T.P. Mukerjee, J.
1. This is a reference by the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as 'the Act'. The reference has been made at the instance of the Commissioner of Income-tax, U.P., Lucknow, on the question of law set out hereinbelow.
2. The respondent. Raja Jagdish Pratap Sahi, hereinafter referred to as 'the assessee', was a big zamindar. Consequent on the abolition of zamindari in the year 1951, the assessee received compensation in the shape of zamindari abolition compensation (Z. A. C.) bonds and thereafter he started investing his money in shares and securities. During the previous years relevant to the assessment years 1957-58, 1958-59 and 1960-61, to which the present reference relates, the assessee sold some of the shares and purchased certain other shares. In some of these transactions the assessee earned a surplus over the cost price, while in other transactions the shares were sold for less than the cost price. The resultant effect of these transactions was that there was a total surplus of Rs. 3,100, Rs. 15,098 and Rs. 1,666 for the three relevant years. These amounts were included in the total income of the assessee on the basis that they were profits resulting from an adventure in the nature of trade. The contention of the assessee was that the shares were sold not with a view to make a profit but for purchase of ordinary shares of Tata Iron and Steel Co. Ltd., for better investment. The contention was not accepted by the Income-tax Officer.
3. Appeals to the Appellate Assistant Commissioner proved unsuccessful, and, thereupon, the assessee took the matter to the Appellate Tribunal in second appeal. The assessee's case before the Tribunal was that, on the abolition of zamindari, the assessee started investing his funds in Government securities, debentures and preference shares of limited companies. Subsequently, the assessee was advised that for the purpose of investment Tata ordinary shares were the best, and acting upon such advice the assessee gradually liquidated his holdings of Government securities, debentures and preference shares of other companies with a view to invest the amounts in Tata ordinary shares. Thus, by the assessment year 1960-61, the assessee held Tata ordinary shares of the value of Rs. 8,68,000 out of a total holding of Rs. 10,22,000 and by the next succeeding assessment year 1961-62, the assessee's holding in Tata ordinary shares amounted to Rs. 9,49,000 out of a total holding of Rs. 10,41,000. The assessee contended that he had all along been an investor and never a dealer in shares and that the surpluses which he had received in the course of realisation of investments represented accretion to capital and was nottaxable as profit in an adventure in the nature of trade. The Tribunal gave effect to the contention of the assessee and held that the amounts in question were received by the assessee in the process of his conversion of the investments and, as such, the same could not be taxed under Section 10 of the Act as profits of a business. The Tribunal, therefore, directed that the amounts in question be deleted from the total income of the assessee for the three relevant assessment years.
4. The questions referred by the Tribunal for the opinion of this court are :
'1. Whether there were any materials on record to support the finding of the Tribunal that the assessee was not a dealer in shares and securities and preference shares and debentures during the three assessment years in question ?
2. Whether the profits and losses arising from the sale of shares and securities, preference shares and debentures of the assessee can be taxed as business profits '
5. From the order of the Tribunal, which is annexure 'C' to the statement of the case, it would appear that the assessee had started the process of conversion from the assessment year 1954-55. During the period relevant to the assessment years 1954-55 and 1955-56, the assessee had purchased mostly Government securities and debentures of Standard Vacuum Refineries Co. Ltd. and of Burmah Shell Refineries Ltd. The assessee had also preference shares of Tata Iron and Steel Company and Titagurh Paper Mills Ltd. In the next following year, relevant to the assessment for 1956-57, the assessee sold most of the Government securities and preference shares and invested the sate proceeds in Tata ordinary shares. The assessee also purchased shares of Indian Cable Company Ltd., Dunlop Rubber Company Ltd. and I. C. I. Co. Ltd., but in the same year it sold away the shares of Dunlop Rubber Company Ltd. at a loss.
