Companies Act Case Laws Commissioner of Income Tax Vs H Holcklarsen

Companies Act Case Laws

Commissioner of Income Tax Vs H Holcklarsen

PETITIONER:

COMMISSIONER OF INCOME TAX, BOMBAY

Vs.

RESPONDENT:
H. HOLCK LARSEN

DATE OF JUDGMENT08/05/1986

BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
PATHAK, R.S.

CITATION:
1986 AIR 1695 1986 SCR (2)1072
1986 SCC (3) 364 JT 1986 341
1986 SCALE (1)1340
ACT:
Income, exigibility to tax – Purchase and sale of Right
shares acquired under section 81 of the Companies Act, 1956
Whether the assessee is a “dealer”/”trader” or “investor”
Question of law, fact or both explained – Whether trade or
investment is a question OF law – Whether the intention of
the assessee relevant – Assessee’s intention is to nurse
investments by acquiring and selling shares – Whether could
be treated as “plunging in the waters of trade”.

 

HEADNOTE:
The Respondent-assessee was a partner in the firm of
Larsen and Toubro, upto 1946. On 7th/8th February 1946 that
firm was converted into a private limited under the same
name. In consideration of his interest in the firm, the
assessee was allotted 53,486 Right shares of the company, as
per section 81 of the Companies Act, 1956. During the next
few accounting years upto the financial year 1953-54 during
which the company became a public Ltd. company, the assessee
acquired 2,994 shares of the said company and sold 1550
shares. The purchases and sales of shares of the said
company were few and far between upto the financial year
1953-54 but these became larger in number and at close
intervals in the next few succeeding financial years ending
between 31.3.55 and 31.3.60. During the aforesaid period,
the assessee had acquired 29,969 shares of the said company
and sold 37366 shares thereby making a profit of Rs.
1,65,581. Besides purchasing and selling equity shares of
the said company, the assessee had also dealt in preference
shares of the said company. The assessee had sold shares of
Andhra Cement Co. in the financial year 1954-55, made
purchases of shares of S.C.C. and I.C.C. in the years 1955-
56, 1956-57 and 1958-59 and also of shares of India Cement
Co. and National Carbon in 1955-56 and also sold shares of
Guest Keen Williams and Indian Cement Co. in 1958-59. During
all these years the purchases and sales of equity shares of
the said company were more marked than the purchase and sale
of other shares. Besides the sale of equity shares of the
said company and shares of other companies, the
1073
assessee had also sold some of his original shares of the
said company held by him. For all the accounting years upto
the year ending March 31st, 1958 he was assessed as an
investor The Income Tax Officer on a reconsideration of the
findings in earlier years took the view that the assessee
was an investor only till March 31st, 1954 but that from the
financial year 1954-55 the assessee was a dealer in shares
and therefore, profits made by him during such years are
liable to tax. me first Appeal before the Appellate
Commissioner was rejected. The assessee therefore, filed a
second appeal. In such an appeal before the Tribunal, the
assessee contended that (1) the assessee never purchased
equity shares of the said company from any outsider or any
stranger except in a few cases from close friends or from
members of the staff just to accommodate them; (2) that 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 limit; (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 neither effected
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. Two members namely Judicial Member as well as
Accountant Member gave separate but concurrent opinions and
came to the conclusion that the assessee was a dealer in
shares and not an investor. me 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 asking good profits.
(3) Its capital had increased and, therefore, right shares
were offered to the existing shareholders. (4) The assessee
had a substantial holding of equity shares in the company.
(5) It was not obligatory on the assessee to acquire right
shares. (6) In fact, the assessee was indebted to the bank
and was having an overdraft account on which he was paying
interest. (7) Not only right shares were sold by the
assessee, but he
1074
had also sold some of the original equity shares held by
him. In a reference to the High Court, the High court
answered in favour of the assessee and held that the
assessee was not a dealer in shares. Hence the appeal by
certificate.
