Raja Bahadur Kamakhya Narain Singh Vs.
Commissioner of Income-Tax Bihar and Orissa [1969] INSC 212 (1 September 1969)
01/09/1969 SHELAT, J.M.
SHELAT, J.M.
VAIDYIALINGAM, C.A.
CITATION: 1971 AIR 794 1970 SCR (2) 163 1969
SCC (3) 791
CITATOR INFO :
RF 1986 SC1695 (35)
ACT:
Capital or Income-Purchase and sale of gold
and shares- Principles for deciding whether profit on transactions is revenue
or capital receipt-Question is of mixed fact and law-High Court in reference
not barred from going into findings of Tribunal on such question on the ground
that it is one of fact and therefore final.
HEADNOTE:
The assessee inherited a vast estate
consisting of agricultural and other land as also Government securities worth
Rs. 40 lacs. In 1937 he attained majority and control of the estate from the
Court of Wards. In the accounting year 1938-39 he sold some of these securities
at a profit.
Thereafter he opened an account in the
Imperial Bank of India in the name of his wife and called it "account of
48 lacs floating in the share market." In September 1939 he purchased
shares worth Rs. 34.14 lacs out of the said fund but sold them, again at a
profit in the Years 1939', 1940' and 1941. The profits on the said sales of
shares were subjected to tax by the Income-tax Officer in the years 1939-40,
1940-41 and 1941-42. The Tribunal however held that the asessee was not a
dealer in shares anti' held the profits not to be taxable. Between June. and
November 1940 the assessee purchased gold for Rs. 28.47,380/--from out of the
sale proceeds of the aforesaid shares. This gold was sold 'at a profit in the
accounting periods relevant t0 the 1945-46 and 1946-47 assessment years. With
the sale proceeds certain shares including 7,025 shares of Karanpura
Development Co. Ltd. were purchased, most of which were sold at a profit.
Certain Victory Bonds were purchased and resold within two months. The
Income-tax Officer subjected the profits from the sales of gold and Karanpur
shares to tax in the assessment years 1945-46 and 1946-47. The Tribunal on
,considering the whole pattern of transactions from 1938 onwards came to the
conclusion that the said' profits were rightly taxed. The High Court upheld the
view of the Tribunal holding inter alia, that the findings were of fact and not
arrived at without evidence so that no interference was warranted in reference
proceedings. The assessee appealed.
HELD: (1) When a transaction is not in the
ordinary lines of an assessee's business the facts must be properly assessed to
discover whether it was in the nature of trade.
The test often applied' is--has the assessee
made his shares and securities the stock-in-trade of a business ? [171 G;
172 H] (ii) Since in the present case the
Tribunal had the advantage of examining the assessee's transactions during the
whole period i.e. right from 1938-39 to 1944-45 and thus had more comprehensive
picture of all the transactions, there would be no bar to its coming to a
conclusion different from that arrived at in the earlier years. if the acts and
conduct of the assessee taken as a whole throughout the period pointed to a
different conclusion. [174 A--B] (iii) On the facts and circumstances of the
case, however the finding of the Tribunal, concurred in by the High Court, that
the transactions in question were in the nature of trading transactions, was
not justified. [174 C--D] 164 (a) It is a notorious fact that in 1940 the
fortunes of the allies were none too bright. The conversion by the assessee of
his entire share holding into gold in that year was consistent with his case
that he did so because of the nervousness engendered by the breaking out of the
war, the initial German victories, and the fall of France.. The fact that the
assessee did not invest all his cash would not mean, 'as the Tribunal thought,
that his case about the purchases of go1d was not correct. [174 D--F] The
Tribunal also failed to give due significance. to the fact that the assessee
who started with the plan of getting 'at least net 7% yield, put a very large
part of his funds into gold, an altogether sterile security, and retained it
for 4 years. The price of gold began to rise in 1941 and was at its peak in
1943. The fact that the assessee did not sell his gold then but only in October
1944 when the price had fallen showed that it was only after the:
fortunes of war had turned in favour of the
allies and confidence restored that he felt it safe to invest his money in
income-beating securities. The further fact that he sold practically the whole
of his stock of gold in October 1944 instead of reselling it bit by bit after
the price was rising since 1942 was inconsistent with the hypothesis that the
object with which the go1d was purchased was to trade in it. [174 G--H; 175
A--D] (b) The fact that the account in the Imperial Bank opened in 1939 was
called "Rs. 48 lacs floating in the share market" was given undue
significance by the Tribunal.
