9911796707
TMI Blog1980 (9) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Mrs. Ghosh, who was also technically qualified, assisted her husband in this regard. The company over the years had made considerable progress in the technical field. The previous year under consideration was the financial year ended on March 31, 1961, so far as the assessment year 1961-62 was concerned. In this period both Dr. and Mrs. Ghosh effected sales of certain shares. According to them, the surplus which arose was assessable only as capital gains and they showed such surplus as income from capital gains. In the case of Dr. Ghosh, the ITO accepted that the surplus arising out of the sale of 1,145 equity shares, acquired prior to 1944, and 14,000 deferred shares, acquired prior to 1946, represented capital gains. There were also sales by Dr. Ghosh of 20,000 equity shares which it is stated in the assessment order were acquired in September, 1960, and sold a few days thereafter. The surplus from such sales was assessed as business income. In the case of Mrs. Ghosh, the ITO accepted that the surplus arising out of the sale of 6,000 ordinary shares and 19,000 deferred shares which represented holdings for over 20 years would be assessable only as capital gains. There we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had then started (from May 28, 1960) negotiation with Dr. Vikram Sarabhai of the Sarabhai group. At this stage, the appellate order mentions two factors which co-existed, i.e., (a) the company wanted fresh capital for installation of the penicillin plant, and (b) the party who was to purchase the shares wanted a controlling interest in the company. Dr. and Mrs. Ghosh had between them only 17.2% of the voting power and the purchasers did not want to buy the small minority holding. To enable the company to get fresh capital and at the same time to pass a controlling interest to the purchasers the method followed was to issue fresh capital and offer it to the existing shareholders. Most of the shareholders did not accept the offer and Dr. and Mrs. Ghosh were able to buy the bulk of the shares. Out of a total of 62,250 equity shares offered to the existing shareholders, Dr. Ghosh bought 20,000 shares and Mrs. Ghosh bought 29,600 shares. Applications for the new shares were made on two occasions and the amount of the application money was paid on August 19,1960, and September 9, 1960. Allotment of shares was made on September 14, 1960. Allotment money was paid on September 16, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) That the appellant (Mrs. Ghosh) as managing director owned substantial shares in the company since last 20 years or more. (6) In the normal course of human conduct a person having decided to get rid of a particular thing as unsuited to his/her purpose would not at the same time make special efforts and acquire more of that thing. (7) Originally the negotiations of sale was going on for old holdings and when the negotiation reached a concluding stage, the outcome being decent margin of profit that through the power and influence as a result of holding important positions in the company the appellants got allotted further shares in their names within an unusually short time and ultimately the fresh shares acquired were also included in the deal, viz., sale of shares." It was stressed on behalf of the assessees that the new shares were not purchased with the object of carrying out any adventure in the nature of trade, but with the sole object of divesting themselves of their whole interest in the company which was their creation and to ensure that the company may survive and develop in future in competent hands. It was also stated that the price paid by the purchasers w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Messrs. Gidwani and Taneja on the other, where the letter of August 9, 1960, (item (vii) above) was considered. (ix) Letter dated August 31, 1960, from Dr. Ghosh to Dr. Sarabhai regarding certain conditions of Dr. Ghosh continuing as technical adviser which could be incorporated in the agreement of sale. The letter also mentioned the proposed board meeting of the company to be called on September 14, 1960. (x) Letter of September 6, 1960, from Dr. Sarabhai to Dr. Ghosh regarding the appointment of new directors, etc. (xi) Letter of July 31, 1968, (this is subsequent to the assessment) from Karamchand Premchand (P.) Ltd. to Mrs. Ghosh confirming that the price paid was not only for the price of shares but also for acquiring the controlling interest of the company. On behalf of the department, it was submitted that negotiations by the assessees with the Sarabhai Group for the sale of shares were started on May 28, 1960, and when the offer was made by the assessee on June 18, 1960, to sell shares worth Rs. 6 lakhs, the new shares were not even in existence. It was stressed that it was only on June 22, 1960, that the directors of the company had passed the necessary resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvances in technology the company required large funds if the company was to make any progress. Dr. Ghosh did not have the finances. Some method had to be found whereby Dr. and Mrs. Ghosh, who wanted to dispose of their existing shares, could do so. Factually, though Dr. and