M/S. Ramnarain Sons (Pr.) Ltd. Vs.
Commissioner of Income Tax, Bombay  INSC 260 (5 December 1960)
CITATION: 1961 AIR 1141 1961 SCR (2) 904
CITATOR INFO :
E 1962 SC1267 (7,10,11) R 1963 SC 835 (21) RF
1968 SC 761 (7) RF 1970 SC 529 (7) E 1973 SC 182 (12) RF 1986 SC1695 (30)
Income Tax--Assessment--Purchase of shares
for acquiring managing agency rights--Loss incurred in sale of such shares--If
of a capital nature.
The appellants, a private limited company,
carrying on business as brokers, managing agents and dealers in shares and
securities and having as one of their objects the acquisition of managing
agencies, purchased shares of the Dawn Mills at a rate much higher than the
market rate for obtaining the controlling voting right and thereby acquired the
managing agency of the Mills. Later on, they sold-some of those shares and
suffered a loss of Rs. 1,78,438. The Income-tax Officer in assessing the
taxable income disallowed the loss and the Appellate 905 Assistant Commissioner
on appeal confirmed that order. The Income-tax Appellate Tribunal held that the
shares did not become stock-in-trade of the appellants, but since the loss
incurred was incidental to their business of acquiring managing agency, it was
allowable as a revenue loss. On reference, the High Court held that the shares
acquired by the appellants were a capital asset and the loss suffered by the
sale was of a capital nature.
Held, that the High Court had taken the
correct view of the matter and the appeal must fail.
The question whether a transaction is or is
not an adventure of the nature of trade has-to be decided in the light of the
intention of the assessee judged by the legal requirements associated with the
concept of trade or business.
Since the shares in question were purchased
by the appellants with the intention of acquiring the managing agency and not
in the course of their business as dealers in shares with the intention of
trading in those shares and what was acquired by such purchase was a capital
asset in the shape of a managing agency, it could not be said merely because
the managing agency could be utilised for earning profits, that those shares
were stock-in-trade of their share business.
G.Venkataswami Naidu and Co. v. The
Commissioner of Incometax,  Supp. 1 S.C.R. 464 and The Oriental
Investment Co., Ltd. v. The Commissioner of Income-tax, Bombay,  S.C.R.
49, referred to.
CIVIL APPELLATE JURISDICTION; Civil Appeal
No. 698 of 1957.
Appeal by special leave from the judgment and
order dated August 2, 1956, of the Bombay High Court in Income-tax Reference
No. 1 of 1956.
A. V. Viswanatha Sastri, B. A. Palkhiwala and
G. Gopalakrishnan, for the appellant.
Hardyal Hardy and D. Gupta, for the
1960. December 5. The Judgment of the Court
was delivered by SHAH, J.-The High Court of Judicature at Bombay answered the
following two questions referred by the Income Tax Appellate Tribunal, Bench
"B", Bombay, under s. 66(1) of the Indian Income-Tax Act, 1922:
(1) Whether the acquisition of the managing
agency 906 of the Dawn Mills Co., Ltd., was in the nature of a it n
"business" carried on by the assessee company? (2)..If the answer to
the first question is in the affirmative, whether the loss suffered by the
assessee of...company of Rs. 1,78,438 on purchase and sale of 400 shares of the
Dawn Mills Co., Ltd., being incidental to its business of acquiring the
managing agency, was a loss of a revenue nature?, as follows:
(1)..Acquisition of the managing agency was
an acquisition of a capital asset;
(2)..The loss in respect of the 400 shares
was of a capital nature.
Against the order of the High Court, this
appeal is preferred with special-leave.
The appellants are a private limited company
registered under the Indian Companies Act, 1913, and carry on business as brokers,
managing agents and dealers in shares and securities. One of the objects for
which the appellants were incorporated was to acquire managing agencies. The
appellants also carried on business in shares of different companies, and were
assessed to income-tax as dealers in shares and securities.
M/s. Sassoon J. David, & Co., Ltd. were
the managing agents of the Dawn Mills Ltd.-a public limited company-and they
held 2,507 out of a total issue of 3,200 shares. On September 28, 1946, the
appellants purchased from M/s.
Sassoon J. David & Co., Ltd. 1,507 shares
of the Dawn Mills at the rate of Rs. 2,321-8-0 per share and having obtained a
controlling voting right, acquired the managing agency rights of the Mills. The
remaining, one thousand shares were acquired from M/s. Sassoon J. David &
Co., Ltd. by the Directors of the appellants at the rate of Rs. 1,500. At the
material time, the ruling market price of the shares of the Dawn Mills was Rs.
1,610. In December, 1946, the appellants sold 400 out of the shares purchased
by them, and thereby suffered a loss of Rs. 1,78,438. The loss suffered by the
appellants in the year of account January 1, 1946, to December 31, 1946, by
sale of shares including 400 shares of the 907 Dawn Mills was Rs. 1,92,834.
Crediting Rs. 1,05,907 earned as profit in certain other share transactions,
the net loss suffered in the share transactions in the year of account amounted
to Rs. 86,927. The appellants valued their shares at the end of the year of
account, at cost or market price whichever was lower. By this method of
valuation, the books of account of the appellants showed a loss of Rs. 7,97,792
which included a loss of Rs. 7,04,000 on the valuation of the Dawn Mills shares
held by the appellants at the end of the year of account.
