1971 (9) TMI 3 - SC - Income Tax

Whether the finding of the Tribunal that profit from sale of shares was revenue in nature can be questioned before the High Court - Instead of the answer returned by the High Court the question is answered in favour of the revenue

Summary

Issues:
1. Determination of whether the profit from the sale of shares by the assessee was capital gain or taxable as revenue profit.
2. Whether the assessee was a dealer in shares during the relevant accounting period.

Analysis:
1. The case involved an appeal regarding the tax treatment of profits from the sale of shares by the assessee, a private limited company acting as managing agents for various companies. The assessee sold shares of different companies resulting in a net profit. The dispute arose on whether this profit should be considered as capital gain or taxable as revenue profit. The Income-tax Officer treated the profit as taxable, while the assessee claimed it to be capital gain. The Appellate Assistant Commissioner viewed the profit as a revenue receipt, emphasizing the regular buying and selling of shares by the assessee. The Tribunal had differing opinions, with one member considering the assessee a dealer in shares and the other disputing this claim. The President of the Tribunal ultimately sided with the view that the assessee was a dealer in shares, leading to the reference of the case to the High Court.

2. The High Court upheld the Tribunal's decision that the assessee was a dealer in shares but approached the question from a new angle. It analyzed the nature of the shares sold, considering factors like the purpose of acquisition, holding period, and sale patterns. The High Court concluded that the profit did not arise from the business of a dealer in shares but was a capital receipt. It noted that the assessee had not previously claimed to hold the shares as investments and had engaged in extensive transactions over the years, indicating a shift from an investor to a dealer. The High Court's decision favored the assessee, contradicting the Tribunal's finding.

3. The Supreme Court, in its judgment, criticized the High Court's approach, stating that the matter of whether the shares were held as investments or stock-in-trade was not adequately addressed before. The Court highlighted that the assessee had not provided evidence to distinguish the shares sold as part of its investment portfolio. It emphasized that the burden of proof lies with the assessee to demonstrate the nature of its share holdings. Since the assessee failed to establish that the shares sold were capital investments, the Court ruled in favor of the revenue authority, considering the profit as taxable revenue. The Court emphasized the importance of factual determinations by the Tribunal and criticized the High Court for overstepping its jurisdiction in making findings on factual matters.

In conclusion, the Supreme Court allowed the appeal, overturning the High Court's decision and ruling in favor of the revenue authority. The judgment underscored the significance of providing evidence to differentiate between shares held as investments and those forming part of a trading business, placing the onus on the assessee to substantiate the nature of their share holdings to determine the tax treatment of profits from share sales.