1. The question referred for our decision is :
'Whether the inference of the Tribunal, that the shares in question constituted the stock-in-trade and that the profit on sale is a trading profit, is legal ?'
2. We are concerned with the assessment years 1945-46 and 1946-47 and the account years corresponding to these assessment years are the two financial years March 31, 1945, and March 31, 1946. The assessee is a Hindu undivided family which originally consisted of one Girdharlal Trikamlal and his three sons, Dhirajlal, Hiralal and Kirtilal. Girdharlal passed away on 26th July, 1942.
3. During the life time of Girdharlal he was a partner in firm known as Girdharlal Trikamlal & Co. His eldest son, Dhirajlal, was also a partner in that firm. On the death of Girdharlal on 26th July, 1942, that partnership was dissolved and a new firm comprising Dhirajlal and his younger brother, Hiralal, came into existence. That firm took over all the assets and liabilities of the former firm of Girdharlal Trikamlal & Co.
4. On the date of Girdharlal's death there was standing to the credit of his personal account with the partnership firm a sum of Rs. 25,31,999. The firm, therefore, owed him that amount on the date of his death. On his death his widow and the three sons inherited the amount standing to the credit of his personal account in the partnership and in satisfaction of that amount the new firm formed by Dhirajlal and Hiralal transferred shares which the firm owned to the market value of Rs. 18,34,586 from out of a large amount of shares which the firm held of the value of Rs. 23,60,000.
5. For the balance of Rs. 6,96,415 the new firm held itself liable to the members of the Hindu undivided family.
6. The Hindu undivided family during the lifetime of Girdharlal was not doing any business in stocks and shares on its own. After they received the shares worth Rs. 18,34,586 from the firm it appears that they started selling a substantial part of the shares in the market. In the years 1944-45, 1945-46 and 1946-47 the purchases, sales and profits were as follows :
Purchases Sales ProfitRs. Rs. Rs.Financial year 1944-45 about 36,000 3,67,300Assessment year 1945-46 16,767 3,65,983 1,26,718Assessment year 1946-47 9,859 1,25,304 44,239
7. In the assessment year 1944-45, the Income-tax Officer assessed the income of the Hindu undivided family from the said purchases and sales and purchases of shares. The appellate Assistant Commissioner in appeal reversed the decision and that there were no indications that the assessees were doing business and that the receipts in their hands were in the nature of capital receipts. The department took the matter in appeal to the Tribunal and the Tribunal by an order passed on the 1st August, 1951, reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. They held that the transfer was effected with the object of evading income-tax and the very fact that the shares were transferred, and that too a substantial holding of the firm, indicated conclusively that the object of the transfer was to evade income tax; that the Hindu undivided family (the assessee) did not take the share as the return of its capital; that the shares did not remain with the Hindu undivided family for a considerable time but they disposed of them soon after, and that taking into account all the circumstances and the frequencies of the purchases and sales the irresistible inference appeared to be that from the very start the intention of Dhirajlal both as a transferor and as a transferee was to deal in these shares. Thus, by their order dated 1st August, 1951, the Tribunal held that the income in the hands of the Hindu undivided family was a business income and taxable as such. The tribunal declined to make a reference as it found no question law upon their order and in an application under section 66(2) of the Indian Income-tax Act, the High Court also declined to call for a reference.
8. The assessee then took the matter up to the Supreme Court and the decision of the Supreme Court is to be found reported in : 26ITR736(SC) . The Supreme Court found the order of the Tribunal unsustainable and the reasons are stated at page 740 as follows :
'The learned Attorney-General frankly conceded that it could not be denied that to a certain extent the Tribunal had drawn upon its own imagination and had made use a number of surmises and conjectures in reaching its result. He, however, contended that eliminating the irrelevant material employed by the Tribunal in arriving at its conclusion, there was sufficient material on which the finding of fact could be supported. In our opinion, this contention is not well-founded. It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises.'
9. Upon that view the Supreme Court framed the question : 'Whether the finding of the Tribunal is not vitiated by reason of its having relied upon suspicions and surmises not supported by any evidence on the record or upon partly inadmissible material ?' and remanded the case to the High Court with a direction that the High Court should ask the Tribunal to state a case.
