Case: Dhirajlal Girdharilal Vs. C.I.T. Bombay

1. This appeal by special leave is directed against an order of the High Court of Judicature at Bombay, whereby the High Court summarily dismissed an application made under Section 66(2) of the Indianx Act, 1922, requiring thex Appellate Tribunal to state a case and refer to it the questions of law said by the appellant to arise out of the order of the Tribunal The appellant is a Hindu undivided family, comprised of Dhirajlal and his two brothers Hiralal and Kirtilal, Dhirajlal being the karta of the family. Girdharlal Trikamlal who was the father of Dhirajlal, Hiralal and Kirtilal, was the head of the joint Hindu family before his death on 26th July, 1945. During his lifetime he and one of his sons Dhirajlal were also carrying on business separately in their firm name Girdharlal Trikamlal & Co., as dealers in stocks and shares. This firm was dissolved on the death of Girdharlal and a new firm comprised of Dhirajlal and his younger brother Hiralal was formed with the object of taking over the business formerly carried on by Messrs. Girdharlal Trikamlal & Co. Girdharlal had an account with the firm of Girdharlal Trikamlal & Co. and on the date of his death this account had a credit balance of Rs. 25, 31, 999. The firm Girdharlal Trikamlal & Co. at that moment had shares of the value of Rs. 23, 60, 000 approximately as part of their total assets. On the death of Girdharlal, his three sons and his widow clearly became entitled to the amount that stood to his credit in the firm Girdharlal Trikamlal & Co. and by an arrangement made after his death the Hindu undivided family got in July, 1942, shares of the value of Rs. 18, 34, 586 from the firm towards payment of its liability to the Hindu undivided family as part of the inheritance of Girdharlal and for the balance the Hindu undivided family was shown as creditor of the new firm. The shares that were handed over were valued at the market price. The Hindu undivided family thus in its status as such became the owner of those shares. It is common ground that the family in that status antecedent to that date was not doing any business in stocks or sharesThe Hindu undivided family having obtained the shares, it sold some of the shares in the financial year4 and made a profit of Rs. 1, 42, 025 in the assessment year. Thex Officer during that year included the profit made by sale of shares in the assessment of the Hindu undivided family by arriving at the following finding :" The undivided Hindu family continued to do the share business and purchased shares worth Rs. 3, 00, 460 during the account years3 and. What the assessee got from their father Mr. Girdharlal Trikamlal was converted by them into trading capital or, in other word they had converted their inheritance into the. Thefact that they had been purchasing other shares appears to point to this conclusion only. In these circumstances I include the profit of Rs. 1, 42, 025 in the assessment. "The appellantcombated this position before the Appellate Assistant Commissioner and contended that the family was not doing any business in stocks and shares. On the other hand. it was only unloading the shares which had come to it on the death of Girdharlal Trikamlal and was trying to convert them into cash, and whatever shares were purchased were purchased by way of. TheAppellate Assistant Commissioner accepted this contention and gave a reduction of Rs. 1, 42, 025 in the income as assessed. He said as follows :" Thus on facts before me I hold that the transactions in shares are by way of change in investment and not business dealings. Hence the profit is capital accretion and not business profit. Thus the same is not liable to assessment. "er ofx preferred an appeal against this order and with. TheTribunal by its order dated the 1st August, 1951, allowed the appeal and restored theorderof thex Officer. It held that thetransferof sharesof thevalue of Rs. 18, 34, 586 by the new firm to the Hindu undivided family was a device to evade. After examining the purchases and salesof sharesby the Hindu undivided family during the years 1942, 1943, 1944 and 1945, the Tribunal came to the conclusion that the moving spirit in the new firm being Dhirajlal who was also the kartaof theHindu undivided family, knowing the conditions obtaining in the market effected the said transactionsof thetransferof sharesto enable the Hindu undivided family to realize the. TheTribunal concluded its decision with the following observations :" Sharesof thevalue of Rs. 18 lakhs odd were, one might say, by a dealer in shares to himself in anothere was absolutely no reason why the shares should have beend to the Hindu undivided family. It has also not been pointed out why the Hindu undivided family found it necessary to effect sales of a larger ofshares in the financial years4 and. It has also not been shown why the Hindu undivided family should have purchased sharesof thevalue of over Rs. 2 lakhs between 1st August, 1942, and 1st March, 1943. We have examined the frequenciesof thesales in the financial year. Shares were sold in July, August, October, December, January, February and. Theirresistible inference appears to be that from the very start the intention of Dhirajlal both as ar and as ae was to deal in these shares. "The appellantmade an application to the Tribunal for statementof thecase and for a reference of questions of law arising outof theorderof theTribunal to the High Court. By itsorderdated the 23rd November, 1951, the Tribunal disallowed the application on the ground that the question whether or not the Hindu undivided family carried on business in respectof thesharesd to it by the firm and in thesharespurchased by it, is a question of fact and that no question of law arose outof thefindingsof theTribunal and that from the very start the intention of Dhirajlal both as ar ande was to deal in these. Dissatisfied with theorderof theTribunal, the appellant made an application to the High Court under Section 66(2) for a direction to the Tribunal to state a case and to refer to it the following questions of law :1. Whether on the facts and circumstancesof thecase the assessee was doing business insharesin the account year ; or2. Whether there is any material on record on the basis of which it could be held that the assessee was doing the business insharesin the account year5. As already pointed out, the High Court summarily dismissed the application, presumably on the ground that in its opinion no question of law arose outof theorderof theTribunal. On an application being made to this Court under the provisions of Article 136of theConstitution, leave to appeal against thisorderwas granted.

Reasoning:
e question whether or not the Hindu undivided familywas doing business insharesd to it by the firm is undoubtedly a question of fact but if the court of fact, whose decision on a question of fact is final, arrives at this decision by considering material which is irrelevant to the enquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decision partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation clearly an issue of law arises. It is apparent from the following quotation from the judgmentof theTribunalthat not only was its approach to the question raised before it tainted with suspicion, but it took into consideration ar ofcircumstances based purely on conjectures and surmises and for which there was not a scintilla of evidence on the recordThe learnedl frankly conceded that it could not be denied that to a certain extent theTribunalhad drawn upon its own imagination and had made use of ar ofsurmises and conjectures in reaching its result. He, however, contended that eliminating the irrelevant material employed by theTribunalin arriving at its conclusion, there was sufficient material on which the finding of fact could be supported.In our opinion, this contention is not well founded. It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mindof thecourt was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated becauseof theuse of inadmissible material and thereby an issue of law arises7. For the reasons given above we areof theopinion that both theTribunaland the High Court were in error in the view that no issue of law arose in the case and that theTribunalcould not be called upon to state a case and to refer to the High Court any issue of. Thetwo questions framed by the appellant and which he wanted the High Court to ask theTribunalto refer to it are comprehensive enough to embrace the issue of law that, in our opinion, arises outof theorderof the. But we think that it would clarify the position if these two questions wered in the following form :" Whether the findingof theTribunalis not vitiated by reason of its having relied upon suspicions and surmises not supported by any evidence on the record or upon partly inadmissible material ? "