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TMI Blog1980 (4) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ctric motors, diesel oil engines, etc., and all its shares were held by one Shri D. D. Desai and his wife, Smt. S. D. Desai, who were the only two directors of the company. The assessee-company was managed by a firm called Dharamsey Co., which is also managing another company called Hindustan Electric Co. Ltd., which is referred to as " Electric Co. " in the statement of the case as well as in this reference. The Electric Co. was established in 1949 in order to take over the proprietary business of D. D. Desai. With effect from 6th March, 1960, the Electric Co. was converted into a public company with a capital of Rs. 40,00,000. The Electric Company entered into a collaboration agreement with a Swiss Co. and the capital of the Electric Company was increased to Rs. 1,20,00,000, out of which the Swiss Company held just over 50% so that the Electric Company became a subsidiary company of the Swiss Company. The assessee-company purchased 1,015 shares of the Electric Company in 1956 for a sum of Rs. 101,500. After about five years the assesseecompany acquired an additional 3,150 shares in the Electric Company from four other shareholders, who held different number of shares. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right shares was motivated by profit and the amount received was business income. The AAC confirmed this order of the ITO when he held that the assessee's activities in regard to the shares in the relevant accounting year had to be taken to be in the nature of trade and the profits arising therefrom had to be assessed as income from business. In the assessment for the assessment year 1964-65, the surplus of Rs. 38175 which the assessee had earned on sale of 2,500 shares was also claimed as capital gains, but the ITO held that the said transaction was an adventure in the nature of trade. The AAC also confirmed the order of the ITO. Two appeals in respect of the two separate years were disposed of by the Tribunal by a common order. The Tribunal took the view that the assessee was right in contending that in both the years the amount assessed as business profit should be treated only as capital gains. The Tribunal held that the right to subscribe to the right shares was capital and profit arising from the disposal of such right could not be regarded as revenue gain unless the shares formed the stock-in-trade or that the rights are disposed of in the course of a transaction whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits. These circumstances, according to the learned counsel for the revenue, clearly showed that the activity of the assessee-company in the sale of shares really amounted to an adventure in the nature of trade and that the profit from this activity was liable to be treated as business income. Now, each one of the circumstances, which have been reproduced above, would really indicate that, according to the revenue, the shares were originally purchased by the assessee only with a view to make a profit. The question then is whether if investment is made in shares with the intention of making a profit, that by itself would convert the activity into an adventure in the nature of trade. In the present case, we are concerned with really two sums, one received by the transfer of the right to subscribe to right shares and the other profit earned by the sale of 2,500 shares. The assessee-company had only purchased 772 right shares out of 2,082 right shares, to which it was entitled to subscribe. Now, if the assessee-company was merely interested in making a profit, there is no reason why it could not have sold its right to purchase the entire complement of 2,082 shares. As it is we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... often applied is, has the assessee made his shares and securities the stock-in-trade of business." In CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706, the Supreme Court quoted with approval the observations of Lord justice Clerk in Californian Copper Syndicate v. Harris [1904] 5 TC 159, which, as pointed out by the Supreme Court, have become classical (p. 710): "' It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit ...... assessable to income tax. But, it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business ...... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts the question to be determined being: Is the sum of gain that has been made a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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