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TMI Blog1969 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the surplus receipt of Rs. 33,481 arising out of the sale of some more gold, and the second relates to the receipt of Rs. 88,522 realised by the assessee as a result of sale of certain shares. All the three questions raise the common problem whether the said transactions in gold and shares were by way of realisation of investment or were adventures in the nature of trade or business. The assessee was at all material times a land-holder deriving large income from agriculture, royalties of minerals and income from forests forming part of his estate. Prior to 1937, when he was a minor, his estate was under the management of a court of wards. On attaining majority, the estate, which included Government securities of the value of about Rs. 40 lakhs, was handed over to him on August 19, 1937. During the account year 1938-39 he sold the whole lot of these securities and realised Rs. 44,25,088, the sale thus resulting in an excess of Rs. 4,55,305. This excess amount was assessed as profit by the Income-tax Officer for the assessment year 1939-40. But, on appeal against the assessment order, the Appellate Tribunal set aside that order on a finding that the said sale was by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they were the result of a change in investment and could not be said to be transactions in the nature of trade or business. His case was that neither the Government securities, nor the shares and debentures purchased out of their sale proceeds, nor the gold were sold and purchased by way of dealing in them, that at no time they became his stock-in-trade for any business or adventures in the nature of trade or business therein, that the transactions were mere conversions from one investment to another, depending upon the circumstances which prevailed during the respective periods and that the sale of gold in 1944 and 1945 was occasioned partly due to the tide in the Second World War turning in favour of the Allies and partly due, (a) to his having to pay Rs. 7 lakhs by way of income-tax, (b) expenses for the marriage of his younger brother, (c) for payment of Rs. 6 lakhs debt to one Gupta, and (d) for purchase of Victory Bonds worth Rs. 14 lakhs and odd at the instance of the Government authorities as contribution of his estate to the war effort. The Tribunal rejected the case that gold had been sold for the reasons given by the assessee or as a change in investment and hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the war situation then. By an order dated April 2, 1959, the High Court referred that statement of case back to the Tribunal under section 66(4) directing it to consider further all the materials before it and file a supplementary statement of case as the High Court found the statement factually incorrect in certain respects. The Tribunal accordingly sent a supplementary statement of case on April 23, 1960. After setting out the assessee's transactions of the sale of Government securities in 1938-39, the purchase of shares from their sale proceeds, their sale in 1939-40 and 1940-41, the purchase of gold and its sale, the Tribunal once again rejected the assessee's claim that those transactions were conversions of one investment to another made for a better return or that the gold was sold in October, 1944, for pressing necessities alleged by the assessee. Regarding the purchase and sale of shares, the Tribunal stated that the assessee purchased shares of the value of Rs. 37 lakhs and odd in 1945-46, that those were shares of two concerns only, Bokaro and Ramgur Co. Ltd. and Karanpura Development Co. Ltd., and that as the latter company's shares were of the value of Rs. 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore complete picture of the assessee's transactions over a length of period which its predecessor had not when it dealt with the assessments for the assessment years 1939-40 to 1941-42. The High Court further held that there was fresh material, namely, that when the gold was sold, its sale proceeds were again invested in shares and the fact that though Victory Bonds were purchased in January, 1945, they were sold after an interval of two months only. The High Court, in this view, concluded that " the Appellate Tribunal, therefore, had before it fresh materials for coming to a conclusion contrary to the one come to by its predecessors in the previous orders." It rejected the assessee's case (a) that he had converted one investment into another, i.e., from shares and securities to gold, because of the worsening of the war situation after the fall of France in 1940, (b) that when the war situation improved in 1944 and with that the price of gold began to fall he once again converted his investment from gold to shares, i.e., from an unproductive investment into one which could give him an adequate yield, and (c) that he had sold gold because of pressing necessities. The first contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f case showed that the purchases of gold and shares were made without any intention at that time to resell them at profit, and that, therefore, the subsequent sales thereof would not stamp those transactions with the character of trade or business in them. Since these appeals arise out of reference, under section 66(2), we cannot exercise any wider power of interference than that permitted to the High Court under the Act. That was not disputed by Mr. Desai. But in support of his contention that this was a case where the High Court could and should have interfered with the Tribunal's findings, he cited a number of decisions. It is not necessary to go into all those decisions as the principles on which such interference can be made and the scope of power under section 66 to do so are by now well established. That the question, whether an assessee carries on business or whether certain transactions are in the course of business or whether they amount to adventures in the nature of trade or business, is a mixed question of fact and law is well-settled. The decision in Venkataswami Naidu Co. v. Commissioner of Income-tax, is an instance in point where this court observed that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding ; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business. Though the assessee was at the material time a land-holder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enquiry on the question whether these transactions were in the nature of trade or business, it would not be altogether irrelevant to notice that in 1938-39, when the assessee sold the Government securities, he sold the entire lot and invested the bulk of their sale proceeds in shares and debentures, i.e., as much as Rs. 34 lakhs. The same feature is present also in his purchase of gold in 1940, and its disposal in 1944 and 1945, using its sale proceeds in buying shares, which, it must be remembered, were of two companies only. The transactions thus are not diversified, nor are gradual according to the opportunities offered by fluctuating market prices, but are in bulk and almost at a time, which ordinarily are not the characteristics of the dealings of a person carrying on trade or business in them. Thus, in 1938-39 all Government securities were sold and the bulk of their sale proceeds, i.e., Rs. 34 lakhs and odd, used in the purchase of shares. The same was the case when gold was bought and sold. Furthermore, when a person trades in shares and debentures, he does not ordinarily buy shares of two companies only, except when a particular scrip had the possibility of giving an unusu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court have said. But the only new materials pointed out by the Tribunal from which a different conclusion could be arrived at were : (1) the sale of gold in 1944 and 1945, (2) the purchase of the said shares from its sale proceeds, and (3) the sale of Karanpura shares. The question, therefore, the Tribunal had before it was, whether when the assessee purchased the gold he did so with the intention to deal in it. The Tribunal held, and the High Court concurred with it, that the assessee's transactions showed that they were in the nature of trading transactions. Two facts, however, throw considerable doubt on the validity of that conclusion and neither the Tribunal nor the High Court seems to have weighed them with the consideration which they demand. The first fact is that in 1940 he converted his entire shareholding into gold, a fact consistent with his case that he did so because of the nervousness engendered by the breaking out of the Second World War, the initial German victories and the fall of France. The Tribunal did not countenance this case for it thought that if that was so, the assessee would have invested the other cash lying with him also in gold, and, secondly, bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions, we think that the Tribunal placed undue emphasis on the fact that when he opened the bank account in March, 1939, with the sale proceeds of Government securities, he did so, firstly, in the name of his wife, and, secondly, called that account as one of " Rs. 48 lakhs floating in the share market ". The first had no particular significance and the second properly viewed only meant that he wanted to set apart this fund for transactions in shares and securities and not mix up his other capital and the income arising from his estate. The name he gave to this account cannot for that reason only render his dealings with that account into trading transactions, if otherwise, they were not. Similarly, the Tribunal was unduly impressed by the fact that he sold away the Victory Bonds within about two months from their purchase. The correspondence produced by the assessee clearly shows that he had bought those bonds at the pressure of the then Commissioner. The bonds were not likely to fetch him the yield he desired. His purchase of them had thus served the purpose, viz., his showing to the authorities that his estate had made a war contribution. The sale by him of those bonds wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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