Appeals Nos
581 to 584 of 1966
Appeals by special leave from the judgment and order dated March 26
1964 of the Calcutta High Court in Income tax Reference No 6 of 1961
K Sen Bishan Narain RK Chaudhuri and BP Maheshwari for the appellant in all the appeals
Niren De Solicitor General TA Ramachandran R N Sachthey and SP Nayar for the respondent in all the appeals 354 The Judgment of the Court was delivered by Bhargava J
These appeals came up before this Court on the 17th April 1967 when an order of remand was made by this Court asking the Income tax Appellate Tribunal to submit a further statement of the case
The question that has come up
for consideration is  Whether on the facts and circumstances of the case the surplus derived by the assessee in the sale of its shares and securities in the relevant previous years was a revenue receipt and as such taxable under the Income Tax Act
 The facts and circumstances under which the question was referred by the Tribunal for the opinion of the High Court are mentioned in that order of remand and need not be repeated
In the order of remand it was pointed out that it was not possible to find out from the statement of the case whether the Tribunal accepted the explanation of the assessee that in the previous year relevant to the assessment year 1953 54 the control of McLeod  Co Ltd went out of the hands of the Directors of the assessee and it was for this reason that the assessee sold the shares of McLeod  Co It was also pointed out further that the Tribunal had not stated what was the object of the assessee in buying 6900 ordinary shares of McLeod  Co It appeared from the order of the Income tax Officer that these shares were purchased in a number of lots from the year 1948 to 1950 and it was also not stated as to what was the object in buying other securities and why did the assessee confine its activities mostly to the shares of McLeod  Co Ltd and the companies managed by McLeod  Co Ltd It was in the light of these omissions that the Tribunal was asked to send a supplementary statement
That supplementary statement has now been received and the answer to the question has to be given on the basis of the facts contained in the original statement of the case as well as this supplementary statement
The relevant facts which emerge out of these statements of the case are that the principal activity of the assessee was investment of its capital in shares and stocks
It changed its investments by sale of its shares and stocks from time to time
The income of the Company was primarily derived from dividends on shares and interest received by it on the investments
These activities were covered by Clauses 1 3 and 4 of the Memorandum of Association
The activity mentioned as the object in Clause 2 is to acquirehold sell and transfer shares stocks Debentures Debenture Stocks Bond obligations and 355 securities issued or guaranteed by any company constituted or carrying on business in British India and in the United Kingdom or in any colony or dependency or possession thereof or in any foreign country and Debenture Stocks Bonds obligations and securities issued or guaranteed by any Government Sovereign Ruler Commissioners public body or authority supreme Municipal  Local or otherwise whether at home or abroad In the supplementary statement the Tribunal has recorded the finding that in its opinion the purchases and sales of the shares in question were in pursuit of this clause 2 in the Memorandum of Association
The Tribunal has further stated that the assessee had not placed any evidence as to the object behind the acquisition of the shares of McLeod  Co Ltd and the shares of companies managed by McLeod  Co Ltd nor had the Income tax Officer ascertained the object behind such acquisitions
The Tribunal was also unable to find out why the assessee had more or less confined its activities mostly to the shares of McLeod  Co Ltd and the companies managed by McLeod  Co Ltd The facts proved showed that in the account year relevant to the assessment year in question 21046 shares were held by the Kanoria group including 6977 shares in McLeod  Co Ltd held by the assessee
Mr CL Kanoria resigned his office as Director of McLeod  Co Ltd on 17th March 1952 and the approval of the Government to his resignation was given by the Central Government on 16th October 1952
Thereafter Sri CL Bajoria joined the Directorate of McLeod  Co Ltd 6900 shares
were sold by the assessee to Sri CL Bajoria or his nominees on 27th May 1952 at a time when Sri CL Kanoria had already sent in his resignation from the office of Director but the resignation had not yet been accepted by the Government
It has also been found that Sri CL Bajoria acquired 12440 shares in all
including 6900 shares purchased from the assessee but there was no material on the record to prove that his group obtained a controlling interest in McLeod  Co Ltd as a result of acquisition of  these shares
As a fact it was held that after the resignation of Sri CL Kanoria Messrs CL Bajoria and Baijnath Jalan both  of Ms Soorajmull Nagarmull became Directors of McLeod  Co Ltd These are the principal facts on the basis of which it has to be determined whether the sale of these shares by the assessee resulted in a revenue receipt or in a capital gain
It appears to us that the facts and circumstances in this case can lead to