Dismissing the appeals and the connected special leave
petitions, the Court
^
HELD: 1. The Jurisdiction conferred on the High Court
under section 66(1) of the Act of 1922 equivalent to section
256 of the Act of 1961 was lid ted to entertaining
references involving questions of law. If the point raised
on 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. The High Court was free
to adopt such construction of the document or the statute as
appeared to it 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 regarded as
conclusive in proceedings under reference. If however, such
a finding of fact was based on an inference drawn from
primary evidentiary facts proved in the case, its
correctness and validity were open to challenge in reference
proceedings within however narrow limits. The assessee or
the revenue could contend that the inference had been drawn
on considering inadmissible evidence or after excluding
admissible and relevant evidence and if the High Court was
satisfied that the inference was the result of improper
admission or exclusion of evidence it would be Justified in
examining the correctness of the conclusion. It may also be
open to the party to challenge a conclusion of fact drawn by
the Tribunal on the ground that it was not supported by any
legal evidence or that the impugned conclusion drawn from
the relevant facts was not rationally possible and if such a
plea was established, the Court might consider whether the
conclusion was not perverse and should not, therefore be set
aside. However, it was within those narrow limits that the
conclusions of fact recorded by the Tribunal could be
challenged in a reference t-o the High Court) Such
conclusions could never be challenged on the ground that
these were based on misappreciation of evidence. A
conclusion
1075
reached by the Tribunal on the ground that it is a
conclusion on a question of mixed law and fact, is no doubt
based upon the primary evidentiary facts but its ultimate
form is determined by the application of relevant legal
principles. The need to apply the relevant legal principles
tends to confer upon the final conclusion its character of a
legal conclusion. In dealing with findings on questions of
mixed law and fact the High Court, however, has to accept
the findings of the Tribunal on the primary questions of
facts; but it is open to the High Court to examine whether
the Tribunal had applied the relevant legal principles
correctly or not; and in that sense, the scope of inquiry
and the context of the Jurisdiction of the High Court in
dealing with such points was the same as in dealing with
pure points of law, and not beyond that. [1085 B-H;
1086 A-C]
1.2 What are the characteristics of the business of
dealing in shares or that of an investor was a mixed
question of fact and law. What is the legal effect of the
facts found by the Tribunal and whether as a result the
assessee could be termed a dealer in shares or an investor
was a question of law. In between the domains occupied
respectively by question of fact and law, there is a larger
area, in which both these questions run into each other,
forming, so to say conclaves within each other. These are
mixed question of law and fact. The instant case is one of
question of law and fact. [1088 F-G; 1089 D-F]
1.3 Where a person in selling his investment realised
an enhanced price, the excess over his purchase price was
not profit assessable to tax as income, but it would be so
if what was done was not a mere realisation of the
investment but an act done for making profit. The
distinction between the two types of transactions is not
always easy to make. Whether the transaction is of one kind
or the other depends on the question whether the excess is
an enhancement of the value by realising a security or a
gain in an operation of profit-making. The assessee might
invest his capital in shares with the intention to resell
these if in future their sale bring in a higher price. Such
an investment though motivated by a possibility of enhanced
value, did not necessarily render the investment a
transaction in the nature of trade. In the premises the
totality of all the facts will have to be borne in mind and
the correct legal principles applied to these. If
1076
all the relevant factors have been taken into consideration
and there has been no misapplication of the principles of
law then the conclusion arrived at by the Tribunal cannot be
interfered with because the inference is a question of law,
if such an inference was a possible one, subject, however,
that all the relevant factors have been duly weighed and
considered by the Tribunal the inference reached by the
Tribunal should not be interfered with. [1093 D-H]
J.P. Harrison (Watford) Ltd. v. Griffitos (H.M.
Inspector of Taxes), 40 Tax Cases 281 at 295-296; Leeming v.
Jones [1930] 15 T.C. 333 at 357; Stanley (Surveyor of Taxes)
v. The Gramophone and Typewriter, Ltd., 5 Tax Cases 358;
Califoroian Copper Syndicate (Limited and Reduced) v. Harris
(Surveyor of Taxes), 5 Tax Cases 159 at 166; Commissioners
of Inland Revenue v. Lysaght, [1928] A.C. 234 = 13 Tax Cases
511 (at page 247 of Appeal Cases); and Edwards (Inspector of
Taxes) v. Baristow and Another, 3 W.L.R. 410 – 28 I.T.R. 579
quoted with approval.
G. Venkataswami Naidu & Co. v. Commissioner of Income-
Tax, 35 I.T.R. 594 S.C.; Oriental Investment Co. Ltd. v.
Commissioner of Income Tax, Bombay 32 I.T.R. 664 S.C.; Sree
Meenakshi Mills Ltd. v. Commissioner of Income Tax Madras,
31 I.T.R. 28 S.C.; Saroj Kumar Mazumdar v. Commissioner of
Income Tax, West Bengal, 37 I.T.R. 242 S.C.; Ramnarain Sons
(Pvt.) Ltd. v. Commissioner of Income-tax, Bombay, 41 I.T.R.
534 S.C.; Janki Ram Bahadur Ram v. Commissioner of Income-
tax, Calcutta, 57 I.T.R. 21 S.C.; Miss Dhun Dadabhoy Kapadia
v. Commissioner of Income-tax, Bombay, 63 I.T.R. 651 S.C.;
Dalhousie Investment Trust Co. Ltd. v. Commissioner of
Income Tax (Central), Calcutta, 68 I.T.R. 486 S.sC.; P.M.
Mohammed Meerakhan v. Commissioner of Income-tax, Kerala, 73
I.T.R. 735 S.C.; and Raja Bahadur Kamakhya Narain Singh v.
Commissioner of Income-tax, Bihar & Orissa, 77 I.T.R., 253
S.C. referred to.
2. Section 81 of the Companies Act, 1956 provides that
if a company proposes to increase its subscribed capital by
allotment of further shares, such shares should be offered
to the existing share-holders of equity shares and the offer
should be deemed to include a right to renounce the shares.
The right to receive the new shares is embedded in the old
1077
shares. Therefore the moment, the issue of right shares are
announced the original share was bound to depreciate because
a larger number of people participate in the existing
capital. Right shares were not acquired by the assessee as a
matter of free choice. The assessee acquired those shares if
the assessee did not do so, his capital would erode.
