Case: New Era Agencies (Pvt.) Ltd., Bombay Vs. Commissioner Of Income-Tax, Bombay City 1,Bombay

the four items, viz, relinquishment of Managing Agency. He paid the amount to the Managing Agents Chidambaram Mulraj and Co. Ltd. Deducting the amount of Rs. l0 lakhs from the total consideration of Rs. 45 lakhs, the balance of Rs. 35 lakhs was distributed by Mulraj Kersondas among the 25,000 ordinary shares and 10,000 preference shares. It was pointed out for the appellant that at the material time when the transactions had gone through the market price for Elphinstone Mills shares was Rs. 37 per ordinary share and Rs. 88 per preference share, but when Mulraj Kersondas distributed Rs.35 lakhs among the ordinary and preference shares each ordinary share was paid at the rate of Rs. 80 and each preference share was paid at the rate of Rs. l50. According to the appellant therefore the excess amount paid by the purchaser over and above the market price was paid by him for the controlling interest which was being transferred along with the shares. In other words, the contention of the appellant was that the profit on the sale of the shares made by the appellant must be calculated on the basis of what it got for the sale-price of the shares only and not on the basis of the entire consideration received by it which was a composite payment received for the price of the shares and for parting with the controlling interest. We are unable to accept this argument as correct. It may be that in the total disposal of the entire block of shares in favour of K D Jalan the latter may have acquired certain amount of controlling power apart from mere acquisition of shares. It is also conceivable that Mulraj Kersondas in going through the transaction with K. D. Jalan, might have given to K. D. Jalan not only the shares but also certain other advantages. But the question must be examined from the view-point of the appellant and what we have to see is what the appellant parted with and what the appellant got in return. It should be noticed that the appellant itself had no controlling interest in the Elphinstone Mills. It was not the Managing Agent of the Elphinstone Mills and its holding in the shares of the Elphinstone Mills was only to the extent of 13 per cent which could not give it any controlling power. Mr. Sanat P. Mehta said that though the appellant had not a sufficiently large holding to give it any controlling power, it was a member of the Mulraj Kersondas group and it was working in close concert with Mulraj Kersondas who had considerable controlling power and interest. It was argued that the transaction entered into by Mulraj Kersondas with K. D. Jalan, although entered into by Mulraj Kersondas alone, should be treated as the transaction on behalf of the entire group of Mulraj Kersondas including the appellant. What was therefore being offered by Mulraj Kersondas to K. D. Jalan was an offer on behalf of the entire group which had a built-in power which it was proposing to transfer to K. D. Jalan in the scheme proposed by Mulraj Kersondas who was the representative of the group. It was therefore argued on behalf of the appellant that it would not be correct to say that the appellant had not parted with anything more than the block of its shares in the present transaction. It is not possible to accept this argument put forward on behalf of the appellant. There is nothing on the record of the case to support the theory that the transaction with K. D. Jalan was not a transaction by Mulraj Kersondas himself but a transaction of the entire group. As appears from the letter of Mulraj Kersondas dated September 25, 1953, the offer was on behalf of Mulraj Kersondas alone. His letter to the Managing Agents was a direction given by him asking them to do certain things to suit his convenience and as it appears from the record, the direction was promptly observed by them. As pointed out by the High Court, the circumstances of the case indicate that Mulraj Kersondas was, by reason of his influence and power in a position to command obedience of his wishes from his nominees and associates concerned When Mulraj Kersondas decided to enter into a transaction for the sale of the shares to K D. Jalan he called upon the appellant to keep at his disposal the holding which the appellant had in its shares of the Elphinstone Mills. No controlling power was held by the appellant itself in the Elphinstone Mills and it was not in a position to procure the resignation of the Directors or to bring about the appointment of the persons of the choice of K. D. Jalan as Directors. Nor was it in a position to call upon the Managing Agents to relinquish their office All these were, however, possible to Mulraj Kersondas because of the influence and power which he possessed.The part taken by the appellant in the transaction with K. D Jalan was merely a passive part, viz., keeping at the disposal of Mulraj Kersondas its holding in Elphinstone Mills shares which it had held in its business as a dealer in shares. So far as the appellant is concerned, what it parted with was the shares which it held and what it received was the payment for those shares. It follows therefore that the entire sum received by the appellant from Mulraj Kersondas was the price of the shares disposed of by Mulraj Kersondas and consequently the whole of the excess over the cost price of the shares was the profit of the appellant.7. We accordingly hold that no part of the amount of Rs. 10,42,990 received by the appellant from Mulraj Kersondas can be regarded as consideration for any other valuable right excepting the price of the shares sold by it. The second question was therefore rightly answered by the High Court against the appellant.8.

