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TMI Blog1964 (4) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... s also and the profit and loss even in the dealings of the Elphinstone Mills was taken by the assessee to its revenue account during these years. At the end of the year 1948, the assessee held 5,137 ordinary shares and 1,131 preference shares of the Elphinstone Mills. During the years subsequent to the year 1948, the assessee did not effect any sale in the Elphinstone Mills' shares, excepting a solitary transaction of 160 shares, in the year 1952. On the other hand it purchased some more shares and added to its holdings in the shares of the said mills. Thus, in the year 1953, the assessee held in all 8,693 ordinary shares and 2,117 preference shares of the Elphinstone Mills. It may be pointed out that during the years from 1948 onwards there was a slump in the price of the shares of the Elphinstone Mills and the price of the ordinary and preference shares at the material time in 1953 were ₹ 37 per ordinary share and ₹ 88 per preference share. On the 25th of September, 1953, Mulraj Kersondas wrote a letter to Shri K.D. Jalan, a big businessman of Calcutta, making an offer of sale to him of 25,000 ordinary shares and 10,000 preference shares of the Elphinstone Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital reserve account and showed it as a capital reserve in its balance-sheet. In the assessment of the assessee for the assessment year 1954-55, the Income-tax Officer treated the amount of ₹ 2,34,231 as the income of the assessee from the sale of shares and brought the said amount to tax. He did not accept the assessee's contention that the sale of the said shares was on capital account and held that the sale had taken place in the course of the business of the assessee as a dealer in shares. The assessee appealed to the Appellate Assistant Commissioner who accepted the assessee's contention that the said amount represented a capital gain and did not form part of the income from the business of the assessee and accordingly allowed the assessee's appeal. Against the decision of the Appellate Assistant Commissioner, the department appealed to the Income-tax Tribunal. The Tribunal reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Two contentions were raised on behalf of the assessee before the Tribunal. Firstly, it was contended that the sale of the shares by the assessee in the year 1953 was a sale on capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his court was pleased to take the view that the entire controversy between the parties had not been brought out by the question which had been framed and referred to by the Tribunal and it was, therefore, necessary to call for a supplemental statement on two more questions of law which arose on the order of the Tribunal. This court accordingly directed the Tribunal to make a supplemental statement referring two additional questions to this court. The Tribunal has accordingly submitted a supplemental statement referring the following two additional questions: (1)Whether, on the facts and in the circumstances of the case, the amount of ₹ 10,42,990 received by the assessee, as allotted by Mulraj Kersondas out of the sum of ₹ 45 lakhs received by him from Shri K.D. Jalan represents exclusively the price of the shares or includes therein any consideration for the procuring of the resignation of the present directors, for obtaining the appointment of the directors, of the choice of Shri K.D. Jalan and for the resignation of the present managing agents of the mills. (2)If so, what in view thereof should be taken as the sale price of each of the ordinary shares and ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of being drawn from the circumstances that there had been no sale effected by the assessee during the years subsequent to 1949, because there was a slump in the price of shares in the market during those years and the Tribunal was also of the view that the circumstance that the assessee added to its holding during those years also did not indicate that it was regarding these shares as investment shares, because even dealers in shares would like to retain and consolidate their holding in a sagging market with a view to be able to release their holding when a favourable opportunity arises. Having regard, therefore, to the circumstances that the assessee was a private limited company which was authorised by its memorandum to deal in shares, and in fact had dealt in shares almost from its inception, and that it had dealt in the shares of the Elphinstone Mills and had taken the profit and loss from the transactions in the said shares to the revenue account, the Tribunal was of the view that the profit of ₹ 2,34,231 made by the assessee-company in the year 1953 was a revenue receipt and not a capital gain. According to the Tribunal, the circumstance that the assessee-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a part of the stock-in-trade of the assessee. Now the argument of the learned counsel that the assessee was an investor in the shares of the Elphinstone Mills right from the inception cannot bear any scrutiny. The assessee was admittedly a dealer in shares. It had dealt in shares, including the shares of the Elphinstone Mills during its business for the years 1942-1948 without any manner of