Further, as the facts disclose, he had to find so much more
money in order to acquire the shares and it was not always
prudent to permit the overdraft account to swell. The true
object in this case was to prevent depreciation in the value
of the shares investment. The assessee also renounced some
of his rights to get the right shares and thereby entered
into these transactions to nurse his investments. In the
background of the correlation of several factors, in the
instant case, the action of the assessee was like a prudent
investor and not of a plunger in the waters of trade. [1096
E-G; 1097 8; 1098 F; 1099 F]
3. Consideration of all relevant facts involves 1)
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 did not
consider the relevant factors in their proper perspective
and in particular, namely, (i) that the assessee was the
Chairman of the company and in fact that if he did not
participate in buying right shares there might have been
adverse effect on the market so far as the shares of the
company were concerned; (ii) that he had an overdraft with
the Bank; (iii) and that he had to remit money to Denmark
for the purchase of his house. And as such the attitude of a
person entitled to right shares for judging whether he was a
dealer and investor was not viewed in proper dimension but
merely noted by the Tribunal resulting in the non-
consideration of a vital factor leading to an erroneous
inference. The Tribunal in this case has undoubtedly noted
the assessee’s contention of nursing the investment. The
Tribunal, however, has not considered in its order the
actual position as to how then nursing of the ; investment
was necessary. Tribunal thus erred. In that view of the
matter the High Court was justified in interfering with the
conclusion reached by the Tribunal. There is no reason to
interfere with the order of High Court. [1099 D-H; 1100 A-B]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1954-
55 (NT) of 1974 etc.
1078
From the Judgment and Order dated 10th August, 1971 of
the Bombay High Court in Income Tax Reference No. 124 of
1963.
V. Gauri Shankar and Ms. A. Subhashini for the
Appellant.
S.T. Desai, H. Salve, Ravinder and Ms. A.K. Verma for
the Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These appeals by certificate
arise from the judgment and decision of the High Court of
Bombay dated 10th August, 1971 in Income Tax Reference No.
124 of 1963.
The question involved in these appeals is familiar in
direct tax laws. The points in controversy are short. But
the adjudication is pending for long. Assessment years
involved are 1957-58 and 1958-59. The High Court disposed of
these references on 10th August, 1971 and in 1986 i.e.
nearly after 28 years of the years of assessment we are
posed with the question whether in respect of certain
transactions in those years the assessee was a dealer or an
investor and consequentially whether the income arising from
the sale of shares by the assessee is to be taxed on revenue
account of capital account.
The question that the High Court had to answer was as
follows:
“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 asseessee.
The assessee, H. Holck Larsen, was a partner in the
firm of M/s Larsen & Toubro (hereinafter referred to as the
‘said company’) unto 1946. On 8th February, 1946/7th
February, 1946, that partnership was converted into a
private limited company
1079
of the same name. In considerations of his interest in the
firm, the assessee was allotted shares of the company.
Against payment of cash, the assessee got 1875 equity shares
and against his interest in the partnership firm, he got 53,
486 equity shares. During the next few accounting years upto
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 upto the
financial year 1953-54, but these became larger in number
and at close intervals in the next few succeeding years. The
chart would indicate the position in this respect
_________________________________________________
(1) (2) (3) (4) (5)
Financial No of Value No. Of Sale
year shares (Rs.) Shares Price
ending acquired sold (Rs.)
_________________________________________________
31-3-1955 —– —– 4,60O 51,173
31-3-1956 6,111 61,110 13,955 1,88,433
31-3-1957 6,1026 1,020 7,661 1,24,406
31-3-1958 1,256 12,560 5,050 63,721
31-3-1959 5,500 55,000 5,200 87,810
31-3-1960 11,000 1,11,000 10,400 2,45,732
_________________________________________________
During the years mentioned in the chart, the assessee
had acquired 29,969 shares of the said company and sold
37,366 shares thereby making a profit of Rs. 1,65,581.
Besides purchasing and selling equity shares of the said
company, the assessee had also dealt in preference shares of
the said company. The assessee had sold shares of Andhra
Cement Co. in the financial year 1954-55, made purchases of
shares of S.C.C. and I.C.C. in the years 1955-56, 1956-57
and 1958-59 and also of shares of India Cement Co. and
National Carbon in 1955-56 and also sold shares of Guest
Keen Williams and Indian Cement in 1958-59. During all these
years the purchases and sales is equity shares of the said
company were more marked than the purchase and sale of other
shares. Besides the sale OF equity shares of the said
company and shares of other companies stated above, the
assessee had also sold some of his original shares of the
said company held by him.
1080
On these facts the assessee contended before the Income
Tax Officer that the assessee was only an investor and not a
dealer in shares but this contention was rejected by the
Income Tax Officer and the Appellate Assistant Commissioner.
Aggrieved by the said decision of the Appellate
Assistant Commissioner, the assessee filed second appeal
before the Tribunal. Before the Tribunal it was contended on
behalf of the assessee (1) that the assessee never purchased
equity shares of the said company from any outsider or any
stranger except in a few cases from close friends or from
members of the staff just to accommodate them; (2) that 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 limit; (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 neither effected
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 a 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 offered to the existing
shareholders. (4) The assessee had a substantial holding of
equity shares in the company. (S) It was not obligatory on
the assessee to acquire right shares. (6) In fact, the
assessee was indebted to the bank and was having an over-
draft account on which he was paying interest. (7) Not only
right shares were sold by the assessee, but he had also sold
some of the original equity shares held by him.
