Case: E.D. Sassoon and Company Limited Vs. Commissioner of Income Tax, Bombay

These two appeals are by certificate against the judgment of the High Court of Bombay, answering four out of the five questions referred to it in favour of the assessee and one question in favour of the revenue A partnership firm (hereinafter referred to as the firm) comprising of some of the members of the Sassoon family was carrying on business under the name and style of E. D. Sassoon & Co. for a number of years prior to 1920 at Bombay, Calcutta, Karachi, Hongkong, Shanghai, London, Manchester, Basra and the Persian Gulf. The business which it was carrying on was that of bankers, commission agents, agents of joint stock companies, dealers in shares and securities, foreign exchange, etc. In the accounting year 1919 the firm incurred net loss of Rs. 12, 37,but in 1920 it seems to have made large profits mostly "in London Exchange Account." It, however, claimed depreciation in shares and securities amounting to Rs. 9, 26,shown under the head depreciation in shares and securities. On 8th September, 1920, and 4th December, 1920, two companies were incorporated in Bombay, the former was known as the Bombay Trust Corporation Ltd. and the latter as E.D. Sassoon & Co. Ltd. (hereinafter called theThe Bombay Trust Corporation carried on business in Bombay which comprised mainly the business of dealers in shares, securities and foreign exchange. This company (B.T.C.) had by the end of December, 1920, investments in shares and securities to the extent of Rs. 3, 23, 78, 494. By the end of 1921, investments in shares and securities had risen to Rs. 4, 31, 32, 212 and by the end of December, 1922, these investments had risen to Rs. 10, 43, 78, 511. Though these facts have been given in the statement of the case, as we shall presently show, they are not germane for the determination of the questions before usThewas incorporated with several objects, one of whichacquire and take over as a going concern the business now carried on at Bombay, Calcutta, Karachi, Hongkong, Shanghai, London, Manchester, Basra and Bagdad and all or any of the assets and liabilities of the proprietors of that business in connection therewith, and with a view thereto, enter into the Agreement referred to in clause 4 of the companys Articles of Association and to carry the same into effect with or without4 of the articles of association of the company provided that theshall forthwith enter into the agreement mentioned in clause 3 of the memorandum of association with such modifications, if any, as the directors shall approve. On June 30, 1961, the agreement referred to was finally executed by theThe said agreement provided, inter alia, for purchase of the business of the said firm and its assets including shares, and debentures for valuable consideration therein set out at the market price prevailing on 31st December, 1920, which purchase was to be completed on or before that date. It appears that pursuant to the said agreement, the company took over the business of the said firm and also purchased shares and securities worth Rs. 1, 93, 79,at market value as on 31 st December, 1920. It further purchased between 1st January, 1921, to 31st January, 1921, from the market further shares and securities worth Rs. 4, 28, 05, 627 in the ordinary course of itstax Officer, in the accounting year 1921, there was no dealing in shares and securities. At the end of the year 1921, as was done by the predecessor firm in the year 1920, thevalued the securities and shares at the prevailing rates which showed an appreciation of Rs. 9, 26, 713 on its valuation at the market rate. The appreciation of Rs. 9, 26,was, however, not taxed because it is alleged that thehad contended that this appreciation should be deleted from the computation of income. At the relevant time during the course of the assessments theaccounts were examined by the examiner of accounts who made the following note on 12th October, 1922"With regard to the second item it would be seen from the last years B form put up herewith that the company is a habitual dealer of shares and it was allowed Rs. 9, 26,as a set off against the profits of 1920, the loss on shares and securities (depreciation). Hence, appreciation of Rs. 9, 27, 708.67 will have to be taxed thisthe above report theOfficer endorsed on the 23rd December, 1922, ass and securities of Rs. 6, 55, 895 and Rs. 3, 28, 112....book entry. Securities being valued at the end of the year and appreciation or depreciation brought into the accounts. These securities are being taken over by the new company, B. T. C. Ltd., Bombay. Show this on instructions from their London House only and these items may therefore be disregarded forpurposes."It may be mentioned that the firm was being assessed for the yeartax Act, 1918, on the income of the accounting year 1921 and for the assessment years49 thewas being assessed under the Act of 1922. In the year of assessmentny discontinued its business and claimed exemption on Rs. 33, 40, 057 under section 25(3) of the Act. This claim was rejected by theOfficer on the ground, (1) that in the year 1921 the assessee claimed and obtained a deduction in respect of appreciation in shares and securities amounting to Rs. 9, 26, 708, and (2) it had discontinued one of the businesses which the firm was doing, namely, dealing in stocks andy appealed and the Appellate Assistant Commissioner held that on the evidence it was clear that the business which was discontinued in the year of assessment was not charged to tax under the Act of 1918 on the income from share dealings either for the accounting years 1918, 1919 or 1920 or for the accounting year 1921. As the assessment to tax on the share dealings was a basic requirement for exemption under section 25(3) and that not having been established the question of granting any relief under the said provision did not arise. The Tribunal in appeal, though it held that the firm was assessed to tax under the Act of 1918, nevertheless negatived the relief on the ground that thedid not intend to do the business of dealing in securities acquired from the old firm. On an application by thefor reference under section 66(1) the following five questions were referred to the High Court"(1) Whether, on the facts and in the circumstances of the case, theis entitled to claim exemption under section 25(3) of the Act ?