1969 (7) TMI 3 - SC - Income Tax

Whether the surplus realised by the sale of the shares of Aluminium Corporation of India Ltd., J. K. Investment Trust and Raymond Woollen Mills amounting in the aggregate to Rs. 3,99,587 or any part thereof was the revenue income of the assessee liable to tax under the Income-tax Act, 1922 - Held, Yes - Assessee s appeal dismissed

Summary

Issues:
1. Whether the profit on the sale of shares is taxable as revenue income or capital gain under the Income-tax Act, 1922?

Detailed Analysis:
The case involved the assessment of an appellant firm to income tax for the year 1946-47 concerning a profit of Rs. 3,99,587 on the sale of shares. The firm claimed the amount to be "capital gain" and thus not taxable. However, the Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal rejected this claim, considering the profit as arising from a well-planned business activity fully utilizing the firm's resources. The High Court of Allahabad affirmed the tax liability, leading the firm to appeal to the Supreme Court. The firm's arguments regarding the nature of the transactions and the motive behind the sale of shares were thoroughly examined by the courts. The Supreme Court analyzed the facts and circumstances surrounding the purchase and sale of shares by the firm, concluding that the transactions were part of a continuous business activity aimed at earning profits. The court found that the firm's claims of acquiring shares for capital investment purposes and selling them due to financial difficulties were not substantiated by the evidence presented. The court emphasized that the firm's activities were profit-oriented and not merely capital investments, leading to the affirmation of the tax liability on the profit from the share sales.

2. Whether the purchase and sale of shares by the firm constitute commercial transactions or capital investments?

Detailed Analysis:
The Supreme Court delved into the nature of the transactions involving the purchase and sale of shares by the appellant firm. The court scrutinized the timeline of events, financing arrangements, selling patterns, and the motives behind the transactions. It was observed that the firm purchased shares with borrowed funds, sold them at a profit in small lots, and some shares were even sold to outsiders through brokers. The court rejected the firm's claims that the shares were distributed to associates or acquired due to financial difficulties. The court highlighted that the interest paid on the borrowed amount for purchasing shares was treated as a revenue expenditure, indicating a commercial motive behind the transactions. Additionally, the court noted that the firm's activities of purchasing and selling shares were part of a profit-making scheme, emphasizing the commercial nature of the transactions rather than capital investments. The court compared the case to precedent where the intention behind purchasing shares was crucial in determining whether the transactions were capital investments or business activities. Ultimately, the court concluded that the purchase and sale of shares by the firm were commercial transactions driven by a profit motive, leading to the dismissal of the appeal and affirmation of the tax liability on the profits from the share sales.