Rameshwar Prasad Bagla Vs.
Commissioner of Income-Tax, U.P., Lucknow  INSC 235 (27 September 1972)
KHANNA, HANS RAJ KHANNA, HANS RAJ HEGDE, K.S.
REDDY, P. JAGANMOHAN DUA, I.D.
CITATION: 1973 AIR 182 1973 SCR (2) 452 1973
SCC (3) 575
R 1976 SC 772 (6) RF 1977 SC2008 (16)
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.
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.
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,  41 I.T.R. 534 relied on.
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
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 Group, (4) 454 Poddar Group,
(5) Bagla Group, and (6) Kantilal Nahalchand.
The Bagla Group consisted of the assessee and
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.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
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 India United Mills Ltd. was not the purchase of a stock in trade as held by
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 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 Seasons 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)  41 I.T.R. 534.
459 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)
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.