In the income-tax assessment for the year
1947-48, the appellants claimed Rs. 86,927 as loss on sales in trade in shares
and Rs. 7, 97,792 as loss on valuation of stock-in trade. The Income Tax
Officer, Companies' Circle III(1), Bombay, disallowed the loss suffered by the
appellants in the sale of the Dawn Mills shares, because in his view those
shares were purchased by way of capital-investment and the loss suffered by
sale thereof could not be allowed as a trading loss. He also held that the
appellants were not entitled to depart from the method adopted in earlier years
and to value the closing stock of shares in the year of account at cost or
market price whichever was lower and to claim the difference between the
opening and closing valuation as a trading loss. The Appellate Assistant
Commissioner confirmed that order. In appeal, the Income Tax Appellate Tribunal
held that the managing agency of the Dawn Mills was acquired by the appellants
as a part of their business activity and the shares of the Mills having been
purchased in the regular course incidental to their business of acquiring the
managing agency, the loss on the sale of those shares was allowable as a
revenue loss; but the shares of the Dawn Mills were not, the stock-in-trade of
the appellants' business and they were not entitled to treat the difference
between the purchase price and the value at close of the year of those shares,
as a trading loss.
Accordingly, the Tribunal allowed Rs.
1,78,438 as loss on sale of 400 shares of the Dawn Mills., but did not allow
7,04,000 as loss arising out of the valuation
of the Dawn Mills shares at the 908 end of the year of account. On the
application of the Commissioner of Income Tax, the Tribunal referred to the
High Court the questions set out hereinbefore. In the High Court, the
appellants took out a notice of motion for directing the Tribunal to refer
certain questions which the appellants claimed arose out of the order of the
Tribunal and which the Tribunal did not refer.
The High Court agreed with the opinion of the
Tribunal that the shares of the Dawn Mills were not the stock-in-trade of the
appellants and that those shares were purchased by the appellants with the
object of acquiring the managing agency.
The High Court, however , held that the
shares acquired by the appellants formed a capital asset and the loss suffered
by sale of 400 out of those shares in the year of account being a capital loss,
was not in the computation of income a permissible deduction. The High Court
dismissed the notice of motion taken out by the appellants.
In considering whether a transaction is or is
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".
The inference on this question raised by the Tribunal on the facts found is of
mixed law and fact and is open to challenge before the High Court on a
reference under s. 66 of the Income Tax Act G. Venkataswami Naidu & Co. v.
The Commissioner of Income Tax (1). It was held in The Oriental Investment Co.,
Ltd. v. The Commissioner of Income Tax, Bombay (2), that the question whether
the appellants' transactions amounted to dealing in shares and properties or to
investment, is a mixed question of law and fact, and that the legal effect of
the facts found by the Tribunal on which the assessee could be treated as a dealer
or an investor, is a question of law. The Tribunal held that the shares of the
Dawn Mills purchased by the appellants did not become their stock-in-trade. But
they held that the transaction (1)  SUPP. S.C.R. 646.
(2)  S.C.R. 49.
909 having been effected in the regular
course of the business of the appellants, viz., the acquisition of managing
agencies, the loss resulting from the sale of shares was incidental to that
business and was a revenue loss. It is not easy to appreciate the process by
which this conclusion was reached. The shares were purchased for the purpose of
acquiring the managing agency of the Dawn Mills; they were not purchased in the
course of the appellants' business as dealers in shares. 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 hares and their Memorandum of Association authorises them to carry
on business in shares of any importance in the circumstances of this case. The
appellants by entering the shares of the Dawn Mills in their statement of
shares in which trading transactions were carried on could not alter the real
character of the acquisition. The appellants were undoubtedly dealers in
shares; but the transaction in the Dawn Mills shares was ex facie not a
business transaction. The current market rate at the date of purchase was Rs.
1,610 per share whereas the appellants acquired the shares at the rate of Rs.
2,321-8-0 per share. 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 910
acquisition of the 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 intention in purchasing shares was not to acquire them as part
of the trade of the appellants in shares. The Tribunal found that the Dawn
Mills' shares were acquired by the appellants for obtaining the managing agency
of the Mills. The agency was acquired by virtue of the voting power which the
appellants obtained having purchased a very large block of shares, and for
acquiring the managing agency, the appellants did not pay any distinct
consideration. The managing agency is manifestly the source of profit of the
appellants; but the shares purchased and the managing agency acquired were both
assets of a capital nature and did not constitute stock-in-trade of a trading
venture. If the shares were acquired for obtaining control over the managing
agency of the Dawn Mills, the fact that the acquisition of the shares was
integrated with the acquisition of the managing agency did not affect the character
of the acquisition of the ;hares. Subsequent disposal of some out of the shares
by the appellants could also not convert what was a capital acquisition into an
acquisition in the nature of trade.
The High Court was therefore right in holding
that the acquisition of the managing agency was an acquisition of a capital
asset and the loss incurred by sale of the 400 shares was of a capital nature.
The High Court was also right in dismissing the notice of motion for an order
directing the Tribunal to refer the questions suggested by the appellants. If
the acquisition of the shares was not acquisition of a stock-in trade, but of a
capital asset, the appellants, by valuing the shares at cost or market price
whichever was lower, could not bring the difference between the purchase price
and the valuation made by them into their trading account.
The appeal therefore fails and is dismissed