Properly viewed it only meant that the
assessee wanted to set apart this fund for transactions in shares and
securities and not mix up his other capital and the income arising from his
estate. [175 D--E] (c) The sale of the. Victory Bonds within two months of
their purchase would not invest the transaction with the stamp of trade or
business they were only purchased to show to the authorities that his estate
had made a contribution to the war effort. [175] (d) The Karanpur shares were
purchased by the assessee with a view to getting control over the company's
management by procuring 51% of its total shares. When that plan failed he sold
these shares. In these circumstances the transaction could not be considered to
be on revenue account. [175 G--H; 176 D] Kishan Prasad & Co. Ltd. v.C.I.T.,
(1955) 27 I.T.R. 49 and C.I.T.v. National Finance Ltd. (1962) 44 I.T.R. 788,
'applied.
(e) The expression 'adventure in the nature
of trade' implies the existence of certain elements in the transactions which
in law would invest them with the character of trade or business. The question
therefore whether a particular transaction is an adventure. in the nature of
trade is a mixed question of law and fact and the court can review the
Tribunal's finding thereon. Therefore in the present case the High Court was
wrong in treating the Tribunal's decision as a finding of fact and refusing to
interfere on that ground. [171 A--C] Venkataswami Naidu & Co. v.C.I.T.,
(1959) 35 I.T.R. 594, 603, 604 and Liquidators of Pursa Ltd. v.C.I.T., (1954)
25 I.T.R. 265, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 481 and 482 of 1966.
Appeals by special leave from the judgment and
order, dated April 15, 1963 of the Patna High Court in Misc.
Judicial Cases Nos. 342 and 346 of 1954.
165 S.T. Desai and D.N. Mukherjee, for the
appellant (in both the appeals).
Jagadish Swarup, Solicitor-General, S.K.
Aiyar, R.N. Sachthey and B.D. Sharma, for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Shelat, J. These two appeals, under special leave, arise from two References to
the High Court of Patna under s. 66(2) of the Income Tax Act, 1922 and relate
to the assessment years 1.945-46 and 1947. In the first appeal, the question
arising for determination is whether, on the facts and circumstances of the
case, the surplus receipt of Rs. 13,43,469/-, realised as a result of the side
of gold, is assessable as income, or profits or gains for the assessment year
1945-46 under s. 4(3) (vii) of the Act. In the 2nd appeal, two questions arise
for determination; one relates to the surplus receipt of Rs. 33,481/- arising
out of the sale of some more gold, and the second relates to the receipt of Rs.
88,522/- realised by the assessee as a receipt as a result of sale of certain
shares. All the three questions raise the common problem whether the said
transactions in gold and shares were by way of realisation of investment or
were adventures in the nature of trade or business.
The assessee was at all material times a
landholder deriving large income from agriculture, royalties of minerals and
income from forests forming part of his estate.
Prior to 1937, when he was a minor, his
estate was under the management of a Court of Wards. On attaining majority, the
estate, which included Government securities of the value of about Rs. 40 lacs,
was handed over to him on August 19, 1937. During the account year 1938-39 he
sold the whole.
lot of these securities and realised Rs.
44,25,088/-, the sale thus resulting in an excess of Rs. 4,55,305/-. This
excess amount was assessed as profit by the income-tax officer for the
assessment year 1939-40. But on appeal against the assessment order, the
Appellate Tribunal set side that order on a finding that the said sale was by
way of a change in investment, and therefore, was not a transaction in the
nature of trade or business. On March 23, 1939, the assessee opened an account
in the Imperial Bank of India initially with Rs. 46 lacs, which included the
said sale proceeds of Rs. 44 lacs 'and odd and to which on March 27, 1939 he
added Rs. 2.60 lacs. The account was opened in the name of his wife and was
called "Account of Rs. 48 lacs floating in the share market''' In
September 1939, the assessee purchased shares and debentures of the value of
Rs. 34.14 lacs from out of the funds in the said account. He, however, sold
certain shares for Rs.
