The Commissioner of Income Tax, Delhi and
Rajasthan Vs. M/S National Finance Ltd.  INSC 25 (29 January 1962)
29/01/1962 HIDAYATULLAH, M.
CITATION: 1963 AIR 835 1962 SCR Supl. (2) 865
CITATOR INFO :
E 1970 SC1815 (4) R 1971 SC 794 (20)
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.
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 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, distinguished.
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.
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
Radhey Lal Agarwal and P.C. Agarwal for the
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 incompetent, 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 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
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 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, 035 (i.e. over 80 per
cent) (2) Jaswant Straw Board Ltd.
(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.
(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
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 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
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
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
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 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 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
"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 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, 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
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
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 the 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 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
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
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
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 their 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.