The Tribunal was of the view that as the Chairman of
the Board of Directors of the said company, the assessee
knew the financial position of the company and also knew
that the
1081
company’s business was expanding and flourishing, and yet he
sold away the shares of such a company held by him. The
sale, according to the Tribunal, must have been to earn
profits. The frequency of the acquisition of right shares
and the sales in large numbers in quick succession,
according to the Tribunal, established the motive to make
profit and that all the dealings in shares were part and
parcel of a profit making scheme.
The Tribunal noted that the Appellate Assistant
Commissioner had found that in some years, the income of the
assessee was much more than the expenses he had to meet and
notwithstanding that fact, the assessee had sold some
shares. The Tribunal further noted that the correctness of
this finding was neither challenged before the Tribunal nor
anything established to the contrary. According to the
Tribunal, therefore, if the assessee was under no obligation
to acquire right shares, there was no necessity for him to
apply for and obtain right shares except to make profits on
their sales. According to the Tribunal, it is far from the
conduct of a prudent and reasonable man like the assessee to
expect him to sell away his capital assets to meet the
recurring personal expenditure. The frequent acquisition of
right shares at par coupled with the fact that even some of
the original holdings were sold, were against the assessee’s
intention of nursing his investments according to the
Tribunal.
The Tribunal noted that according to the Appellate
Assistant Commissioner, such an activity was ‘self-
destructive purpose by self-cancelling activity’. The
Tribunal was in agreement with the view of the Appellate
Assistant Commissioner and came to the conclusion that it
was the idea of huge profits that the assessee was making by
sale of shares of the said company that 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
1082
the assessee was doing business in the assessment years
under consideration.
Two members namely Judicial Member as well as
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, 6102 and 1,256 whereas the assessee had
sold from time to time right shares which were 13,955, 7661
and 5,050 respectively. The maximum number of shares held by
the assessee was little over 56,600 and this number went
down progressively from the assessment year 1953-54 to
assessment year 1958-59 by about 15,000. The Accountant
Member, therefore, was of the view that it was not possible
to accept the submission of the assessee that the shares
were sold only to reduce the overdraft taken from the bank.
It may be mentioned, while on this aspect, that during
the first few years apart from the years in question i.e.
1959-60 and 1960-61, i.e. from the assessment years 1955-56,
1956-57, 1957-58 and 1958-59, the assessee had been treated
by the revenue as an investor in shares and was not taxed on
the dealings of these shares. This is an aspect which
requires to be taken into consideration in conjunction with
other factors in answering the question. The second point on
this aspect is that for subsequent years for which Special
Leave Nos. 8292-8293 of 1979 are pending are for the
assessment years 1968-69 and 1969-70 and in those two years
the Tribunal had accepted the position that the assessee was
an investor and not a dealer in shares. This position,
however, according the revenue, had to be accepted in view
of the judgment of the Bombay High Court in the instant case
which is under appeal before this Court. Therefore, it was
not, according to the counsel for the revenue, on any
divergence of finding or any different inference being drawn
from the said findings but because of decision of the Bombay
High Court and out of deference to it, the assessee had to
be treated as an investor. The findings of the Tribunal for
those two years are
1083
also the subject matter of Special Leave Petition 8292 and
8293. These will have to be disposed of along with these
appeals.
The High Court in the impugned judgment answered the
question in favour of the assessee and held that the
assessee was not a dealer in shares.
In this case the facts have been enumerated and
tabulated in the statement of the case. The Tribunal on
those facts came to the conclusion that the assessee was for
the relevant two years a dealer in shares. The High Court,
however, in answer to the question held to the contrary and
held that the assessee was an investor in shares.
In the background of these facts, two questions arise,
where courts have to deal with these types of transactions.
The first question is, whether the findings 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 that 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 conclusion arrived at
by the Tribunal would be without evidence and perverse in
law. If 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 dealer in shares or an
investor in the shares.
The two questions have been dealt together in many
decisions which may be noted, though no case can provide
guidance for all situations.
1084
How in case of sale of share the object or the purpose
of selling the shares, in order to determine whether one was
a dealer in shares or an investor in shares, should be
viewed may be looked at from the angle of Lord Reid in J.P.
Harisson (Watford), Ltd. v. Griffiths (H.M. Inspector of
Taxes) 40 Tax cases 281 at 295-296 when he observed:
“The question has been asked in a number of cases:
“If this was not trading, what was it?” With all
deference to those who have used that argument, I
do not think that it is very useful in most cases.
Human affairs – and business affairs – are of
infinite variety. They do not fit neatly into
categories or classes. Innominate contracts and
transactions are of frequent occurrence, and I
would not expect to find appropriate names to
denote new kinds of operations devised for the
sole purpose of gaining tax advantages. In the
present case the question is not what the
transaction of buying and selling the shares lacks
to be trading, but whether the later stages of the
whole operation show that the first step – the
purchase of the shares – was not taken as, or in
the course of, a trading transaction.”
The real question as Lord Reid said was not whether the
transaction of buying and selling the shares lacks the
element of trading, but whether the later stages of the
whole operation show that the first step – the purchase of
the shares – was not taken as or in the course of, a trading
transaction. It was, further, reiterated in that decision
that where a question of inference from certain facts found
by the Tribunal arises, unless the court comes to the
conclusion that the inference drawn by the Tribunal could
not be reasonably drawn at all, then it is not proper to
interfere with that finding of facts.
