 1964 of the Calclltta High Court in J ncome-tax Reference No. 6 of 1961. A. K. Sen, Bishan Narain, R. K. Chaudhuri and E. P. Mahesh-H wari, for the appellant (in a]J the appeals). Niren De, Solicitor-General, T. A. Ramachandran, R. N. Sa~hthey and S. P. Nayar, for the respondent (in all the appeals) The Judgment of the Court was delivered by Bhargava, J. These appeals came up before this Courl'on the 17th April, I 967, when an order of remand was made by this Court, asking the Income-tax Appellate Tribunal to submit a fur-ther statement of the case. The question that has come up for consideration is :- "Whether on the facts and circumstances of the case, the surplus derived by the assessee in the sale of its shares and securities in the relevant previous years was a reve-nue receipt and as such taxable under the Income Tax Act." The facts and circumstances under which the question was referred by the Tribunal for the opinion of the High Court are mentioned in that order of remand and need not be repeated. In the order of remand, it was pointed out that it was not Section: PRECEDENTS COMMISSIONER OF INCOME-TAX (CENTRAL),CALCUTTA DATE OF JUDGMENT:22/11/1967 BENCH:BHARGAVA, VISHISHTHASHAH, J.C.RAMASWAMI, V. CITATION: 1968 AIR 761 1968 SCR (2) 353 CITATOR INFO : RF 1986 SC1695 (33) pos.sible to find out from the statement of the case whether tlte Tribunal accepted tl1e explanation of the assessee that, in the pre-vious year relevant to the assessment yqr 1953-54, the control of McLeod & Co. Ltd. went out of the hands of the Directors of the assessee and it was for thi<; reason that the assessee sold the shares of McLeod & Co. It was also pointed out further that the 'Yribunal had not stated what was the object of the assessce in buy-ing 6,900 ordinary shares of McLeod & Co. It appeared from the order of the Income-tax Officer that these shares were purchased in a number of lots from the year I 948 to I 950, and it was also not stated as to what was the object in buying other securities, and why did the assessee confine its activities mostly to th.; shares of McLeod & Co. Ltd. and the companies managc:P by McLeod & Co. Ltd. . It was in the light of these omissions that the Tribunal was asked to send a supplementary statement. That supplement-ary statement has now been received and the answer to the questiorr has to be given on the basis of the facts contained in the original statement of the case as well as this supplementary state-ment. The relevant facts which emerge out of these statements of the case are that the principal activity of the assessee was investment of its capital in shares and stocks. It changed it• investments by sale of its shares and stocks from time to time. The income of the Company was primari\y derived from dividends on shares and interest received by it on the investments. These activities were covered by Clauses (I), (3) and ( 4) of the Memorandum of Association. The activity mentioned as the object in Clause ( 2) is : "to acquire, bold, sell and transfer shares, stocks, Debentures, Debenture Stocks, Bond, obligations and A securities issued or· guaran te::d by any company consti-tuted or carrying qn business in British India and in the United Kingdom or in any colony, or dependency or possession thereof or in any foreign country and Deben-ture Stocks, Bonds, obligations and securities, issued or guaranteed by any Government, Sovereign, Ruler, Com-B missioners, public body or authority supreme, Municipal Local or otherwise whether at home or abroad." In the supplementary sta!ement, the Tribunal has recorded the finding that, in its opinion, the purchases and sales of the shares in questio)l were in pursuit of this clal!l'e (2) in the Memorandum of Association. The Tribunal has further stated that the assessee c had not placed any evidence as to the object behind the acquisi-tion of the shares of McLeod & Co. Ltd and the shares of com-panies managed by McLeod & Co. Ltd., nor had the Income-t;u Officer ascertained the object behind such acquisitions. The Tribunal was also unatife to find out why the assessee had more or less confined its activities mostly to the shares of McLeod & Co. D Ltd and the companies managed by McLeod & Co. Ltd. The facts proved showed that, in the account year relevant to the assessment year in question, 21,046 shares were . held by the Kanoria group, including 6,977 shares in McLeod&. Co. Ltd. held by the assessee. Mr. C. L. Kanoria resigned