Jeevan Reddy, J.
1. The Income-tax Appellate Tribunal, Hyderabad, has referred the following three questions for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's finding that the shares acquired by the assessee on distribution of assets on dissolution of the firm, constituted the stock-in-trade of the assessee's business, is rationally possible
(2) Whether, on the facts and in the circumstances of the case, the sale in respect of 1/3rd of the shareholdings acquired by the Government from the assessee, could not be held to be a conditional sale and the corresponding loss disallowed
If the answer to question No. 2 above is in the negative -
(3) Whether, on the facts and in the circumstances of the case, the entire loss of Rs. 2,25,690 could not be disallowed as capital loss ?'
2. We shall state the relevant facts as they appear from the statement of the case, and the orders annexed thereto.
3. A firm name 'Dayaram Surajmal', consisting of five partners, including Pannalal Lahoti, was acting as the managing agents of M. S. K. Mills situated at Gulbarga (now in the State Karnataka). This firm was initially constituted in 1926; but, thereafter, there was a reconstitution under a partnership deed dated September 2, 1946. The business of this firm was banking, oil mills, commission, ginning, press, factories and money-lending. Pannalal Lahoti died on April 26, 1956, leaving behind him his widow, Smt. Bhima Bai, and his daughter, Godavari Bai. He had executed a will dated April 21, 1956, appointing his wife and his brother-in-law, Sri. B. M. Bhandari, as executors. Consequent on the death of Pannalal Lahoti, the aforesaid firm was dissolved on October 31, 1959, and a deed of dissolution recorded on July 4, 1960. Meanwhile, Smt. Bhima Bai, the widow of Pannalal Lahoti, also died after adopting one Sri Sureshchandra Lahoti, in exercise of the power given to her by her husband. On the dissolution of the said firm, 54974 shares of M. S. K. Mills, out of the shares held by the firm were allotted to the share of Lahoti. Each of these shares was in the face value of Rs. 10, but they were allotted to the Lahoti's estate at the rate of Rs. 5, which was the then the market value. It appears that M.S.K. Mills (hereinafter referred to as 'the mills') was running in grave financial difficulties. It had borrowed heavily from the Punjab National Bank, and was also in arrears of contribution to the Regional Provident Fund Commissioner, and was not able to meet its obligations. In such a situation, the principal shareholders of the mills, including Sri Bhandari, the sole executor of the Lahoti's estate, approached the Chief Minister of Mysore, by their letter dated June 16, 1960, with a request for financial assistance, for better and economic working of the mills, and also to discharge the liabilities owing to the Punjab National Bank and the Regional Provident Fund Commissioner. It is relevant to note the terms offered by the principal shareholders, which were ultimately accepted by the Government of Mysore. They were : (i) to transfer 51% of their shareholding in the mills to the Government of Mysore; (ii) to retain the sum of Rs. 4,00,000, which had already been advanced by them to the mills, for a further period of five years, without charging any interest; (iii) to provide a further sum of Rs. 2,50,000 for the working of the mills; and (iv) 2,50,000 for the working of the mills; and (iv) to accept suitable arrangement with the Government's representative, for the proper and efficient management of the affairs of the mills. In lieu thereof, the Govt. of Mysore, by its letter dated November 11, 1960, agreed to assist the mills to the extent of Rs. 14.5 lakhs. Accordingly, 51% of the shares held by Lahoti's estate were transferred to be Government, at the rate of 2 1/4 paise per share, i.e., @ 1/4 per cent. of their face value. The Govt. of Mysore agreed further to transfer back 1/3 of the shares so transferred to it, at the same rate, after the amounts advanced by it were discharged. It appears that the amounts advanced by the Government of Karnataka were found not sufficient and, accordingly, there was another agreement on January 25, 1964, whereunder the Government agree to advance a further sum of Rs. 60 lakhs. But the further condition imposed in lieu of this fresh advance was that 1/3 of the shares which the Government had agreed to convey back, shall be held by the Government till the end of the year 1975, or till the amount of Rs. 60 lakhs advanced by the Government was repaid, whichever was earlier. It was further agreed that the dividend or bonus that might be declared by the mills relating to the said 17% of shares, should be paid over to the principal shareholder. In pursuance of the above agreement, 45,365 shares out of 54,974 shares held by Lahoti's estate, were transfer by the exectour, Shri. Bhandari, to the Government of Karnataka, at the rate of 21/2 paise per share, i.e., for a total sum of Rs. 1,135. The estate of the deceased Lahoti valued the remaining 9,609 shares at Rs. 48,045, at the rate of Rs. 5 per share, and thus arrived at a loss of Rs. 2,25,690, and claimed it as a revenue loss in the relevant accounting year. The ITO accepted this claim but the Commissioner, exercising his power under s. 263, set aside the order of the ITO. The Commissioner held that the transferred shares constituted a capital asset in the hands of the executor and, therefore, any loss resulting from the said transaction was a capital loss. Further, he made a distinction between 17% of the shares which were agreed to be conveyed back to the principal shareholders, and the remaining 34%. In view of the agreement of the Government of Mysore to convey back 17% of the shares after its debt was repaid, and also its further agreement to pay the dividends, paid on these shares meanwhile, to the principal shareholders, the Commissioner held that the transaction in so far as these 17% of the shares were concerned, was really in the nature of a mortgage by conditional sale. He held that the proportionate (loss in a sum of Rs. 75,230) cannot be allowed either as capital loss, or as revenue loss. With respect to the balance of loss of Rs. 1,50,460 relatable to 34% of shares, he held that it is a capital loss, and not allowable as a revenue loss.