How a question of this nature should be viewed has been
indicated by this Court as early as 1958 in G. Venkataswami
Naidu & Co. v. Commissioner of Income-tax, 35 I.T.R. 594
S.C.. The question there was whether sale of a land to a
company could be treated in the facts and circumstances of
the case as an adventure in the nature of trade. There, on
the facts this
1085
Court upheld the findings of the Appellate Tribunal in
affirming that the assessee knew that it would be able to
sell 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 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 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 regarded as conclusive in
proceedings under reference. If, however, such a finding of
fact was based on an inference drawn from primary
evidentiary facts proved in the case, its correctness and
validity were open to challenge in reference proceedings,
within, however, narrow limits. The assessee or the revenue
could contend that the inference had been drawn on
considering inadmissible evidence or after excluding
admissible and relevant evidence; and if the High Court was
satisfied that the inference was the result of improper
admission or exclusion of evidence, it would be justified in
examining the correctness of the conclusion. It may also be
open to the party to challenge a conclusion of fact drawn by
the Tribunal on the ground that it was not supported by any
legal evidence; or that the impugned conclusion drawn from
the relevant facts was not rationally possible; and if such
a plea was established, the court might consider whether the
conclusion was not preverse and should not, therefore, be
set aside. It was to be remembered, however, that it was
within those narrow limits that the conclusions of fact
recorded by the Tribunal could be challenged in a reference
to the High Court. Such conclusions could never be
challenged on the ground that these were based
1086
on misappreciation of evidence. A conclusion reached by the
Tribunal on the ground that it is a conclusion on a question
of mixed law and fact, is no doubt based upon the primary
evidentiary facts, but its ultimate form is determined by
the application of relevant legal principles. The need to
apply the relevant legal principles tends to confer upon the
final conclusion its character of a legal conclusion. In
dealing with findings on questions of mixed law and fact the
High Court however, has to accept the findings of the
Tribunal on the primary questions of facts; but it is open
to the High Court to examine whether the Tribunal had
applied the relevant legal principles correctly or not; and
in that sense, the scope of enquiry and the context of the
jurisdiction of the High Court in dealing with such points
was the same as in dealing with pure points of law, and not
beyond that.
Before considering other cases it may be appropriate to
refer to the report of Royal Commission on Taxation of
Profits and Income of England, which was presented to the
Parliament of United Kingdom in June 1955. There, the Royal
Commission considered whether a simple test could be evolved
that would separate taxable cases from non-taxable one. 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 reccognisable as a 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 transaction. 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 for
which they hope or expect a rise. The Royal Commission noted
that Lord Buckmaster in Leeming v. Jones, [1930] 15 T.C. 333
at 357 had observed that “an accretion to capital” did not
become income merely because the original capital was
invested in the hope and expectation that it would rise in
value.
1087
The Royal Commission at page 39 of the report observed
that there should be no single fixed rule i.e. each case
must be decided according to its own circumstances. The
general line of enquiry that had been favoured by appeal
Commissioners and encouraged by the Courts, according to the
Royal Commission, was to see whether a transaction that is
said to have given rise to a taxable profit bears any of the
“badges of trade”. The Royal Commission was of the view that
seemed to them the right line, and it had the advantage that
it based itself on objective tests of what was a trading
adventure instead of concerning itself directly with the
unravelling of motive. At the same time, the Royal
Commission was of the view that there was some lack of
uniformity in the treatment of different cases according to
the tribunals before which these had been brought. The Royal
Commission sought to identify these “badges of trade” as
follows:
“(1) The subject matter of the realisation. While
almost any form of property can be acquired to be
dealt in, those forms of property such as
commodities or manufactured articles, which are
normally the subject of trading are only very
exceptionally the subject of investment. Again
property which does not yield to its owner an
income or personal enjoyment merely by virtue of
its ownership is more likely to have been acquired
with the object of a deal than property that does.
(2) The length of the period of ownership.
Generally speaking, property meant to be dealt in
is realised within a short time after acquisition.
But there are many exceptions from this as a
universal rule.
(3) The frequency or number of similar
transactions by the same person. If realisation of
the same sort of property occur in succession over
a period of years or there are several such
realisations at about the same date a presumption
arises that there has been dealing in respect of
each.
