Case: Commissioner Of Income Tax, Nagpur Vs. Sutlej Cotton Mills Supply Agency Ltd

The material facts in the statement of the case were as follows. The assessee is a public limited company and it is controlled by the Birlas. The assessee applied for certain shares of the Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. (hereinafter referred to as the " rayon company "), also a company controlled by the Birlas. This company was floated on August 25, 1947, with a paid up capital of Rs. 5 lakhs made up of 50, 000 ordinary shares of Rs. 10 each. In the year ending December 31, 1951, the rayon company issued certain new, shares for paid up capital of Rs. 1, 17, 25, 000 made up as follows:Rs.7, 60, 000 Ordinary shares of Rs. 10 each fully 76, 00, 000 paid up1, 50, 000 Ordinary shares of Rs. 10 each with 3, 75, 000paid up at Rs.each 1, 50, 000 6% preference shares of Rs. 100 each 37, 50, 000 paid up at Rs. 25 each (redeemable at par at the company option after a specified date by giving one years notice).The assessee which was interested in the rayon company and which had already purchased 1, 000 ordinary shares, subscribed for 3, 49, 000 shares of the new issue and paid Rs. 8, 72, 500 as application money on the 25th and 27th February, 1951, and paid Rs. 26, 17, 500 as final call money on August 10, 1951. These purchases were authorised by a resolution of the assessee dated February 7, 1951. The assessee sold a part of its stock, viz., 1, 58, 200 shares at a profit of Rs. 2, 13, 150.For the assessment year(accounting year ending on March 31, 1956), theOfficer sought to assess the amount on the basis that it was profit accruing to the assessee from an adventure in the nature of business. The assessee contended that the amount represented capital gain as the shares were purchased by way of investment and that the same cannot be taxed as revenue receipt. TheOfficer rejected the contention. The assessee filed an appeal before the Appellate Assistant Commissioner. He confirmed the order. The assessee then went up in appeal before the Appellate Tribunal.The Tribunal came to the conclusion, after considering all the circumstances, that the transaction was in the nature of a business adventure and that profits were liable to be taxed. The reasons which induced the Tribunal to come to this conclusion were : The assessee was authorised by clauses 12, 13, 28 and 29 of paragraph 3 of its memorandum of association to buy and sell shares ; there were specific resolutions of the company authorising a director of the asseseee to purchase and sell these shares ; the assessee had included the profit of Rs. 2, 13, 150 in the profit and loss account without taking it to any reserve account or specifically set it apart for any other purpose ; the assessee had purchased the shares from borrowed funds and not with money readily available to it ; the assessee did not make the sales on account of any pressing necessity to meet existing liabilities but had in fact kept a part of the sale proceeds as liquid cash in the United Commercial Bank Ltd ; the assessee had, in the past, dealt in shares as business transaction and had claimed for the assessment yearRs. 1, 29, 214 as loss on account of its dealing in shares of M/s. Titaghur Paper Mills Ltd. ; it also claimed Rs. 6, 30, 000 as loss on account of devaluation of the shares of M/s. Pilani Investment Corporation though that was not allowed ; there had recently grown a business practice of investing large sums of money in shares in new ventures with an eye on their appreciation for obtaining by sale substantial profits in futureThe High Court, in its judgment, said that there was no provision in clauses 10, 12, 13, 28 and 29 of paragraph 3 of the memorandum of association of the assessee which authorised the carrying on of the business of purchasing and selling shares, although some of these clauses did authorise the assessee to acquire and sell shares in other similar companies ; that the inclusion of the profit of Rs. 2, 13, 150 in the profit and loss account without taking it into any reserve specifically was not conclusive of the question whether it was a capital asset or a revenue receipt ; that the true nature and character of the moneys received was to be determined not by the manner in which the assessee treated it but by its inherent character, and that it was wholly immaterial as to how the assessee treated the amount in question ; and that there was no evidence that the shares were purchased out of borrowed funds as the assessee had a fixed deposit of Rs. 31, 75, 000 in the United Commercial Bank Ltd., and a deposit of Rs. 8, 76,in the current account of the bank. The High Court was of the view that the finding of the Tribunal that the sale of shares in 1955 was made not on account of any pressing necessity to meet existing liabilities was based on materials placed before the Tribunal.The court, however, said:" It may be that, at that time, the liabilities of theexisted, but it is quite another matter to say that it was obliged to sell the shares in order to meet those liabilities. "The High Court was also of the view that the conclusion of the Tribunal that the assessee had claimed Rs. 1, 29, 214 as loss on account of dealing in shares of M/s. Titaghur Paper Mills Ltd. for the assessment yearand that the claim was allowed by theOfficer must be accepted as correct, but said that this solitary transaction cannot be taken as conclusive of the fact that the sale of shares in question here was an adventure in the nature of trade.

Court's reasoning:
The Tribunal relied on the following circumstances for coming to the conclusion. The assessee had been dealing in shares from 1951 to 1953. For the assessment yearthe assessee claimed a sum of Rs. 1, 29, 214 which was shown in the profit and loss account and theof the company for the year ending March 31, 1951, as a loss in the dealing of shares of M/s. Titaghur Paper Mills Ltd. This claim was allowed by theOfficer. According to the Tribunal, this would show that the assessee had been buying and selling shares even though as an isolated adventure in the nature of business. The High Court has not upset this finding, but has only said that this is an isolated transaction. That apart, in the same year, a sum of Rs. 6, 30, 000 was debited to the profit and loss account on devaluation of the shares of M/s. Pilani Investment Corporation. Such a debit was permissible only on the footing that the shares constituted theof the assessee. It is no doubt true that the department did not allow this claim. But that was on the basis that the claim that the shares have fallen in value was not proved to the satisfaction of theOfficer, and not on the basis that the shares were not held asas the High Court wrongly thought. The Tribunal also referred to the resolutions passed by the assessee authorising one of its directors to purchase and sell the shares in the rayon company. The finding of the High Court that the clauses of the memorandum of association, viz., clauses 10, 12, 13, 28 and 29 do not authorize the company to acquire and sell shares as business has no relevance in view of the aforesaid resolution of the assessee and of the fact that it had been dealing in shares in a commercial spirit as is evident from its claim for loss in dealings in the shares of M/s. Titaghur Paper Mills Ltd. and devaluation of shares of M/s. Pilani Investment Corporation on the basis that they had fallen in valueSecondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the rayon company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstance for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business. Looking into all the circumstances, the Tribunal negatived the case of the assessee that it had invested its funds with a view to earn dividend.TheTribunal found, after taking into account all the relevant circumstances, that the dominant intention of the assessee was to make profit by resale of the shares and not to make an investment.The finding that loss or profit is a trading loss or profit is primarily a finding of fact, though in reaching that finding the Tribunal has to apply the correct test laid down by law. When we see that the Tribunal has considered the evidence on record and applied the correct test, there is no scope for interference with the finding of the Tribunal (see Commissioner ofv. Ashoka Marketing Co.)We do not think that the High Court was right in interfering with the judgment of the Tribunal.