1970 (2) TMI 30 - HC - Income Tax

Shares purchased with money raised by pledging and selling jewellery were sold at profit - transaction was an adventure in the nature of trade - therefore the profit from the sale of shares were business profits

Issues Involved:
1. Whether the purchase and sale of shares of Sirpur Paper Mills Ltd. was an adventure in the nature of trade.
2. Whether the profit of Rs. 1,01,842 realized from the sale of shares is assessable to income-tax under section 10 of the Income-tax Act, 1922.

Detailed Analysis:

1. Whether the purchase and sale of shares of Sirpur Paper Mills Ltd. was an adventure in the nature of trade:

The Income-tax Officer determined that the purchase and sale of Sirpur Paper Mills Ltd. shares by the assessee constituted an adventure in the nature of trade. This conclusion was based on the sequence of transactions: pledging jewelry, borrowing money, purchasing gold, selling gold, and then purchasing and selling shares, all within a short period. The officer noted that the assessee's intention was to capitalize on the rising market and make a profit.

The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this view, emphasizing that the transactions were organized and indicated a profit motive rather than a mere change of investment. The Tribunal also referenced the assessee's past involvement in speculative business, reinforcing the conclusion that the transactions were in the nature of trade.

The assessee argued that the transaction was isolated and driven by a profit motive, which alone does not constitute an adventure in the nature of trade. The assessee cited the House of Lords' decision in Jones v. Leeming, which distinguished between capital accretion and income, emphasizing that an isolated transaction does not automatically become an adventure in the nature of trade.

However, the court found that the assessee's purchase and sale of shares were not isolated but part of a series of transactions aimed at profit-making. The court noted that the shares were not bought for dividend income but for quick resale in a rising market. The assessee's previous speculative activities further supported the conclusion that the transactions were in the nature of trade.

2. Whether the profit of Rs. 1,01,842 realized from the sale of shares is assessable to income-tax under section 10 of the Income-tax Act, 1922:

The court examined whether the profit from the sale of shares should be considered taxable income. The assessee's counsel argued that the profit was a capital accretion, not taxable income, citing the Supreme Court's decision in Janki Ram Bahadur Ram v. Commissioner of Income-tax, which differentiated between commercial commodities and non-commercial assets like land.

The court, however, found that shares, like other commercial commodities, could be subject to trade activities. The court referred to the observations in Californian Copper Syndicate v. Harris, which stated that gains from the realization of securities could be taxable if the transactions were part of a business operation.

The court also considered the Supreme Court's decision in Venkatasuami Naidu & Co. v. Commissioner of Income-tax, which emphasized the need to evaluate the overall circumstances of a transaction. Factors such as the nature of the commodity, the assessee's usual business, the motive behind the purchase, and the conduct following the purchase were relevant.

In the present case, the court concluded that the transactions were systematic and aimed at profit-making. The purchase and sale of shares were not for investment but for quick profit in a rising market. The assessee's previous speculative activities further supported this conclusion.

Therefore, the court held that the profit of Rs. 1,01,842 was business profit assessable to income-tax under section 10 of the Income-tax Act, 1922. The question referred to the court was answered in favor of the department, and the assessee was ordered to pay the costs of the reference.

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