doubt. It had taken its profits and losses in the entire share business carried on by it, including the business in the Elphinstone Mills' share to the revenue account. No distinction has been made by the assessee at any time in its books of account with regard to the shares of the Elphinstone Mills. There can be no manner of doubt therefore that till the year 1948, at any rate, the assessee was a dealer in the shares of the Elphinstone Mills. Mr. Palkhivala has pointed out that although undoubtedly there have been transactions both of purchase and sale in the shares of the Elphinstone Mills by the assessee during this period, the volume of purchases is comparatively larger than the volume of sales and at the end of the year 1948, the assessee was possessed of as many as 5,137 ordinary s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other shares by the assessee. Having regard to these circumstances, namely, the dealings both in purchases and sales of the shares of the mills and the conduct of the assessee in treating the profits and losses as business profits, we cannot agree with Mr. Palkhivala that the assessee was an investor right from the beginning or that its attitude in purchasing the shares of the Elphinstone Mills was in any way different from its attitude in purchasing other shares which were its stock-in-trade. Mr. Palkhivala's alternative argument is that at any rate after 1948 the holding in the shares of the Elphinstone Mills was regarded by the assessee not as its stock-in-trade but as investment. Mr. Palkhivala has argued that the circumstance that the assessee has been a dealer in shares for some years does not preclude it from being an investor in shares in subsequent years and he has for that purpose invited our attention to the decisions in Ladhu Ram Taparia v. Commissioner of Income-tax [1962] 44 ITR 521 (SC) and New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax [1963] 49 ITR (SC) 13. Now it is true that a person who has been a dealer in shares in some years could be an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Commissioner, then on the principle of the decisions in Kishan Prasad Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 49 (SC) and the unreported decision of this court in Income-tax Reference No. 41 of 1952 decided on the 11th of March, 1953, the holding of the assessee in the shares of the Elphinstone Mills would be on capital account. Now, it is true that the Income-tax Officer has made an observation in his order that the main idea of the assessee-company in purchasing the shares of the Elphinstone Mills was probably to support the managing agents in the general meetings of the shareholders of the Elphinstone Spinning Weaving Mills Ltd., Bombay. He has further held on consideration of all the circumstances that the motive of the assessee in dealing in the shares of the Elphinstone Mills was to make a profit in the business as a dealer in shares. It may be pointed out that it was not the case of the assessee before the Income-tax Officer that it had made purchases of the shares of the Elphinstone Mills with a view to give support to the managing agents in the general meetings of the shareholders. The case before the Income-tax Officer was that it had all along been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner could be regarded as a finding of fact arrived at by him, the said finding was clearly vitiated because it was based on facts which were contrary to the record. The finding of the Appellate Assistant Commissioner that the sale was motivated by the illness of Mulraj Kersondas was equally erroneous, because as pointed out by the Income-tax Tribunal, Mulraj Kersondas was not suffering from any illness and was actively engaged in business not only at the material time but even prior and subsequent thereto. It will, therefore, be seen that the observation of the Income-tax Officer was not in the nature of a finding of fact arrived at by him and the treatment of the said observation as a finding of fact by the Appellate Assistant Commissioner was influenced by his having completely misunderstood certain important facts on record. When the matter went before the Tribunal, the Tribunal considered all the circumstances of the case and came to the conclusion that the assessee's dealing in the shares of the Elphinstone Mills was nothing different from its other dealings as a dealer in shares. It is no doubt true that the Appellate Tribunal in its order has not specifically de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d having regard to all the circumstances of the case the contention of Mr. Palkhivala that the assessee had acquired its holding in the Elphinstone Mills' shares with a view to support the managing agency is not supported by any material on record. That being so, we cannot agree with Mr. Palkhivala that the Appellate Tribunal has overlooked a vital aspect of the case or has ignored any important material on record which was in favour of the assessee. Since the contention urged by Mr. Palkhivala cannot be accepted, the decisions in Kishan Prasad Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 49 (SC) and in Reference No. 41 of 1952, relied on by him, cannot help him. It may also be pointed out that in both these cases, the acquisition of the shares was by persons who were the managing agents or who wanted