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

Explanation:
0[ds]In our opinion there is no justification for the argument put forward on behalf of the appellant. It is admitted that the appellant is a dealer in shares and that it had actually dealt with the shares of Elphinstone Mills during Its business from the years 1943 to 1948. The appellant had carried forward the profits and losses in the entire share business carried on by it to its revenue account including the business in the Elphinstone Mills share. During the years from 1943 to 1948 the appellant purchased shares of the Elphinstone Mills and also sold them. It is true that at the end of the year 1948 the appellant was possessed of as many as 5137 ordinary shares and 1131 preference shares of the Elphinstone Mills but It is also apparent that in 1944 the appellant had sold 2,000 shares and in 1947 and 1948 the appellant had sold 1,000 shares in each year. During all these years the profits and losses in these shares have been treated on the same footing as the profits and losses in other shares by the appellant. An alternative argument was presented by Mr. Sanat P. Mehta that at least from the year 1948 the holding in the shares of the Elphinstone Mills was regarded by the appellant not as a stock-in-trade but as anwas contended that the circumstance that the appellant had been a dealer in shares for some years did not preclude it from being an investor in shares in subsequent years. It is no doubt true that a person who has been a dealer in shares in some years can be an investor in shares in subsequent years. It is also true that it is possible for a dealer in shares to convert a part of its stock-in-trade into investment. But as has been observed by the Appellate Tribunal, there is nothing in the books of the appellant or in its resolutions to show that it had changed its attitude towards the shares of the Elphinstone Mills from the year 1948. The only circumstance pointed out by the appellant is that from the year 1949 onwards the appellant had not sold the shares of the Elphinstone bulls but on the other hand had added to its holding. But this circumstance in itself is not sufficient to reach an inference that the appellant had treated its holding in the shares asis apparent that during the Years 1949-53 the shares of the Elphinstone Mills had slumped in price and this may be the reason why the appellant did not affect any sales during this period. It was pointed out that during this period the appellant had also made further purchases of the shares. But it is not unreasonable to think that the appellant who was a dealer in shares was making further purchases and accumulating its holding when the market was falling so as to be in a position to sell the shares to its advantage when a suitable opportunity occurred. The argument was further stressed on behalf of the appellant that it had purchased the shares of the Elphinstone Mills with a view to support the Managing Agents of the Mills since the appellant itself had an interest in the Managing Agency Company, being one of its share-holders. It was therefore contended that the holding of the appellant in the shares of Elphinstone Mills must be treated as a holding on capital account and the sale thereof must also be regarded as on capital account, We do not think there is any warrant for this argument. As pointed out by the Appellate Tribunal, there is no material on the record to suggest that the main object of the appellant in acquiring the shares of the Elphinstone Mills was to give support to the Managing Agents. The conduct of the appellant in disposing of large number of hares of Elphinstone Mills during the years 1943-48 is not consistent with the theory that the appellant was acquiring shares for the purpose of supporting the Managing Agents. There is also nothing on the record to show that during the years 1949- 53 when no sales were effected it was necessary to conserve the holding in the shares of the Elphinstone Mills because the Managing Agency was in any way threatened. It also appears that at the time when the Managing Agency was acquired there was no need to make any use of the holding of the appellant in the shares of the Elphinstone Mills because the appellant at that time had hardly any shares.Subsequently to the acquisition of the Managing Agency until it was relinquished in 1953 there is nothing on the record of the proceedings to show that at any time the Managing Agency had Felt its existence either precarious or in need of support. We therefore reject the argument of the appellant on this aspect of the case and hold that the profit made by the appellant on the sale of the shares was its business income and the first question was rightly answered by the High Court against the appellant and in favour of the Income Taxare unable to accept this argument as correct. It may be that in the total disposal of the entire block of shares