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New Era Agencies Private Ltd. Vs. Commissioner of Income-tax, Bombay City 1 - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1961
Judge
Reported in[1964]54ITR518(Bom)
ActsIncome Tax Act, 1961 - Sections 28
AppellantNew Era Agencies Private Ltd.
RespondentCommissioner of Income-tax, Bombay City 1
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - sale of shares - section 28 of income tax act, 1961 - whether sale of ordinary shares and preference shares of assessee was on capital account or revenue account - in view of circumstances of case main object of assessee in acquiring said shares was not to support managing agents of company - profit made on sale of said shares by assessee was income of assessee from its business - held, such profit being revenue profit liable to tax. - - the tribunal was of the view that an inference that the holding in these shares was regarded by the assessee as on capital account was no capable of being drawn from the circumstances that there had been no sale effect by the assessee during the years subsequent to 1949, because there was a slump in the price of shares in the market.....v.s. desai, j.1. the assessee is private limited company whose shareholders are mulraj kersondas and his nominees and is thus controlled by the mulraj. the assessee is dealer in the shares, both in forward and ready market. it was incorporated some time in the early forties. in the year 1942 mulraj kersondas obtained control of the elphinstone spinning and weaving mills (hereinafter referred to as the elphinstone mills). he also acquired the managing agency of the elphinstone mills for a consideration of rs. 6 lakhs. there was also another private limited company known as chidambaram mulraj & co. ltd., and the shareholders of this limited company were mulraj and his nominees, including the present assesseee. in the year 1943, mulraj assigned the managing agency of the elphinstone mills to.....
Judgment:

V.S. DESAI, J.

1. The assessee is private limited company whose shareholders are Mulraj Kersondas and his nominees and is thus controlled by the Mulraj. The assessee is dealer in the shares, both in forward and ready market. It was incorporated some time in the early forties. In the year 1942 Mulraj Kersondas obtained control of the Elphinstone Spinning and Weaving Mills (hereinafter referred to as the Elphinstone Mills). He also acquired the managing agency of the Elphinstone Mills for a consideration of Rs. 6 lakhs. There was also another private limited company known as Chidambaram Mulraj & Co. Ltd., and the shareholders of this limited company were Mulraj and his nominees, including the present assesseee. In the year 1943, Mulraj assigned the managing agency of the Elphinstone Mills to Chidambaram Mulraj & Company. During the years 1942 to 1948, the dealings in shares of the assessee-company included dealing in shares of the Elphinstone Mills also and the profit and loss even in the dealings of the Elphinstone Mills was taken by the assessee to its revenue account during these years. At the end of the year 1948, the assessee held 5,137 ordinary shares and 1,131 preference shares of the Elphinstone Mills. During the years subsequent to the year 1948, the assessee did not effect any sale in the Elphinstone Mills shares, excepting a solitary transaction of 160 shares, in the year 1952. On the other hand it purchases some more shares and added to its holdings in the shares of the said mills. Thus, in the year 1953, the assessee held in all 8,693 ordinary shares and 2,117 preference shares of the Elphinstone Mills. It may be pointed out that during the years from 1948 onwards there was a slump in the price of the shares of the Elphinstone Mills and the price of the ordinary and preference shares at the material time in 1953 were Rs. 37 per ordinary share and Rs. 88 per preference share.