to acquire the managing agency. Those were not the cases of persons other than the managing agents who merely wanted to give support to the managing agents by the voting rights held by them by virtue of their shares. Mr. Joshi has argued that in view of this distinction the decision in the said cases will have no application to the present case even if we were to hold ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging agents, M/s. Chidambaram Mulraj Co. Ltd., who had relinquished the managing agency according to the directions of Mulraj Kersondas. Deducting this amount of ₹ 10 lakhs from the total consideration of ₹ 45 lakhs the remaining ₹ 35 lakhs was the consideration of the remaining three items, namely, the price of the shares, the resignation of the present directors and the appointment of new directors of the choice of K.D. Jalan. The latter two items, according to the assessee, may be regarded as controlling rights in the Elphinstone Mills. The assessee's contention therefore is that the amount of ₹ 35 lakhs which was distributed by Mulraj Kersondas between 25,000 ordinary shares and 10,000 preference shares was the amount which he had paid to the holders of the said shares not only for the price of the shares but also for the controlling interest which had been parted with by them in favour of the purchasers of the shares. The assessee points out that at the material time when this transaction was gone through, the market price for the shares of the Elphinstone Mills was ₹ 37 for an ordinary share and ₹ 88 for a preference share. On a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of ₹ 10 lakhs to the relinquishment of the managing agents and paid over that amount to the managing agents by way of compensation for loss of their office. The other two items, namely, the resignation of the present directors and the appointment of the new directors of the choice of K.D. Jalan were also valuable from the point of view of K.D. Jalan and those two advantages must also have influenced Jalan in agreeing to the price demanded by Mulraj. Mulraj Kersondas however in distributing the amount received by him did not set apart any amount for the said two items and he proceeded to distribute the entire amount of ₹ 35 lakhs amongst the ordinary and preference shares. Mr. Palkhivala's argument is that since no amount was set apart as was done in the case of managing agency but the same was included and distributed in the payment made for the ordinary and preference shares, in the price paid for every ordinary and every preference share there was involved a part which was attributable as a consideration for these two items. According to him, although Mulraj himself had set apart a sum of ₹ 10 lakhs as compensation for the loss of the managing agents, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on behalf of the entire group of Mulraj Kersondas, including the present assessee. What was being offered by Mulraj Kersondas to K.D. Jalan was on behalf of the entire group and therefore also on behalf of the assessee. The group had a built-in power which it was proposing to transfer to K.D. Jalan under the scheme proposed by Mulraj Kersondas who was the representative of the group. According to Mr. Palkhivala, therefore, it would not be correct to say that the assessee-company was not parting with anything more than a block of its shares in the present deal. Now the theory that Mulraj Kersondas and his associate concerns had formed a group and that the transaction with K.D. Jalan was not a transaction of Mulraj Kersondas himself but a transaction of the entire group does not appear to be borne out by the record. The associate concerns in Mulraj group were dummies of Mulraj and entirely controlled by Mulraj. They had merely to do what was dictated to them by Mulraj. As we see from the letter which Mulraj wrote to K.D. Jalan, the offer made in the said letter was by Mulraj and was on his own behalf. His letter to the managing agents was a direction given by him to them to do c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able rights, excepting the price of the shares sold by it. In the result, therefore, our answer to the questions referred to us by the Tribunal arising for determination in the present reference are as follows: With regard to the first question our answer is in the affirmative and with regard to the second question we hold that the entire amount received is for the price of the shares. In view of our answer to the second question, the third question does not survive and, therefore, need not be answered. The assessee will pay the costs of the department. Mr. Palkhivala has handed over to us during the course of the argument the grounds of appeal filed by the department before the Tribunal and a copy of the application made by the assessee for reference under section 66(1). He has requested that we should take these documents on record. The reason urged by Mr. Palkhivala in support of this request is that in the statement made by the Tribunal in paragraph 18 of the statement drawn by it, the Tribunal has stated thus: The only objection of the assessee to the statement of the case is that the Income-tax Officer having held that the shares were acquired probably to suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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