(2) Whether, on the facts and in the circumstances of the case, the loss suffered on the sale of property in Shanghai was allowable as a revenue deduction out of profits of the year ?(3) Whether, on the facts and in the circumstances of the case, theis entitled to deduct Rs. 3, 70, 943, the amount transferred to the Superannuation Fund against income of the year ?(4) Whether, on the facts and in the circumstances of the case, theis entitled to claim a sum of Rs. 2, 92, 672 transferred after the liquidation of the company as against the profits of the company ?(5) Whether, on the facts and in the circumstances of the case, theis entitled to set off the loss of Rs. 3, 28, 825 suffered in 1948 as against profit of?"Except for the second question, the High Court answered the other four questions against the revenue, the appellant in Civil Appeal No. 162 (NT) of 1969. On the second question its answer was in favour of the revenue and against thein respect of which it has filed Civil Appeal No. 26 of 1969

Reasoning: The High Court has taken into consideration the assessment orders for the years23 dated the 10th January, 1923, for the conclusion that thewas taxed on profits on dealings in shares and stocks in respect of those years which in its view showed beyond doubt that the company was trading, in shares and securities for the year 1921 immediately after it took over from the firm. Even otherwise also, there is sufficient material on the record to hold that the entire business of the firm which included dealing in shares and stocks was taken over by theas a going concern, that large holdings of stocks and shares were transferred to theand that there is no evidence to show that for the years2 and also for subsequent years, thewas not dealing in shares. On the other hand, the statement of the case clearly discloses, as stated earlier, that thepurchased in the market during the period 1st January, 1921, to 31st December, 1921, shares and stocks worth Rs. 4, 28, 05, 627 in the ordinary course of its business. The logical inference which arises from the above circumstances is that thewas carrying on the same business as that of the firm including dealing in shares and stocks. There is also no material on record which would justify theauthorities or the Tribunal in coming to the conclusion that the shares and stocks which were transferred to thewere only intended to be held as investmentsIt was again contended on behalf of the revenue that the records of assessments for the accounting year 1921 not only showed that the appreciation in shares and stocks of Rs. 9, 76, 708 was excluded but income from dividend and securities amounting to Rs. 12, 85, 408 was not taken into account, and was assessed in the hands of B.T.C. Limited. This is based on the order of theOfficer notwithstanding the fact that the examiner of accounts had pointed out that the company is a habitual dealer in shares and stocks and that the appreciation will have to be taxed. On behalf of the assessee it is contended that the question pertaining to this aspect was sought to be raised in the application under section 66(1) and when it was not referred an application was made before the High Court for framing a question dealing with this aspect. The High Court, however, in the view it took, did not think that that question need be framed. There is no doubt that theOfficer had omitted for some reason to include Rs. 9, 76, 708 being the appreciation of shares and stocks for the accounting year 1921 for which the assessment year isbut that is not to say that thedid not deal in shares and stocks in that year, nor is there any basis for theofficer and the Appellate Assistant Commissioner in holding that B.T.C. Ltd. took over the shareholding from the firm and not theThe Tribunal on the other hand held that the shares were transferred to theThere is no mention in its order that these shares were transferred to B.T.C. and not to theThe shares and securities were only transferred to the B.T.C. Ltd. inany case, irrespective of the question whether thewas dealing in shares after it had taken over the business from the firm, it is clear that thewas carrying on several other businesses which it had taken over from the firm as a going concern. Even where one or two business activities are discontinued after thetook over, none the less it would not justify us in holding that the business of the firm which was taken over has been discontinued, because under section 25(3) there is no restriction to the applicability of the exemption only to income on which the tax was payable under any particular head.case was referred to and followed in the case of O.RM.M.SP.SV. Firm v. Commissioner ofappears to us that in any view of the matter thewas entitled to relief under section 25(3); as such, the judgment of the High Court has to be confirmed. The learned advocate for the assessee, has indicated that he does not press the Civil Appeal No. 26(NT) of 1969 which deals with the second question.