1. This is a reference under section 66 (2) of the Indian Income-tax Act, 1922, for the determination of there questions :
'(1) Whether, on the facts and in the circumstances of the case, the loss of Rs. 5,44,580 (rupees five lakhs forty-four thousand five hundred and eighty) on sale of shares of the Jupiter General Insurance Co. Ltd. and East and West Insurance Co. Ltd. was a revenue loss allowable in computing the business of the petitioners
(2) Whether there is any evidence for coming to the conclusion that the sole intention in purchasing the shares of the Jupiter General Insurance Co. Ltd. and East and West Insurance Co. Ltd. in the year ending March 31, 1949, was to acquire a hold over the insurance companies
(3) Whether, on the facts and in the circumstances, the Tribunal has misdirected itself in law and acted without evidence in coming to the conclusion that the loss of Rs. 5,44,580 (rupees five lakhs forty-four thousand five-hundred and eighty) was not a revenue loss but a capital loss ?'
2. The assessee, Messrs. New Prahlad Mills (P.) Ltd., is engaged in the business of manufacture and sale of textiles. Its affairs were formerly managed by the Bombay Company Ltd., but in February, 1946, the whole of its share capital was purchased by Amrit Vanaspati company who were appointed as its managing agents. The affairs of the Amrit Vanaspati Company were managed by two persons called G. L. Bajaj and T. P. Khetan.
3. In the assessment year 1949-50 for which the corresponding accounting year ended on the 31st of March, 1949, the assessee showed a loss of Rs. 5,44,580 on the sale of its holdings in two companies, the Jupiter Insurance Company Ltd. and the East and West Insurance Company Ltd. (hereinafter called 'Jupiter' and 'East and West', respectively). This controversy before us centres round the question whether the loss claimed by the assessee is a revenue loss or a capital loss.
4. The case of the assessee being that the transactions in purchase and sale of shares spreading over a period of three years constituted a single adventure, it is necessary, for a proper appreciation of the questions involved in the reference, to trace the pattern of these transactions from their commencement.
5. Accounting year ended on the 31st of March, 1947 :
On the 20th of February, 1947, the assessee purchased 18,900 ordinary shares and 21,850 preference shares of Jupiter and 70,000 shares of East and West, for a composite price of Rs. 17,87,500 which was far higher than the market price. The shares were purchased from Sir Alagappa Chettiar who wanted to sell the shares of the two companies in a block or not at all. By reason of that condition, the assessee had to purchase the shares of East and West though it wanted to purchase the Jupiter shares only.
Accounting year ended on the 31st of March, 1948 :
From 1st of April, 1947, to 31st of March, 1948, the assessee purchased 2,207 ordinary shares and 3,954 preference shares of Jupiter. It also purchased 500 shares of National machinery Manufacturing Company but we are not concerned with that transaction. These purchases were made in different lots in the open market for a total consideration of Rs. 2,00,288.
6. During this period, the assessee sole 250 ordinary shares of Jupiter and 6,800 shares of East and West. These shares were sold in the open market for a total consideration of Rs. 15,800.
Accounting year ended on the 30th March, 1949 :
During this period, that is to say, from 1st April, 1948, to 31st March, 1949, the assessee purchased 42,148 ordinary shares and 52 preference shares of Jupiter and 6,800 shares of East and West. The ordinary shares of Jupiter were purchased from East and West Insurance Company, while the acquisition of 6,800 shares of East and West was in the nature of a repurchase of the shares which were sole by the assessee in the previous accounting year. The three lots of shares were purchased for a total consideration of Rs. 24,29,535.
7. In April, 1948, the assessee sold 70,000 shares of East and West for a consideration of Rs. 3,50,000. In January, 1949, it sold 63,000 ordinary shares of Jupiter for Rs. 28,50,000 and 25,000 preference shares of that company for Rs. 6,25,000.
8. After these sales, the assessee was left with five ordinary shares and 856 preference shares of Jupiter and 500 shares of National Machinery Manufacturing Company. At the close of the year, that is, on the 31st of March, 1949, the assessee valued these shares at the market price of Rs. 67,443. On the basis of this valuation it claimed the loss of Rs. 5,44,580.
9. During the course of assessment proceedings, the Income-tax Officer asked the assessee to state what was the object of purchase of the various shares and in reply the assessee stated that it object was to 'raise their market values and resell them with a view to earn profit.' The Income-tax Officer rejected this explanation and held that the shares were purchased by the assessee, not for the purpose of dealing in them, but as an investment to acquire a controlling interest in Jupiter.
