ivil Appeal No 1953 of 1968
Appeal by special leave from the judgment and order dated September 17 1962 of the Allahabad High Court in Misc
IT Application No 167 of 1955
AK Sen GL Sanghi and BR Agarwal for the appellant
Jagdish Swarup Solicitor General SK lyer RN Sachthey and BD Sharma for the respondent
In proceedings for assessment to incometax for the year 1946 47 the appellant firm was assessed to tax in respect of an amount of Rs 399587 received by it as profit on sale of shares
The plea of the firm that the amount was capital gain and was on that account not taxable was rejected
In the view of the Income tax Officer the profit arose from a well planned business activity in which the assessee had fully utilised its resources
The Appellate Assistant CommiSsioner affirmed the decision of the Income tax Officer
The Income tax Appellate Tribunal dismissed the appeal filed by the firm
The Tribunal amongst others referred the following question to the High Court of Allahabad for opinion Whether the surplus realised by the sale of the shares of Aluminium Corporation of India Ltd JK Investment Trust and Raymond Woollen Mills amounting in aggregate to Rs 399587 or any part thereof was the revenue income of the assessee liable to tax under the Income Tax Act 1922  The High Court answered the question in the affirmative
The firm has appealed to this Court with special leave
In 1944 the firm purchased 50000 ordinary shares of Raymond Woollen Mills Ltd hereinafter called Raymond for Rs 6975255
The firm paid Rs 700000 on November 41944 and the balance on December 6 1944
The transaction was financed with the aid of a loan of Rs 70 lakhs borrowed from the Hindustan Commercial Bank Ltd The firm sold those shares through brokers between November 23 1944 and April 2 1946 and realised Rs 7242200 the transaction resulting in a net profit of Rs 266945
Between January 26 1945 and April 5 1946 the firm also purchased 67 debentures 5582 preference shares and 18576 ordinary shares of the Aluminium Corporation 722 Ltd hereinafter called Aluminium for Rs 857480Except 2118 preference shares the entire lot of shares with the debentures was sold for Rs 705957 between February 1 1945 and August 13 1945
Adjusting the cost of shares left on hand the firm realised a net profit of Rs 60278 in that transaction
The firm also purchased 290 A Class shares of JK Investment
Trust Ltd hereinafter called J K Trust on February 4 1945 for Rs 145000 and sold the same on August 22 1945 for Rs 217264 the transaction resulting in a net profit of Rs 72364
Before the departmental authorities the firm claimed that it had taken over the entire share capital issued by Raymond with a view to secure its managing agency and had thereafter distributed the shares of Raymond to the various associates of the firm and the transaction being one to facilitate acquisition of a capital asset being a capital investment the profit realised by sale of the shares was not liable to be assessed to income taX
The firm also claimed that when a part of the new issue of capital of Aluminium was not taken over by the public the firm as financiers of the JK Group of Industries took over the shares and the debentures not subscribed within the time allowed
This transaction it was contended was also of the nature of capital investment
It was explained that the shares were sold on account of financial embarrassment and not with the object of earning income and the profit realised by the sale did not attract tax
Similar contentions were also raised in respect of the shares of JK Trust
The departmental authorities rejected the contentions
The Tribunal agreed with them
From the facts found by the Tribunal it is clear that for purchasing the Raymond shares the firm paid Rs 700000 on November 4 1944 and the balance on December 6 1944 and commenced selling the shares on November 23 1944
The contention that the shares were only distributed to the allied concerns is contrary to the findings of the Tribunal
Some of the shares were sold through brokers to outsiders
It is a significant circumstance that the firm parted with all the Raymond shares by April 2 1946 and did not retain a single share after that date
It is true that some of the shares were held by JK Industries Ltd and other JK concerns
But the transfer even to the JK concerns was in all cases for a profit
Within a few days after purchasing the Raymond shares the firm started unloading them
and the shares were never sold without making profit
The interest paid for the loan borrowed from the Hindustan Commercial Bank Ltd for financing the purchase of Raymond shares was debited in the accounts as a revenue expenditure and it was claimed as a permissible allowance
The firm used to promote Companies
723 One of its activities was to finance sister concerns known as JK Industries
The Case of the firm that the shares had to be sold on account of financial embarrassment was plainly untrue
The Tribunal was in our judgment right in inferring that the purchase and sale of shares was a business activity which was continuous and since the firm had entered upon a well planned scheme for earning profit and that in furtherance and execution of that profit making scheme they sold the shares at the opportune time and that the sale of the shares was not merely on account of pecuniary embarrassment as claimed the profit realised by the firm by the sales of shares could not be characterised as a casual receipt nor could it be treated as accretion to a capital asset
Strong reliance was however placed on a somewhat obscure statement in the order of the Appellate Assistant Commissioner  In the case of Raymond Woollen Mills shares it is clear beyond doubt that the purchase of the shares was a first rate business deal and that it was motivated by the desire and intention to acquire the Managing Agency of the Mills
If this is not an operation in the scheme of profit making it is not known what will constitut e such a transaction
 Apparently there is a typographical error in the second clause of the first sentence and the word not has by inadvertence been omitted otherwise in the context in which it occurs the clause has no meaning whatever
In any event as rightly pointed out by the High Court the reasons given by the Tribunal and the conclusion recorded by it are inconsistent with the finding that the shares were purchased with the sole object of acquiring the Managing Agency of the Raymond Woollen Mills and not with a view to make profits