2. On the 25th September, 1953, Mulraj Kersondas wrote a letter to Shri K. D. Jalan, a big businessman of Calcutta, making an offer of sale to him of 25,000 ordinary shares and 10,000 preference shares of the Elphinstone Mills for a total sum of Rs. 45 lakhs He stated in the said letter the shares, which he was offering, stood in different names of himself, his family members and his allied concerns and others. This offer for the sale of the ordinary and preference shares was accompanied by a further offer that if the offer for the sale was accepted, Mulraj Kersondas would obtain the resignation of the present directors persons of the choice of K. D. Jalan and that he would also obtain the resignation of the present managing agents of the Elphinstone Mills, namely, M/s. Chidambaram Mulraj and Co. Ltd. It was further stated in the letter that the price to be paid, the transfer of the shares, the resignation, of the directors and the appointment of the new directors of the choice of the purchaser and the resignation of the managing agents would all be simultaneous. The offer was accepted by K. D. Jalan and on 21st of October, 1953, Mulraj wrote to the managing agents, namely, Messrs. Chidambaram Mulraj and Co. Ltd., requesting them to resign their office as the managing agents of the Elphinstone Mills. He wrote in the said letter that in consideration for the resignation of the managing agency, he would pay them a sum of Rs. 10 lakhs as compensation for the loss of office. In pursuance of this letter received from the Mulraj and the managing agents immediately on the same day submitted resignation of their office as the managing agents of the Elphinstone Mills. Out of the consideration of Rs. 45lakhs which Mulraj received from K. D. Jalan he paid over a sum of Rs. 10 lakhs to the managing agents and distributed the balance of Rs. 35 lakhs amongst 25,000 ordinary shares and 10,000 preference shares, paying Rs. 80 for every ordinary shares and Rs. 150 for every preference share. The assessee company who had a holding of 8,693 ordinary shares, paying Rs. 80 for every ordinary share and Rs. 150 for every preference share. The assessee-company who had a holding of 8,693 ordinary shares and 2,317 preference shares received a total amount of Rs. 10,42,990. However, the total receipts as shown by the books of accounts of the assessee was only Rs. 10,37,775, there being no explanation for the discrepancy of Rs. 5,215. The profit on the sale of shares as worked out in the assessee's books was Rs. 2,34,231. The assessee in its accounts however did not show this surplus in its profit and loss account, but took it to the capital reserve account showed it as a capital reserve in its balance-sheet. In the assessment of the assessee for the assessment year 1954-55, the Income-tax Officer treated the amount of Rs. 2,34,231 as the income for the assessee from the sale of the shares and brought the said amount to tam. He did not accept the assessee's contention that the sale of the said shares was on capital account and held that the sale had taken place in the course of the business of the assessee as a dealer in shares. The assessee appealed to the Appellate Assistant Commissioner who accepted the assessee's contention that the said amount represented a capital gain and did not form part of the income from the business of the assessee and accordingly allowed the assesssee's appeal. Against the decision of the Appellate Assistant Commissioners, the department appealed to the Income-tax Tribunal. The tribunal reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Two contentions were raised on the behalf of the assessee before the Tribunal. Fristly, it was contended that the sale of the the shares by the assessee in the year 1953 was a sale on capital account and not a part of its business of dealing in shares. Therefore, the profit made on the said sale was not a revenue profit but a capital gain. It was contended in the alternative that even if the sale of shares was taken to be a sale of the stock-in-trade, the amount of Rs. 10lakhs and odd received by the assessee was not wholly the price of the shares sold by it, but is was a composite amount received by the assessee for the sale of the shares and also for parting with certain other valuable rights, namely, the controlling interest in the mills and the relinquishment of the managing agency. The Tribunal did not accept either of these contentions. It held that the sale of the shares of the Elphinstone Mills by the assessee in the year 1953 was nothing more than a transaction in its business in shares and the transaction therefore could not be said to have been on capital account. It also further held that the entire amount received by the assessee was the price of the shares which it had sold and it did not include anything as consideration for parting with any other valuable rights. It accordingly allowed the appeal of the department, set aside the order of the appellate Assistant Commissioner and restored that of the Income-tax Officer. Thereafter, at the instance of the assessee it drew up a statement of the case and referred to this court the following question under section 66(1) of the Indian Income-tax Act.

'Whether on the facts and in the circumstances of the case the sum of Rs. 2,34,231 was the income of the assessee ?'

3. In the application made by the assessee requesting the Tribunal to make a reference under section 66(1) it had prayed for the reference of certain other question also. The Tribunal however had declined to refer those additional questions also. The tribunal however had declined to refer those additional questions suggested by the assessee on the ground that the question which it had framed and was referred to this court was sufficient to bring out the entire controversy between the parties. A notice of motion was taken out by the assessee in this court in which it was prayed that this court may direct the Tribunal to make a supplemental statement referring to this court certain other questions on the ground that the Tribunal was wrong in taking the view that the question it had framed was sufficient to bring out the entire controversy between the parties. On that notice of the motion, this court was pleased to take the view that the entire controversy between the parties had not been brought out by the question which had been reamed and referred to by the Tribunal and it was, therefore, necessary to call for a supplemental statement on two more question of law which arose on the order of the Tribunal. This court accordingly directed the Tribunal to make a supplemental statement referring two additional questions to this court. The Tribunal has accordingly submitted a supplemental statement referring the following two additional questions :

'(1) Whether, on the facts and in the circumstances of the case, the amount of the Rs. 10,42,990 received by the assessee, as allotted by Mulraj Kersondas out of the sum of Rs. 45 lakhs received by him from Shri K. D. Jalan represents exclusively the price of the shares or included therein any consideration for the procuring the resignation of the present directors, for obtaining the appointment of the directors, of the choice of Shir K. D. Jalan and for the resignation of the present managing agents of the mills.

(2) If so, what in view thereof should be taken as the sale price of each of the ordinary shares and each of the preference shares sold by the assessee in calculating its income arising therefrom ?'

