Sardar Indra Singh and Sons Ltd. Vs.
Commissioner of Income-Tax, West Bengal [1953] INSC 50 (23 September 1953)
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 securitiesWhether
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.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 40 of 1952.
Appeal from the Judgment and Order dated 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, SolicitorGeneral 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, concessionaires, 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, 194041 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 somewhat
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 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.
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