1967 (11) TMI 7 - SC - Income Tax

Sale of entire block of shares - Profit was not a capital accretion but business income - entire excess received by assessee over cost price was profits from business - Assessee s appeal is dismissed

Issues Involved:
1. Whether the sum of Rs. 2,34,230 was the income of the assessee.
2. Whether the amount of Rs. 10,42,990 received by the assessee represented exclusively the price of the shares or included any consideration for procuring the resignation of the present directors, obtaining the appointment of directors of the choice of the purchaser, and the resignation of the present managing agents.
3. If so, what should be taken as the sale price of each of the ordinary shares and each of the preference shares sold by the assessee in calculating its income arising therefrom.

Detailed Analysis:

Issue 1: Whether the sum of Rs. 2,34,230 was the income of the assessee.
The appellant, a private limited company controlled by Mulraj Kersondas, dealt in shares. From 1942 to 1948, the appellant included the profit and loss from dealings in Elphinstone Mills shares in its revenue account. By 1948, the appellant held a significant number of these shares. In 1953, the appellant sold its shares to K. D. Jalan and recorded a profit of Rs. 2,34,231, which it took to the capital reserve account, not showing it in its profit and loss account. The Income-tax Officer treated this amount as business income, which the Appellate Assistant Commissioner later categorized as capital gain. The Income-tax Appellate Tribunal reversed this decision, treating it as business income.

The court held that the appellant was a dealer in shares and had treated the profits and losses from Elphinstone Mills shares as part of its business income. The appellant's argument that it had converted these shares into an investment was rejected due to a lack of evidence in its books or resolutions. The court noted that the appellant's inactivity in selling shares from 1949-1953 was likely due to a slump in share prices, not a change in the nature of the holding. Thus, the profit from the sale was rightly treated as business income.

Issue 2: Whether the amount of Rs. 10,42,990 received by the assessee represented exclusively the price of the shares or included any consideration for procuring the resignation of the present directors, obtaining the appointment of directors of the choice of the purchaser, and the resignation of the present managing agents.
The appellant argued that the Rs. 45 lakhs received by Mulraj Kersondas from K. D. Jalan was a composite consideration for four items: the sale of shares, procuring resignations of directors, securing appointments of new directors, and obtaining the resignation of the managing agents. It contended that the excess amount paid over the market price was for the controlling interest, not just the shares.

The court rejected this argument, stating that the appellant itself had no controlling interest in Elphinstone Mills and was not in a position to procure resignations or appointments. The transaction was conducted by Mulraj Kersondas alone, and the appellant merely provided its shares. The entire amount received by the appellant was for the shares, not for any additional rights.

Issue 3: If so, what should be taken as the sale price of each of the ordinary shares and each of the preference shares sold by the assessee in calculating its income arising therefrom.
Given the court's findings on the second issue, this question did not survive and was not addressed.

Conclusion:
The court upheld the High Court's judgment, affirming that the profit from the sale of shares was business income and that the entire amount received by the appellant was for the shares alone. The appeal was dismissed with costs.

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