4. We will refer to the question contained in the original reference made by the Tribunal as question NO. 1 and the two further questions referred by the supplemental statement as questions Nos. 2 and 3 respectively for the purpose of disposal of the present reference.

5. Although the Tribunal regarded the first question as sufficiently wide to bring out the entire controversy between the parties in view of the further questions which we have called for by the supplemental statement, we will regard the first question as being only concerned with the point whether the sale of 8,693 ordinary shared and 2,317 preference shares of the assessee in the year 1953 was on capital account or revenue account.

6. Now the assessee was a company which was dealing in shares both in the ready and forward markets. Ever since its incorporation in the early forties it had dealt in shares including the shares of the Elphinstone Mills Between the years 1943 and 1948 it had both bought and sold the shares of the Elphinstone Mills and the selling Transactions at the time were of the considerable bulk of the shares. Thus in the year 1944 it had sold as many as 2,155 ordinary shares and in the year 1947 and 1948 it had sold 1,000 shares in each year. There is no dispute that during these years between 1943 and 1948 the profit or loss in the shares of the Elphinstone Mills had always been taken to the revenue account by the assessee and the profit was taxed as business profit and loss was claimed as a business loss. During the years 1949 to 1953 there had been no transactions of the sale of shares of the Elphinstone Mills on the part of the assessee, excepting solitary instance in the year 1952 when 160 hares were sold to Lady Thakercy at par value. On the other hand, there had had been some further addition to is holding in the said shares by the assessee during these years. Apart from the circumstances, however that there has been no sale of the shares during these years, there is nothing else to indicate that the assessee had changed its attitude towards these shares or that it had converted its holding in these shares from stock-in trade to capital. The Tribunal was of the view that an inference that the holding in these shares was regarded by the assessee as on capital account was no capable of being drawn from the circumstances that there had been no sale effect by the assessee during the years subsequent to 1949, because there was a slump in the price of shares in the market during those years and the Tribunal was also of the view that the circumstance that the assessee added to its holding during those years also did not indicate that it was regarding these shares as investment shares, because even dealers in shares would like to retain and consolidate their holding in a sagging market with view to be able to release their holding when a favourable opportunity arises. Having regard, therefore, to the circumstances that the assessee was private limited company which was authorised by its memorandum to deal in shares and in fact had dealt in shares almost from its inception, and that it had dealt in the shares of the Elphinstone Mills and had taken the profit and loss from the transactions in the said shares to the revenue account, the Tribunal was of the view that the profit of Rs. 2,34,231 made by the assessee-company in the year 1953 was a revenue receipt and not a capita gain. According to the Tribunal, the circumstance that the assessee-company was working in concert with Mulraj Kersondas and his nominees and allied concerns and that in the sale of the shares in the years 1953 it had done so in combination with Mulraj and other was not sufficient to regard the sale as anything except business sale. It pointed out that the assessee was itself a legal entity and it held no controlling interest in the Elphinstone Mills not had any managing agency rights in respect of the said mills. Although, therefore, it had jointed the group of Mulraj Kersondas in the sale of its share in bulk in 1953, it had done so with no other motive except that of making profit in its business and the transaction entered into by the assessee was only an illustration of a type of transaction well known in the financial world, namely, purchase of the shares and control of industrial units and subsequent sale thereof when opportunity occurs. In the view of the Tribunal, therefore, the profit made by the assessee on the transaction was revenue profit and, therefore, liable to tax.

7. Mr. Palkhivala, the learned counsel appearing on the behalf of the assessee, has argued that the sale by the assessee in the present case was a sale on capital account. His argument is that although the assessee was a dealer in shares so far as the acquisition of the shares of the Elphinstone Mills was concerned, it was not acquiring the said shares as its stock-in-trade. The assessee was a controlled concern of Mulraj Kersondas. Mulraj Kersondas had control of the Elphinstone Mills and he had also control over the managing agency company of the Elphinstone Mills. The assessee itself was a shareholder o the managing agency company and, therefore, also interested in the managing agency. The assessee-company had purchased shares of the Elphinstone Mills not with a view to deal with them as a dealer in shares but with a view to support the managing agents of the Elphinstone Mills and to maintain control over the Elphinstone Mills. Mr. Palkhivala has also argued that the even if the assessee could not be regarded as having been an investor in the shares of the Elphinstone Mills right from the inception, at any rate, from the year 1949 onwards it has regarded its holding in the shares of the Elphinstone Mills as an investment in order to secure support to the managing agency of the said mills and consequently at the material time when the shares were sold they were not a part of the stock-in-trade of the assessee.

