Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd.

Judgment

The Judgment of the Court was delivered by MATHEW, J.-This is an appeal from the judgment of the High Court of Madhya Pradesh in a reference made at the instance of the assessee M/s. Sutlej Cotton Mills Supply Agency Ltd. (hereinafter referred to as the 'assessee') by the Income Tax Appellate Tribunal (hereinaf,er referred to as the 'Tribunal') under s. 66(1) of the Indian Income Tax Act. The question referred was : "Whether the inferencg of the Tribunal that the profit of Rs. 2,13,150/- arising from the sale of 1,58,200 shares of the Gwalior Rayon Silk Manufactunng \ Weavmg) Co. Ltd., is assessable as business profit is correct ?". When the reference came up for hearing before the High Court, the High Court found that although the Tribunal was of the view that the question referred was a mixed question of Jaw and fact, it had not stated all the facts and circumstances on which it based its conclusion that the profit of Rs. 2,13,1501- was a business profit and so the Court called for a supplementary statement of the case and a supplementary statement of the case was submitted to the Court by the Tribunal.

The material facts in the statement of the case were as follqws. The assessee is a public limited company and it JS controlled by the Birlas. The assessee applied for certain shares of the Gwalior Rayon Silk Manufacturing (Weaving) Company Limited (hereinafter referred to as the "Rayon Company"), also a company controlled by the Birlas. This company was floated on 25-8-1947 with a paid up capital of Rs. 5 lakhs made up of 50,000 ordinary shares of Rs. 10 /- each. In the year ending 31-12-1951, the Rayon Company issued certain new shares tor paid up capital of Rs. 1,17,25,000/- made up as follows: 7,60,000 Ordinary shares of Rs. 10/- each fully paid up. 1,50,000 Ordinary shares of Rs.JO/. each with paid up at Rs. 2/8/- each. 1,50,000 6% preference shares of Rs. 100/-each paid up at Rs 25/- each (redeemable at par at the con1- pany•s option after a specified date by giving one Year's notice). Rs. 76,00,000 3,75,000 37,50,000 I l C.I.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.)

The assessee which was interested in the Rayon Company and which bad already purchased l,OOQ. ordinary shares, subscnbed for 3,49,000 shares of the new issue and paid Rs. 8,72,500/ as application money on the 25th and 27th February, 1951, and paid Rs. 26,17,500/- as final call money on 10-8-1951. These purchases were authorized by a resolution of the assessee dated 7-2-1951. The assessee sold a part of its stock viz., 1,58,200 shares at a profit of Rs. 2,13,150/-. For the assessment year 1956-57 (accounting year ending on 31-3-1956), the Income Tax Officer sought to assess the amount on the basis that it was profit accruing to the assessee from an adventure in the nature of business. The assessee contended that the amount represented capital gain as the shares were purchased by way of investment and that the same cannot be taxed as revenue receipt. The Income Tax Officer rejected the contention. 'fhe assessee· tiled · art appeal before the Appellate Assistant Commissioner.

He confirmed. the order. The assessee then went up in appeal before the • .Appellate Trlbunal. The Tribunal came to . the conclusion, after considerl~g all 'the circumstances, that .the transaction was in the nature of a business .l\dventure and that profits were liable to be taxed. The reasons ;vhich induced the Tribunal to come to this conclusion were : The assessee was. authorised by clauses 12, 13, 28 and 29 of paragraph 3 of .its Memorandum of Association to buy and sell shares; there were specific resolutions of the Company authorising a director of the assessee to purchase and sell these shares; th~ assessee had included the profit of Rs. 2,13,1501- in the profit and loss account without taking it to .any reserve account or specifically set it apart for any other purpose; the assessee had purchased the shares from borrowed funds and not with money readily available to it; the assessee did not make the sales. on account of any pressing necessity to meet existing liabilities but had .in fact kept a part of the sale-proceeds as liquid cash in the United Commercial Bank Ltd.; the assessee had, in the' past, dealt in shares as busi, ness transaction and had claimed for the assessment year 1951-,52 Rs. 1,29,214/- as loss on account of its dealing in shares of M/s. Titagarh Paper Mills Ltd.; it also claimed Rs. 6,30,000/- as loss on ·account of devaluation of the shares of M/s. Pilani Investment Corporation though that was not allowed; there had recently grown a business practice of investing large sums of money in shares in new ventures with an eye on their appreciation for obtaining by sale substantial profits in future.

