Case: M/S. Ramnarain Sons (Pr.) Ltd Vs. Commissioner Of Income Tax, Bombay

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 appellants formed a capital assets 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 appellants. 6. 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 - Venkataswami Naidu and Co., v. Commissioner of Income-tax, 1959-1 SCR Sup. 646 : (AIR 1959 SC 359 ).It was held in Oriental investment Co., Ltd. v. Commissioner of Income-tax, Bombay, 1958 SCR 49 : ((S) AIR 1957 SC 852 ), that the question whether the appellants transactions amounted to dealing in shares and properties 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 treated 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 having been effected in the regular course of the business of the appellants, viz., the acquisition of managing agencies, the loss resulting from the sale of shares was incidental to that business and was a revenue loss. It is not easy to appreciate the process by which this conclusion was reached. The shares were purchased for the purpose of acquiring the managing agency of the Dawn Mills; they were not purchased 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 managing 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 circumstance by itself does not evidence an intention to trade in the shares. Nor is the fact that the appellants 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 transaction were carried on could not alter the real character of the acquisition. The appellants were undoubtedly dealers in shares; but the transaction in the Dawn Mills shares was ex facie not a business 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 and 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 prevailing market rate. The only reason for entering into the transaction which could not otherwise be regarded as a prudent business transaction, was the acquisition of the managing agency. If the purpose of the acquisition of a large block of shares at a price which exceeded the current market price by a million rupees was the acquisition of the managing agency, the inference is inevitable that intention in purchasing shares was not to acquire them as part of the trade of the appellants in shares. The Tribunal found 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 voting power which the appellants obtained having purchased a very large block of shares, and for acquiring the managing agency, the appellant did not pay any distinct consideration. The managing agency is manifestly the source of profits of the appellants; but the shares purchased and the managing agency acquired were both assets of a capital 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 capital acquisition into an acquisition in the nature of trade. 7. The High Court was therefore right in holding that the acquisition of the managing agency was an acquisition of a capital 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 acquisition of the shares was not acquisition of a stock-in-trade, but of a capital asset, the appellants, by valuing the shares at cost or market price whichever was lower, could not bring the difference between the purchase price and the valuation made by them into their trading account.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]5. The High Court agreed with the opinion of the Tribunal 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 appellants formed a capital assets 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 appellantsThe appellants had undoubtedly purchased the shares of the Dawn Mills with money borrowed at interest, but that circumstance by itself does not evidence an intention to trade in the shares. Nor is the fact that the appellants 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 transaction were carried on could not alter the real character of the acquisition. The appellants were undoubtedly dealers in shares; but the transaction in the Dawn Mills shares was ex facie not a business 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 and 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 prevailing market rate. The only reason for entering into the transaction which could not otherwise be regarded as a prudent business transaction, was the acquisition of the managing agency. If the purpose of the acquisition of a large block of shares at a price which exceeded the current market price by a million rupees was the acquisition of the managing agency, the inference is inevitable that intention in purchasing shares was not to acquire them as part of the trade of the appellants in shares. The Tribunal found 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 voting power which the appellants obtained having purchased a very large block of shares, and for acquiring the managing agency, the appellant did not pay any distinct consideration. The managing agency is manifestly the source of profits of the appellants; but the shares purchased and the managing agency acquired were both assets of a capital 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 capital acquisition into an acquisition in the nature of trade7. The High Court was therefore right in holding that the acquisition of the managing agency was an acquisition of a capital 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 acquisition of the shares was not acquisition of a stock-in-trade, but of a capital asset, the appellants, by valuing the shares at cost or market price whichever was lower, could not bring the difference between the purchase price and the valuation made by them into their trading account.