8. Now the argument of the learned counsel that the assessee was an investor in the shares of the Elphinstone Mills right from the inception cannot bear any scrutiny. The assessee was admittedly a dealer in shares. It had dealt in shares, including the shares of the Elphinstone Mills during its business for the years 1942-1948 without any manner of doubt. It had taken its profits and losses in the entire share business carried on by it, including the business in the Elphinstone Mill's share to the revenue account. No distinction has been made by assessee at any time in its books of account with regard to the shares of the Elphinstone Mills. There can be no manner of doubt therefore that till the year 1948, at any rate, the assessee was a dealer in the shares of the Elphinstone Mills. Mr. Palkhivala has pointed out that although undoubtedly there have been transactions both of purchase and sale in the shares of the Elphinstone Mills by the assessee during this period, the volume of purchases is comparatively larger than the volume of sales and at the end of the year 1948, the assesee was possessed of as many as 5,137 ordinary shares and 1,137 preference shares of the Elphinstone Mills. The large holding in the shares of the Elphinstone Mills would indicate, according to the learned counsel, that the attitude of the assessee towards these shares was different form its attitude with regard to its stock-in-trade. The large holdings of the assessee in the shares of the mills taken along with the circumstances that it was an associate concern of Mulraj Kersondas who had the control of the Elphinstone Mills and the managing agency of the said mills would lead to a reasonable inference that the assessee's holding in these shares was not as a stock-in-trade but to give support to the maintenance of control over the Elphinstone Mills by Mulraj Kersondas and the group of his associate concerns. In our opinion, the inference suggested by the learned counsel cannot be regarded as a correct inference. As we have already stated earlier the control over the Elphinstone Mills was acquired by Mulraj Kersondas in the year 1942 when he acquired the managing agency of the mills for a consideration of Rs. 6 lakhs. Mularaj's control over the Elphinstone Mills has continued thereafter until September, 1953, when he sold the shares and relinquished the managing agency rights in favour of K. D. Jalan. At the time when the control was acquired by Mulraj Kersondas, the assessee-company had not a large holding in the Elphinstone Mill's shares. The support of the holding of the assessee-company could therefore not have been required for the purpose of acquiring control. During the years 1943-48, the assessee purchased shares of the mills and also sold them. There is however nothing to indicate that there was any other purpose in the said purchases and sales, except the purpose of the business of the assessee. If the shares were being purchased for the purpose of giving support of the maintenance of control over the Elphinstone Mills by the group of Mulraj Kersondas, the assessee-company would not have indulged in sales of shares to a considerable extent as we have pointed out earlier. During the years 1943-48, a large number of shares have also been sold by the assessee. Thus, in 1944, 2,000 shares have also been sold and in 1947-48, 1,000 shares have been sold in each year. During all these years, the profits and losses in these shares have been treated on the same footing as the profits and losses in other shares by the assesee. Having regard to these circumstances, namely, the dealings both in purchases and sales of the shares of the mills and the conduct of the assessee in treating the profits and losses as business profits, we cannot agree with Mr. Palkhivala that the assessee was an investor right from the beginning or that its attitude in purchasing the shares of the Elphinstone Mills was in any way different from its attitude in purchasing other shares which were its stock-in-trade. Mr. Palkhivala's alternative argument is that at any rate after 1948 the holding in the shares of the Elphinstone Mills was regarded by the assessee not as its stock-in-trade but as investment. Mr. Palkhivala has argued that the circumstance that the assessee has been a dealer in shares for some years does not preclude it from being an investor in shares in subsequent years and he has for that purpose invited attention to the decision in Ladhu Ram Taparia v. Commissioner of Income-tax and New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax. Now it is true that a person who has been a dealer in shares in some years could be an investor in shares in subsequent years. It is also true that it is possible for a dealer in shares to convert a part of his stock-in-trade into investment. But what is necessary to find out is whether the assessee has done so in the present case. As has been observed by the Tribunal there is nothing in the books of the assessee or in its resolutions to show that it has changed its attitude towards the shares of the Elphinstone Mills. The only circumstances that can be pointed out in its resolutions to show that from the year 1949 onwards the assessee has not indulged in sales of the shares of the Elphinstone Mills but on the other hand has added to its holding. This circumstances however by itself is not sufficient to raise an inference that the assessee has treated its holding in shares as investment and has not effected any sales. In the year 1949-53 the shares of the Elphinstone Mills had slumped in price and that may very readily account for the assessee's not having effected any sales because it was not advantageous to sell. The circumstances that there have been further purchases made by the assessee during the time the prices for the shares had fallen down is not an unusual conduct on the part of the dealers in shares. It is very often that dealers in shares, who can afford to keep their holdings accumulated when the market is falling, accumulate their holdings so as to be in a position to sell the shares to advantage when a suitable opportunity occurs. We do not therefore find any substantial circumstance in the present case which would support the case of Mr. Palkhivala that the assessee was an investor in these shares from 1948 onwards. It is the argument of Mr. Palkhivala that, although the assesee was a dealer in shares, his considerable purchases in the shares of the Elphinstone Mills was with a view to support the managing agents of the mills, since the assessee itself had an interest in the managing agency company being one of its shareholders. Mr. Palkhivala argues that that is the finding of the Income-tax Officer and the Appellate Assistant Commissioner and his complaint is that the Income-tax Tribunal has ignored this vital aspect. According to Mr. Palkhivala, if the holding of the shares of the managing agents as held by the Income-tax Officer and the Appellate Assistant Commissioner, then on the principle of the decisions in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax and the unreported decision of this court in Income-tax Reference No. 41 of 1952 decided on the 11th March, 1953, the holding of the assessee in the shares of the Elphinstone Mills would be on capital. Now it is true that the Income-tax officer has made an observation in his order that 'the main idea of the assessee-company in purchasing the shares of the Elphinstone Mills was probably to support the managing agents in the general meetings of the shareholders of the Elphinstone Spinning & Weaving Mills was to make a profit in the business as a dealer in shares. It may be pointed out that it was not the case of the assessee before the Income-tax Officer that it had made purchases of the shares of the Elphinstone Mills with a view to give support to the managing agents in the general meeting of the shareholders. The case before the Income-tax Officer was that it had all along been an investor in the shares and, therefore, its holding in the shares was on capital account. The observation made by the Income-tax Officer in the circumstances was not a finding recorded by him but a possible inference which he dealt with in considering the entire circumstances of the case. When the matter went before the Appellate Assistant Commissioner he did not refer to the said observations of the Income-tax Officer and took the view that on the said position the holding of the assessee in the shares would be on capital account on the basis of the decision of Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax. It may,. however, be pointed out that the Appellate Assistant Commissioner was inclined to accept the inference that the main idea of the company in purchasing the shares was to support the managing agents because he was of the opinion that the said inference was supported by certain other facts, which were disclosed on the record. Thus, according to him, the assessee never had any dealings in ready shares and it was not authorised by its memorandum of association to deal in shares. It was in the light of these circumstances that he was disposed to take the view that the motive of the assessee in purchasing the sales was not to do business in the shares but to support the managing agents. The disposal of the shares by the assessee was, according to him, an integral part of the transaction of the sale of the managing agency and the entire transaction was motivated mainly by the illness of Mulraj Kersondas who was suffering from a heart attack and high blood pressure at the material time and there was, therefore, no profit motive in the sale of the shares by the assessee. Now the facts on which the Appellate Assistant Commissioner accepted the observations of the Income-tax Officer that the main idea of the assessee in purchasing the shares was to support the managing agents were the facts that the assessee was not a dealer in ready shares and was not authorised to do so by its memorandum of association had clearly and specifically authorised it to deal in shares. Assuming, therefore, that the acceptance of the said observation of the Income-tax Officer by the Appellate Assistant Commissioner could be regarded as a finding of fact arrived at by him, the said finding was clearly vitiated because it was based on facts which were contrary to the record. The findings of the Appellate Assistant Commissioner that the sale was motivated by the illness of Mulraj Kersondas was equally erroneous, because as pointed out by the Income-tax Tribunal, Mulraj Mersondas was not suffering from any illness and was actively engaged in business not only at the material time but even prior and subsequent thereto. It will, therefore, be seen that the observation of the Income-tax Officer was not in the nature of a finding of fact arrived at by him and the treatment of the said observations as a finding of fact by the Appellate Assistant Commissioner was influenced by his having completely misunderstood certain important facts on record. When the matter went before the Tribunal, the Tribunal considered all the circumstances of the case and came to the conclusion that the assessee's dealing in the shares of the Elphinstone Mills was nothing different from its other dealings as a dealer in shares. It is no doubt true that the Appellate Assistant Commissioner that the holding of the shares by the assessee was to give support to the managing agents at the general meetings of the company. It has, however, dealt with the circumstances on the basis of which the said finding could be arrived at are the circumstances that the assessee had acquired a considerable holding in the shares of the Elphinstone Mills and that for 4 or 5 years after 1949, it had effected no sales in those shares. Now both these circumstances have been considered by the Tribunal and it had held that these circumstances are not sufficient to warrant an inference that the holding of the shares of the Elphinstone Mills by the assessee could be regarded as on capital shares of the Elphinstone Mills by the assessee could be regarded as on capital account. Mr. Joshi, the learned counsel for the revenue, has urged that apart from the fact that it was never the case of the assessee before the Income-tax Officer it had purchased the shares for supporting the managing agents there were hardly any other circumstances, excepting the two pointed out above, which could warrant the inference that the purchase of the shares of the Elphinstone Mills was to support the managing agents. On the other hand, he says that the material on record points to the contrary. Thus, the conduct of the assessee in disposing of the large number of shares of the Elphinstone Mills during the years 1943-48 is inconsistent with the theory that the assessee was acquiring shares for the purpose of supporting the managing agents. There is nothing on record to show that during the years 1949-53 when no sales were effected, it was necessary to conserve the holding in the shares of the Elphinstone Mills because the managing agency was in any way threatened. The learned counsel says that, at the time when the managing agency was acquired, there was obviously no need to make any use of the holding of the assessee in the shares of the mills because the assessee at that time had hardly any shares; and subsequent to the acquisition of the managing agency until it was relinquished in 1943, there is nothing on record to show that at any time the managing agency had felt its existence either precarious or in need of support. There is considerable force in these submissions of the learned counsel for the revenue and having regard to all the circumstances of the case the contention of Mr. Pallhivala that the assessee had acquired its holding in the Elphinstone Mill's shares with a view to support the managing agency is not supported by any material on record. That being so, we cannot agree with Mr. Palkhivala that the Appellate Tribunal has overlooked a vital aspect of the case or has ignored any important material on record which was in favour of the assesee. Since the contention urged by Mr. Palkhivala cannot be accepted, the decisions in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax and in reference No. 41 of 1952, relied on by him, cannot help him. It may also be pointed out that in both these cases, the acquisition of the shares was by persons who were the managing agents or who wanted to acquire the managing agency. Those were not the cases of persons other than the managing agents who merely wanted to give support to the managing agents by the voting rights held by them by virtue of their shares. Mr. Joshi has argued that in view of this distinction the decision in the said cases will have no application to the present case even if we were to hold agreeing with Mr. Palkhivala that the main object of the assessee in purchasing the shares of the Elphinstone Mills was to give support to the managing agents at the general meetings of the company. We need not however consider the submission of Mr. Joshi in view of our conclusion that it cannot be said on the material on record that the main object of the assessee in acquiring the shares of the Elphinstone Mills was to give support to the managing agents. Having regard to these circumstances, we are of the opinion that the argument of Mr. Pallhivala that the holding of the assessee in the shares of Elphinstone Mills being on capital account, the sale thereof must also be regarded as on capital account cannot be accepted. In that view of the matter we must hold, agreeing with the Appellate Tribunal, that the profit made on the sale of shares by the assessee was the income of the assessee from its business.