The High Court, in its judgment, said that there was no provision in clauses 10, 12, 13, 28 and 29 of paragraph 3 of Memorandum of Association of the assessee which authorised the carrying on of the business of purchasing and selling shares, although some of these clauses did authorise the assessee to acquire and sell shares in other similar companies; that the inclusion of the profit of Rs. 2,13,150/- in the profit and. loss account without taking it into any reserve specifically was not conclusive of the question whether it was a capital asset or a revenue receipt; that the· true nature and character of the moneys received was to be determined not by the manner in which the assessee treated it but by its inherent character, and, that it was wholly immaterial 10-714 Sup. Cl/75 j SUPREM~ COURT REPORTS L1976]

1 S.(.&. as to how the assessee treated the amount iu question; and that there was no evidence that the shares were purchased out of borrowed funds as the assesoee had a fixed deposit of Rs. 31, 75,0001- in the United Commercial Bank Ltd. and a deposit of Rs. 8,76,008-2-0 in the current accomll of the Bank. The High Court was of the view that the finding of the Tribunal that the sale of shares in 1955 was made not on account of any pressing necessity to meet existing liabilities was based on materials placed before the Tribunal. The Court, however, said : "It may be that, at that tim~, the liabilities of the assessee company existed, but it is quite another matter to say that it was obliged to sell the shares in order to meet those liabilities." The High Court was also of the view that the conclusion of the Tribunal that the assessee had claimed Rs. 1,29,214/- as loss on account of dealing in shares of Mis.

Titagarh Paper Mills Ltd. for the assessment year 1951-52 and that the claim was allowed by the Income Tax Officer must be accepted as correct, but said that this Solitary. transaction cannot be taken as conclusiw of the fact that the sale of shares in question here was an adventure in the nature of trade. The main reason which impelled the High Court to hold that the transaction was not an adventure in the nature of trade was that the dominant intention of the assessee in acquiring the shares was to boost the shares of a sister concern viz., the Rayon Company, and thus render it assistance for setting it up as a going concern and when that was accomplished, the assessee started selling the inv~tment w\lich had in the mean time enhanced in value. The question which the Tribunal had to consider in the appeal and which was referred to the High Court was a mixed question of law and fact, namely, whether the profit from sale of the shares in question was a revenue or a capital receipt.

The distinction between capital accretion and-income has been explained by Rowlatt, J. in Thew v. South West Af•ica Co. Ltd.( 1). The learned judge said that for the purpose of ascertaining whether profits made upon a sale of an article are taxable profits, the question to be asked is : "Is the article acquired for the purpose of trade ?". If it is, the prgfit arising from its sale must be brought into revenue account and that the profit is chargeable as capital gains if the sale is of a capital asset, and as business profit if the sale is in the course of business or the transaction constitutes an adventure in the nature of trade. The line between capital sales and sales producing income has been drawn by Lord Justice Clerk in Californian Copper Syndicate v. Harris(") in a passage which has become classical :

"It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinarv investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit .... assessable to income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business .... What is the line which (1) 9 T. C 141 (2) 5 T. C. 159. ·C.l.T. v. SUTLEJ COTTON MILLS LTD.

(Mathew, !.) l 3 I separates the two classes of cases may be difficult to define, .and each case must be considered according to its facts; the question to be determined being-ls the sum of gain that has cbeen made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying l out a scheme for profit-making ?" In the absence of any evidence of trading activity in cases of purchase and resale of sh>ares, it has been held that profit arising from the resale is an accretion to the capital. If a transaction is ill the assess-ee's ordinary line of business there can be no difficulty in holding that it is in the nature of trade. But th(> difficulty arises where the transaction is outside the assessce's line of business and then, it must depend upon the facts and circumstances of each case whether the rransaction is in the nature of a trade.

