Case: Raja Bahadur Kamakhya Narain Singh Vs. Commissioner Of Income-Tax Bihar And Orissa

2. The assessee was at all material times a landholder deriving large income from agriculture, royalties of minerals and income from forests forming part of his estate. Prior to l937 when he was a minor, his estate was under the management of a Court of Wards. On attaining majority, the estate, which included Government securities of the value of about Rs. 40 lacs was handed over to him on August, 19, 1937. During the account year 1938-39 he sold the whole lot of these securities and realised Rs. 44,25,088/- the sale thus resulting in an excess of Rs. 4,55,305/-. This excess amount was assessed as profit by the income-tax officer for the assessment year 1939-40. But on appeal against the assessment order, the Appellate Tribunal set aside that order on a finding that the said sale was by way of a change in investment, and therefore, was not a transaction in the nature of trade or business. On March 23, 1939, the assessee opened an account in the Imperial Bank of India initially with Rs. 46 lacs, which included the said sale proceeds of Rs. 44 lacs and odd and to which on March 27, 1939 he added Rs. 2.60 lacs. The account was opened in the name of his wife and was called "Account of Rs. 48 lacs floating in the share market". In September 1939, the assessee purchased shares and debentures of the value of Rs. 34.14 lacs from out of the funds in the said account. He, however, sold certain shares for Rs. 5,75,723/- in October 1939, and then the rest of them in 1940 and 1941 realising Rs. 29,58,677/and Rs. 64,201/- respectively. The first sale fetched a profit of Rs. 1,17,064/-, the second a profit of Rs. 25,133/- and the third a loss of Rs. 1,642/- The income-tax officer brought to tax the two surpluses in the assessments for the assessment years 1940-41 and 1941-42. But the department was again unsuccessful as the Tribunal once again held, on the strength of the correspondence which had passed between the assessee, his bankers and the brokers in Calcutta, that the only possible conclusion emerging from that correspondence was that the assessees intention was not to deal in shares and debentures and that the said transactions were a mere change in investment carried out of a single scheme of earning a better yield from investments. The Tribunals orders in respect of these assessments for the assessment years 1939-40 to l941-42 were made part of the Statement of Case filed by the Tribunal before the High Court in the present References.3. Between June 28, 1940 and November 9, 1940 the assessee purchased 68109 tolas of gold for Rupees 28.47,380 /- from out of the sale proceeds of the said shares. The gold so purchased was kept in his family vaults at Padma, the seat of his estate, for nearly 4 years. Between October 9, 1944 and October 20, 1944, he disposed of the bulk of the gold i.e., 55494 tolas, for Rs. 36.80,174/- the sale resulting in a surplus of Rs. 13,43,469/-, which is the subject-matter of the first appeal. The remaining quantity of gold was sold in October 19, 1945: that that sale brought him an excess of Rs. 33.481/-, which is part of the subject-matter of the second appeal.4. In respect of these two surplus amounts, the assessee contended that they were the result of a change in investment and could not be said to be transactions in the nature of trade or business. His case was that neither the Government securities, nor the shares and debentures purchased out of their sale proceeds, nor the gold were sold and purchased by way of dealing in them, that at no time they became his stock-in-trade for any business or adventures in the nature of trade or business therein, that the transactions were mere conversions from one investment to another, depending upon the circumstances which prevailed during the respective periods and that the sale of gold in 1944 and 1945 was occasioned partly due to the tide in the second world war turning in favour of the allies and partly due (a) to his having to pay Rs. 7 lacs by way of income-tax, (b) expenses for the marriage of his younger brother, (c) for payment of Rs. 6 lacs debt to one Gupta and (d) for purchase of Victory Bonds worth Rs. 14 lacs and odd at the instance of the Government authorities as contribution of his estate to the war effort.5. The Tribunal rejected the case that gold had been sold for the reasons given by the assessee or as a change in investment and held that (1) conversion of shares into gold was not due to any panic resulting from the war, (2) that there was no pressing necessity for the sale of gold as alleged by him, (3) that Victory Bonds were not by way of any war effort since the assessee sold them away within a short time after their purchase, and (4) the sale proceeds of gold were utilised in purchasing shares for which he borrowed an additional amount of Rs. 5.10 lacs in 1945-46 against gold. In this view the Tribunal confirmed the I. T. O.s decision that the two excess amounts were liable to income-tax in the two assessment years.6. The sale Proceeds of gold sold as aforesaid were utilised by the assessee in purchasing 7025 shares of Karanpura Development Company Limited for Rs. 2,37,267/- during the period December 8, 1944 to April 20, 1945 and shares of Bokaro Ramgur Company for Rs. 39,81,663/- purchased in 1945-46. Part of the sale proceeds were also utilised in purchasing the said Victory Bonds. Between November 8, 1945 and February 21, 1946, he sold 6950 of the Karanpura shares realising a net surplus of Rs. 88,522/-, which the Income Tax Officer treated as business profit and brought to tax for the assessment year 1946-47.7. As the Statement of Case by the Tribunal shows, the Tribunal examined the assessees dealings since the time he took over the said estate. The Tribunal noted that the said shares were purchased from the said Rupees 48 lacs in the Bank reserved for that purpose and that they were sold and purchased at very short intervals. From these facts it held that he must be considered to have launched a scheme in dealing in shares, which conclusion, it thought, was strengthened by the fact of the assessee having borrowed Rs. 5.10 lacs for the said purpose. The Tribunal further held that the complete picture of the said transactions over a length of time had not been before the preceding Tribunal when it passed the earlier orders for the assessment years 1939-40 to 