9. The next question which falls to be considered in the present reference is whether the entire amount of Rs. 10,32,990 which the assessee received for its ordinary and preference shares represents exclusively the price of the shares or constitutes a composite payment for the price of the shares and certain other valuable rights. The assessee's case in this connection is that the transaction entered into by Mulraj Kersondas with K. D. Jalan of Calcutta which involved the sale of 25,000 ordinary shares and 10,000 preference shares of the Elphinstone Mills was not a transaction for the sale of shares simpliciter. The offer which Mulraj Kersondas made to K. D. Jalan on the 25th of September, 1953, comprised of four items, namely, the sale of 25,000 ordinary shares and 10,000 preference shares, procuring of the resignation of the present directors of the Elphinstone Mills, securing the appointment of persons of the choice of K. D. Jalan as directors of the company and obtaining the resignation of the present managing agents of the Elphinstone Mills. The consideration of Rs. 45 lakhs for this offer was a composite consideration for all these four items. After the offer was accepted by K. D. Jalan and the payment of Rs. 45 lakhs was paid by him to Mulraj Kerosndas, the latter appropriated Rs. 10 lakhs out of the aforesaid Rs. 45 to one of the four items, namely, the relinquishment of the managing agency. He paid that amount to the managing agents, M/s. Chidambaram Mulraj & Co. Ltd. who had relinquished the managing agency according to the directions of Mulraj Kersondas. Deducting this amount of Rs. 10 lakhs from the total consideration of Rs. 45 lakhs the remaining Rs. 35 lakhs was the consideration of the remaining three items, namely, the price of the shares, the resignation of the present directors and the appointment of new directors of the choice of K. D. Jalan. The latter two items, according to the assessee, may be regarded as 'controlling rights' in the Elphinstone Mills. The assessee's contention therefore is that the amount of Rs. 35 lakhs which was distributed by Mulraj Kersondas between 25,000 ordinary shares and 10,000 preference shares was the amount which he had paid to the holders of the said shares not only for the price of the shares but also for the controlling interest which had been parted with by them in favour of the purchasers of the shares. The assessee points out that at the material time when this transaction was gone through, the market price for the shares of the Elphinstone Mills was Rs. 37 for an ordinary share and Rs. 88 for a preference shares, each ordinary share was paid at the rate of Rs. 50. The excess amount paid by the purchaser over and above the market price was what was paid by him for the controlling interest, which was being transferred along with the shares. According to the assessee, therefore, the profit on the shares, if any, made by the assessee in the disposal of its holding of the ordinary and preference shares held by it must be calculated on the basis that what it got for the sale price of the shares only and not on the basis of the entire consideration received by it, which was obviously a composite payment received for the price of the shares and for the parting of the controlling interest. Mr. Palkhivala, on behalf of the assessee, invited out attention to decisions in Commissioner of Income-tax v. Ramnarain Sons Ltd, Puranmal Radhakishan & Company v. Commissioner of Income-tax and Baijnath Chaturbhuj v. Commissioner of Income-tax, in support of his submission that whenever a composite price is received for the sale of shares together with other valuable rights, the price paid has to be apportioned between the shares and other valuable rights for the purposes of ascertaining the assessable profit or loss on shares.