It is riot necessary to constitute trade that there should be a series of transactions, hath of purchase and of sale. A single transaction of purchase and sale outside the assessee's line of business may constitute an adventure in the naturi> of trade. Neither repetition nor continuity of similar transactions is necessary to constitute a transaction an adv~nture in the nature of trade. µ there is repet1tion and continuity, the assesse~ would be ~arrying on a business and the question whether the activity is an adventure in the nature of trade can hardly arise. A transaction may be regarded as isolated _although a similar transaction may have taken placei a fairly Jong time before [see I. R .. v. Reinhold(')]. The principles umlerlying the distinction between a capital sale and iE an adventure in the nature of trade were examined by this Court m Vcnkataswa111i Naidu & Co. v. C.T.T.('), where thfs Court said that the character of a transaction cannot be cfetermined solely on the application of any abstract rule, principle or test but must depend upon aU the facts and circumstances of the case.

Ultimately, it is a matter" of first impression with Court whether a particular transaction is in the nature of trade or not. It has been said that a single plunge may be enough pmvided it is· shows to the satisfaction of the Court that the plunge is made iii the waters of the trade; but mere purchase/sale of shares-if that is all that is involved in the plunge-may fall short of anything in the nature of trade. Whether it is in the nature of trade will depend on the facrs and circumstantes. Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed cireumstances would only be a realisation of capitaI and w0uld not ~tamp the fnthS11ctioh with a business character [see j C.I.T. v. P.K.N. Co., Ltd. (8}].

Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. transaction is not neceS$arily in the nature of trade because the purchase (I) 34 T. C. 389; 392. (2) [1959] 35 I. T. R. 594. (3) [1966] 60 I. T. R. 65 (S. C.). [1976} 1 S.C.R. was made with the intention of resale [see Jenkinson v. Freeland(!); Radha Debi Jalan v. C./:T.(2); India Nut Co. Ltd. v. C.l.T.( 8 ); M/s. ·Sooniram Poddar v. C.I.T.(4); Ajax Products Ltd. v. C.l.T.('); Gustad Irani v. C.l.T. (6); and Mrs. Alexander v. C.I.T. (7)]. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment [see Leeming v. Jones( 8 ) and also the decisions of this Court in Saroj Kumar Mazumdar v. C.l.T. (9) and Janki Ram Bhadur Ram v. C.:.l.T. (1°)].

In I. R. v. Fraser( 11 ) Lord Norman said : "The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that this is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity for safo does not occur. An amateur may purchase a picture with a view to its resale at a porfit, and yet he may recognise at _the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. ... " An accretion to capital does not become .income merely . because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income. Lord Dunedin said in Leeming v. Jones(') at p. 360:

"The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or a concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever.~ This Court laid down in Venkataswami Naidu & Co. v. C./.T.(12) that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade. The intention to resell would, in conjunction with the condnc~ of the assessee and other circumstances, point to the business character of the transaction. In the light of the principles above referred to, it is necessary . to examinP- whether the Tribunal had approached the question from the right perspective, viz., whether on the basis of its fincfmg on questions of fact, the inference that the transaction was an adventure in the nature of trade was justified. (I) 39 T. C. 636 (C. A.). (3)

[l960J39 I. T. R. 234. (5) [196lJ 43 I. T. R. 297, 310. (7) [1952] 22 I. T. R. 379, 402. (9) [l959J 37 I. T. R. 242, 250-1. (II) 24 T. C. 498, 501. (2) [1951) 20 I. T. R. 176. (4) [1939) I. T. R. 470, 478-9. (6) [1957) 31 ,I. T. R. 92. (8) 15 T. C. 333. (10) [1965) 57 I. T. R. 21. (12) [l959J35 I. T. R. 594, 610, 622. I c.J.T. v. SUTLEJ COTTON MILLS LTD. (Mathew, J.) ! 33 The Tribunal relied on the following circumstances for coming to the conclusion. The assessee has been dealing in shares from 1951 to 1953. For the assessment year 1951-52, the assessee claimed a sum of Rs. 1,29,214/- which was shown in the profit and loss account and the balance sheet of the company for the year ending 31-3-1951 as a loss in the dealing of shares of M/s. Titagarb Paper Mills Ltd. This daim was alJowed by the Income Tax Officer. According to the Tribunal, this would show that the assessee bad been buying and selling shares even though as an isolated atlventure in the nature of business.