Counsel for the firm invited our attention to the decision of this Court in Ramanarain Sons P Ltd vs Commissioner of Income tax Bombay1 in support of his contention that a transaction for purchasing shares with the object of acquiring the managing agency of a Company will be regarded as capital investment and not a business in share
In Ramnarain Sons  case1 the appellant Company was a dealer in shares and securities and also carried on business as managing agents of other companies
With a view to acquire the managing agency of a company the appellant Company purchased from the managing agents a large block of shares at a rate approximately 50 above the ruling market rate
Two months later the appellant Company sold a small lot out of those shares at a loss and claimed the loss as a 1 724 trading loss
It was found in that case by the Tribunal that the intention of purchasing the shares was not to acquire them as part of the stock in trade of tax payer s business in shares but to facilitate the acquisition of the managing agency of the Company which was in fact acquired and on that account loss incurred by the sale of a small lot could be regarded only as a loss of capital nature
The Court observed in that case that the circumstance that the tax payer had borrowed loans at interest to purchase the shares or that it was a dealer in shares and was authorised by its memorandum of association to deal in shares was of no effect
On a review of the evidence the Tribunal held that the shares were purchased with the object of acquiring the managing agency and with that view the High Court agreed
Whether a transaction is or is not an adventure in the nature of trade is question of mixed law and fact in each case the legal effect of the facts found by the Tribunal on which the tax payer could be treated as a dealer or an investor in shares has to be determined
In the present case the transaction since the inception appears to be impressed with the character of a commercial transaction entered with a view to earn profit
Large block of shares was purchased at the ruling rates with borrowed money and soon thereafter the shares were disposed of at a profit in small lots
Some of the shares were sold through brokers to strangers
The story of the firm that some or all the shares were merely distributed to its associates is not proved
The interest which the firm had to pay for the amount borrowed for purchasing the shares was acted in the revenue account and was claimed as a revenue allowance
It was not the case of the firm that Aluminium and JK Trust shares were purchased for acquiring the managing agency
It was claimed that the shares were taken over because the public did not accept those shares
It was one of the objects of the firm to finance its allied concerns and in taking over shares which the public did not subscribe the firm was acting in the course of its business
The firm commenced selling the shares soon after they were purchased
Aluminium shares were purchased between January 26 1945 and April 5 1946 except a few which were retained and sold at profit
Whereas the first lot was purchased on January 26 1945 the first sale was made on February 1 1945
It could not be said that this was an investment in shares independent of the trading activity of the firm
The story that the shares had to be sold on account of financial difficulties is plainly belied by the circumstance that the firm went on purchasing and selling the Aluminium shares
JK Trust shares were purchased on February 14 1945 and were sold on August 22 1945
Aluminium shares as well as JK Trust shares were sold at a profit 725 and through brokers
These transactions were also stamped with the character of commercial transactions entered into with a profit motive and were not transactions in the nature of capital investments
The answer recorded by the High Court is therefore correct
The appeal fails and is dismissed with costs
VPS Appeal dismissed


Summary:
The assessee firm used to promote companies
It purchased all the shares of a Company at the ruling rates with borrowed money and very soon thereafter disposed of all of them at a profit
Before the Income tax authorities the assessee claimed that it had taken over the shares with a view to secure the managing agency of that Company and had thereafter distributed the shares to its allied concerns that the transaction was only to facilitate acquisition of a capital asset and the profit realised from the sale of such a capital investment was a capital gain
It was found by the Departmental authority and the Tribunal that the shares were not merely distributed to the assessee s associates but that some of the shares were sold to its allied concerns and others to strangers through brokers in small lots and at a profit
Also the interest which the assessee had to pay for the amount borrowed for purchasing the shares was debited in its revenue account and was claimed before the Income tax authorities as a revenue allowance
The assessee also purchased shares of two other Companies which were its allied concerns and commenced selling them soon after at a profit
It was claimed before the Income tax authorities with respect to these transactions that when a part of the new issue of capital of those two Companies was not taken over by the public the assessee as the financiers of those two companies took over the shares that the were in the nature of a capital investment and the shares were sold on account of financial embarrassment  and not with the object of earning income and so the profit realised by the sale did not attract income tax
The Departmental authorities and the Tribunal found that the first lot of shares in one of these two Companies was purchased in January 1945 and the firm went on purchasing and selling the shares of that Company thereafter from February 1945 and hence there could not have been any financial embarrassment 
As regards the shares in the second company they were purchased in February 1945 and sold in August 1945
The sales were all through brokers and at a profit
On the question whether the total profits realised by the assessee was a capita1 gain or revenue income HELD Whether a transaction is or is not an adventure in the nature of trade is a mixed question of law and fact in each case the legal effect of the facts found by the Tribunal on which the tax payer could be treated as a dealer or an investor in shares has to be determined
724 C D In the present case on the facts found there was a well planned scheme for earning profit
Therefore all the transactions were impressed with the character of a commercial transaction entered into with a view to earn profits and were not capital investments and hence were liable to tax 724 D 725 A B 721 Ram Narain Sons P Ltd
T Bombay C explained