10. Now, there is no doubt that the offer made by Mulraj Kersondas to K. D. Jalan was for the sale of shares together with certain other advantages which could be valuable to the purchaser. K. D. Jalan, when he considered the offer and accepted it, did so in view of the power and other advantaged which he was getting along with the purchase of shares. It can no doubt be said that from the point of view of Jalan what he was paying for was not for the price of the shares simpliciter, but also for certain other valuable rights. The price of Rs. 45 lakhs which he paid was, therefore, a composite payment, which he was making for the shares and for the control which he was thereby acquiring. The relinquishment of the managing agency of the Elphinstone Mills was a valuable and important matter from the point of view of K. D. Jalan. There can be no doubt whatever that, in agreeing to the price, he was taking into consideration the value of the relinquishment of the managing agency. Mulraj Kersondas on receipt of the consideration appropriated a sum of Rs. 10 lakhs to the relinquishment of the managing agents and paid over that amount to the managing agents by way of compensation for loss of their office. The other two items, namely, the resignation of he present directors and the appointment of the new directors of the choice of K. D. Jalan were also valuable from the point of view of K. D. Jalan and those two advantages must also have influenced Jalan in agreeing to the price demanded by Mulraj. Mulraj Kersondas however in distributing the amount received by him did not set apart any amount for the said two items and he proceeded to distribute the entire amount of Rs. 35 lakhs amongst the ordinary and preference shares. Mr. Palkhivala's argument is that since no amount was set apart as was done in the case of managing agency but the same was included and distributed in the payment made for the ordinary and preference shares, in the price paid for every ordinary and every preference share there was involved a part which was attributable as a consideration for these two items. According to him, although Mulraj himself had set apart a sun of Rs. 10 lakhs as compensation for the loss of the managing agents, he income-tax authorities or the Tribunal were not bound by the said calculation and were free to increase or reduce the amount as they thought proper on a consideration of the true value of the managing agency rights. If on a proper appreciation of the correct value of the managing agency it was found that the managing agency was of greater value than Rs. 10 lakhs then the excess of that amount over Rs. 10 lakhs, which was distributed among the shareholders, would have to be taken off in order to determine the proper price for the shares received by the shareholders. According to Mr. Palkhivala, therefore, from the amount of Rs. 10,42,990 received by the assessee for its holding and preference shares, a certain amount appropriate to the other valuable rights must be taken out and it is only with reference to the balance that the profit or loss of the assessee in its business as a dealer in shares must be calculated.