4. Against the order of the Commissioner, the assessee filed an appeal before the Tribunal, which was heard by a Bench consisting of two Members. The Accountant Member agreed with the assessee that it was a revenue loss and liable to be treated as such, as claimed by the assessee. With respect to the 17% of shares also, the Accountant Member disagreed with the Commissioner, and held that it was a case of a sale with an agreement to reconvey and that no distinction can be made between 17% of shares and the remaining 34% of shares.
5. The Judicial Member, however, came to a different conclusion. He held that on the dissolution of the firm, M/s. Dayaram Surajmal, the shares allotted to Lahoti's estate constituted its capital asset, and treating them as capital asset only in the hands of executor, they were sold to the Govt. of Karnataka, as aforesaid. With respect to the 17% of shares,however, the Judicial Member also disagreed with the Commissioner, holding that the theory of mortgage by conditional sale was not correct and that even with respect to these 17% of shares, there was a sale. In view of the difference of opinion between the two Members, the matter was referred to a third Member, the Vice-President of the Tribunal, under s. 255(4) of the Act.
6. The third Member adopted the facts as stated in the order of the Judicial Member; but, ultimately agreed with the view taken by the Accountant Member. It would be relevant to notice briefly the reasoning and the findings of the third Member. He observed in the first instance that, prima facie, the assets received by a partner on the distribution in specie of the assets of the firm on its dissolution, inter se the partners, would be capital in the hands of partner. Then he posed the question : whether there were any circumstances to come to the conclusion that, in the present case, they constituted the stock-in-trade in the hands of assessee He then noted the fact that Pannalal Lahoti was registered as a dealer in shares and that, after his death, the executor, Shri. Bhandari, also took out a similar licence for dealing in shares. He, however, observed that, even a dealer in shares may hold some shares as investments, and the other as stock-in-trade; and one has, therefore, to consider whether there was anything in the manner of acquisition, the treatment given in the books, and the circumstances attending the sale of these shares, upon which it could be held that the assessee treated these shares as stock-in-trade. Another principle enunciated by the third Member was that, where a person inherits a business but continues to carry it on, there is a simultaneous acquisition of a capital asset and the conversion of its stock into his stock-in-trade. Looked at from this angle, he observed, there were some aspects in the present case which made it appear that the assessee had agreed to take the shares in lieu of his interest in the firm, as he was a dealer in shares, and hoped eventually to make a good bargain out of what was a bad asset. The three circumstances relied upon by him in this behalf, are : (i) the shares were acquired by the assessee at their market value, at the time of their acquisition; (ii) in October, 1957, the executor was admitted as a member of the stock exchange on his application. This application was made at about the time the shares were being distributed by the dissolved firm; and (iii) though the shares came to the assessee on the dissolution of the firm, their value as an investment was very poor. The third Member next dealt with the reason given by the Commissioner, and held that none of the reasons pointed out by the Commissioner are sustainable in law. The points made out by the Commissioner by negatived by the Third Member, are : (i) the assessee was not revaluing the shares year after year, though their value was fast declining. The third Member observed that the assessee was not revaluing even the other shares, admittedly held by him as stock-in-trade; (ii) during the period between acquisition (October, 1957) and their sale (in the year 1960) the assessee never dealt in these shares. The third Member observed that this was of no relevance, because the assessee might have expected