(4) Supplementary work on or in connection with
the property realised. If the property is worked
up in
1088
any way during the ownership so as to bring it
into a more marketable condition; or if any
special exemptions are made to find or attract
purchasers, such as the opening of an office or
large-scale advertising, there 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 oportunity 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. Commissioner of
Income-tax, Bombay, 32 I.T.R. 664 S.C. 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 a
mixed question of fact and law. What is the legal effect of
the facts found by the Tribunal and whether as a result the
assessee could be termed a dealer in shares or an investor
was itself a question of law. The mere fact that a company
had within its objects the dealing in investment in shares,
did not give to the company the characteristics of a dealer
in shares, but if other circumstances were proved it might
be relevant for the purpose of determining the nature of the
activities of the Company. This Court observed that
inference from facts would be a question of fact or a
question of law according as the point for determination is
one of pure fact or a mixed question of law and fact. A
finding of fact without evidence
1089
to support it or based on relevant and irrelevant matters is
not unassailable. This Court observed at page 669 of the
report that it was difficult to draw a line and draw a
distinction as to what was a question of law and what was a
question of fact. After referring to several authorities,
this Court came to the conclusion that though English
decisions began with a broad definition of what were
questions of law, ultimately the House of Lords decided that
a “matter of degree” was a question of fact and it had also
been decided that a finding by the Commissioners of a fact
under a misapprehension of law or want of evidence to
support a finding were both questions of law. This Court
observed as to what are the characteristics of the business
of dealing in shares or that of an investor was a mixed
question of fact and law. What is the legal effect of the
facts found by the Tribunal and whether as a result the
assessee could be termed a dealer in shares or an investor
was a question of law. As was observed by Venkatarama Ayyar,
J. in Sree Meenakshi Mills Limited v. Commissioner of
Income-Tax, Madras, 31 I.T.R. 28 S.C. that in between the
domains occupied respectively by question of fact and law,
there is a large area, in which both these questions run
into each other, forming, so to say conclaves within each
other. These are mixed question of law and fact. The instant
case is one.
In the case of Stanley (Surveyor of Taxes) v. The
Gramophone and Typewriter, Limited, 5 Tax Cases 358 the
Court of Appeal in England had dealt with that question. The
Court of Appeal in England observed at 374 of the report as
follows:
“It is undoubtedly true that, if the Commissioners
find a fact, it is 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 Calfornian Copper Syndicate (Limited and Reduced) v.
Harris (Surveyor of Taxes), 5 Tax Cases 159 at 166 Lord
1090
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 Commissioners of Inland Revenue v. Lysaght, [1928]
A.C. 234= 13 Tax Cases 511 (at page 247 of Appeal Cases 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
the incidents relating to certain factors which lead to the
conclusion were varying that certainly produce the result
then the matter must be a matter of degree, and the
determination of whether or not the degree extended so far
as to make a man in that case resident or ordinarily
resident in England was for the Commissioners and it was not
for the Courts to say whether they would have reached the
same conclusion.
The question was again considered in Edwards (Inspector
of Taxes v. Baristow and Another, 3 W.L.R. 410 = 28 I.T.R.
579. There the House of Lords held that the facts found led
inevitably to the conclusion that the transaction was an
adventure in the nature of trade and that the Commissioners’
inference to the contrary should be set aside. Viscount
Simonds observed that whether the transaction was not an
adventure in the nature of trade was an inference of fact
but could be set aside because it appeared that the
Commissioner had acted without any evidence or on a view of
the facts which could not reasonably be entertained. In
making that inference the Commissioners were to be assumed
to have been rightly directed in law as to the
characteristics which distinguish such an adventure, and, so
far as the Scottish courts had diverged from this approach
to such problems, the other approach adopted by the English
courts was to be preferred. Lord Radcliffe observed that
without any misconception of law appearing on the face of
the case stated, the facts found may be such that no person
acting judicially and properly as to the relevant law could
have come to the determination reached.
1091
We have noted Lord Reid in J.P. Harisson (Watford),
Ltd. v. Griffiths (H.M. Inspector of Taxes) (supra) saying
that intention at the time of the purchase was a relevant
and often a conclusive factor whether the resale was in the
nature of an adventure in trade or not. But in Saroj Kumar
Mazumdar v. Commissioner of Income-Tax, West Bengal 37
I.T.R. 242. (SC), this Court referred to the observations of
Lord Dunedin in the case of Jones v. Leeing (supra) where
the House of Lords observed that the fact that a man did not
intend to hold an investment might be an item of evidence
tending to show whether he was carrying on a trade or
concern in the nature of trade in respect of his
investments, but per se it led to no conclusion whatever.
In the case of Rannarain Sons Pvt. Ltd. v. Commissioner
of Income Tax, Bombay 41 I.T.R. 534 S.C. 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 Bhadur Ram v. Commissioner of
Income Tax, Calcutta 57 I.T.R. 21 S.C. this Court observed
that the profit motive in entering 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 assessee,
though not directly part of it, an intention to launch upon
an adventure in the nature of trade might readily be
inferred.
This Court had occasion to consider the question of new
shares offered to the holder of old shares in a company with
right to renounce in the case of Miss Dhun Dadabhoy Kapadia
v.
1092
Commissioner of Income-Tax, Bombay, 63 ITR 651 S.C. There,
the appellant, who was not a dealer in shares, held by way
of investment 710 ordinary shares in the Tata Iron and Steel
Co. Ltd. The company made an offer to her by which she was
entitled to apply for 710 new ordinary shares at a premium
with an option of either taking the shares or renouncing
there, wholly or partly, in favour of others. The appellant
renounced her right to all the 710 shares on 12th June,
1956, and realised Rs. 45,262.50. When this amount was
sought to be wholly taxed as a capital gain, the appellant
claimed that on the issue of the new shares, the value of
her old shares depreciated, since the market quotation of
the old shares which was Rs. 253 per share on 1st June, 1956
fell to Rs. 198.75 on 4th June, 1956 and that a result of
this depreciation she suffered a capital loss in the old
shares to the extent of Rs. 37,630 which she was entitled to
set off against the capital gains of Rs. 45,262.50. In the
alternative she claimed that the right to receive the new
shares was a right which was embedded in her old shares and,
consequently when she realised the sum of Rs. 45,262.50 by
selling her right, the capital gain should be computed after
deducting from that amount the value of the embedded right
which became liquidated. It was held that the appellant was
entitled to deduct from the sum of Rs. 45,262.50 the loss
suffered by way of depreciation in the old shares.