11. Now what seems to us as necessary to be found that out in the present case is whether the assessee has received anything more than the price of its holding. It may be that on the total disposal of the entire block of shares in favour of Jalan, K. D. Jalan may have acquired a certain amount of controlling power apart from the mere acquisition of shares. It may also be that Mulraj Kersondas in going through the present transaction with K. D. Jalan might have given to K. D. Jalan in the said transaction not only shares but certain other advantages. We have however to consider the matter from the point of view of the assessee and what we have to see is what the assessee parted with and what the assessee got. It must be remembered that the assessee itself had no controlling interest in the Elphinstone Mills. It was not the managing agent of the Elphinstone Mills and its holding in the shares of the Elphinstone Mills was only to the extent of 13 per cent. which could not give it any controlling power. Mr. Palkhivala has stated that, although the assessee itself had not a sufficiently large holding to give it any controlling power, it was a member of the Mulraj Kersondas group and it was in correct with Mulraj who had considerable controlling power and interest. Mr. Palkhivala argues that the transaction entered into by Mulraj Kersondas with K. D. Jalan, although entered into by Mulraj alone, was as a matter of fact a transaction on behalf of the entire group of Mulraj Kersondas including the present assessee. What was being offered by Mulraj Kersondas to K. D. Jalan was on behalf of the entire group and therefore also on behalf of the assessee. The group had a built-in powers which it was proposing to transfer to K. D. Jalan under the scheme proposed by Mulraj Kersondas who was the representative of the group. According to Mr. Palkhivala, therefore, it would not be correct to say that the assessee-company was not parting with anything more than a block of its shares in the present deal. Now the theory that Mulraj kersondas and his associate concerns had formed a group and that the transaction with K. D. Jalan was not a transaction of Mulraj Kersondas himself but a transaction of the entire group does not appeal to be borne out by the record. The associate concerns in Mulraj group were dummies of Mulraj and entirely controlled by Mulraj. They had merely to do what was dictated to them by Mulraj. As we see from the letter was by Mulraj and was on his own behalf. His letter to the managing agents was a direction given by him to them to do certain things to suit his convenience and as we see from the record the said direction was promptly obeyed by them. It appears to us in the circumstances of the case that Mulraj Kersondas by reason of the influenced and power which he had at his disposal was in a position to command obedience to his wishes from his nominees or associate concerns. When Mulraj decided to enter into a transaction for the sale of shares with K. D. Jalan, he called upon the assessee to keep at his disposal the holding which the assessee had in the shares of the Elphinstone Mills. No power or control was held ny the assessee in the Elphinstone Mills. It was not in a position to procure the resignation of the existing directors, nor to bring the appointment of direction of the choice of K. D. Jalan, nor was it in a position to call upon the managing agents to relinquish their office. All these things were, however, possible to Mulraj Kersondas because of the influenced and power which he possessed. The part of the assessee in the transaction with K. D. Jalan was merely keeping at the disposal of Mulraj the holding in Elphinstone Mill's shares which it had held in its business as a dealer in shares, So far as the assessee is concerned, what it parted with was the shares which it held and what it received was the payment for them. We do not think that the assessee in keeping its shares at the disposal of Mulraj Kersondas was doing anything more than what a declare in shares would do to secure best advantage for himself. It may be that out of the consideration of Rs. 45 lakhs received by Mulraj Kersondas, if he had so chosen, he could have kept apart a certain sum for the other items before distributing the price of the shares. But the circumstances that Mulraj Kersondas has not done would not make any part of the price, which the assessee had received in return, anything else than the price of the shares. From the point of view of the assessee's business, the entire sum received by it from Mulraj Kersondas was a price of the shares disposed of by Mulraj Kersondas and consequently, the whole of the excess over the cost price of the shares of the assessee is the profit of the assessee in its business in shares. In our opinion, therefore, no part of the amount of Rs. 10,42,990 received by the assesee from Mulraj Kersondas can be regarded as consideration for any other valuable rights, excepting the price of the shares sold by it.