5,75,723/- in October 1939, and then the rest
of them in 1940 and 1941 realising Rs. 29,58,677/- and 166 Rs. 64,201/-
respectively. The first sale fetched a proFit of Rs. 1,17,064/- the second a
profit of Rs. 25,133 and the third a loss of Rs. 1,642/-. The income-tax
officer brought to tax the two surpluses in the assessments for the assessment
years 1940-41 and 1941-42. But the department was again unsuccessful as the
Tribunal once again held, on the strength of the correspondence which had
passed between the assessee, his bankers axed his brokers in Calcutta, that the
only possible conclusion emerging from that correspondence was that the
assessee's intention was not to deal in shares and debentures, and that the
said transactions were a mere change in investment carried out of a single
scheme of earning a better yield from investments.
The Tribunal's orders in respect of these
assessments for the assessment years 1939-40 to 1941-42 were made part of the
Statement of Case filed by the Tribunal be,fore the High Court in the present
References.
Between June 28, 1940 and November 9, 1940
the assessee purchased 68,109 tolas of gold for Rs. 28,47,380/- from out of the
sale proceeds of the said shares. The gold so purchased was kept in his family
vaults at Padma, the seat of his estate, for nearly 4 years. Between October 9,
1944 and October 20, 1944, he disposed of the bulk of the gold, i.e. 55,494
tolas, for Rs. 36,80,174/-, the sale resulting in a surplus of Rs. 13,43,469/-,
which is the subject-matter of the first appeal. The remaining quantity of gold
was sold of October 19, 1945, and that sale brought_ him an excess of Rs.
33,481/-, which is part of the subject-matter of the second appeal.
In respect of these two surplus amounts, the
assessee contended that they were the result of a change in investment and could
not be said to be transactions in the nature of trade or business. His case was
that neither the Government securities, nor the shares and debentures purchased
out of their sale proceeds, nor the gold were sold and purchased by way of
dealing in them, that at no time they became his stock-in-trade for any
business or adventures in the nature of trade or business therein, that the
transactions were mere conversions from one investment to another, depending
upon the circumstances which prevailed during the respective periods and that
the sale of gold in 1944 and 1945 was occasioned partly due to the tide in the
second world war turning in favour of the ,allies and partly due (a) to his
having to pay Rs. 7 lacs by way of income- tax, (b) expenses for the marriage
of his younger brother, (c) for payment of Rs. 6 lacs debt to one Gupta and (d)
for purchase of Victory Bonds worth Rs. 14 lacs and odd 'at the instance of the
Government authorities as contribution of his estate to the war effort.
The Tribunal rejected the case that gold had
been sold for the reasons given by the assessee or as a change in investment
and 167 held that: (1 ) conversion of shares into gold was not due to any panic
resulting from the war, (2) that there was no pressing necessity for the sale
of gold as alleged by him, (3) that Victory Bonds were not by way of any war
effort since the assessee sold them away within a short time after their
purchase, and (4) that he sale proceeds of gold were utilised in purchasing
shares for which he borrowed an additional amount of Rs. 5.10 lacs in 1945-46
against gold. in this view the Tribunal confirmed the I.T.O.'s decision that
the two excess amounts were liable to income tax in the two assessment years.
The sale proceeds of gold sold as aforesaid
were utilised by the assessee in purchasing 7(325 shares of Karanpura
Development Co. Ltd. for Rs. 2,37,267/- during the period from December 8, 1944
to April 20, 1945 and shares of Bokaro Ramgur Co. for Rs. 39,81,663/- purchased
in 1945-46. Part of the sale proceeds were 'also. utilised in purchasing the
said Victory Bonds. between November 8, 1945 and February 21, 1946, he sold
6950 of the Karanpura shares realising a net surplus of Rs. 88,522/-, which the
Income Tax Officer treated as business profit and brought to tax for the
assessment year 1946-47.
As the Statement of Case by the Tribunal
shows, the Tribunal examined the assessee's dealings since the time he took
over the said estate. The Tribunal noted that the said shares were purchased
from the said Rs. 48 lacs in the Bank reserved for that purpose and that they
were sold and purchased at very short intervals. From these facts it held that
he must be considered to have launched a scheme in dealing in shares, which
conclusion, it thought, was strengthened by the fact of the assessee having
borrowed Rs. 5.10 lacs for the said purpose. The Tribunal further held that the
complete picture of the said transactions over a length of time had not 'been
before the preceding Tribunal when it passed the earlier orders for the
assessment years 1939-40 to 1941-42, and therefore, its conclusions were not
applicable to the transactions in question. It consequently held the assessee
to be a dealer in shares. As regards the gold ,also, the Tribunal confirmed the
orders of the I.T.O. rejecting the assessee's case that the gold was purchased
by him owing-to the war crisis and sold by him on account of the pressing
necessities alleged by him and the change in the war situation then.
