1954 (10) TMI 8 - SC - Income Tax

Whether on the facts and circumstances of the case the assessee was doing business in shares in the account year? Whether there is any material on record on the basis of which it could be held that the assessee was doing the business in shares in the account year? Held that - both the Tribunal and the High Court were in error in the view that no issue of law arose in the case and that the Tribunal could not be called upon to state a case and to refer to the High Court any issue of law. The two questions framed by the appellant and which he wanted the High Court to ask the Tribunal to refer to it are comprehensive enough to embrace the issue of law that, in our opinion, arises out of the order of the Tribunal. But we think that it would clarify the position if these two questions were re-stated in the following form -- Whether the finding of the Tribunal is not vitiated by reason of its having relied upon suspicions and surmises not supported by any evidence on the record or upon partly inadmissible material ? Allow this appeal, set aside the order of the High Court dismissing the application of the appellant under Section 66(2) of the Indian Income-tax Act, and remand the case to the High Court

Summary

Issues:
1. Dispute over whether a Hindu undivided family was conducting business in shares or not.
2. Applicability of Section 66(2) of the Indian Income-tax Act, 1922 for reference of questions of law to the High Court.

Detailed Analysis:

1. Business Activity in Shares:
The case revolved around the question of whether a Hindu undivided family was engaged in the business of shares or merely making investments. The Income-tax Officer included profits from the sale of shares in the family's assessment, considering it as trading capital converted from inheritance. However, the Appellate Assistant Commissioner viewed the transactions as a change in investment, leading to a reduction in the assessed income. The Commissioner of Income-tax appealed and the Tribunal held that the family's actions were a tax evasion scheme. The Tribunal scrutinized the family's share transactions, concluding that the family was actively trading shares, especially under the influence of the family head, Dhirajlal. The Tribunal's decision was based on suspicions and conjectures, lacking substantial evidence.

2. Applicability of Section 66(2) of the Indian Income-tax Act:
The appellant sought a reference of questions of law to the High Court under Section 66(2) of the Income-tax Act, which was initially rejected by the Tribunal. The High Court summarily dismissed the application, prompting the appellant to appeal to the Supreme Court. The Supreme Court found that the Tribunal's decision was flawed as it relied on suspicions and conjectures without substantial evidence, thereby raising an issue of law. The Court allowed the appeal, directing the High Court to ask the Tribunal to refer the question of law regarding the Tribunal's reliance on unsupported suspicions and surmises back for consideration.

In conclusion, the Supreme Court's judgment highlighted the importance of factual accuracy and evidence-based decision-making in tax matters. It emphasized that decisions based on conjectures and suspicions could lead to legal issues. The Court's ruling underscored the need for a clear distinction between investment activities and business transactions for tax assessment purposes.