no other conclusion except that these shares were purchased and sold by the assessee with the motive of earning a profit by such purchases and sales and not with the object of investing its capital in these shares in order to derive 356 income from that investment
It is true that the principal business of the assessee was to invest capital and to derive income from dividends on shares and interest on other investments but at the same time the object contained in the Memorandum of Association of the assessee Company clearly showed that one of the objects was also to deal in shares stocks debentures etc by acquiring holding selling and transferring them
In the years prior to the assessment year the case put forward by the assessee that the various acquisitions and sales of shares were in the nature of investments was accepted by The Department but such a decision given in the earlier years is not binding in the proceedings for assessment during subsequent years
The particular shares noin question
it appears were purchased between 31st March1948 and 31st March 1952
The earliest purchases in March1948 were at an average price of Rs 267 13 0 per share
In the next two years ended 31st March 1949 and 31st March 1950the average purchase price was Rs 201 8 0 and Rs 182 10 0and the last purchase in the year ended 31st March 1952 was at the rate of Rs 128 14 0
On 1st April
1952 the assessee s total holding of shares in McLeod  Co Ltd was 6977 at a total cost of Rs429587 4 0 out of the total holding of shareS including shares in other companies of the value of Rs 1758741 4 0Thus on that date the holdings in McLeod  Co Ltd formed the major part of the share holdings of the assessee
It is significant that the shares were purchased during a period when their market price was continuously falling
The earliest purchases in the year ended 31st March 1948 were at an average price Rs 267 13 0 while in the last of these three years ended 31st March 1952 the average price was Rs 128 14 0
The largest block of 4757 shares was purchased in the year ended 31st March 1950 when the average price was Rs 182 10 0
The assessment order of the Income tax Officer also shows that the shares were not only purchased in a rapidly falling market but in order to make these purchases the assessee had taken loans amounting to about Rs 8 lacs at interest varying from 312 to 5 
The dividend being declared was at a very low rate so that the return on this investment after taking into account the interest paid and super tax to be paid came to a very small percentage
being less than 1
This circumstance that the shares were purchased at a time when their prices were falling and the return on investments was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit
The shares were in fact sold at considerable profit subsequently and that is how the question of charging that profit to tax as revenue receipt has arisen
The explanation sought to be given by the 357 assessee that the shares were in fact being held as investment and were sold simply because the control of McLeod  Co Ltd went out of the hands of the Directors of the assessee has not been proved according to the supplementary statement of the case submitted by the Tribunal
In fact the Tribunal was not satisfied that even the purchasers viz the Bajoria group on buying these shares from the assessee acquired a controlling interest in McLeod  Co Ltd or in the companies managed by that Company
The object of the sale as given by the assessee has therefore remained unproved whereas the fact that the purchases of the shares were made at a time when they were not expected to give a good return as investment and were actually sold at a very good profit leads to the reverse inference that the purchases and sales of these shares were an adventure in the nature of trade
Even the sequence of events does not bear out the contention of the assessee
Sri CL Kanoria first resigned on 17th March 1952 and he sold his shares while his resignation was still pending for approval by the Government
The sale took place on 27th May 1952 at a time when the resignation not having received the approval of the Government the control of McLeod  Co Ltd group of companies was still with the Kanoria group
The resignation was accepted on 16th October 1952 about five months after the sale of the shares
There is no evidence
to show that as a result this sale
the control in the McLeod  Co group of companies passed to the Bajoria group though Ms CL Bajoria and Baijnath Jalan did subsequently loin the Directorate of McLeod  Co Ltd On these facts it is not possible to hold that the Tribunal was incorrect in recording it5 conclusion that the sale of these shares by the assessee was not the result of control of the McLeod  Co Ltd passing from the hands of Kanoria group to the Bajoria group
In fact the Kanoria group was holding a majority 21046 shares out of 40000 shares in McLeod  Co Ltd even at the time when these shares were sold on 27th May 1952
The assessee thus having failed to prove the object of the sale of these shares the inference that the shares were sold with the sole object of earning profit is justified
This conclusion is further strengthened by the conduct of the assessee as found by the Tribunal in subsequent years
In the year ended 31st March 1955 the assessee again purchased a large number of shares of McLeod  Co Ltd These purchases were made between 23rd August 1954 and 29th September 1954
The first purchases were made at a rate of Rs 150 per share
and the purchases were continued even in the month of September when the rate rose to nearly Rs 250 per share