The question was again considered by this Court in
Dalhousie Investment Trust Co. Ltd. v. Commissioner of
Income-Tax (Central), Calcutta, 68 ITR 486 S.C. There this
Court on the facts came to the conclusion that the assessee
dealt with the shares of Moleod and Co. and the allied
companies as stock-in-trade, and that these were in fact
purchased even initially not as investments but for the
purpose of sale at a profit and therefore the transactions
amounted to an adventure in the nature of trade, and the
profit derived by the appellant from the sale of share was
therefore revenue receipt and as much liable to income-tax.
It was held that the decision of department in the earlier
years that the transactions were in the nature of change of
investments was not binding in the proceedings for
assessment during the subsequent years.
In P.M. Mohammed Meerakhan v. Commissioner of Income-
tax, Kerala, 73 ITR 735 S.C. this Court reiterated that it
was not
1093
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. Commissioner
of Income-Tax, Bihar & Orissa, 77 ITR 253 S.C. 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 selling his investment realised an
enhanced price, the excess over his purchase price was not
profit assessable to tax as income, but it would be so, if
what was done was not a mere realisation of the investment
but an act done for making profit. The distinction between
the two types of transactions is not always easy to make.
Whether the transaction is of one kind or the other depends
on the question whether the excess is an enhancement of the
value by realising a security or a gain in an operation of
profit-making. The assessee might invest his capital in
shares with the intention to resell these if in future their
sale bring in a higher price. Such an investment, though
motivated by a possibility of enhanced value, did not
necessarily render the investment a transaction in the
nature of trade.
In the premises the totality of all the facts will have
to be borne in mind and the correct legal principles applied
to these. If all the relevant factors have been taken into
consideration and there has been no misapplication of the
principles of law then the conclusion arrived at by the
Tribunal cannot be interfered with because the inference is
a question of law, if such an inference was a possible one,
subject, however, that all the relevant factors have been
duly weighed and considered by the Tribunal, the inference
reached by the Tribunal should not be interfered with.
1094
In order to determine the question involved in the
instant appeals, certain features will have to be borne in
mind. All the right shares were acquired directly as right
shares at par from the company. It was further urged that as
Chairman assessee was duty-bound to support the issue of new
shares by the company. Sales were made to reduce his
overdraft, according to the assessee. The sales were also
made to purchase a house in Denmark and for which permission
had been obtained from Reserve Bank of India to remit Rs. 1
lakh. This would appear from the assessment order for 1959-
60.
It was further emphasised that the market price was
lower on the date of sale and there was no profit motive.
The Income-tax Officer, however, held that profit was the
intention of the assessee for acquisition of the shares. The
shares acquired after 1st April, 1954 were held as trading
stock. This date was chosen by the Income-tax Officer
because from this date, the assessee started selling as well
as buying 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 reported in 85 I.T.R. at page 285 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 nature of investment was a question
of
1095
law and must be viewed in the light of the intention of the
assessee.
On the question of how the right shares affect the
original shares, our attention was drawn to Investments – An
Introduction to Analysis and Management Fifth Edition,
wherein it was emphasised at page 35 of the book that the
world economies offered a wide variety of securities or
assets to satisfy the investor’s desire for return and risk.
Most investors are risk-averse, and attempt to maximize
their wealth. As a principle, investors maximize wealth by
maximizing return and minimizing risk. Investment may be
defined as the purchase by an individual or institution it
was observed of an asset that produces a return proportional
to risk over some future period. The investments, it was
further observed, available for purchase were typically
financial assets, but real or tangible assets might be
included among the alternative investments.
Another principle guiding investment, it was emphasised
at page 604 of the book, was the main reason for
diversification – reduction of a risk of loss of capital and
income. Investors face an unknown and uncertain future and
try to diversify the investments. As a general rule it was
emphasised at page 603 of the book, growth of capital was a
desirable objective of portfolio management. This did not
mean that every investor must invest in growth stocks; this
would be Inconsistent with many investors’ needs. A fund can
be built up from reinvested income as well as through the
purchase of growth shares. A large fund does provide more
income for the investor than a small fund. Many investors
have increased the capital value of their funds through
reinvested dividends and interest income. Some wanted
income, some capital gains, and some a combination of both.
In spite of these variations, several objectives should be
considered as basic to a well-executed investment programme.
The guiding principles establish the indifference curve of
risk versus return for the investor.
To various other authorities our attention was drawn to
highlight this aspect.
In Business Finance – F W Paish and R J Briston, Sixth
1096
|Edition at page 115, it was observed how issue of right
shares depreciates the value of the original shares. It was
thus observed :
“Since the price to be paid for the new shares is
substantially below the current 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 share 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 share-holders of Equity Shares and the offer
should be deemed to include a right to renounce the shares.
