Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-Tax, West Bengal.

Judgment

s.c.:R. In the view we have expressed above, it is unnecessary to deal with the alternative contention based on section 8(1) of the Act. We allow the appeals, set aside the answer made by the High Court to question No. 1 and answer it as follows: In view of the finding of fact that the old joint family business in Banaras brocade was wound up and was no longer carried on by the joint family as such during the relevant chargeable accounting periods, the same business could not legally be treated as having continued unbroken in respect of such periods for the purpose of section 10-A of the Excess Profits Tax Act read with sections 4 and 5 of the same Act. The judgment of the High Court will stand in other respects. The appellants will have their costs of the appeals. Advocates' fee one set. Appeals atlowed. Agent for the appellants: Naunit Lal. Agent for the respondent: G. H. Rajadhyaksha. SARDAR INDRA SINGH AND SONS LTD. COMMISSIONER OF INCOME-TAX, WEST BENGAL.

[PATANJALI SASTRI C.J., S. R. DAs, VrvrAN Bos:m, GHULAM HASAN and BHAGWATI JJ.] Incomdax Act (XI of 1922), s. IO-Income-Sale of shares and sec1irities-Company carrying on business as financiers and promoters of cornpanies-1 ncorne frorn sale of securities-Whether assessable-Tests. 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 assssses's business that it could be fairly said that the surplus is the profits and gains of the business . Soh"1n Pathak and Sons Commissioner of Income-tax, U.P. Patanjali Sastri G. J. 19$8 Sep. 23. [1954] It is not necessary that the surplus should have resulted from such a course of dealing in securities as by itself would amount Sardar Indra to the carrying on of a business of buying and selling securities.

Singh and Sona It would be enough if such sales were effected in the usual course Ltd. of carrying on the business, or, in other words1 if the realisation of securities is a normal step in carrying on the assesseejs Commissioner of business:. Income-tax, k L l I West Bengal. P1li1~Jab a-operative Ban tc. v. ncome-tax Ooniniissioner, Lahore (67 I.A. 464) followed. Where one of the objects of a cotnpany 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 profi~s made by the co1npany 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 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. 0. Chatterjee (R. P. Khosla, with him) for the appellant. C. K. Daphtary, Solicitor-General 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 S.C.R. i69 Act with the following objects, among others, set out in the memorandum of association : sardar Indra To carry on and undertake any business, transaction, Singh and Sons operation or work commonly carried on or undertaken Ltd. by bankers, capitalists, promoters, financiers, conces- .v .. Commissioner of s10na1res, contractors, mere an s, managers, managmg t ncomeax:, agents, secretaries and treasurers. west Bengal. To purchase or otherwise acquire, ;ind to sell. ....... . stock, share ......... business concerns and undertakings. Patanjali Sastri a. J. 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 num her 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, 1940-41 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 ofthe company's business, the Tribunal came to the following conclusion: "From the foregoing particulars it is clear that the company has been financing and prfrmoting the business of other companies. For this purpose, it .had to vary its holdings from time to time, quite a J?.Umber of shares held by the company have been of a speculative character. To hold these investments andto finance i7o [1954) several companies (managed or otherwise) the appellant company had to resort to obtaining loans and overar ar n ra Singh and Sons drafts. It IS, therefore, clear that shares were acquired Ltd. by the appellant company in the ordinary course of its business and they became its stock-in-trade. The profit Commissioner 01 on sale of these shares did not essentially arise out of W lncomBe-taxl. the sale of investment of any surplus funds.

It is, est enga · J l l t ere.ore, c ear t at tie sa e o mvestments and makmg Patanjali of fresh investme·nts are linked up with the business of Sastri a. J. the company as financiers, inasmuch as investing and realising its holdings when finance were needed is part of the normal business of th_e company ......... There is ample evidence to show tha1r1{te 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 S.C.R. should have resulted from such a course of dealing in securities as by itself would amount to the carrying on Sardar Indra of a business o~ buying and selling securities.

It would Singh and Sona be enough if such sales were effected in the usual course Ltd. of carrying on the business or, in the words used by the Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax Commissioner, Lahore('), if the realisation Income-tax, West Bengal. of securities is a normal step in carrying on the assessee's business. Though that case arose out of the assessment Patanjali of a banking business, the test is one of general appli- Sastri a. J. cation 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. 0. Banerjee. Agent for the respondent: G. H. Rajadhyaksha. COMMISSIONER OF INCOME-TAX, WEST BENGAL A. W. FIGG}ES & CO., AND OTHERS. [MEHR CHAND MAHAJAN, S. R. DAs and BHAGWATIJJ.] Income-tax Act (XI of 1922), s. 25(4)-Firm paying tax i11 1918 -Conversion to limited co1npany in 1947-Right to relief under s. 25(4)-0hange in personnel of jinn in 1939 and 1947, effect of. For purposes of assessment to income-tax, a firm is a different entity distinct from its partners, and a mere change in the constitution of the firm does not bring into existence a new assessable unit or a distinct assessable entity. (1) 67 LA. 464, 481, Sep. 24.