in favour of K D Jalan the latter may have acquired certain amount of controlling power apart from mere acquisition of shares. It is also conceivable that Mulraj Kersondas in going through the transaction with K. D. Jalan, might have given to K. D. Jalan not only the shares but also certain other advantages. But the question must be examined from the view-point of the appellant and what we have to see is what the appellant parted with and what the appellant got in return. It should be noticed that the appellant itself had no controlling interest in the Elphinstone Mills. It was not the Managing Agent of the Elphinstone Mills and its holding in the shares of the Elphinstone Mills was only to the extent of 13 per cent which could not give it any controlling power. Mr. Sanat P. Mehta said that though the appellant had not a sufficiently large holding to give it any controlling power, it was a member of the Mulraj Kersondas group and it was working in close concert with Mulraj Kersondas who had considerable controlling power andis not possible to accept this argument put forward on behalf of the appellant. There is nothing on the record of the case to support the theory that the transaction with K. D. Jalan was not a transaction by Mulraj Kersondas himself but a transaction of the entire group. As appears from the letter of Mulraj Kersondas dated September 25, 1953, the offer was on behalf of Mulraj Kersondas alone. His letter to the Managing Agents was a direction given by him asking them to do certain things to suit his convenience and as it appears from the record, the direction was promptly observed by them. As pointed out by the High Court, the circumstances of the case indicate that Mulraj Kersondas was, by reason of his influence and power in a position to command obedience of his wishes from his nominees and associates concerned When Mulraj Kersondas decided to enter into a transaction for the sale of the shares to K D. Jalan he called upon the appellant to keep at his disposal the holding which the appellant had in its shares of the Elphinstone Mills. No controlling power was held by the appellant itself in the Elphinstone Mills and it was not in a position to procure the resignation of the Directors or to bring about the appointment of the persons of the choice of K. D. Jalan as Directors. Nor was it in a position to call upon the Managing Agents to relinquish their office All these were, however, possible to Mulraj Kersondas because of the influence and power which he possessed.The part taken by the appellant in the transaction with K. D Jalan was merely a passive part, viz., keeping at the disposal of Mulraj Kersondas its holding in Elphinstone Mills shares which it had held in its business as a dealer in shares. So far as the appellant is concerned, what it parted with was the shares which it held and what it received was the payment for those shares. It follows therefore that the entire sum received by the appellant from Mulraj Kersondas was the price of the shares disposed of by Mulraj Kersondas and consequently the whole of the excess over the cost price of the shares was the profit of theaccordingly hold that no part of the amount of Rs. 10,42,990 received by the appellant from Mulraj Kersondas can be regarded as consideration for any other valuable right excepting the price of the shares sold by it. The second question was therefore rightly answered by the High Court against thedo not think there is any warrant for this argument. As pointed out by the Appellate Tribunal, there is no material on the record to suggest that the main object of the appellant in acquiring the shares of the Elphinstone Mills was to give support to the Managing Agents. The conduct of the appellant in disposing of large number of hares of Elphinstone Mills during the yearsis not consistent with the theory that the appellant was acquiring shares for the purpose of supporting the Managing Agents. There is also nothing on the record to show that during the years 194953 when no sales were effected it was necessary to conserve the holding in the shares of the Elphinstone Mills because the Managing Agency was in any way threatened. It also appears that at the time when the Managing Agency was acquired there was no need to make any use of the holding of the appellant in the shares of the Elphinstone Mills because the appellant at that time had hardly any shares.Subsequently to the acquisition of the Managing Agency until it was relinquished in 1953 there is nothing on the record of the proceedings to show that at any time the Managing Agency had Felt its existence either precarious or in need of support. We therefore reject the argument of the appellant on this aspect of the case and hold that the profit made by the appellant on the sale of the shares was its business income and the first question was rightly answered by the High Court against the appellant and in favour of the Income Tax