The High Court has not upset this finding, but bas only said that this is an isolated transaction. That apart, in the same year, a sum of Rs. 6,30,000/- was debited to the profit and loss account on devaluation of the sb&res of M/s. Pilani Investment Corporation. Such a debit was permissible only on the footing that the shares constituted the stock in trade of the assessee. lt is no doubt true that the Department did not allow this claim. But that was on the basis that the claim that the shares have fallen in value was not proved to the satisfaction of the Income Tax Officer, and not on the basis that the shares were not held as stock in trade as the High Court wrongly thought. The Tribunal also referred to the resolutions passed by the oassessee autb0rising one of its directors to purchase and sell the shares in the Rayon Company.

The finding of the High Court that the clauses of the Memorandum of Association viz., clauses 10, 12, 13, 28 and 29 do not authorize the company to acquire and sell shares as business has no relevance in view of the aforesaid resolution of the assessee and of the fact that it had been dealing in shares in a commercial spirit as is evident from its claim for loss in dealings in the shares of M/s. Titagarh Paper Mills Ltd. and devaluatio',1 of shares of M/s. Pilani Investment Corporation on the basis that they had fallen in value. Secondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the Rayon Company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares.

But there was evidence before the Tribunal for its finding that the liabilities of the assessce exceeded its assets. The finding, therefore, that the shares were purchased with borrowed funds on which the assessee woas paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend, was correct. We cannot say that this was not a relevant circumstance for the Tribunal to toake into consideration for coming to the conclusion that the transaction was an adve'ature in the nature of business. Looking into all the circumstances, the Tribunal negatived the case of the assessee that it had invested its funds with a view to earn dividend.

The c•ase of the assessee throughout was that the purchase of the shares was by way of investment and the sale was forced by necessity because the creditors were pressing for repayment of the loan. The Tribunal found that the shares were not sold to liquidate the debts of the assessee as the balance sheet as on 21-3-1956 showed that the proceeds were kept -as liquid cash in the United Commercial Bank Ltd. As already stated, the main reason why the High Court came to a different conclusion, is stated as follows in the judgment : " .... Undoubtedly, there are some elements which are contra-indicative of i11vestment but there are other considerations which detract from their value as elements indicating an adventure in the nature of trade, the main being, that . the assessee company, which is controlled by the Birlas, purchased the shares with a view to assisting a sister company controlled by the same persons; and not to embark upon a venture in the nature of trade."

At no time had the assessee a case that the shares were purchased with a view to help a sister company· controlled by the Birlas. No such case was set up by the assessee either before the Income Tax Officer or the Appellate Assisvant Commissioner; nor was it urged before the Appellate Tribunal. Nowhere in the statement of case or the supplementary statement of case prepared by the Tribunal ano filed in the High Court was there a'.1y finding on the question. The whole conclusion of the High Court is based on unwarranted assumption of facts which must have been· taken from the argument of the assessee before the High Court. The danger of failing to recognize that the jurisdiction of the High Court in these matters is only advisory and that conclusion of facts are conclusioias on which the High Court is to exercise the advisory jurisdiction is illustrated by this case. Mr. Chagla for the respondent contended that the only question to be asked and answered is :

What was the dominant intention of the assessee when it pnrd1ased the shares ? If the domiaat>t intention was to carry on an adventure in the nature of business, the profit can be taxed; otherwise not. In other words, the question is whether the assessee purchased the shares in a commercial spirit with ·a view to make profit by trading in them. The Tribunal found, after taking into accom1t all the relevant circumstances that the dominant intention of the assessee was to make profit by resale of the shares and not to make an investment. The finding that loss or profit is a trading loss or profit is primarily a finding of fact, though in reaching that finding the Tribunal has to apply the correct test laid down by law When we see that the Tribunal has considernd the evidence on record and applied the correct test, there is no seep" for interference with the finding of the Tribunal (see C. I. T. v. Ashoka Marketing Co.(').

We do not think! that the High Court was right in interfering with the judgm~at of the Tribunal. In the result we reverse the judgment of the High Court and allow the appeal with costs. P.B.R. Appeal 1•ilowed. (1) [t972] 83 I. T. R. 439.