By an order dated April 2, 1959, the High
Court referred that statement of Case back to the Tribunal under s. 66(4)
directing it to consider further all the materials before it and file a
supplementary Statement of Case as the High Court found the Statement factually
incorrect in certain respects.
The Tribunal accordingly sent a supplementary
Statement of Case on April 23, 1960.
After setting out the assessees transactions
of the sale of Government securities in 1938-39, the purchase of shares from
168 their sale proceeds, their sale in 1939-40 and 1940-41, the purchase of
gold 'and its sale, the Tribunal once again rejected the assessee's claim that
those transactions were conversions of one investment to another made for a
better return or that the gold was sold in October 1944 for pressing
necessities alleged by the assessee. Regarding the purchase and sale of shares,
the Tribunal stated that the assessee purchased shares of the value of Rs. 37
lacs and odd in1945-46, that those were shares of two, concerns only, Bokaro,
and Ramgur Co. Ltd. and Karanpura Development Co. Ltd. and that as the latter
company's shares were of the value of Rs. 2,37,267/- only, the 'bulk of the
amount of Rs. 37 lacs and odd went into the purchase of the shares of Bokaro:
and Ramgur Co.. Ltd. The Tribunal noted that the sale of Karanpura shares
resulted in a net profit of Rs. 88,522/-, that in respect of the Karanpura
shares there was correspondence showing that his brokers had advised him to
acquire 51% of the company's share holding as he desired to obtain control over
its management, that for doing so he wanted to obtain founders' shares (each of
which shares carried 3 votes per share), that a compromise was proposed in a
suit he had filed as the lessor of the mines leased out to the company, that
M/s. Bird & Co., the managing agents of that company, were not willing to.
sell him shares representing the unissued capital of the company on terms
proposed by the assessee and that ultimately he failed to obtain majority of
shares which only could have enabled him to obtain control over the company's
management.
But the Tribunal found that "the
assessee was attempting to obtain control of the company not by purchasing of
shares in the market, but by issue of shares by the company in order to settle
the dispute between the company and the assesses These negotiations finally
failed." It finally held that having perused the correspondence and having
regard to the circumstances, the purchase of Karanpura shares was not in
pursuance of a scheme to obtain control over the company by acquiring 51% of
the votes therein.
The High Court, after hearing the:
References, held that though the Tribunal had in the earlier assessments held
that the assessee's transactions in shares, securities and gold did not amount
to transactions in the nature of trade or business, and therefore, the assessee
could not be treated as a dealer- in those articles. There was no bar to the
revenue coming to a different conclusion, though to do so it must have some new
materials and facts before it. It further held that the present Tribunal could
a/so arrive at such a conclusion having regard to: (a) the frequency of
transactions of purchase and sale of shares, (b) the short interval between
purchase and sale of shares, (c) the fact of Rs. 48 lacs in the assessee's
wife's account having been ear-marked for shares transactions, (d) his
borrowing Rs.
5.10 lacs 'against gold for purchase 169 of
shares, and lastly, the fact that the Tribunal this time had before it a more
complete picture of the assessee's transactions over a length of period which
its predecessor had not when it dealt with the assessments for the assessment
years 1939-40 to 1941-42. The High Court further held that there was fresh
material, namely, that when the gold was sold, its sale proceeds were again
invested in shares and the fact that though Victory Bonds were purchased in
January 1945 they were sold after an interval of two months only. The High
Court, in this view, concluded that "the Appellate. Tribunal, therefore
had before it fresh materials for coming to a conclusion contrary to the one
come by its predecessors in the previous orders." It rejected the
assessee's case: (a) that he had converted one investment into another, i.e.
