M/S. Ramnarain Sons (PR.) Ltd. v. Commissioner of Income Tax, Bombay

SHAH, J.-The High Court of Judicature at Bom­ bay answered the following two questions referred by the Income Tax Appellate Tribunal, Bench "B", Bombay, under s. 66(1) of the Indian Income Tax Act, 1922: (1) Whether the acquisition of the managing agency M /s. Ramnarain Sons (Pr.) Ltd. v. Commissio11er of Income-tax, Bombay Shah ]. 1960 of the Dawn Mills Co.,. Ltd., was in the nature of a "business" carried on by the assessee company? P.1 /s. Ra»1narain Sons (I».) Ud. (2) If the answer to the first question is in the v. affirmative, whether the loss suffered by the assessee Commissioner cf company of Rs. 1, 78,438 on purchase and sale of 400 In&ome-tax, shares of the Dawn Mills Co., Ltd., being incidental to Bombay its business of acquiring the managing agency, was a Shall]. loss of a revenue nature?, as follows: (1) Acquisition of the managing agency was an acquisition of a capital asset; (2) The loss in respect of the 400 shares was of a capital nature. Against the order of the High Court, this appeal is preferred with special leave. The appellants are a private limited company registered under the Indian Companies Act, 1913, and carry on business as brokers, managing agents and dealers in shares and securities. One of the objects for which the appellants were incorporated was to acquire managing agencies. The appellants also carried on business in shares of different companies, and were assessed to income-tax as dealers in shares and securi­ ties. M/s. Sassoon J. David & Co., Ltd. were the manag­ ing agents of the Dawn Mills Ltd.-a public limited company-and they held 2,507 out of a total issue of 3,200 shares. On September 28, 1946, the appellants purchased from M/s. Sassoon J. David & Co., Ltd. 1,507 shares of the Dawn Mills at the rate of Rs. 2,321-8-0 per share and having obtained a con­ trolling voting right, acquired the managing agency rights of the Mills. The remaining one thousand shares were acquired from M/s. Sassoon J. David & Co., Ltd. by the Directors of the appellants at the rate of Rs. 1,500. At the material time, the ruling market price of the shares of the Dawn Mills was Rs. 1,610. In December, 1946, the appellants sold 400 out of the shares purchased by them, and thereby suffered a loss of Rs. 1,78,438. The loss suffered by the appellants in the yeftr of account January 1, 1946, to December 31, 1946, by sale of shares including 400 shares of the 2 S.C.R. SUPREME COURT REPORTS 907 Dawn Mills was Rs. 1,92,834. Crediting Rs. 1,05,907 earned as profit in certain other share transactions, h h . . h M/s. Ramnarai the net loss suffered in t e s a.re transactions m t e Sons (Pr.) Ltd. year of account amounted to Rs. 86,927. The appel- v. !ants valued their shares at the end of the year of Commissioner o account at cost or market price whichever was lower. Income-tax, By this method of valuation, the books of account of Bombay the appellants showed a loss of Rs. 7,97,792 which included a loss of Rs. 7,04,000 on the valuation of the Dawn Mills shares held by the appellants at the end of the year of account. In the income-tax assessment for the year 1947-48, the appellants claimed Rs. 86,927 as loss on sales in trade in shares and Rs. 7,97,792 as loss on valuation of stock-in-trade. The Income Tax Officer, Companies' Circle IIl(l), Bombay, disallowed the loss suffered by the appellants in the sale of the Dawn Mills shares, because in his view those shares were purchased by way of capital investment and the loss sum~red by sale thereof could not be allowed as a trading loss. He also held that the appellants were not entitled to depart from the method adopted in earlier years and to value the closing stock of shares in the year of account at cost or market price whichever was lower and to claim the difference between the opening and closing valuation as a trading loss. The Appellate Assistant Commissioner confirmed that order. In appeal, the Income Tax Appellate .Tribunal held that the managing agency of the Dawn Mills was acquired by the appellants as a part of their business activity and the shares of the Mills having been purchased in the regular course incidental to their business of acquiring the managing agency, the loss on the sale of those shares was allowable as a revenue loss; but the shares of the Dawn Mills were not the stock-in-trade of the appellants' business and they were not entitled to treat the difference between the putchase price and the value at close of the year of those shares, as a trading loss. Accordingly, the Tribunal allowed Rs. I, 78,438 as loss on sale of 400 shares of the Dawn Mills, but did not allow Rs. 7,04,000 as loss arising out of the valuation of the Dawn Mills shares at the Shah]. 908 SUPREME COURT REPORTS [1961) 1 960 end of the year of account. On the application of the Mfs. Ramna.ain Commissioner of Income Tax, the Tribunal referred to sons (1'<.) Ltd. the High Court the questions set out hereinbefore. In v. the High Court, the appellants took out a notice of Commis.