12. In the result, therefore, our answer to the questions referred to us by the Tribunal arising for determination in the present reference are as follows

13. With regard to the first question our answer is in the affirmative and with regard to the second question we hold that the entire amount received is for the price of the shares. In view of our answer to the second question, the third question does not survive and, therefore, need not be answered. The assessee will pay the costs of the department.

14. Mr. Palkhivala has handed over to us during the course of the argument the grounds of appeal filled by the departmental before the Tribunal and a copy of the application made by the assessee for reference under section 66(1). He has requested that we should take these documents on record. The reason urged by Mr. Palkhivala in support of this request is that in the statement made by the Tribunal in paragraph 18 of the statement drawn by it, the Tribunal has stated thus :

'The only objection of the assessee to the statement of the case is that the Income-tax Officer having held that the shares were acquired probably to support the managing agency, it was not open to him to contend that the assessee was a dealer in those shares from the date of acquisition. The objection is misconceived, firstly, as it does not arise out of the order of the Tribunal, and, secondly, as the Income-tax Officer, has in paragraph 10 of his order dated March 7,1955, held that the motive in selling shares and transferring the managing agency was to make a profit and that this motive had existed all along while the shares were being acquired.'

15. Mr. Palkhivala says that the Tribunal is wrong in saying that the question whether the shares were acquired by the assessee-company to support the managing agency does not arise on its order. The assessee had, as a matter of fact, raised the said argument before the Tribunal, and in the reference application which it had made referred to having raised the said point and having cited even authorities in support of the said point. Although Mr. Joshi for the revenue has objected to our taking these documents on record, in view of the submission urged by Mr. Palkhivala we have acceded to his request to take the documents on record as desired by him.


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