Mrs. Ghosh, because of their long and intimate association with the company, had effective control over the affairs of the company, i.e., a de facto control, they had only a minority interest. They approached the Sarabhais, who had the money, for selling the shares. Though the Sarabhais were willing to pay a larger amount than the face value of the shares, because Dr. Sarabhai knew the intrinsic worth of the company and its business, they wanted to ensure that the de facto control which had hitherto been exercised by the assessee because of the personal relation they had with the other shareholders of the company, would be transferred to them in the only manner which was effective, i.e., by giving them (M/s. Karamchand Premchand (P.) Ltd. of the Sarabhai group) the de jure controlling interest in the company. The new shares were acquired and parted with by the assessees, it was stated, only to fulfil the requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement with the Sarabhai group which was legally enforceable. Referring to the decision in the case of G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC) and the submission of the department, that if the purchase was made with the intention to resell there would be a presumption of an adventure in the nature of trade, reference was invited in particular to the observation of the court at p. 610 : " Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. We thus come back to the same position, and that is, that the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchasers but looking to the transaction as a whole, this, it was submitted, could not impress the transaction with the stamp of an adventure in the nature of trade. It was finally urged that the order of the AAC should be upheld. The Tribunal found that the authorised capital had not been increased by 31st March, 1960, but stood increased by 31st March, 1961, to Rs. 50 lakhs. Thus, even before the negotiations between Dr. Ghosh and Dr. Sarabhai started on May 28, 1960, the Tribunal held that the board of directors had considered it necessary to raise the authorised capital of the company as well as to issue new shares. The Tribunal thus found that the need for additional funds was felt by the company even before the start of any negotiations between Dr. Ghosh and Dr. Sarabhai. According to the Tribunal, a reading of the letter dated 18th June, 1960, in the background of the directors' resolution of the 19th February, 1960, showed the intention of Dr. Ghosh to secure financial collaboration for the company and to pass on to the Sarabhais the controlling interest in the company. The Tribunal held that from the letter it was clear that it was made known to the Sarabhais that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho offered to subscribe to the shares, in the view of the Tribunal, was clearly indicative of sufficient time having been allowed to all the shareholders to subscribe if they desired to do so to the new issue. The Tribunal held that there was no evidence to suggest that the issue of shares was arranged or rushed through in any manner to help the assessees to corner any shares of the new issue. When the offers from existing shareholders were found inadequate, the assessees applied for, and obtained, additional shares. In the background of the facts stated above, the Tribunal did not agree with the department that in offering to give shares worth Rs. 6 lakhs at a time when the assessees did not possess such shares they were taking any speculative plunge. The assessees, the Tribunal observed, were associated with the company for a number of years and it was reasonable to assume that they would have known the difficulties in securing additional funds, which made them come to the conclusion that the existing shareholders would not be interested or would not have the resources to subscribe fully or even adequately to the new offer. The letter of June 18, 1960, and August 31, 1960, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e requisite financial collaboration was found. The Sarabhais, however, insisted on acquiring a controlling interest. Without acquiring such controlling interest they had no intention to put in their funds. It would, therefore, have been impossible for the Ghoshes to sell to Sarabhais their existing shares unless they could pass on to the Sarabhais a controlling interest in the company. From the fact that even when new shares were offered the response from existing shareholders was poor, it was evident that the assessees could not have found ready purchasers for their own existing shares from persons other than the Sarabhais. The assessees applied for new shares and parted with them so as to secure and transfer to the Sarabhais as desired by them, the controlling interest in the company. The assessees had further kept the company fully informed of the negotiations and the terms on which the Sarabhais had agreed to come in. The dominant object in acquiring and parting with the new shares in the circumstances as set out could not be attributed to making a personal gain though sizeable surplus did accrue to the assessees as a result of the transactions. For, Dr. and Mrs. Ghosh requesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it one which is an adventure in the nature of trade. Such was also the observation of their Lordships in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) at p. 26. We have already found, as fact, that the making of a personal gain was not the dominant objective in the assessees' entering into the transaction and, therefore, the fact that as a result of the transactions a sizeable surplus did result to the assessees does not make the transaction an adventure in the nature of trade. 