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TMI Blog1986 (5) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... llows: " Whether, on the facts and in the circumstances of the case, the assessee was a dealer in shares in the accounting periods relevant to the assessment years 1959-60 and 1960-61 ? " The said question was referred by the Tribunal to the High Court at the instance of the assessee. The assessee, H. Holck Larsen, was a partner in the firm of M/s. Larsen & Toubro (hereinafter referred to as the " said company ") up to 1946. On February 8, 1946/February 7, 1946, that partnership was converted into a private limited company of the same name. In consideration of his interest in the firm, the assessee was allotted shares of the company. Against payment of cash, the assessee got 1,875 equity shares and against his interest in the partnership firm, he got 53,486 equity shares. During the next few accounting years up to the financial year 1953-54, the assessee acquired 2,994 shares of the said company and sold 1,550 shares. According to the statement of the case, the purchases and sales of shares of the said company were few and far between up to the financial year 1953-54, but these became larger in number and at close intervals in the next few succeeding years. The chart would indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the shares that were acquired by the assessee were only right shares issued by the company to its existing shareholders (3) that the assessee had to meet huge personal expenses and tax liability in the relevant accounting periods; (4) that the assessee had an overdraft account and he wanted to keep the said overdraft account within reasonable limits; (5) that the assessee wanted to nurse his investments in the company; and (6) that the assessee had to and was forced and compelled by circumstances to sell some of the shares acquired by him. In the premises, the assessee's contention was that the sales of the said shares were effected neither voluntarily nor with a view to make any profit nor under a profit-making scheme, but were effected under compelling circumstances and as no assessee could be a trader by compulsion, the assessee was not a trader in respect of these shares. The Tribunal rejected the said contentions. The Tribunal held: (1) The assessee was the chairman of the board of directors of the said company. (2) The said company had ever since its inception expanding its business and making good profits. (3) Its capital had increased and, therefore, right shares were of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat compelled him to acquire right shares frequently and in large numbers notwithstanding the fact that he was indebted to the bank and he was having an overdraft account with it. The facts that the assessee did not sell all the right shares or that the founder of the company was interested in acquiring right shares or that he did not take all the right shares offered to him because of his financial liability, according to the Tribunal, would not affect the issue. The Tribunal, therefore, came to the conclusion that the assessee was doing business in shares in the assessment years under consideration. Two members, namely, the judicial Member as well as the Accountant Member, gave separate but concurrent opinions for coming to the conclusion that the assessee was a dealer in shares. In his separate order, the Accountant Member had observed that in the assessment years 1956-57 to 1960-61 both inclusive, the acquisition of the shares was large and so also the sale of shares and in the first three accounting years, the shares sold were much more than the shares acquired by right. The right shares acquired in those three years were 6,111, 6,102 and 1,256 whereas the assessee had sold f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions arise, which the courts have to deal with in these types of transactions. The first question is whether the finding of the Tribunal or the fact-finding body is based on evidence from which the conclusions arrived at by the said fact-finding body can be said to be either reasonable or possible. Therefore, in the context of the controversy in the instant case, it is necessary to examine what were the facts found by the Tribunal and whether all the facts have been fully considered by the Tribunal for the conclusions drawn. If the conclusions drawn by the Tribunal are pure inferences of facts, then no question of law arises and no occasion is caused for interference. If, however, the conclusion arrived at by the fact-finding body is such that no reasonable man could possibly have arrived at, then the conclusion arrived at by the Tribunal would be without evidence and perverse in law. there is material to support the conclusion, the fact that another body or the court might have arrived at a different conclusion is not relevant. The second question is what are the legal principles applicable to the facts of these types of cases to determine whether the conduct was that of a deale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the lands to the managed company whenever it thought it profitable to do so; that the assessee had purchased the four plots of land with the sole intention of selling them to the mills at a profit which intention raised a strong presumption in favour of the view taken by the Tribunal. This court reiterated that the jurisdiction conferred on the High Court under section 66(1) of the Act of 1922 (hereinafter called " the old Act "), i.e., section 256 of the Act of 1961 (hereinafter called " the new Act "), was limited to entertaining references involving questions of law. It was emphasised that if the point raised on a reference related 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 might have due regard for the view taken by the Appellate Tribunal, its decision would not be fettered by the Tribunal's view. It was free to adopt such construction of the document or the statute as appeared to it to be reasonable. Where the point sought to be raised on a reference was a pure question of fact, the finding of fact recorded by the Tribunal must be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion considered whether a simple test could be evolved that would separate taxable cases from non-taxable ones. The Royal Commission noted that one was that profit arising from any realisation of property should be declared by law to be taxable income if the property had been acquired with a view to profit-seeking. This seems to have been the kind of test envisaged by the 1920 Commission where they spoke of " any profit made on a transaction recognisable as business transaction, i.e., a transaction in which the subject-matter was acquired with a view to profit-seeking ". The difficulty the Royal Commission felt about applying that test was that, in any normal sense of the words, a " view of profit-seeking " might accompany many transactions that would not be called business transactions. Since few investors, it was noted, could expect that their investments would remain exactly stable in value in their hands, they are bound to contemplate the probabilities of rise or fall and it is hardly to be expected that they will not choose one in which they hope or expect a rise. The Royal Commission noted that Lord Buckmaster in Leeming v.Jones [1930] 15 TC 333, 355 (HL), had observed that " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is some evidence of dealing. For, when there is an organised effort to obtain profit, there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way. (5) The circumstances that were responsible for the realisation. There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase. (6) Motive. There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller's intentions and even, if necessary, in the face of his own evidence. " In Oriental Investment Co. Ltd. v. CIT [1957] 32 ITR 664, this court had occasion to deal with the question of how far the finding in respect of dealing in shares was a question of fact or a question of law or a mixed question of fact and law. This court observed that what were the characteristics of the business of dealing in shares or that of an investor was mixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not open to this court to question that finding unless