from shares and securities to gold, because of the worsening of the war
situation after the fall of France in 1940, (b) that when the war situation
improved in 1944 and with that the price of gold began to fail he once again
converted his investment from gold to shares, i.e., from an unproductive
investment into one which could give him an adequate yield, and (c) that he had
sold gold because of pressing necessities. The first contention was held
unsustainable because even after purchasing gold the assessee had retained
considerable cash; the second was rejected on the ground that the assessee had
sold gold not because of the allied victory in sight but because he found the
gold un profitabIe by reason of the fall in its price and the third was
rejected as the assessee had failed to make good the pressing necessities
alleged' by him. The High Court further held that the findings given by the
Appellate Tribunal were all findings of fact and as they could not be said to
have been arrived at without any evidence they could not be interfered with in
a Reference under s. 66(2), and answered the questions as to the two surplus
amounts of Rs. 13 lacs and odd and Rs. 33 thousand 'and odd as liable to
assessment. In regard to the excess of Rs. 88,522/_ resulting from the sale of'
Karanpura shares, the High Court agreed with the Tribunal that that amount also
was rightly brought to tax. It held that the finding of the Tribunal that the
purchase of these shares was not in pursuance of a scheme to obtain control in
the company and that the assessee's scheme for that purpose was to acquire
shares representing the unissued capital of the company was one of fact with
which also it had no jurisdiction to interfere.
Counsel for the appellant disputed the
correctness of the High Court's judgment and contended: (1 ) that it was in error
in declining to go into the correctness of the findings of the Tribunal by
merely stating that they were findings of fact, (2) that the question whether a
particular item was a trading profit or capital accretion depended on the
intention on the part of the assessee at the time of the transaction in
question and which had Sup CI/70--12 170 to be arrived at by an inference from
established facts and was, therefore, a mixed question of fact and law, (3)
that on the facts and circumstances, the Tribunal, and following it the High
Court, was in error in treating the gold and the Karanpura shares as the
stock-in-trade of the assessee for his alleged trading activities, (4) that the
onus of proving that the activities of the assessee amounted to activities in the
nature of trade or business was on the department and particularly so,, as the
Tribunal in the earlier assessments had come to a contrary conclusion, and (5)
that the facts and circumstances as accepted by the Tribunal in its Statement
of Case showed that the purchases of gold and share were made without any
intention at that time to resell them at profit, and that therefore, the
subsequent sales thereof would not stamp those transactions with the character
of trade or business in them.
Since these appeals arise out of References
under s. 66(2), we cannot exercise any wider power of interference than that
permitted to the High Court under the Act. That was not disputed by Mr. Desai.
But in support of his contention that this was a case' where the High Court
could and should have interfered with the Tribunal's findings he cited a number
of decisions. It is not necessary to go into all these decisions as the
principles on which such interference can be made and the scope of power under
s. 66 to do so are by now well established. That the question, whether an
assessee carries on business or whether certain transactions are in the course
of business or whether they amount to adventures in the nature of trade or
business, is a mixed question of fact and law is well-settled. The decision in
Venkataswami Naidu & Co. v.C. 1. T.(1) is an instance in point where this
Court observed that the expression 'adventure in the nature of trade' appearing
in the definition of 'business' implies the existence of certain elements in
the .adventure which in law would invest it with the character of trade and
that renders the question whether a transaction 'is in the nature of trade a
mixed question of law and fact and the High Court in such a case would
interfere if the Tribunal had misdirected itself in law of 'also Liquidators of
Pursa Ltd. rs. C.I.T.)(2).
But to distinguish a question of fact and a
question of law is not always easy, for, sometimes there is a common area
between the two and though a mere question of fact can be turned into one of
law, care should be taken against a finding of a mixed question of fact and law
being given the unassailability which the Act confers on a pure finding of
fact. The case of Sree Menakshi Mills Ltd. v.C. 1. T.(3) holds that where an ultimate
finding on an issue is an inference to be drawn from facts found, on
application of a principle of law, there is a mixed question of law and fact
and such an inference in such a (1) (1959) 35 I.T.R. 594 at 603 to 604. (2)
(1954) 25 I.T.R. 265. (3) (1957) 31 I.T.R. 28.
171 case is a question of law open to review
by the court. On the other hand, when the final determination of the issue does
not involve any application of a principle of law, an inference is a pure
inference of fact drawn from the other basic facts. Such an inference can be
attacked only if there is no evidence to support it, or, if it is perverse.
Since the expression 'adventure in the nature
of trade' implies the existence of certain elements in the transactions which
in law would invest them with the character of trade or business and the
question on that account becomes a mixed question of law and fact, the Court
can review the Tribunal's finding if it has misdirected itself in law.