10. On receipt of this order a Division Bench of this court passed an order on the 22nd August, 1956, calling for a fresh finding from the Tribunal (vide annexure 'C'). When the Tribunal thus considered the matter afresh it took a view favourable to the assessee. It upheld the order of the Appellate Assistant Commissioner holding that the income was in the nature of capital receipt in the hands of the assessee and dismissed the appeal. The Tribunal pointed out that two questions arose before them, namely, (1) whether the transfer of shares and assets to the Hindu undivided family was a genuine transaction, and (2) whether the Hindu undivided family continued to carry on the share business previously carried on by the partnership As regards the first question, the Tribunal observed that from the stand taken by the department before them it was clear that the department accepted the position that there was a genuine transfer of the shares and assets to the Hindu undivided family, and therefore the only question which remained to be determined was whether the nature of the transactions put through by the Hindu undivided family amounted to carrying on a business or as the Income-tax Officer had put it whether the Hindu undivided family 'converted their inheritance into stock-in-trade.' As to whether upon the nature of the transaction the assessee could be said to be carrying on a business, the Tribunal held in paragraph 11 of its order :
'What is a business in shares will depend upon the intention of the parties at the material time. This intention has to be judged by surrounding circumstances. It is not a case of a venture in the nature of trade. All that we have to ascertain is whether the assessee-Hindu undivided family carried on a business in shares. If the assessee had not made any purchases, the question of dubbing him with the stamp of a share-dealer would not arise. The difficulty has only arisen in view of the fact that the assessee in the first year purchased shares of the value of over Rs. 2 lakhs. The Income-tax Officer may say that the purchase of new shares indicates that the assessee had converted his holding of shares into his stock-in-trade. But considering the meagre purchases made thereafter, we do not think that would be a correct finding. Speaking for ourselves, we have our doubt as to the genuineness of the transfer to the Hindu undivided family and the time it was effected. But, as this fact is accepted by the department, we leave it at that.'
11. They, therefore, confirmed the finding of the Appellate Assistant Commissioner that this receipt in the hands of the assessee was in the nature of a capital receipt. Their observation in passing that they doubted the genuineness of the transfer was an obiter dictum and can have no effect because the department had never challenged the genuineness of the transfer.
12. After the case was sent back to the Tribunal the findings were then against the department. It does not appear that the department took the matter further against the order of the Tribunal dated 23rd January, 1960. Therefore, so far as the assessment year 1944-45 is concerned, it must be held that the findings finally given were that the transference of the shares by the partnership to the Hindu undivided family was a genuine one and that if thereafter the Hindu undivided family was a genuine on and that if thereafter the Hindu undivided family purchased some shares and sold others they did that only with a view to altering their investments and not with a view to making a gain in business in stocks and shares.
13. We have reproduced these findings of the Tribunal in its order dated 23rd January, 1960, at some length and referred to the previous proceedings culminating in this order also at some length because they are of vital importance in considering the order dated 9th April, 1953, for the subsequent assessment years 1945-46 and 1946-47 which are the years under reference before us.
14. In this order the Tribunal has done nothing more than to refer to its earlier order passed on 1st August, 1951, for the assessment year 1944-45. On the date on which the order under reference was passed it appears that the appeal before the Supreme Court in the assessment year 1944-45 was pending. In fact it is so stated in the order under reference itself. In passing the order under reference the Tribunal did not go into the question arising before them at all. On the contrary, it has expressly stated in its order :
'The question involved is the same as involved in I. T. A. No. 1178 of 1950-51 against the assessment made on the assessee for the year 1944-45.'
15. Counsel on behalf of the assessee wished to argue the matter before the Tribunal as is clear from paragraph 2 of its order. He cited the case Dunn Trust Ltd. (In voluntary liquidation) v. Williams, but the Tribunal felt that that decision rested on its own facts and reiterated that 'the findings in I. T. A No. 1178 of 1950-51 are quite specific. In fact, we were not asked by Mr. Palkhivala to change our opinion in so far as the findings were concerned. It is unnecessary to refer to these findings. 'From these remarks it is clear that the Tribunal did not decide the matter afresh for the assessment years 1945-46 and 1946-47, but merely relied upon its previous decision in I. T. A. No. 1178 of 1950-51 for the assessment year 1944-45, and in fact in order to judge the legality of their decision we must only look to the order passed on 1st August, 1951, in I. T. A. No. 1178 of 1950-51.
16. Now we have set forth that order at some length and what was the result consequent upon that order The matter was taken before the Supreme Court by special leave. The Supreme Court held that order could not be sustained for the reason that in passing it the Tribunal had drawn upon its own imagination and had made use of a number of surmises and conjectures in reaching its result. For the same reason, therefore, we must declare the order under reference invalid and bad in law. We accordingly answer the question referred by saying that the inference of the Tribunal that the shares in question constituted the stock-in-trade and that the profit on sale is a trading profit is not a legal inference. The Tribunal shall give a fresh finding on the question. The Commissioner to pay the costs of this reference.
17. In stating the case, the Tribunal has in paragraph 13 of the statement referred to the decision of the Tribunal in two of the assessee's appeals to the Tribunal for the years 1947-48 and 1948-49, and stated that on the same points as are before us the Tribunal held in favour of the assessees and has also annexed that order of the Tribunal dated 15th September, 1960, as annexure 'F'. Strong exception has been taken on behalf of the department to this portion of the statement of the case. It does appear to us that the reference to the orders for the subsequent years was entirely irrelevant and should not have been brought into the statement of the case, especially when the subsequent order had not even been made on the date on which the Tribunal passed the order under reference. The statement of the case should have been confined to any matter arising upon the order under reference and nothing more. For these reasons we allow the notice of motion, dated 16th May, 1963, and order the deletion of paragraph 13 from the statement of the case and removal of annexure 'F' from the record. There shall be no order for costs on the notice of motion. The Commissioner to pay the costs of the reference.