a rise in their value, as a result of his deal with the Govt. of Karnataka; (iii) the sale of shares - which were then quoted on the stock exchange @ Rs. 2 per share-at the rate of 2-1/2 paise per share. The third Member observed that, according to the statement filed by the assessee before the Tribunal, these shares were not at all quoted on any stock exchange after 1957 and that, according to that statement, the intrinsic value of the shares was 'nil' as on September 30, 1962. The third Member, accordingly, held : 'there is, therefore, no ground to presume that the shares were sold much below the market price or that this indicates that the assessee did not treat them as stock-in-trade'. The third Member then considered the circumstances attending the sale, and held, agreeing with the Accountant Member, that there was nothing in the sale transaction itself which renders it as one on capital account. He observed that the assessee had no interest in the mills, other than as a shareholder and that the financial arrangements were made not with a view to increase the assessee's control over the mills, but only with a view to see that the value of the shares is enhanced; and his interest in doing all this was only that of a dealer in shares. He observed further that, when the assessee was selling away a major portion of his shares, it cannot be said that he was doing all that to retain control over the mills. He observed finally that the transaction entered into with the Govt. of Karnataka was one that a dealer in shares would enter into and that, it was the best bargain which the assessee, in the circumstances, could enter into, to salvage his stock.
7. In this referred case, it is contended by Sri M. S. Murthy, the learned standing counsel for the Department, that the conclusion of the majority of the Members of the Tribunal, is unsustainable in the facts and circumstances of the case, judged in the light of the relevant legal principles. He submitted that the question, whether the loss was a capital loss or a revenue loss, is a mixed question of fact and law, and not a pure question of fact. He submitted that, once it is held that the shares allotted to the assessee on the dissolution of the firm, M/s. Dayaram Surajmal, constituted a capital asset in his hands, it was for the assessee to show and establish how and in what manner did he convert them into a stock-in-trade. He submitted that absolutely no material has been placed by the assessee before the authorities to show any such conduct on his part. Counsel disputed the reasoning of the third Member, upon which he held that even the acquisition of these shares by the assessee, in pursuance of the dissolution of the erstwhile firm, was with a view to treat them as stock-in-trade. Learned counsel supported the reasoning and the conclusion of the Judicial Member and commended the same for our acceptance. He submitted further that, in so far as the 17% of shares are concerned, it was only a transaction of mortgage by conditional sale, because they were transferred only as a security for the loan, and only with a view to deprive the shareholder of their voting power, pending satisfaction of the amounts advanced by the Govt. of Karnataka. He laid particular stress upon the fact that, even during the period the shares were held by the Govt., the dividends or any other amounts payable in respect of these shares, was to be paid over to the shareholders only.
8. On the other hand, it is contended by Sri. N. V. Ranganadham, learned counsel for the assessee, that the fact that the executor got admitted as a member of the stock exchange, at about the time these shares were allotted to him, and the fact that these shares were dealt with in the same manner as the other shares admittedly held a stock-in-trade, clearly show that the assessee was treating the shares as stock-in-trade. He submitted that the bargain which the assessee and the other principal shareholders struck with the Govt. of Karnataka, was only with a view to enhance the value of these shares, so that they can be sold at a better price. Learned counsel supported the reasoning and the conclusion of the Accountant Member and the third Member of the Tribunal.