10. The Appellate Assistant Commissioner and the Tribunal also took the same view. The Tribunal dismissed the assessee's appeal in regard to the loss claimed by it, but it expressed itself equivocally by saying that 'the assessee was not merely interested in the purchase of the shares, wait for a rise in prices, and then to sell the shares at profit, but it was interested in having a hold in the insurance companies' and 'the purchase and the sale of shares in this case, as pointed out, involves somethings more than the mere idea of realising a higher price on the sale of shares by trading in them.'
11. The Tribunal rejected the assessee's application under section 66 (1) but the High Court entertained the application under section 66 (2) and asked the Tribunal to submit a statement of the case on the three questions mentioned at the outset of this judgment. The reference came for hearing before Kotwal C.J. and V. S. Desai J. who, by their judgment of the 4th of August, 1969, called for a supplementary statement of the case. The learned Chief Justice, who delivered the judgment of the Bench, observed that the Tribunal's findings showed that the assessee did have the intention of trading in shares but that it had also got the intention of acquiring control of the two insurance companies. The Tribunal, however, had not adverted to many an important aspect of the matter of control; as, for example, it did not consider the sales effected by the assessee, not, indeed, did it consider the extent of the voting rights under the control of the assessee. A further statement of the case, therefore, became necessary and was called for.
12. The Tribunal has now submitted a supplementary statement of the case to which are attached six agreed annexures showing the holdings of the assessee and its nominees in Jupiter, the holding of East and West in Jupiter and the percentage of votes controlled by the assessee in Jupiter.
13. In paragraph 10 of the supplementary statement, the Tribunal observes that there was no material whatsoever before it when it heard the appeal, showing to what extent the assessee controlled the affairs of East and West. The department produced additional evidence before the Tribunal at the stage of the supplementary statement of the case and on the assumption that the said evidence was admissible, the Tribunal has found that the assessee had complete control over East and West.
14. The question that arises for consideration is whether the transactions of purchase and sale of shares are in the nature of trade or whether they are in the nature of an acquisition of a capital asset. In Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax, the Supreme Court observes that in considering whether a transaction is or is not 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 are associated of with the concept of trade or business. The question whether the assessee's transactions amount to dealing in shares or to investment is 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, is a question of law. In Commissioner of Income-tax v. National Finance Ltd., the Supreme Court has reiterated the same view by saying that though the question whether a particular loss is a trading loss or a loss on the capital side, depends on the facts of each case, the question is not one of pure fact but a mixed question of fact and law, and the decided cases indicate how the matter is to be viewed in the context of the facts.
15. The case of the assessee is that it purchased the shares of Jupiter for boosting up their prices and then selling them at a profit and not for acquiring control either of that company or of East and West. Now, in regard to the letter company, the Tribunal has found that the assessee never wanted to purchase the shares of that company but it was obliged to purchase them along with the shares of Jupiter, because the vendor stipulated for a block sale. It cannot, therefore, be said that the assessee had any intention to acquire a controlling interest in East and West.
16. Annexed to the supplementary statement of the case dated the 28th February, 1970, are six agreed statements which show the shares held by the assessee and its nominee-directors in Jupiter, the shares held by East and West in Jupiter and the percentage of voting rights which was under the control of the assessee at different periods. The overall position is the control of the assessee at different periods. The overall position is reflected in annexure A-6 which is a summary of the five agreed statements which are annexures A-1 to A-5. Theses agreed statements and the summary show that on the 28th February, 1947, when the first block of shares was purchased by the assessee, it held 21,850 preference shares and 19,676 ordinary shares in Jupiter. East and West held 41,260 ordinary shares in Jupiter on that date. On the basis of shares held by the assessee in Jupiter it had a control over 22.42 per cent. of the voting rights in Jupiter. If the shares held by East and West in Jupiter are taken into consideration, the assessee controlled 47.90 per cent. voting rights in Jupiter. This state of affairs continued from the 28th of February, 1947, till the 17th of July, 1947, when the annual general meeting of Jupiter was held. On the 15th of February, 1948, this position underwent a slight change. On the basis of its own holdings in Jupiter, the assessee controlled 22.20 per cent. voting rights in Jupiter. If the shares held by East and West in Jupiter are taken into account, the control of the assessee over the voting rights in Jupiter would be 49.72 per cent.
17. The summary shows that if one were to have regard to the holding of the assessee itself in Jupiter, the assessee never controlled 50 per cent. or more of the voting rights in that company, at any stage. If, however, the shares held by East and West in Jupiter are taken into account, the assessee had control over 50.05 per cent. voting rights in Jupiter on the 16th February, 1948, and it had control over 50.54 per cent. voting rights on 31st March, 1948, and 21st April, 1948. On this latter basis, the assessee controlled more than 50 per cent. voting power in Jupiter for a little over 70 days. On the 30th April, 1948, it sold its entire holding in East and West.
