1967 (11) TMI 3 - SC - Income Tax

Company - buying and selling shares - buying and selling of shares amounted as business - Assessee s appeal is dismissed

Issues Involved:
1. Whether the surplus derived by the assessee from the sale of its shares and securities in the relevant previous years was a revenue receipt and thus taxable under the Income-tax Act.

Detailed Analysis:

Issue 1: Taxability of Surplus from Sale of Shares and Securities as Revenue Receipt

The primary question for consideration was whether the surplus derived by the assessee from the sale of its shares and securities constituted a revenue receipt and was thus taxable under the Income-tax Act.

Background and Tribunal's Findings:
The Tribunal was asked to submit a supplementary statement to clarify certain points, including the object behind the acquisition of shares, particularly those of McLeod and Co. Ltd., and the reasons for the assessee's confined activities to these shares. The Tribunal's supplementary statement indicated that the purchases and sales of the shares were in pursuit of clause (2) of the memorandum of association, which included dealing in shares, stocks, debentures, etc.

Facts and Circumstances:
1. Principal Activity: The principal activity of the assessee was the investment of its capital in shares and stocks, with income primarily derived from dividends and interest.
2. Memorandum of Association: The memorandum of association included an object to acquire, hold, sell, and transfer various securities.
3. Purchase and Sale of Shares: The Tribunal noted that the shares were purchased during a period of falling market prices and sold at a considerable profit. The assessee had taken loans to purchase these shares, indicating a motive of earning profit rather than investment.
4. Control of McLeod and Co. Ltd.: The explanation that the shares were sold due to the change in control of McLeod and Co. Ltd. was not substantiated. The Tribunal found no material evidence that the Bajoria group obtained a controlling interest as a result of the share acquisition.

Conclusion by the Court:
The court concluded that the shares were purchased and sold with the motive of earning profit rather than as an investment to derive income from dividends. The Tribunal's findings indicated that the transactions were an adventure in the nature of trade. The court noted that the earlier acceptance by the department of the transactions as investments was not binding for subsequent years.

Legal Principles and Precedents:
1. Investment vs. Trade: The court referenced the principle that mere variation of investments does not necessarily mean that the profits are taxable unless the variation amounts to dealing in investments.
2. Stock-in-Trade: The court observed that the shares were dealt with as stock-in-trade, despite not being shown as such in the account books.
3. Purpose of Purchase: The court emphasized the importance of the purpose behind the purchase of shares. If the purpose was investment, profits from sale would not be revenue income. However, in this case, the initial purpose was found to be profit from resale.

Final Judgment:
The High Court's conclusion that the surplus from the sale of shares and securities was a revenue receipt and taxable under the Income-tax Act was upheld. The appeals were dismissed with costs, affirming that the income derived from these transactions was taxable as revenue income.

Appeals Dismissed:
The appeals were dismissed with costs, and the court affirmed the High Court's conclusion that the income derived from the sale of shares and securities was taxable as revenue receipt under the Income-tax Act.

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