9. Now, the principal is well settled that the stock-in-trade of a joint family or a firm, when allotted to a member on partition or dissolution, would become capital assets in his hands, and subsequent sale by him would result in capital gain unless there is evidence to show that he treated them as his stock-in-trade. That this is a well settled principle has also been accepted by the Judicial Member, as also by the third Member (Vice-President) of the Tribunal, though the latter seeks to qualify it by saying that that is a prima facie rule. The third Member has given three reasons for holding that 'the assessee may have agreed to take these shares in lieu of his interest in the firm as he was a sharedealer and hoped eventually to make a good bargain out of what was a bad asset'. Firstly, the third Member has not recorded a definite finding. What all he says is that the assessee 'may have agreed' to take the shares in lieu of his interest in the firm as he was a dealer in shares, and hoped eventually to make a good bargain. Secondly, we find that the three reasons given by him, viz., (i) the acquisition of shares at their market value, (ii) admission of the executor as a member of the stock exchange at about that time, and (iii) the value of the shares as investment on that date was very poor do not lead to the conclusion, which he did. We are of the opinion that two of the three reasons given by the third Member in this behalf are not at all relevant. We are unable to see as to how the fact that these shares were allotted to Lahoti's estate at their market value on the date of their allotment is relevant to say that the executor received these shares as stock-in-trade. Admittedly, the market value of these shares on the date of their allotment to Lahoti's estate was Rs. 5 per share; and because the firm was dissolved and its assets including the shares of M. S. K. Mills held by it, were being distributed among the partners, the market value was adopted, instead of their face value. Similarly, the third reason given, viz., that on the date of allotment their value as investment was very poor, can hardly be said to be relevant on the said question. Indeed, it is difficult to see how these circumstances are indicative of the intention to treat them as stock-in-trade, on the part of Sri Bhandari. The firm was dissolved as a result of the death of Lahoti, and not because the mill was not doing well. Now, the second reason given by the third Member, viz., that executor got admitted himself as a member of the stock exchange at about the time of allotment of these shares, is neither here nor there, for, admittedly, the estate held several other shares which were admittedly, the estate held several other shares which were admittedly held as stock-in-trade. For, dealing in those and other shares, the executor had to be admitted as a member of the stock exchange. Therefore, that fact cannot be treated as a ground for holding that what was received as a capital asset, was converted into stock-in-trade by the executor.
10. In our opinion, the Judicial Member applied the correct test, viz., that what is received by a partner on the dissolution of the firm is a capital asset and that it is for the assessee to prove how and by what conduct he converted the same into stock-in-trade. In this connection, it is relevant to recall that the firm 'Dayaram Surajmal' was itself not a dealer in shares. Without a doubt, these shares were investments in the hands of the said firm. Therefore, when those shares were distributed among the partners, they would equally be in the nature of a capital asset. So far as the Accountant Member is concerned, he does not appear to have kept this basic fact in mind, which has vitiated his judgment.
11. We are also of the opinion that the Accountant Member and the third Member were not right in observing that the Commissioner ought not to have taken into consideration the circumstance, which he did, for holding that it remained a capital asset. One of the points made by the Commissioner was that, when the shares were carrying a market value of Rs. 2 per share on the date of their sale to the Govt. of Karnataka, their sale (a) 21/2 paise per share is not the conduct of a dealer in shares, but that of a person who is holding them as an investment and is seeking to salvage the same. This has been met by the third Member with reference to a certain record placed before the Tribunal, showing that 'the intrinsic value of the shares was 'nil' as on September 30, 1962, computed on the company's balance-sheet as on that date'. Now, firstly, it may be noticed that neither the Accountant Member nor the third Member have recorded a finding of fact that, on the date of sale the value of the shares was 'nil'. That their value was 'nil' on September 30, 1962, i.e., two years later, is of little consequence, because, admittedly, on October, 1957, when they were allocated between the partners, their market value was Rs. 5 per share. The circumstances mentioned by the Commissioner cannot be said to be an irrelevant one, while determining the question whether the assessee, in any manner, converted the said shares into stock-in-trade.
12. Now, coming to the circumstances attending the sale, the third Member agrees that the said transaction is not inconsistent with the conduct either of a person holding the shares as an investment, or of a dealer in shares.
13. He observed : 'The Commissioner of Income-tax and the learned Judicial Member have emphasized that the assessee had sold the shares as part of a scheme to reactivate the mills. I, however, agree with the learned Accountant Member that this aspect of the assessee's case is also consistent with his interests as a dealer in shares.....'
14. We agree that such a transaction could have been entered into both by a person holding the shares as an investment, and also by a dealer in shares, holding those shares. But this only means that the said transaction does not show in any manner the assessee wanted to convert what was a capital asset, into a stock-in-trade. The position was that, by 1960, the value of the shares had gone down substantially, there were several debts outstanding, and the major shareholders were in no position to meet those obligations and to run the mill in a viable manner. Therefore, they entered into a deal with the Govt. of Karnataka, whereunder the Government agreed to advance a substantial amount in consideration of the transfer at 51% of shares - 34% of them absolutely, and 17% to be held until the amount advanced by the Government were satisfied, and to be recovered thereafter to the major sharholders at the same rate of 21/2 paise per share. The question is not one of retaining control over the mills; the question is, whether the said conduct does show in any manner that the assessee sought to convert what was a capital asset, into stock-in-trade We are of the opinion that it does not so indicate. To reiterate, the said transaction is consistent both with the conduct of an investor as well as dealer in shares.