1941-42, and therefore, its conclusions were not applicable to the transactions in question. It consequently held the assessee to be a dealer in shares. As regards the gold also the Tribunal confirmed the orders of the I.T.O. rejecting the assessees case that the gold was purchased by him owing to the war crisis and sold by him on account of the pressing necessities alleged by him and the change in the war situation then.8. By an order dated April 2, 1959, the High Court referred that Statement of Case back to the Tribunal under S. 66 (4) directing it to consider further all the materials before it and file a supplementary Statement of Case as the High Court found the Statement factually incorrect in certain respects. The Tribunal accordingly sent a supplementary Statement of Case on April 23, 1960.9. After setting out the assessees transactions of the sale of Government securities in 1938-39, the purchase of shares from their sale proceeds, their sale in 1939-40 and 1940-41, the purchase of gold and its sale, the Tribunal once again rejected the assessees claim that those transactions were conversions of one investment to another made for a better return or that the gold was sold in October 1944 for pressing necessities alleged by the assessee. Regarding the purchase and sale of shares, the Tribunal stated that the assessee purchased shares of the value of Rs. 37 lacs and odd in 1945-46, that those were shares of two concerns only, Bokaro and Ramgur Company Limited and Karanpura Development Company Limited and that as the latter companys shares were of the value of Rs. 2,37,267/only, the bulk of the amount of Rs. 37 lacs and odd went into the purchase of the shares of Bokaro and Ramgur Co. Ltd. The Tribunal noted that the sale of Karanpura shares resulted in a net profit of Rs. 88,522/-, that in respect of the Karanpura shares there was correspondence showing that his brokers had advised him to acquire 51 per cent of the companys shareholding as he desired to obtain control over its management, that for doing so he wanted to obtain founders shares (each of which shares earned 3 votes per share), that a compromise was proposed in a suit he had filed as the lessor of the mines leased out to the company, that M/s. Bird and Co., the managing agents of that company, were not willing to sell him shares representing the unissued capital of the company on terms proposed by the assessee and that ultimately he failed to obtain majority of shares which only could have enabled him to obtain control over the companys management. But the Tribunal foundassessee was attempting to obtain control of the company not by purchasing of shares in the market, but by issue of shares by the company in order to settle the dispute between the company and the assessee. These negotiations finallyfinally held that having perused the correspondence and having regard to the circumstances, the purchase of Karanpura shares was not in pursuance of a scheme to obtain control over the company by acquiring 51 per cent of the votes there in.10. The High Court, after hearing the References, held that though the Tribunal had in the earlier assessments held that the assessees transactions in shares, securities and gold did not amount to transactions in the nature of trade or business, and therefore, the assessee could not be treated as a dealer in these articles, there was no bar to the revenue coming to a different conclusion, though to do so it must have some new materials and facts before it. It further held that the present Tribunal could also arrive at such a conclusion having regard to (a) the frequency of transactions of purchase and sale of shares, (b) the short interval between purchase and sale of shares, (c) the fact of Rs. 48 lacs in the assessees wifes account having been ear-marked for shares transactions, (d) his borrowing Rs. 5-10 lacs against gold for purchase of shares, and lastly, the fact that the Tribunal this time had before it a more complete picture of the assessees transactions over a length of period which its predecessor had not when it dealt with the assessments for the assessment years 1939-40 to 1941- 42. The High Court further held that there was fresh material, namely, that when the gold was sold, its sale proceeds were again invested in shares and the fact that though Victory Bonds were purchased in January 1945 they were sold after an interval of two months only. The High Court, in this view, concluded that "the Appellate Tribunal, therefore had before it fresh materials for coming to a conclusion contrary to the one come to by its predecessors in the previous orders." It rejected the assessees case (a) that he had converted one investment into another, i.e., from shares and securities to gold, because of the worsening of the war situation after the fall of France in 1940, (b) that when the war situation improved in 1944 and with that the price of gold began to fall he once again converted his investment from gold to shares, i. e., from an unproductive investment into one which could give him an adequate yield, and (c) that he had sold gold because of pressing necessities. The first contention was held unsustainable because even after purchasing gold the assessee had retained considerable cash the second was rejected on the ground that the assessee had sold gold not because of the allied victory in sight but because he found the gold unprofitable by reason of the fall in its price and the third was rejected as the assessee had failed to make good the pressing necessities alleged by him. The High Court further held that the findings given by the Appellate Tribunal were all findings of fact and as they could not be said to have been arrived at without any evidence they could not be interfered with in a Reference under Section 66 (2), and answered the questions as to the two surplus amounts of Rs. 13 lacs and odd and Rs. 33 thousand and odd as liable to assessment. In regard to the excess of Rs. 88.522/- resulting from the sale of Karanpura shares, the High Court agreed with the Tribunal that that amount also was rightly brought to tax. It held that the finding of the Tribunal that the purchase of these shares was not in pursuance of a scheme to obtain control in the company and that the assessees scheme for that purpose was to acquire shares representing the unissued capital of the company was one of fact with which also it had no jurisdiction to interfere.