his office as Director of McLeod & Co. Ltd. on 17th March, 1952, and the approval of E the Government to his resignation was given by the Central Government on 16th October, 1952. Thereafter, . Sri C. L. Bajoria joined the Directorate of McLeod & Co. Ltd. 6,900 shares were .sold by the assessee to Sri C. L. Bajoria or his nominees on 27th May, 19?2, at a time when Sri C. L. Kanoria had already sent in his resignation from the office of DirlJctor, but the resigna-tion had not yet been accepted by the Government. It has also F been found that Sri C. L. Bajoria acquired 12,440 shares ,in all, including 6,900 shares purchased from the assessee; but there was no material on the record to prove that his group obtained a con-trolling interest in McLeod & Co. Ltd. as a result of acquisition of these shares. As a fact, it was held that after the resignation of Sri. C. L. Kanoria, Messrs C. L. Bajoria and Baijnat!l Jalan, both G Of M/s. Soorajmull Nagarmull, became Directors of McLeod & Co. Ltd; These are the principal £acts on the basis of which it ha8 to be determined whether the s:i!e of these shares by the asses-see resulted in a revenue receipt or in a capital gain. It appears to us that the facts and circumstances in this case 8 tan lead to no other concluSion, except that these shares were purchased and sold by the assessee with the motive of earning a profit by such purchases and sales and not with the object of investing its capital in the5e. shares in order to derive income from that investment. It is true that the principal busines' of th.~ assesscc was to invest capital and to derive income from dividends on shares and interest. on other investments; but lit the same time. the object contained in the Memorandum of Associa-tion of the assessec Company clearly showed that one of the ob-jects was also to deal in shares, stocks, debentures, etc., by acquir-ing, holding, selling and transferring them. In the years prior to th.~ assessment year. the ca'e put forward by the assessee that the various actjuisitions and sales of shares were in the nature of investments was accepted by ~he Department. but such a decision given in the earlier years is not binding in the proceedings for assessment during subsequent years. The particular shares now in question. it appears, were purchased - between 31st March. 1948 and 31st March, 1952. The earliest purchases in March. 1948 we;e at an average price of Rs. 267-13-0 per share. In the nex'. two years ended 31st March. 1949 and 31st March, 1950. the average purchase price was Rs. 201-8-0 and Rs. 182-10-0, and the last purchase in the year ended 31st March, I 952 was at the rate of Rs. 128-14-0. On 1st April, 1952, the assesscc's total holding of shares in McLeod & Co. Ltd. was 6,977 at a total co5t of Rs.14,29,587-4-0 ou'. of the total holding of shares, including shares in other companies, of the value of - Rs. 17,58,741-4-0. Thus, on that date. the holdings in McLeod & Co. Ltd. formed the major part of the share holdings of the asscssec. It is sign;fic cant that the shares were purchased during a period when their marke: pr;cc was continuously falling. The earliest purchases in the year ended 31st March, 1948 were at an average price of Rs. 267-13-0, while in the, last of these three years ended 31st March 1952, the average price was Rs. 128-14-0. The largest block of 4.757 shares was purchased in the ye'!r ended 31st March, 1950, when the average price was Rs. 182-10-0. · The assessment order of the Income-tax Officer abo shows •hat the shares were not only purchased in a rapidly falling market, but, in order to make these purchases the assessee had taken loans amounting to about Rs. 8 lacs at interest varying from 3!% •o 5 % . The dividend being declared was at a very low rate, so that the return on this investment, after taking into account the intere~t paid and super-tax to be paid, came to a very small pefC':ntage. being less than I % . This circumstance that the shares were pur-chased at a time when their prices were falling and the re).llrn on investments was not at all substantial while loans had been taken to purcha$'! these shares strongly points to a conclusion that the shares could no• have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit. The shares were in fact, sold at considerable profit subsequently and tha• is how the question of charging that profit to tax as revenue receipt has arisen. The explanation sought to he l!iven by the