This purchase of shares of McLeod  Co Ltd in the account year 1954 55
when there was a rising market and when the control was no longer with the Kanoria group and having already passed to the 358 Bajoria group clearly shows that the Tribunal was not wrong in inferring that the purchases of shares of McLeod  Co Ltd were not for the purpose of keeping controlling interest in that Company or for investment but that the shares were being purchased and sold for earning profit so that the transactions were an adventure in the nature of trade in these shares of McLeod  Co Ltd In this connection Mr AK Sen learned counsel for the appellant drew our attention to the following view expressed in the remand order  We are unable to answer the question referred because the mere fact that an investment company periodically varies its investments does not necessarily mean that the profits resulting from such variation is taxable under the Income tax Act
Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income tax Act
 Reliance was also
placed on the observations of this Court in Bengal and Assam Investors Ltd vs Commissioner of Income tax West Bengal1 which were quoted in the remand order and are as follows  It seems to us that on principle before dividends on shares can be assessed under section 10 the assessee be it an individual or a company or any other entity must carry on business in respect of shares that is to say the assessee must deal in those shares
It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business
The only way he can come under section 10 is by converting the shares into stock in trade ie by carrying on the business of dealing in stocks and shares as did the assessee in Commissioner of Income Tax vs Bai Shirinbai K Kooka2  
It was urged that in this case the Tribunal has recorded no finding at all that the shares in McLeod  Co Ltd which were sold by the assessee were converted by it into stock in trade nor has it been held that the variation of its investments by the assessee amounted to dealings in investments
The facts that we found above show that so far as the shares of McLeod  Co Ltd and the allied companies which were sold by the assessee and the income from which has been taxed as revenue income are concerned the assessee in fact dealt with them as stock in trade
It 1 2 359 is true that in the account books they were never shown as such but we have indicated how the evidence and the material in this case lead to the conclusion that the shares were in fact purchased even initially not as investments but for the purpose of sale at profit and that they were actually sold with the purpose of earning profit so that the transactions amounted to an adventure in the nature of trade
Learned counsel also referred to the decision of this Court in Ram Narain Sons Pr Ltd v Commissioner of Income tax Bombay1 to urge that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares and if the purpose was investment the fact that
in varying the investment the sale of those shares resulted in a profit will not
make that profit revenue income
The principle is perfectly  correct but is not applicable to
the case before us on the finding mentioned by us above that even the initial purchase of these shares by the assessee was not for the purpose of investment for earning income from dividends but was with a view to earn profit by resale of those shares
In these circumstances we hold that the High Court was right in arriving at the conclusion that on the facts and circumstances of the present case the income derived by the assessee from the sale of its shares and securities in the relevant previous years was revenue receipt and as such taxable under the Income tax Act
The appeals fail and are dismissed with costs
One hearing fee
YP Appeals dismissed


Summary:
The principal activity of the assessee was investment of its capitals in shares and stocks
It changed its investments by sale of its shares and stocks from time to time
The assessee s income was primarily derived from dividends on shares and interest derived by it on the investments
The assessee purchased the shares of a company when their prices were falling by taking loan at interest and the return on investment was not at all substantial
The assessee s explanation that the shares were in fact being held as investment and were sold simply because the control of the company went out of the hands of the Directors of the assessee
was not accepted by the Tribunal
HELD The income derived by the assessee
from the sale of these shares was revenue receipt and as such taxable under the Income tax Act
From the evidence about the course of dealings and conduct of the assessee the conclusion followed that the purchases of the shares were not for the purpose of keeping controlling interest in that company or for investment but shares were being purchased and sold for earning profit so that the transactions were an adventure in the nature of trade in these shares
359 A B The acceptance by the Revenue in the earlier years that the acquisitions and sales of shares were in the nature of investments was not binding in the proceeding for assessment during subsequent years
356 B C Bengal and Assam Investors Ltd vs Commissioner of income taxWest Bengal and Commissioner of Income tax vs
Bai Shrinbai K Kooka  referred to
Ram Narain Sons P Ltd vs Commissioner of Income tax Bombay  held inapplicable