It is fairly clear that where a person in
selling his investment realises an enhanced price, the excess over his purchase
price is not profit assessable to tax But it would be so, if what is done is
not a mere realisation of the investment but an act done for making profits.
The distinction between the two types of transactions is not always easy to
make The distinction whether the transaction is of one kind or the other
depends on the question whether the excess was an enhancement of the value by
realising a security or a gain in an operation of profit making. If the
transaction is in the ordinary line of the 'assessee's business there would
hardly be any difficulty in concluding that it was a trading transaction, but
where it is not, the facts must be properly assessed to discover whether it was
in the nature of trade. The surplus realised on the sale of shares, for
instance, would be capital if the assessee is an ordinary investor realising
his holding; but it would be revenue, if he deals with them as an adventure in
the nature of trade. The fact that the original purchase was made with the
intention to resell if an enhanced price could be obtained is by itself not
enough but in conjunction with the conduct of the assessee and other
circumstances it may point to the trading character of the transaction. For
instance, an 'assessee may invest his capital in shares with the intention to
resell them if in future their sale may bring in higher price. Such an
investment, though motivated by a possibility of enhanced value, does not
render the investment a transaction in the nature of trade. The test often
applied is, has the assessee made his shares and securities the stock-in-trade
of a business.
Though the assessee was at the material time
a landholder of a large estate, that fact by itself would not mean that his
transactions in shares, securities and bullion cannot be transactions in the
nature of trade. They had, therefore, to be examined in the light of all the
facts and circumstances to ascertain whether they had been entered into in
pursuit of a trading activity. The first relevant ,fact is that the assessees
occupation was that of a landholder, having, on attaining majority, a
considerable amount of money available for raising income there from. The
transactions 172 in question were obviously not in the line of any business or
trade carried on by him. Since the Tribunal came to a conclusion as regards the
nature of the assessee's transactions different from that arrived at earlier,
it would be useful to tabulate them at one place. So tabulated, they are as follows:
(1) Sale of Government securities in 1938- 39
which realised Rs. 44.25 lacs;
(2) Opening of an account with this and
certain other amounts totaling Rs. 48 lacs in the Imperial Bank;
(3) Purchase out of these funds, shares and
debentures of the value of Rs. 34.14 lacs in September 1939;
(4) Sale in October 1939, i.e., within a
month, of some of these shares bringing him Rs.. 5.75 lacs;
(5) Sale of the bulk of the shares in 1940
bringing in Rs. 29.58 lacs;
(6) Sale of the remaining shares in 1941
resulting in a small deficit;
(7) Purchase of 68,109 tolas of gold in June
1940 for Rs. 28.47 lacs;
(8) Sale of the bulk of the gold, i.e.,
55,495 tolas in October 1944 resulting in a surplus of Rs. 13 lacs and odd;
(9) Sale of the remaining gold in October
1945 resulting in a surplus cf Rs.. 33,481/-;
(10) Purchase of Karanpura shares between
December 1944 and April 1945 of the value of Rs. 2,37,267/-;
(11 ) Purchase of Victory Bonds in January
1945 of Rs. 14 lacs, and sale thereof in March 1945;
(12) Borrowing Rs. 5.10 lacs against gold in
1945-46;
(13) Purchase of Bokaro Ramgur shares in
1945-46 for Rs. 39.81 lacs and (14) Sale of Karanpura shares in 1945-46
bringing in a surplus of Rs. 88,000 and odd.
As already stated, though these transactions
were not in the line of any trade of business carried on by the assessee,
nonetheless, if they possess the characteristics of adventures in the nature of
trade, the profits resulting therefrom would be liable to tax. But in an
enquiry on the question whether these transactions were in the nature of trade
or business, it would not be altogether irrelevant 173 to notice that in
1938-39, when the assessee sold the Government securities, he sold the entire
lot and invested the bulk of their sale proceeds in shares and debentures,
i.e., as much as Rs. 34 lacs. The same features is present also in his purchase
of gold in 1940 and its disposal in 1944 and 1945 using its sale proceeds in
buying shares, which, it must be remembered, were of two companies only.
The transactions thus are not diversified nor
are gradual according to the opportunities offered by fluctuating market
prices, but are in bulk and almost at a time, which ordinarily are not the
characteristics of the dealings of a person carrying on trade or business in
them. Thus, in 1938-39 all Government securities were sold and the bulk of
their sale proceeds, i.e. Rs. 34 lacs and odd, used in the purchase of shares.