50. The assessee had never purchased and sold shares earlier and the purchase and sale of the present shares were certainly not allied to any business carried on by the assessees whose only association with the business world in the past was working for the company which they had nurtured. There was a specific reason for their being desirous to part with their existing shareholdings. This was because they were growing old and they wanted to retire. There is no evidence to indicate that they acted in any way against fulfilling their object. The transaction was not an adventure in the nature of trade. 51. Even if the acquiring and passing on of controlling interest is considered in isolation, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mrs. Ghosh 40,000 1,24,000 84,000 The surplus, as indicated above, was shown by each assessee in the return of income as capital gains. 47. The stand of the assessees in returning the surplus as capital gains was that they only wanted a fixed income and they were not interested in fluctuating dividends and hence when the debentures which yielded a fixed income was converted into shares they sold their shares in conformity with their desire to have a fixed income rather than fluctuating income in the form of dividends. 48. The Income-tax Officer was of the view that the past conduct of the assessee was relevant and considering that, in respect of the assessment year 1961-62, he had held the surplus from transactions in shares to be profits from an adventure in the nature of trade, concluded that the intention of the assessees was to make a profit. In his view, as the debentures were purchased after the completion of earlier negotiations which culminated in the transactions in shares considered in the assessment year 1961-62, the assessees were fully aware of the potentialities and could foresee the market value that could be obtained for the equity shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such we are not covering the ground again. The debentures, as floated by the company, were to the extent of Rs. 15 lakhs. The assessees had subscribed only to a small portion thereof. While the assessees held the debentures they were entitled to a fixed return on the investment. The option to convert the debentures into shares had to be exercised within particular period. The assessees, therefore, were compelled to act within the period if they wanted to exercise the option failing which they would have forfeited the right. They decided to exercise the option and thereby secured equity shares. From the figures of the balance-sheet of the company as on 31-3-1964, as given in the assessment orders, it would appear that the option of conversion was exercised by almost all the debenture holders, the debentures having been converted to the extent of almost Rs. 14.99 lakhs. The assessees, therefore, apparently did nothing unusual in exercising the option. As the equity shares did not give them a fixed return they sold the same shortly thereafter and received funds which enabled them to invest a larger capital for securing a fixed return. In our view, the transactions entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the relevant portions as stated in pp. 601 and 602 of the report: " There is no doubt that the jurisdiction conferred on the High Court by section 66(1) is limited to entertaining references involving questions of law. If the point raised on reference relates to the construction of a document of title or to the interpretation of the relevant provisions of the statute, it is a pure question of law; and, in dealing with it, though the High Court may have due regard for the view taken by the Tribunal, its decision would not be fettered by the said view. It is free to adopt such construction of the document or the statute as appears to it reasonable. In some cases, the point sought to be raised on reference may turn out to be a pure question of fact; and if that be so, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the revenue can contend that the inference has been drawn on considering inadm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue on the ground of perversity. That being so, our task has been easier and we are required to see whether the Tribunal has applied the relevant legal principles correctly or not and in doing so has arrived at a correct decision. Mr. Pal argued that it would appear that Dr. Ghosh and Mrs. Ghosh started negotiations with the Sarabhai group to sell shares worth Rs. 6,00,000 at a time when the shares were not even in existence. It would be amply clear, according to Mr. Pal, that they had no mind to hold the shares for themselves or otherwise enjoy them but those were acquired solely and exclusively with the intention to resell at huge profit. Such a dominant intention, according