<ioner of motion for directing the Tribunal to refer certain In;om:-••x. questions which the appellants claimed arose out of om ay the order of the Tribunal and which the Tribunal did Shah J. not refer. The High Court.agreed with the opinion of the Tri­ bunal that the shares of the Dawn Mills were not the stock-in-trade of the appellants and that those shares were purchased by the appellants with the object of acquiring the managing agency. The High Court, however, held that the shares acquired by the appel­ lants formed a capital asset and the loss suffered by sale of 400 out of those shares in the year of account being a capital loss, was not in the computation of income a permissible deduction. The High Court dismissed the notice of motion taken out by the appel­ lants. In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the "legal requirements which are associated with the concept of trade or business". The inference on this question raised by the Tribunal on the facts found is of mixed law and fact and is open to challenge before the High Court on a reference under s. 66 of the Income Tax Act-­ G. Venkataswami NaiWu & Co. v. The Commissioner of Income Tax (1). It was held in The Oriental, Invest­ ment Co., Ltd. v. The Commissioner of Income Tax, Bombay (•), that the question whether the appellants' transactions amounted to dealing in shares and pro­ perties or to investment,. is a mixed question of law and fact, and that the legal effect of the facts found by the Tribunal on which the assessee could be treat­ ed as a dealer or an investor, is a question of law. The Tribunal held that the shares of the Dawn Mills purchased by the appellants did not become their stock-in-trade. But they held that the transaction {I) [1959) Supp. I S.C.R. 646. (2) [1958) S.C.R. 49· I 2 S.C.R. SUPREME COURT REPORTS 909 having been effected in the regular course of the busi- z96o ness of the appellants, viz., the acquisition of ma.nag- Mf R . · · h l It" fr th I f h s. amnararn mg agenmes, t e oss resu mg om e sa e o s ares sons (Pr.) Ltd. was incidental to that business and was a revenue v. loss. It is not easy to appreciate the process by which Commissioner of this conclusion was reached. The shares were pur- Income-lax, chased for the purpose of acquiring the managing Bombay agency of the Dawn Mills; they were not purchased Shah J. in the course of the appellants' business as dealers in shares. By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilised for earning profit, the acquisition of the shares which led to the acquisition of the manag- ing agency could not, in the absence of an intention to trade in those shares, be regarded 'as acquisition of stock-in-trade of the share business. The appellants had undoubtedly purchased the shares of the Dawn Mills with money borrowed at interest, but that cir­ cumstance by itself does not evidence an intention to trade in the shares. Nor is the fa.ct that the appel- lants are dealers in shares and their Memorandum of Association authorises them to carry on business in shares of any importance in the circumstances of this case. The appellants by entering the shares of the Dawn Mills in their statement of shares in which trading transactions were carried on could not alter the real character of the acquisition. The appellants were undoubtedly dealers in shares; but the transac- tion in the Dawn Mills shares was ex facie not a busi- ness transaction. The current market rate at the date of purchase was Rs. 1,610 per share whereas the appellants acquired the shares at the rate of Rs. 2,321-8-0 per share. Even assuming that the appellants acquired the entire block of 2,507 shares from M/s. Sassoon J. David & Co., Ltd.-the shares transferred to the names of the Directors being held by them merely as nominees of the appellants-the price per share was considerably in excess of the pre- vailing market rate. The olny reason for entering into th~ transaction which could not otherwise be re- garded as a prudent business transaction, was the n5 910 SUPREME COURT REPORTS [1961) z96o acquisition of the managing agency. If the purpose M/ R . of the acquisition of a large block of shares at a price so:~ <~7'.;·~;z which exceeded the current market price by a million v. rupees was the acquisition of the managing agency, Commissioner of the inference is inevitable that intention in purcha.s­ Incom•·tax, ing shares was not to acquire them as part of the Bombay trade of the appellants in shares. The Tribunal found Shah J. that the Dawn Mills' shares were acquired by the appellants for obtaining the managing agency of the Mills. The agency was acquired by virtue of the vot­ ing power which the appellants obtained having pur­ chased a very large block of shares, and for acquiring the managing agency, the appellants did not pay any distinct consideration. The managing agency is manifestly the source of profit of the appellants; but the shares purchased and the managing agency acqui­ red were both assets of a capita.I nature and did not constitute stock-in-trade of a trading venture. If the shares were acquired for obtaining control over the managing agency of the Dawn Mills, the fact that the acquisition of the shares was integrated with the acquisition of the managing agency did not affect the character of the acquisition of the shares. Subsequent disposal of some out of the shares by the appellants could also not convert what was a ca.pita.I acquisition into an acquisition in the nature of trade. The High Court was therefore right in holding that the acquisition of the managing agency was an acquisition of a. capita.I asset and the loss incurred by sale of the 400 shares was of a. capital nature. The High Court was also right in dismissing the notice of motion for an order directing the Tribunal to refer the questions suggested by the appellants. If the acqui­ sition of the shares was not acquisition of a stock-in­ tra.de, but of a. capital asset, the appellants, by valu­ ing the shares a.t cost or market price whichever was lower, could not bring the difference between the pur­ chase price and the valuation made by them into their trading account. The appeal therefore fails and is dismissed with costs.