The same was the case when gold was bought 'and sold. Furthermore, when a
person trades in shares and debentures, he does not ordinarily buy shares of
two companies only, except when a particular script has the possibility of
giving an unusual or a certain profit. There was nothing on record to show, nor
did the Tribunal find, that that was the case with the shares of either of the
two companies whose shares the assessee purchased in such large quantity. Prima
facie these transactions would appear in the nature of investments and their
conversion into what the assessee believed to be better investments as the
circumstances changed from time to time.
In support of his contention that these
transactions were not in the nature of trade or business, the assessee had
relied on the correspondence between him on the one hand and his bankers and
brokers on the other, which had satisfied the Tribunal previously with
reference to the assessment years 1939-40 to 1941-42. That correspondence lends
support to the assessee's case inasmuch as he had there in clearly instructed
his brokers to invest the sale proceeds of the said Government securities in
such a way as to give him an annual yield of net 7%. There can be no doubt that
Government securities were sold accordingly and shares of certain companies
were purchased from their sale proceeds in accordance with the advice of his
brokers and bankers. When it was found that certain shares so purchased were
not Likely to yield the percentage he desired, they were sold within hardly a
month from their purchase. The circumstances in which these transactions were brought
'about, would disclose, as was held by the previous Tribunal in the case of the
earlier assessments, that the assessee's intention then was to change his
investments from Government securities into shares and debentures which, he was
advised, would procure him a better yield. This conclusion is consistent with
his sale of the entire lot of Government securities 'at 'a time, his going in
for shares with their sale proceeds and the sale in October 1939 of certain
shares which were found incapable of giving the return he desired.
174 Since the present Tribunal had the
advantage of examining the assessee's transactions during the whole of the
period, i.e., right from 1938-39 to 1944-45 and thus have a more comprehensive
picture of all the transactions, there would be no bar to its coming to a
conclusion different from that arrived at in the earlier years, if the acts and
conduct of the assessee taken as a whole throughout the period pointed to ,a
different conclusion as both the Tribunal and the High Court have said. But the
only new materials pointed out by the Tribunal from which a different
conclusion could be arrived at were (1) the sale of gold in 1944 and 1945, (2)
the purchase of the said shares from its sale proceeds, and (3) the sale of
Karanpura shares.
The question, therefore, the Tribunal had
before it was, whether when the assessee purchased the gold he did so with the
intention to deal in it. The Tribunal held, and the High Court concurred with
it, that the assessee's transactions showed that they were in the nature of
trading transactions. Two facts, however, throw considerable doubt on the
validity of that conclusion and neither the Tribunal nor the High Court seems
to have weighed them with the consideration which they demand. The first fact
is that in 1940 he converted his entire share-holding into gold, a fact
consistent with his case that he did so because of the nervousness engendered
by the breaking out of the Second World War, the initial German victories and
the fall of France. The Tribunal did not countenance this case for it thought
that if that was so, the assessee would have invested the other cash lying with
him also in gold, and secondly because according to it the war panic started in
1942 and not in 1940. We do not think that this was an accurate 'approach. The
fact that the assessee did not invest all his cash cannot mean, as the Tribunal
thought, that his case about the purchase of gold was not correct.
The war had commenced in 1939 and it is a
notorious fact that in 1940 the fortunes of the allies were none too bright.
The fact was that the assessee sold his entire share-holding and applied their
sale proceeds and also a further amount of Rs. 13 lacs and odd obtained ,from
his lessees, M/s Anderson Wright & Co., into. gold. The second fact, whose
significance does not also seem to have been adequately apprehended, was that
the assessee, who started with the plan of getting at least net 7% yield, put a
very Large part of his funds into gold, an altogether sterile security, and retained
that gold in his family vaults ,for nearly 4 years. The Tribunal had before it
the gold prices current during the years 1940 to 1944. These indicate that the
gold price remain steady at Rs. 42 per tola all throughout 1940. There was,
however, an upward trend noticeable from about the end of 1941 which went up to
Rs.