there is no evidence to support it. If, however, the Commissioners state the evidence which was before them and add that upon such evidence they hold that certain results follow, I think it is open, and was intended by the Commissioners that it should be open, to the court to say whether the evidence justified what the Commissioners held. In Californian Copper Syndicate v. Harris (Surveyor of Taxes) [1904] 5 TC 159 at 166 (C. of Exch.), Lord justice Clerk observed that the test was whether the sum of gain that has been made was a mere enhancement of value by realising a security, or was it a gain made in an operation of business in carrying out a scheme for profit-making. In IRC v. Lysaght [1928] AC 234; 13 TC 511 (HL), Lord Buckmaster observed that the distinction between questions of fact and questions of law is difficult to define, but if the circumstances found by the Commissioners in the special case were incapable of reaching the conclusion reached by them, then the conclusion could not be protected by saying that it was a conclusion of fact since there were no materials upon which that conclusion could depend. But if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961] 41 ITR 534 (SC), this court observed that in considering whether a transaction was or was not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee having regard to the legal requirements which were associated with the concept of trade or business. The inference on this question raised by the Tribunal on the facts found was of mixed law and fact and was open to challenge before the High Court on a reference. The question whether the assessee's transactions amounted to dealing in shares and properties or to investment, was a mixed question of law and fact, and the legal effect of the facts found by the Tribunal on which the assessee could be treated as a dealer or an investor, was a question of law. In the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), this court observed that the profit motive in entering into a transaction was not decisive, for an accretion to capital did not become taxable income merely because an asset was acquired in the expectation that it might be sold at a profit. This court further observed that if a transaction was related to the business which was normally carried on by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years that the transactions were in the nature of change of investment was not binding in the proceedings for assessment during the subsequent years. In P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC), this court reiterated that it was not possible to evolve any single legal test or formula which could be applied in determining whether a transaction was an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. In Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC), the question of adventure in the nature of trade was again considered by this court and it was reiterated that since the expression " adventure in the nature of trade " implied the existence of certain element in the transactions which in law would invest these with the character of trade or business and the question on that account became a mixed question of law and fact, the court could review the Tribunal's findings if it had misdirected itself in law. It was fairly clear that where a person in sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g shares on a large scale. Therefore, according to the Revenue, this indicated dealings in shares. It may be noted that as such there was basis for choosing that. The Tribunal, however, after consideration of all these facts, came to the conclusion that the assessee was a dealer in shares. The judgment of the High Court under appeal which incidentally is H. Holck Larsen v. CIT [1972] 85 ITR 285 (Bom), held that the decision in the earlier years that the assessee was an investor was not binding for subsequent years, that the assessee was always an investor. The High Court further observed that the frequency of transactions was not decisive. According to the High Court, it was necessary to appreciate the implications of the issuance of right shares and purchase thereof by the assessee. Right shares were issued by virtue of the provisions of section 81 of the Companies Act. It is not necessary to set out the provisions dealing with the issue of right shares. The issuance of the right shares depreciates the value of the original shares initially. In the impugned judgment, it was held that whether the transactions of sale and purchase of shares were trading transactions or in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market price of the existing ones, the price per share of the enlarged issue will normally be below the price of the old shares before the issue, and the price of the old shares will, therefore, tend to fall; but shareholders will recover this loss either by taking up the new shares themselves or by selling their rights. If they neglect to do either, they will suffer a loss of value on their existing shares without compensation, unless the company, as is now normally the case, sells their rights on their behalf and pays over the proceeds to them. Whatever happens, either the shareholders will take up the shares themselves or they or the company will sell their rights to someone else who will do so. The success of the issue can, therefore, be assured, provided that it is not too large in relation to the capital already issued." As noted above, section 81 of the Companies Act, 1956, so far as relevant for the present purpose provides that if a company proposes to increase its subscribed capital by allotment of further shares, such shares should be offered to the existing shareholders of equity shares and the offer should be deemed to include a right to renounce the shares. The righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with a view to keep the overdraft within reasonable limits and with the prime object of nursing his investments in the company, the assessee had to and was forced and compelled by circumstances to sell some of the shares and the Tribunal has also noted that the assessee would not be a trader by compulsion. The Tribunal had considered these arguments. The Tribunal also noted that the assessee was the chairman of the board of directors. The Tribunal also noted that ever since it inception, the company was expanding its business and making good profits. Its capital had increased and, therefore, right shares were offered to the existing shareholders. The assessee had a substantial holding of equity shares in the company. It was, therefore, according to the Tribunal, not obligatory on the assessee to acquire right shares. The Tribunal considered the acquisition of right shares in the background of the indebtedness of the assessee to the bank and he was having an overdraft account on which he was paying interest. The Tribunal noted the frequency of the acquisition of the right shares and the sales in large numbers in quick succession and, according to the Tribunal, the motive was to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was likely to result which in fact resulted to the assessee by paying interest on the borrowed fund. But the relevant facts must be considered in its proper perspective. It appears that the facts, that the assessee was the chairman of the company and the effect of the issue of right shares vis-a-vis original shares, had not been fully kept in proper perspective by the Tribunal in its evaluation. It further appears that the fact that the assessee was the chairman of the company and in fact that if he did not participate in buying right shares, that would have an adverse effect on the value of the shares of the company, was also not kept in view by the Tribunal. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done, it cannot be said that there has been consideration of all relevant factors. The Tribunal, it appears, fell into an error in not taking into consideration properly and fully, though it noted the fact that if the right shares were not subscribed for by the assessee, his original shares would depreciate in value, but the assessee was also in need of money-he had an overdraft with bank and he had to remit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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