1967 (10) TMI 6 - HC - Income Tax

Whether there was any evidence and/or material before the Tribunal to conclude that the trustees of the trust created by late K were carrying on business in shares - Held, yes

Issues Involved:
1. Whether there was any evidence and/or material before the Tribunal to conclude that the trustees of the trust created by late Mr. J. J. Kapadia were carrying on business in shares.
2. Whether the finding of the Tribunal that the income-tax authorities were right in including under section 16(3) of the Income-tax Act, income in respect of dealing in shares in the appellants' assessment is justified in law.

Issue-wise Detailed Analysis:

1. Evidence and/or Material for Trustees Carrying on Business in Shares:

The first issue addressed whether the Tribunal had sufficient evidence to conclude that the trustees were engaging in business activities involving shares. The Tribunal based its conclusion on the volume and frequency of transactions conducted by the trustees during the relevant years. They noted that nearly two-thirds of the capital had been turned over by the end of Samvat year 2004, indicating business activities rather than mere investment management. Additionally, there was no satisfactory explanation from the assessees regarding the sale of several scrips during the relevant years. The Tribunal also considered the fact that the settlor, a prominent and experienced share dealer, was one of the trustees and had a dominant voice in the administration of the trust.

The assessees contended that the volume of transactions had remained consistent since the trust's inception and that similar activities in previous years (1944-45 to 1946-47) had not been deemed business activities. They argued that the trustees' actions were aimed at safeguarding the trust's interests rather than conducting business. However, the Tribunal noted that the transactions during the relevant years involved significant purchases and sales, including the sale of newly acquired shares at a loss, which was inconsistent with typical investment behavior.

Upon reviewing the supplementary statement provided by the Tribunal, which detailed the transactions, it was evident that the trustees engaged in activities more characteristic of business dealings rather than mere investment management. Consequently, the court concluded that there was sufficient material to support the Tribunal's finding that the trustees were carrying on business in shares. Thus, the first question was answered in the affirmative and against the assessee.

2. Inclusion of Income under Section 16(3) of the Income-tax Act:

The second issue examined whether the income from the trustees' dealings in shares could be included in the settlor's income under section 16(3)(b) of the Indian Income-tax Act. The assessees argued that the income from the trustees' activities was not taxable as it constituted capital accretion rather than business income. Alternatively, they contended that even if it was business income, it did not arise directly from the assets transferred by the settlor and thus should not be included under section 16(3)(b).

Section 16(3) stipulates that in computing an individual's total income, income from assets transferred to a wife or minor child or for their benefit should be included. The court needed to determine whether the income from the trustees' business activities could be considered as arising from the transferred assets.

The court noted that section 16(3)(b) specifically requires the income to arise directly from the transferred assets. The income in question was derived from business activities involving the transferred assets, not directly from the assets themselves. The court emphasized that the language of section 16(3)(b) did not include the phrase "directly or indirectly," implying that only income directly arising from the assets could be included.

The court concluded that the income from the trustees' business activities did not arise directly from the transferred assets. Therefore, it could not be included in the settlor's income under section 16(3)(b). The second question was answered in the negative and in favor of the assessee.

Conclusion:

In summary, the court's answers to the questions were:
1. Affirmative (against the assessee) - There was sufficient evidence to conclude that the trustees were carrying on business in shares.
2. Negative (in favor of the assessee) - The income from the trustees' dealings in shares could not be included under section 16(3)(b) of the Indian Income-tax Act in the settlor's assessment.

Given that one question was answered in favor of the assessee and the other against, the court decided that there would be no order as to costs.

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