1. The two questions in respect of two different assessment years which have been referred to this court under s. 256(1) of the I.T. Act, 1961, at the instance of the revenue are as follows :
1. Assessment year 1963-64
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 61,449 is assessable as business income or should be considered only for purposes of computing capital gains ?'
2, Assessment year 1964-65
'Whether, on the facts and in the circumstances of the case, the surplus of Rs. 38,175 realised on the sale of 2,500 shares is assessable as business income or should be considered only for purposes of computing capital gains ?'
2. The assessee-company which at the material time carried on business in the name and style of M/s. Hindustan Industrial Agencies Pvt. Ltd., and which now functions as Scope (Pvt.) Ltd., was dealing in electric motors, diesel oil engines, etc., and all its shares were held by one Shri D. D. Desai and his wife, Smt. S. D. Desai, who were the only two directors of the company. The assessee-company was managed by a firm called Dharamsey & Co., which is also managing another company called Hindustan Electric Co. Ltd., which is referred to as 'Electric Co.' in the statement of the case as well as in this reference. The Electric Co. was established in 1949 in order to take over the proprietary business of D. D. Desai. With effect from 6th March, 1960, the Electric Co. was converted into a public company with a capital of Rs. 40,00,000. The Electric Company entered into a collaboration agreement with a Swiss Co. and the capital of the Electric Company was increased to Rs. 1,20,00,000, out of which the Swiss Company held just over 50% so that the Electric Company became a subsidiary company of the Swiss Company.
3. The assessee-company purchased 1,015 shares of the Electric Company in 1956 for a sum of Rs. 1,01,500. After about five years the assessee company acquired an additional 3,150 shares in the Electric Company from four other shareholders, who held different number of shares. Thus, the total number of shares held by the assessee-company in the Electric Company was 4,165 and the total investment came to Rs. 4,34,751.
4. In December, 1961, the Electric Company issued a fresh capital of Rs. 20,00,000 by allotting one right share for every two shares held. The assessee-company was thus entitled to 2,082 right shares plus one coupon. The issue of right shares was a part of the scheme of the foreign company's collaboration with the Electric Company, with equity participation. The assessee-company did not take up all the right shares but retained only 772 out of the 2,082 right shares and the right shares in respect of the remaining right shares were sold by the assessee-company for a sum of Rs. 61,449 in the assessment year 1963-64, its financial year being the one which ended on 31st May, 1962. Inclusive of 3 more shares acquired by the assessee-company the total number of shares in the Electric Company held by the assessee-company in the year ending 31st May, 1962, was 4,940.
5. In the accounting year ending on 31st May, 1963, the relevant assessment year being 1964-65, the assessee sold 2,500 shares in the Electric Company for a sum of Rs. 2,97,500 to the following parties :
M. D. Desai 885 shares
M. P. Desai 115 shares
Power Cables Ltd. 1,500 shares
6. M. D. Desai was the brother of D.D. Desai. Power Cables was also an allied concern. There is no indication as to how M. P. Desai is related to either D.D. Desai or M. D. Desai. Some shares in the Power Cables are also held by the assessee-company.
7. In the relevant assessment year 1963-64, though the company had credited a sum of Rs. 61,449, being the amount received for the sale of the right to subscribe for 1,310 right shares in the profit and loss account, in the assessment year 1963-64, at the time of assessment the assessee took the stand that this amount should be treated only as capital gains and not business income. This was, however, rejected by the ITO who merely took the view that the market value of the shares as on 31st May, 1962, according to the balance-sheet of the assessee-company, was Rs. 285 per share as against the market value of Rs. 96 per share at the beginning of the year and, therefore, the assessee's interest in these shares arose out of a possibility of making profit from the same. He, therefore, held that the assessee's sale of the right to subscribe to the right shares was motivated by profit and the amount received was business income. The AAC confirmed this order of the ITO when he held that the assessee's activities in regard to the shares in the relevant accounting year had to be taken to be in the nature of trade and the profits arising therefrom had to be assessed as income from business.
8. In the assessment for the assessment year 1964-65, the surplus of Rs. 38,175 which the assessee had earned on sale of 2,500 shares was also claimed as capital gains, but the ITO held that the said transaction was an adventure in the nature of trade. The AAC also confirmed the order of the ITO.
9. Two appeals in respect of the two separate years were disposed of by the Tribunal by a common order. The Tribunal took the view that the assessee was right in contending that in both the years the amount assessed as business profit should be treated only as capital gains. The Tribunal held that the right to subscribe to the right shares was capital and profit arising from the disposal of such right could not be regarded as revenue gain unless the shares formed the stock-in-trade or that the rights are disposed of in the course of a transaction which may be called an adventure in the nature of trade. The Tribunal noticed that there was hardly any case for the department that the shares of the Electric Company formed the stock-in-trade in the assessee's hands. The Tribunal further found that an investment, though it is motivated by a possibility of enhanced value, did not render the investment a transaction in the nature of trade and in cases relating to adventure in the nature of trade, the mere intention to re-sell for profit is not a conclusive test. The Tribunal then considered the facts that the shares were not purchased in several lots but were acquired on the same day and the 2,500 shares were also sold in bulk. Having regard to the persons to whom these shares were sold, the Tribunal held that the purchases and sales only brought about a redistribution of the holding of a closed group and this was sufficient to show that the transaction did not have any characteristics of trading. The Tribunal further held that the assessee had not sold the entire lot of shares but only a portion, and then reached a conclusion, that, 'taking all the facts into account we are satisfied that it would not be correct to say that by acquiring the shares and subsequently selling a portion of the holdings, the assessee entered into an adventure in the nature of trade'. The surplus was, therefore, directed to be regarded only as capital gains.
