1954 (11) TMI 3 - SC - Income Tax

Whether excess is a receipt from business and not a mere appreciation in capital? Held that - We reverse the decision of the High Court and hold that the purchase of shares to the tune of ₹ 3,00,000 was an investment and not an adventure and the two sums which were taxed were not in the nature of income from business and were therefore not liable to tax. We allow the appeal and set aside the judgment of the High Court with costs to the appellant.

Summary

Issues:
1. Interpretation of the company's memorandum and articles of association regarding the purchase and sale of shares as part of business activities.
2. Determination of excess amounts realized from the sale of shares as revenue receipt chargeable to tax or capital appreciation.

Analysis:
The Supreme Court judgment addressed two main issues arising from the High Court's decision. Firstly, the Court analyzed whether the purchase and sale of shares by the appellant company fell within the scope of its business activities as per the company's memorandum and articles of association. The Court examined the circumstances surrounding the formation of the company in 1917 and the subsequent investment in another company, focusing on the objectives outlined in the memorandum. It was established that the primary purpose of the investment in shares was to acquire the managing agency of a sugar mill, which aligned with the company's objective to manage commercial undertakings. The Court disagreed with the High Court's conclusion that the transaction constituted an ordinary business operation within the company's powers. Instead, the Court held that the investment in shares was capital in nature, intended for long-term gain rather than short-term profit through trading activities.

Secondly, the Court delved into the tax implications of the excess amounts realized from the sale of shares. The Income-tax Officer had treated these amounts as revenue receipts subject to taxation, a decision upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. However, the Supreme Court overturned this decision, ruling that the excess amounts were not income from business but rather capital accretions. The Court emphasized that the investment in shares was a singular transaction aimed at securing a permanent asset, the managing agency, and not part of the company's regular business operations. Therefore, the profits from the sale of shares were deemed capital gains and not taxable as business income.

In conclusion, the Supreme Court allowed the appeal, setting aside the High Court's judgment and ruling in favor of the appellant company. The Court determined that the purchase of shares was an investment, not a business venture, and the profits from the sale were capital in nature, exempt from taxation as business income.