18. It is important that if the assessee had continued to hold the 25,000 preference shares of Jupiter, which it sold on the 30th April, 1948, it would have been able to acquire control of that company. The total number of votes in Jupiter was 1,49,980, 50 per cent. of which is 74,990. If the assessee had not parted with 25,000 preference shares, it would have held 25,804 preference shares in all, which commanded 12,902 votes. The assessee was then holding 62,893 ordinary shares of Jupiter which commanded as many, that is, 62,893 votes. Thus, the assessee could have controlled 12,902 plus 62,893 equal to 75,795 votes, which was more than 50 per cent. of the total number of votes in Jupiter.
19. The three relevant annual general meetings of Jupiter were held on the 17th of July, 1947, 7th of June, 1948, and 15th of September, 1949. On none of these dates did the assessee have control over more than 50 per cent. of the voting rights in Jupiter, even if the holding of East and West in Jupiter is taken into account. What is even more significant is that though the assessee, through its own holding and the holding of East and West in Jupiter, had come to control more than 50 per cent. voting rights in Jupiter in February, 1948, it sold 70,000 shares of East and West in April, 1948, and it also sold 63,000 ordinary shares and 25,000 preference shares of Jupiter in January, 1949. These sales falsify the theory that the assessee had purchased the shares for acquiring control over the affairs of Jupiter. That could not be its real object.
20. The assessee, it seems to us, purchased the shares with a view to boosting up their prices and selling them at an inflated price. For a purchaser wishing to acquire control of Jupiter, a large block of shares would be a valuable asset and the various steps in the transaction of preaches and sale were directed at adding to the shares the weight of such controlling interest. The assessee succeeded in selling the shares at an inflated price but it had made its own purchases at such a high price that the adventure landed it in a loss of Rs. 5,44,580.
21. The conclusion that the assessee was in a position to control the affairs of Jupiter is reached by the Tribunal thus :
'Again, from the figures furnished to us by the learned counsel at the time of the hearing, we find that in regard to the Jupiter Insurance shares, of the total of 1,24,996 ordinary shares issued by the company as at March 31, 1949, the assessee had purchased during the three years as many as 62,255 shares which is more than 50% of the total issued share capital of the company. Similarly, out of the total of 49,967 preference share of the company the assessee had purchased as many as 25,856 shares which again was more than 50% of the total issued capital.'
22. In reaching this conclusion, the Tribunal has overlooked that in January, 1949, the assessee had sold 63,000 ordinary shares and 25,000 preference shares of Jupiter. What was relevant was not whether the purchases made by the assessee over a period of three years exceeded 50 per cent. of the total issued share capital of Jupiter but whether after taking into account the purchases and sales made from time to time, the assessee controlled more than 50 per cent. voting rights in Jupiter, at any given point of time.
23. It is urged for the revenue that though the assessee had sold shares of Jupiter and of East and West during the year ending 31st March, 1948, it did not show either profit or loss in its return and, therefore, it did not itself treat the transactions as trading transactions. We see no substance in this contention, because in the first place there is no evidence that either a profit or a loss had accrued in the year of account ended the 31st of March, 1948. Secondly, the purchases made by the assessee from Sir Alagappa Chettiar were for a consolidated consideration of Rs. 17,87,500 and that amount could not be split up for the purpose of working out whether in the year ended the 31st of March, 1948, a profit or loss had accrued.
24. It is then said that the assessee had not valued its stock-in-trade on the 31st of March, 1948, at the market rate which shows that the transactions are not trading transactions. Now, in appreciating this contention, it must be borne in mind that the assessee had purchased the shares in bulk and the price paid by it was far higher than the price which ruled in the market. In the very nature of things, therefore, it would not have been possible for the assessee to value the shares on the 31st of March, 1948, at the market rate. Then again, as observed by the Supreme Court in Investment Ltd. v. Commissioner of Income-tax :
'Valuation of stock at cost is one of the recognised methods. No inference may, therefore, arise from the employment by the company of the method of valuing stock at cost, that the stock valued was not stock-in-trade.'
25. Counsel for the revenue contends that the assessee had no power under its memorandum to deal in shares and, therefore, it would be legitimate to infer that the assessee had not dealt in shares but had merely acquired a capital asset. Among the object for which the company was established are :
'To undertake any transaction and to carry on any business commonly undertaken or carried on by financiers, bankers, underwriters, concessionaires, contractors for public and other works, capitalist or merchants and to transact and carry on all kinds of guarantee agency commission and mercantile business.'