10. The learned counsel on behalf of the revenue has relied on five circumstances in order to contend that the income from the disposal of the right to subscribe to the right shares and the sale of 2,500 shares was in the nature of business income. These circumstances were as follows :
(1) Moneys required for making purchases in 1961 came from borrowings.
(2) No dividends have been paid by the Electric Company and, therefore, the motive in making further purchases would not have been earning dividends.
(3) When the assessee-company invested moneys in 1961, it must have been aware of the proposed expansion of the capital and the likelihood of the shares appreciating in value.
(4) A substantial part of the holdings was sold within a short time and proceeds were apparently utilised for repaying the creditors.
(5) When no dividends were received and the company itself did not have adequate funds the only object of acquiring the shares was to sell them subsequently at profits.
11. These circumstances, according to the learned counsel for the revenue, clearly showed that the activity of the assessee-company in the sale of shares really amounted to an adventure in the nature of trade and that the profit from this activity was liable to be treated as business income.
12. Now, each one of the circumstances, which have been reproduced above, would really indicate that, according to the revenue, the shares were originally purchased by the assessee only with a view to make a profit. The question then is whether if investment is made in shares with the intention of making a profit, that by itself would convert the activity into an adventure in the nature of trade.
13. In the present case, we are concerned with really two sums, one received by the transfer of the right to subscribe to right shares and the other profit earned by the sale of 2,500 shares. The assessee-company had only purchased 772 right shares out of 2,082 right shares, to which it was entitled to subscribe. Now, if the assessee-company was merely interested in making a profit, there is no reason why it could not have sold its right to purchase the entire complement of 2,082 shares. As it is well known, the right shares are in the nature of capital and the mere fact that on the balance-sheet it is possible to say that a certain profit was made by the sale of the right to obtain right shares, that by itself will not indicate that the activity is in the nature of a trading activity or an adventure in the nature of trade. It is now well established that where an investor invest money with the possibility of the investment appreciating in value, that will not necessarily convert the activity into an adventure in the nature of trade. As pointed out by the Supreme Court in Raja Bahadur Kamakhya Narain Singh v. CIT : 77ITR253(SC) , where a person in selling his investment realised an enhanced price, the excess over his purchase price is not profit assessable to tax, but it would be so, if what is done is not a realisation of the investment but an act done of making profits. While dealing with the expression 'adventure in the nature of trade', the Supreme Court had pointed out that that expressly implies the existence of certain elements in the transactions which in law would invest them with the character of a trade or business and the question on that account becomes a mixed question of law and fact. The Supreme Court has pointed out in that case that if the transaction is in the ordinarily line of the assessee's business, there would hardly be any difficulty in concluding that it was a trading transaction. But where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The Supreme Court then observed as follows (pp. 262-63) :
'The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to re-sell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to re-sell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.'
14. In CIT v. Sutlej Cotton Mills Supply Agency Ltd. : 100ITR706(SC) , the Supreme Court quoted with approval the observations of Lord Justice Clerk in Californian Copper Syndicate v. Harris  5 TC 159, which as pointed out by the Supreme Court, have becomes classical (p. 710) :
'It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinary investment choose to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit ... assessable to income tax. But,it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business ....
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being : Is the sum of gain that has been made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying out a scheme for profit making ?'
15. After referring to these observations, the Supreme Court has pointed out that in the absence of any evidence of trading activity in cases of purchase and resale of shares, the profit arising from the sale is an accretion to capital. The Supreme Court referred to the principles set out in G. Venkataswami Naidu & Co. v. CIT : 35ITR594(SC) , that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances and, according to the Supreme Court, 'ultimately it is a matter of first impression with the court whether a particular transaction is in the nature of trade or not.'
16. It is thus clear from these authorities that a transaction is not necessarily in the nature of trade if the purchase was made with the intention of resale. Now, there is no finding in the present case as to whether it was really the intention of the assessee-company when it purchased the shares either to resell them or to dispose of the right to subscribe to the right shares. Even assuming that there was such an intention, by itself that would not be conclusive, as pointed out by the Supreme Court, that the transaction of sale of the shares was in the nature of trade. If a proper view of the facts in this case is taken, it will be apparent that the 2,500 shares which were sold by the assessee-company were sold to persons who were interested in the assessee-company. They were obviously not sales to strangers or outsiders and the finding recorded by the Tribunal that the sales only brought about a redistribution of the holdings in a closed group appears to be clearly justified having regard to the persons in whose favour these transactions have been made. Even in respect of the disposal of the right to subscribe to the right share, there is no indication anywhere on the record on which reasonably a conclusion could be drawn that the sales were in the nature of a trading activity. All that seems to have been established is that certain profits were made by the sale of the shares and the transfer of the right to obtain the right shares. But, as pointed out by the Supreme Court, that will not conclude the controversy as to whether the activity was in the nature of a trading activity. If this was the only material circumstance established, it is difficult to accept the argument advanced on behalf of the revenue that the income in the years 1963-64 and 1964-65 earned as a result of the sale of the transfer of the right to subscribe to the right shares and the transfer of the shares should be treated as business income. Consequently, both the questions will have to be answered in favour of the assessee.
17. Accordingly, both the questions are answered in the affirmative and in favour of the assessee. The revenue to pay the costs of this reference.