to Mr. Pal, is not offset by other considerations. In support of his argument, he relies on the lines quoted below from the decision in G. Venkataswami Naidu Company v. CIT [1959] 35 ITR 594 (SC), at p. 610: " Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible at a profit. They hoped to sell the plant in one lot, but ultimately had to dispose of it in five separate lots over the period from November, 1946, to February, 1948. Assessments to income-tax in respect of profits arising from this transaction were made under Case of Schedule D for the years 1946-47 and 1947-48. On appeal, the General Commissioners found that it was an isolated case and not taxable, and discharged the assessments. The case was remitted by the Chancery Division to the Commissioner to hear legal arguments and answer the question whether the transaction was an adventure in the nature of trade. They decided, on further consideration, that the transaction was not an adventure in the nature of trade. Lord Radcliffe, in his judgment, at p. 229 of the report, observed as follows : " Here are two gentlemen who put their money, or the money of one of them, into buying a lot of machinery. They have no intention of using it as machinery, so they do not buy it to hold as an income-producing asset. They do not buy it to consume or for the pleasure of enjoyment. On the contrary, they have no intention of holding their purchase at all. They are planning to sell the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re he entered into any contract to buy it. In the above findings, it was found that the purchase and sale were adventure in the nature of trade. Next, Mr. Pal makes a reference to the case of Eames v. Stepmell Properties Ltd. [1966] 43 TC 678 (CA). In this case, the respondent company, Stepmell Properties Ltd., was assessed in respect of an order for 1961-62, tinder Case I of Schedule D of the I.T. Act, 1952 (U.K.), to tax on a sum of J47,900, the profit which the respondent-company had made on sale of some fifty acres of land which the company had acquired immediately after the incorporation or within two days, on July 10, 1959, for @2,100. It was assessed upon the footing that the profit in question was properly to be regarded as the profit of a trading transaction. The respondent-company appealed against the assessment to the Special Commissioners and upon that appeal they were successful. The Crown came in further appeal. Mr. Pal refers to the judgment of Buckley J., at p. 692 of the report. It is observed by his Lordship that the land in question was the land in respect of which B. W. Ltd. were already in negotiation, purporting to act on the respondent-company's behalf, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hargeable to income-tax. It was held that the purchase with the intention of immediate resale constituted an adventure in the nature of trade. It may be noticed that in all these cases, referred to by Mr. Pal, there was absolutely no other consideration other than the motive for profit. In conclusion, Mr. Pal argues that having regard to the motive for sale for a huge profit and with special reference to the fact that the assessee made a profitable bargain, it would not be proper and just to hold that it is a case of capital accretion, but is a profit derived from an adventure in the nature of trade. 0 Mr. Bhattacharya, in reply, points out that even the motive for profit cannot be the sole criterion for finding whether the transaction was in the nature of an adventure in the nature of trade. With reference to the decision of the Supreme Court in the case of CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65, and specially with reference to p. 73 of the report, he argues that profit motive in entering into a transaction is also not decisive. In the case of Janki Rain Bahadur Rain v. CIT [1965] 57 ITR 21 (SC), it is held by the Supreme Court that the fact that the appellant made a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey could pass on to the Sarabhais the controlling interest of the company. In this context, the assessee floated new shares and bought them so as to secure (sic) an approval of Sarabhais, as desired by them, the controlling interest in the company. It was also found that it was not a part of the assessee's ordinary business to make investment in shares. It was apparent, therefore, that there might be profit motive but it was not a sole or dominant motive. These facts may now be applied to the test laid down by the Supreme Court in the case of G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594. The assessees were not traders in the purchase of the shares and their resale and these were not a part of their usual trade and business or incidental to it. The transactions of purchase and sale were not repeated. The purchase of shares was not made with the sole intention to resell on profit. It was held by the Supreme Court in this very case that even in the application of this test a distinction will have to be made between initial intention to resell on a profit which is present but not a dominant or sole intention. The presence of such an intention is no doubt a relevant factor and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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