15. Mr. N. V. Ranganadham laid stress on the fact, as did the Accountant Member and the third Member, that the assessee was treating these shares in the same manner as the other shares held by him in stock-in-trade. It must, however, be remembered that this similar treatment was put forward only in answer to the point made by the Commissioner that the assessee was not valuing these shares at the end of each accounting year, as was normally expected of a dealer is shares. This was answered by the assessee by saying that, even the shares admittedly held by him as stock-in-trade were not being valued at the end of each accounting year. But that does not mean that this circumstance can be taken one indicating the intention of the assessee to convert the said shares into stock-in-trade. We have already ponted out that the fact of the stock exchange at about the time of allotment of these shares,is not indicative of the requisite intent. The executor, admittedly, held a number of shares in stock-in-trade; and for dealing in them, or to deal in other shares on the share market,he has to get himself admitted as such. It must be remembered that Pannalal Lahoti died in April, 1956, and the executor got himself registered in or about October, 1957, as a dealer is shares. This circumstance, therefore, is also not indicative of the requisite intention on the part of the assessee. It is also pointed out by Sri N. V. Ranganadham that the fact that the shares were kept unsold from October, 1957, till 1960, cannot be said to be indicative of the fact that they were continued to be treated as capital asset. May be so; but that does not solve the assessee' problem, because the burden lies upon him to show that what was a capital asset was converted by him into stock-in-trade.
16. Mr. N. V. Ranganadham finally contended that when two inferences are possible from the established circumstances, and the Tribunal has drawn one such inference, this court should not interfere. But, as we have pointed out hereinbefore, the judgment of the Accountant Member is vitiated by his failure to take into consideration the basic fact that on the dissolution of the firm, the shares allotted to the firm, the shares allotted to the estate of Lahoti constituted capital asset and that it was for the assessee to prove in what manner, and how did he convert the same into stock-in-trade. Now, so far as the third Member is concerned, though he has kept the said principle in mind, yet he firstly qualified it by saying that it is only a prima facie rule; and, secondly, he recorded an ambiguous finding, on the basis of certain irrelevant circumstances, that even at the time of receipt of the these shares, the assessee sought to treat them as stock-in-trade. The other reasons given by him have also been found to be not relevant to prove the requisite intent.
17. We need refer only to one judgment of the Supreme Court in Ramnarain Sons (P.) Ltd. v CIT : 41ITR534(SC) , where it has been held that all the shares held by a dealer in shares need not necessarily be presumed to be held by him as stock-in-trade. Some of the shares may be held by him as investment, and some as stock-in-trade. That was a case where the assessee, a dealer in shares and securities, was also carrying on business as managing agent of other companies. In order to acquire the managing agency of a textile mill, the assessee purchased from Sassoon David & Company, who were the managing agents of that company, certain shares at a price far higher than their market value. Some of the shares so purchased were sold away two months later, and the resulting loss. It was held by the Supreme court that the intention in purchasing the said shares was not to acquire them as part of the stock-in-trade of the assessee's business in share, but that it was clearly investment made with a view to facilitate the acquisition of the managing agency. It was accordingly held that the loss resulting from the re-sale of the said shares was a capital loss. This case shows that merely because Sri Bhandari got himself admitted as a member of the stock exchange in October, 1957, it does not follow that all the shares held by him as executor were necessarily treated by him as stock-in-trade.
18. Accordingly, our answer to the first question referred to us is in the negative, i.e., in favour of the Department and against the assessee.
19. In view of our answer to question No. 1, it is not necessary to record our answer to the second question. We may, however, indicate that all the members of the Tribunal are unanimous in their opinion that the transaction relating to one-third of the shares is also a sale, and not a conditional sale. Our answer to the third question, if necessary, would be that the loss of Rs. 2,25,690 is a capital loss.
20. The referred case is answered accordingly. No costs.
21. The learned counsel for the assessee makes an oral request for leave to appeal to the Supreme Court. In our opinion, however, this case does not involve any substantial question of law of general importance which requires to be considered by the Supreme Court. The oral request is accordingly rejected.