65 towards the end of 1942. By the middle of
1943 the gold price had risen to Rs. 90 and even more. In October 1944, when
the assessee sold 175 a large bulk of his gold holding the price was at Rs. 68
per tolaIf the idea of the assessee in purchasing the gold was to trade in it,
he would not have waited for 4 years without disposing of a particle of it. The
price was on the upward trend in 1941 and reached the climax in 1943 when he could
have sold the gold and made considerable gain. The fact that he did not do so
and waited until October 1944 the war fortunes were turning in favour of' the
allies, that confidence had gradually been retained by trading circles and that
that was why he thought that it was no longer necessary for him to retain the
,gold any further and could safely invest his money in income-bearing
securties. The further fact that he sold practically the whole of his stock of
gold in October 1944 instead of selling it bit by bit when the price was rising
since about the end of 1942 is inconsistent with the hypothesis that the object
with which the gold was purchased was to trade in it.
Regarding share transactions, we think that
the Tribunal placed undue emphasis on the fact that when he opened the bank
account in March 1939 with the sale proceeds of Government securities, he did
so, firstly, in the name of his wife 'and, secondly, called that account as one
of "Rs.
48 lacs floating in the share' market".
The first had no particular significance and the second properly viewed only
meant that he wanted to set apart this fund for transactions in shares and
securities and not mix up his other capital and the income arising from his
estate. The name he gave' to this account cannot for that reason only render
his dealing with that account into trading transactions if otherwise, they were
not.
Similarly, the Tribunal was unduly impressed
by the fact that he sold away the Victory Bonds within about two months from
their purchase. The correspondence produced by the assessee clearly shows that
he had bought those Bonds at the pressure of the then Commissioner. The Bonds
were not likely to fetch him the yield he desired. His purchase of them had
thus served the purpose, viz., his showing to the authorities that his estate
had made a war contribution.
The sale by him of those Bonds would not
affect the Government or its war effort. The fact that he sold' them soon after
the purchase would not invest it with the stamp of' trade or business in
Victory Bonds.
As regards the Karanpura shares, the
correspondence between him and the company and the advice he had from his
brokers referred to in the Statement of Case show that the assessee did at one
time entertain the idea of obtaining control over the company's management by
procuring 51% of its total shares. He could do so by purchasing shares in the
open market and also, by other means. He purchased 7,025 shares in the market
but that ,was clearly not enough.
There was at that time litigation going on_
176 between him and the company and he seems to have hit upon the idea that he
would compromise his suit if the managing agents of the company were to sell
him shares representing its unissued capital at prices offered by him. The
object of his offer was that he would not have to pay the market price of the
shares which was 3 times more than the one offered 'by him. The company did not
agree and his move for compromise ,failed. According to him, there was,
therefore, no useful purpose for retaining those shares and he sold 6,950
shares leaving only 75 shares with him. On these facts the Tribunal was not
right in concluding that the shares which the assessee purchased from the
market were not for the purpose of acquiring the major share-holding in the
company and that the control over the company was to be obtained only by
purchasing shares representing the unissued capital. Both the purchase of
shares and the move to obtain shares representing the unissued capital were
part of the same design and if the latter 'failed, his purchase of 7,025 shares
would obviously not bring him nearer his object. Furthermore, the bulk of the
sale proceeds of gold went into the purchase of Bokaro. Ramgur shares which
remained with him till the assessment years in question. The profits made on
the sale of shares, acquired with the intention of obtaining control over the
company's management and not for dealing in them, would be on the capital and
not revenue account. (see Kishan Prasad & Co. Ltd. v.C.I.T.(1) and C.I.T.
v. National Finance Ltd. (2). The Statement of Case itself set out facts which
were consistent with the assessee's case.
In our view the Tribunal misdirected itself
in applying the law to the facts ,found by it both in the matter of gold and
shares, and the High Court would have been entitled to interfere with its
findings instead of holding that it could not do so as the findings were
findings of fact. The questions involved being mixed questions of fact and law,
the hypothesis on which the High Court acted that the findings were purely
findings of fact and therefore 'were unassailable was in our view not correct.
The appeals, therefore, will have to be
allowed and the answers given by the High Court set aside. We hold that the two
questions referred to the High Court should have been answered in assessee's
favour and we do s0 accordingly. The respondent will pay to the appellant costs
of these appeals but only one hearing fee.
(3.C. Appeal allowed.
(1) (1955) 27 I.T.R. 49. (2) (1962) 44 I.T.R.
788.
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