26. That is sub-clause (8) of clause 3 of the memorandum. Considering the width of the language used in the sub-clause, it is difficult to take the view that the assessee had no power to deal in shares. Financiers, banker and underwriters do trade in shares commonly. Apart from that, whether the memorandum conferred upon the assessee the power to trade in shares cannot determine the nature of the transaction which it has entered into. In Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, the Supreme Court observes :
'The circumstance whether a transaction is or is not within the company's powers has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income.'
27. Counsel for the revenue relies on the following circumstances as showing that are not trading transaction but this is the acquisition of a capital asset : (1) The business of the assessee is to manufacture and sell textiles and not to deal in shares; (2) the assessee had not done any trading transaction in the past; (3) the Purchase price paid by the assessee in 1947 was far above the market price; (4) the assessee unwillingly accepted the shares of East and West which a trader will normally not do; and (5) that after the acquisition of the first block of shares, three directors were appointed on the board of Jupiter who were intimately associated with the affairs of the assessee.
28. These circumstances are relevant and must be taken into account for determining whether the loss claimed by the assessee is a trading loss. But they cannot be considered in isolation. They have to be considered along with the other circumstances which we have discussed already. Thus considered, the circumstances are incapable of supporting the inference that the assessee had acquired a capital asset. We would recall attention in this behalf to the salient fact that the assessee sold its holdings in Jupiter at a time when it could have captured control of that company. If the intention was to purchase the shares of that company for the purpose of acquiring control over its affairs, it is unthinkable that at a crucial moment the assessee would have sold its holding in that company. Earlier, we have demonstrated how if the assessee had continued to hold 25,000 preference shares which it sold on the 30th April, 1948, it could have controlled more than 50 per cent. voting rights in Jupiter.
29. Counsel for the department has drawn our attention to the decisions in Commissioner of Income-tax v. Ramnarain Sons Ltd., Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax, Commissioner of Income-tax v. National finance Ltd. and Raja Bahadur Kamakhya Narain Singh v. Commissioner of Income-tax, but these cases, in our opinion, have no application. The decision of this High Court in Commissioner of Income-tax v. Ramnarain Sons Ltd. was carried in appeal to the Supreme Court and the judgment of the Supreme Court is reported as Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax. Both the High Court and the Supreme Court found in that the object of the assess was to acquire had managing agency and that led to the inference that the assessee had acquired a capital asset. In Commissioner of Income-tax v. National finance Ltd. also, it was held that the object of the company in purchasing certain shares was to acquire a lucrative managing agency and, therefore, the acquisition was of a capital asset. In Raja Bahadur Kamakhya Narain Singh v. Commissioner of Income-tax, it was held that the surplus realised by the assessee by the sale of a certain quantity of gold and shares was by way of realisation of investment and was not in the nature of a trading profit. The assessee in that case had waited for four years to sell the gold and the shares were held to have been acquired for the purpose of obtaining control over the management of a company.
30. We are, therefore, of the opinion that the loss of Rs. 5,44,580 suffered by the assessee on the sale of Jupiter shares and East and West shares is a trading or revenue loss which is allowable in computing its business income. Accordingly, we answer question No. 1 in the affirmative.
31. Question No. 2 cannot properly arise our of the finding of the Tribunal because the question assumes that the Tribunal had held that 'the sole intention of the assessee in purchasing the shares was to acquire a hold over the two insurance companies'. The finding of the Tribunal is 'that the assessee was not merely interested in the purchase of the shares wait for a rise in prices, and then to sell the shares at profit, but it was interested in having a hold in the insurance companies.' The Tribunal took the view that though the assessee was interested in selling shares at a profit, it was also interested in obtaining control over the two insurance companies. There is, therefore, no occasion for considering whether there is any evidence for coming to the conclusion that 'the sole intention' of the assessee in purchasing the shares of the two insurance companies was to acquire a hold over them.
32. On the assumption, however, that the question can properly arise out of the judgment of the Tribunal, we must answer it in the negative, because there is no evidence for coming to the conclusion that the 'sole intention' of the assessee in purchasing the shares of the two insurance companies was to obtain control over those companies. We have already adverted to the various facts and circumstances relating to this aspect of the matter, while discussing the first question.
33. On the third question, our opinion, consistently with our finding on the first question, is that the Tribunal misdirected itself in law in coming to the conclusion that the loss of Rs. 5,44,580 is not a revenue loss but is a capital loss.
34. The Commissioner will pay to the assessee the costs of this reference.