The right to receive the new shares is embedded in the old
shares. Therefore the moment, it was emphasised by the High
Court, the issue of right shares are announced, the original
share was bound to depreciate because a larger number of
people participate in the existing capital.
The High Court emphasised that in this case the
assessee had acquired the right shares and sold them and he
also renounced some of those rights. The question which the
High Court was confronted with was whether by indulging in
those transactions, the assessee was trading in shares or
whether he entered into those transactions in the old
capacity of an investor. The High Court was of the view that
the course of
1097
dealings in the instant case showed that the dominant motive
of the assessee in acquiring and selling the new shares and
in renouncing some of the right shares was to prevent the
inevitable erosion of his capital. If the assessee,
according to the High Court, had not acted in the manner he
did, his original investments would have depreciated in
value, and therefore, in a sense he entered into these
transactions to nurse his investments. It was important to
bear in mind, and that could be appreciated if one had
regard to what has been noted before that the Right shares,
according to the High Court, were not acquired by the
assessee as a matter of free choice. The assessee acquired,
according to the High Court, those shares because if the
assessee did not do so, his capital would erode. But as is
apparent from the facts noted before, he had to find so much
more money in order to acquire the shares and it was not
always prudent to permit the overdraft account to swell.
Having regard to all the facts as noted by the High Court
and referring to the relevant decision, the High Court was
of the view that true object in this case was to prevent
depreciation in the value of his investment. The assessee
also in this case, as we have noted before, renounced some
of his rights to get the right shares.
The High Court was of the view that the true intention
of nursing the investment has not been appreciated by the
Tribunal. Therefore, in the light of the facts, the
Tribunal’s inference was not a justified one in the facts
and circumstances of this case.
At the outset it must be stated that the Tribunal in
its order has noted that according to the assessee, the
contention of the assessee was that with a view to keep the
bankdraft within reasonable limit and with the price 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 its 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
1098
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 make profit and that all the
dealings in shares were part and parcel of a profit making
scheme. The Tribunal further noted that the Appellate
Assistant Commissioner, in fact, had found that in some
years the income of the assessee was much more than the
expenses he had to meet and notwithstanding that fact, the
assessee had sold some shares. According to the Tribunal,
the correctness of this finding had neither been challenged
before the Tribunal nor anything established to the
contrary. The Tribunal was of the view that the assessee was
under no obligation to acquire right shares. There was no
necessity for him to apply for right shares except to make
profits. It was far from the conduct of a prudent and
reasonable man like the assessee to expect him to sell away
his capital assets to meet the recurring personal
expenditure, according to the Tribunal. The frequent
acquisition of right shares at par coupled with the fact
that even some of the original holdings were sold, was
against the submission that the sale was to nurse the
investment.
According to the Tribunal if the fact of the overdraft
by the assessee was borne in mind and if the fact of
overdraft is kept in view then it could not be said that the
assessee had purchased the right shares with a view to what
can be ascribed as nursing the investments.
Therefore bearing the principles of the different cases
which we have set out hereinbefore and considering the
motive in the light of the transactions and the intention
with which the shares were acquired, nature of the shares,
the question has to be judged whether there has been trading
in shares or in the words of Lord President Clyde, whether
there was plunge in the waters of trade, in buying shares or
acquisition of shares, (see The Balgownie Land Trust Ltd. v.
The Commissioner of Inland Renenue, 14 Tax Cases 684 at
691).
1099
The High Court, in our opinion, made a mistake in
observing whether transactions of sale and purchase of
shares were trading transactions or whether these were in
the nature of investment was a question of law. This is a
mixed question of law and fact. The entirety of the said
facts have been dealt with both by the Tribunal as well as
the High Court. The High Court observed that there was
nothing on record to show as to what extent and what
measure, the overdraft account was utilised for acquiring
right shares nor indeed was anything to show the gain which
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 – 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 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.
Tribunal, it appears, fell into error in not taking into
consideration properly and fully- though it noted, the fact
that if the right shares were not subscribed 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 money to Denmark for the
purchase of a house – and further when right shares were
issued had he not subscribed to these, there might have been
adverse effect on the market so far as the shares of the
company were concerned. In the background of the correlation
of these factors the action of the assessee was like a
prudent investor and not of a plunger in the waters of
trade. The dealings in the right shares by the assessee
keeping in the background these were right shares and effect
of non-subscription the value of the original shares were
not fully appreciated by the Tribunal. And as such the
attitude of a person entitled to right shares for judging
whether he was a dealer and investor was not viewed in
proper dimension but merely noted by the Tribunal resulting
in the non consideration of a vital factor leading to an
erroneous
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inference. The Tribunal in this case has undoubtely noted
the assessee’s contention of nursing the investment. The
Tribunal, however, has not considered in its order the
actual position as to how the nursing of the investment was
necessary. Tribunal thus erred. In that view of the matter
the High Court was justified in interfering with the
conclusion reached by the Tribunal. There is no reason to
interfere with the order of High Court.
In the premises these appeals must fail and are
dismissed with costs.
In the view we have taken the Special Leave Petition
Nos. 8292-8293 of 1979 are accordingly dismissed. In the
facts and circumstances, however, of these cases, there will
be no order as to costs of these applications.
S.R. Appeals and Petitions dismissed.
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