Court's reasoning:
That the question, whether an assessee carries on business or when the certain transactions are in the course of business or whether they amount to adventures in the nature of trade or business, is a mixed question of fact and law is well settled. The decision in Venkataswami Naidu and Co. v. C.I.T. (l959) 35 ITR 594  at pp. 603 to 604 = (AIR 1959 SC 359  at pp. 363, 364) is an instance in point where this Court observed that the expression adventure in the nature of trade appearing in the definition of "business" implies the existence of certain elements in the adventure which in law would invest it with the character of trade and that renders the question whether a transaction is in the nature of trade a mixed question of law and fact and the High Court in such a case would interfere if the Tribunal had misdirected itself in. It is fairly clear that where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so if what is done is not a mere realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. The distinction whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profitThough the assessee was at the material time a landholder of a large estate, that fact by itself would not mean that his transactions in shares, securities and bullion cannot be transactions in the nature ofhad, therefore, to be examined in the light of all the facts and circumstances to ascertain whether they had been entered into in pursuit of a trading activity. The first relevant fact is that the assessees occupation was that of a landholder, having, on attaining majority, a considerable amount of money available for raising income therefrom. The transactions in question were obviously not in the line of any business or trade carried on bye was nothing on record to show, nor did the Tribunal find, that that was the case with the shares of either of the two companies whose shares the assesses purchased in such large quantity. Prima facie, these transactions would appear in the nature of investments and their conversion into what the assesses believed to be better investments as the circumstances changed from time tocorrespondence lends support to the assessees case inasmuch as he had therein clearly instructed his brokers to invest the sale proceeds of the said Government securities in such a way as to give him an annual yield of net 7 per cent. There can be no doubt that Government securities were sold accordingly and shares of certain companies were purchased from their sale proceeds in accordance with the advice of his brokers and bankers. When it was found that certain shares so purchased were not likely to yield the percentage he desired, they were sold within hardly a month from their purchase. The circumstances in which these transactions were brought about, would disclose as was held by the previous Tribunal in the case of the earlier assessments, that the assessees intention then was to change his investments from Government securities into shares and debentures which, he was advised, would procure him a better yield. This conclusion is consistent with his sale of the entire lot of Government securities at a time, his going in for shares with their sale proceeds and the sale in October 1939 of certain shares which were found incapable of giving the return hethe only new materials pointed out by the Tribunal from which a different conclusion could be arrived at were (1) the sale of gold in 1944 and 1945, (2) the purchase of the said shares from its sale proceeds, and (3) the sale of Karanpurathe only new materials pointed out by the Tribunal from which a different conclusion could be arrived at were (1) the sale of gold in 1944 and 1945, (2) the purchase of the said shares from its sale proceeds, and (3) the sale of Karanpurathe only new materials pointed out by the Tribunal from which a different conclusion could be arrived at were (1) the sale of gold in 1944 and 1945, (2) the purchase of the said shares from its sale proceeds, and (3) the sale of KaranpuraAs regards the Karanpura shares, the correspondence between him and the company and the advice he had from his brokers referred to in the Statement of Case show that the assessee did at one time entertain the idea of obtaining control over the companys management by procuring 51 per cent of its total shares. He could do so by purchasing shares in the open market and also by other means. He purchased 7025 shares in the market but that was clearly not enough. There was at that time litigation going on between him and the company and he seems to have hit upon the idea that he would compromise his suit if the managing agents of the company were to sell him shares representing its unissued capital at prices offered by him. The object of his offer was that he would not have to pay the market price of the shares which was 3 times more than the one offered by him. The company did not agree and his move for compromise failed. According to him, there was, therefore, no useful purpose for retaining those shares and he sold 6950 shares leaving only 75 shares with him. On these facts the Tribunal was not right in concluding that the shares which the assessee purchased from the market were not for the purpose of acquiring the major share-holding in the company and that the control over the company was to be obtained only by purchasing shares representing the unissued capital. Both the purchase of shares and the move to obtain shares representing the unissued capital were part of the same design and if the latter failed, his purchase of 7025 shares would obviously not bring him nearer his object. Furthermore the bulk of the sale proceeds of gold went into the purchase of Bokaro Ramgur shares which remained with him till the assessment years in question. The profits made on the sale of shares, acquired with the intention of obtaining control over the companys management and not for dealing in them, would be on the capital and not revenueStatement of Case itself set out facts which were consistent with the assesseesStatement of Case itself set out facts which were consistent with the assessees