1960 (12) TMI 3 - SC - Income Tax

Whether the acquisition of the managing agency of the Dawn Mills Co. Ltd. was in the nature of a business carried on by the assessee-ccompany ? Whether the loss suffered by the assessee-company of ₹ 1,78,438 on purchase and sale of 400 shares of the Dawn Mills Co. Ltd., being incidental to its business of acquiring the managing agency, was a loss of a revenue nature ? Held that - The High Court was right in holding that the acquisition of the managing agency was an acquisition of a capital asset and the loss incurred by sale of the 400 shares was of a capital nature. The High Court was also right in dismissing the notice of motion for an order directing the Tribunal to refer the question suggested by the appellants. If the acquisition of the shares was not acquisition of a stock-in-trade, but of a capital asset, the appellants, by valuing the shares at cost or market price whichever was lower, could not bring the difference between the purchase price and the valuation made by them into their trading account. Appeal dismissed.

Issues:
1. Whether the acquisition of the managing agency of a company was in the nature of a 'business' carried on by the assessee-company?
2. If the acquisition was in the affirmative, whether the loss suffered on the purchase and sale of shares was of a revenue or capital nature?

Analysis:
1. The High Court answered the questions referred by the Income-tax Appellate Tribunal regarding the nature of the acquisition of the managing agency. The Tribunal held that the managing agency was acquired as part of the appellants' business activity. The shares of the company were bought in the regular course incidental to the business of acquiring the managing agency. However, the High Court determined that the shares acquired were a capital asset, and the loss incurred from the sale of shares was of a capital nature, not a revenue loss. The High Court dismissed the notice of motion taken out by the appellants.

2. The Tribunal found that the shares of the company were not the stock-in-trade of the appellants but were purchased to acquire the managing agency. The shares were acquired for obtaining control over the managing agency, and the acquisition of shares was integrated with the acquisition of the managing agency. The High Court agreed that the acquisition of the managing agency was a capital asset, and the loss from the sale of shares was also of a capital nature. Therefore, the appellants could not bring the difference between the purchase price and the valuation into their trading account.

3. The court considered the intention of the assessee in the transaction, emphasizing that the shares were not acquired for trading purposes but to facilitate the acquisition of the managing agency. The court noted that even though the shares were purchased with borrowed money and the appellants were dealers in shares, the transaction was not a business transaction but a capital acquisition. The court concluded that the shares were not acquired as part of the trade in shares but as a capital asset for acquiring the managing agency.

4. The court discussed the legal principles surrounding the determination of whether a transaction is an adventure in the nature of trade. It was highlighted that the intention of the assessee and the legal requirements associated with the concept of trade or business are crucial factors. The court cited precedents to support the distinction between dealing in shares as a trader and investing in shares as an investor. The court emphasized that the acquisition of shares in this case was not for trading but for a capital purpose, i.e., acquiring the managing agency.

5. In conclusion, the court upheld the decision of the High Court that the acquisition of the managing agency was a capital asset and the loss from the sale of shares was of a capital nature. The court dismissed the appeal with costs, affirming that the appellants could not claim the difference between the purchase price and the valuation as a trading loss since the shares were not acquired as stock-in-trade but as a capital asset for acquiring the managing agency.

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