6. As already stated, the assessment years relevant to the present case are the years 1957-58, 1958-59 and 1960-61. The transactions of purchase and sale made by the assessee during these three years are recorded in the tabular statement given below :
S. No.Name of the Co. No. of shares purchasedSoldProfit/loss on sal of shares.
12345 Assessment year 1957-58 Rs.1.Tata Iron &Steel; Co. Ltd. (preference shares)-20(-) 4532.Standard Vacuum &Refinery; Co. Ltd. (debentures)__(-) 4063.Debentures of Burmah Shell Refineries Ltd.--(+) 3.9594.Tata Iron &Steel; Co. Ltd.2,250--5.Associated Cement Co. Ltd.115--
Assessment year 1958-59 1.Tata Iron &Steel; Co.805_-2.Associated Cement Co.287--3.Hidustan Lever3,100--4.Indian Cable Co.-2.250(4.) 24.0225.Associated Cement Co.-345(- ) 8,7066.Industrial Credit & Investment Corporation-101(-) 3.415
7.Hindustan Lever-3,100(+) 3,197
(4) 1.50,98 Assessment year 1960-61 1.Associated Cement Co.-57(+) 1,6662.Tata Iron &Steel; Co.155--3.Dunlop Rubber Co.97_-4.Indian Iron &Steel; Co.350--
7. It would be noticed from the above table that in the previous year relevant to the assessment year 1957-58, the assessee sold away the debentures of Standard Vacuum and Refineries Co. Ltd. and Burmah Shell Refineries Ltd., the former at a loss and the latter at a profit. He also sold away the preference shares of Tata Iron and Steel Co. Ltd. at a loss and acquired 2,250 Tata ordinary shares.
8. The next year, relevant to the assessment year 1958-59, the assessee again acquired 805 Tata ordinary shares. This year the assessee, no doubt, acquired 287 shares of Associated Cement Co. Ltd., in addition to 115 shares of the same company acquired in the preceding year, but he sold away a lot of 345 shares of Associated Cement Company this year at a loss of Rs. 8,706. The remaining 57 shares of Associated Cement Company Ltd. were sold away by the assessee next year and the sale resulted in a surplus of Rs. 1,666. Besides these transactions, the assessee sold away certainGovernment securities this year. The total investment in Tata ordinary shares, at the end of the year, amounted to Rs. 4,22,000 out of a total investment of Rs. 10,21,000, The assessee also sold away 2,250 shares of Indian Cable Company Ltd. which he had purchased in the previous year relevant to the assessment year 1956-57. But, in this transaction, the assessee made a profit of Rs. 24,022. The assessee also sold away in this year his investments in the Industrial Credit Corporation Ltd. as well as in Hindustan Lever Ltd., resulting, respectively, in a loss of Rs. 3,415 and a surplus of Rs. 3,195.
9. In the previous year relating to the assessment year 1960-61, the assessee acquired 155 Tata ordinary shares. The assessee also purchased 97 shares of Dunlop Rubber Company Ltd., which were sold away next year, and 350 shares of Messrs. Indian Iron and Steel Co. Ltd. The value of the holding of the assessee in Tata ordinary shares at the end of this year amounted to Rs. 8,68,000 as against a total investment of Rs. 9,59,000 made by him.
10. On an analysis of the above figures the following facts stand out clearly. The assessee was at the beginning investing his money in Government securities, debentures and preference shares of limited companies which are, normally, not purchased by a dealer in shares and securities. The fact that the assessee sold away the shares of Messrs. Associated Cement Co. Ltd., which have usually a good market in the stock exchange, at considerable loss shortly after their acquisition, shows that he was determined to acquire only Tata ordinary shares, whether the sale resulted in a profit or loss. Then again, it is significant that not a single scrip of Tata ordinary shares was sold in any of those years. The assessee went on acquiring Tata ordinary shares every year with the result that, as already noted, by the end of the previous year relevant to the assessment year 1961-62, the shareholding of the assessee in Tata ordinary shares amounted to Rs. 9,49,000 out of a total investment of Rs. 10,41,000. The surpluses earned by the assessee in the first and the last years under reference were inconsiderable. These facts clearly point to the truth of the assessee's version that he was liquidating his investments, in Government securities, as well as in preference and equity shares and debentures issued by various companies, with a view to invest, principally, in Tata ordinary.
11. The view taken by the income-tax authorities that the transactions in shares carried on by the assessee were an adventure in the nature of trade is completely unjustified. We find that, in the present case, there is material on record to support the finding of the Tribunal that the assessee has been carrying on the process of conversion of shares and securities from the assessment year 1954-55, with a view to better investment. The principle to be applied in such cases has been laid down by the SupremeCourt in Raja Bahadur Visheshwara Singh v. Commissioner of Income-tax,  41 I.T.R. 685, 691;  3 S.C.R. 287 (S.C.) in the following terms:
'... the principle applicable to such transactions is that when an owner of an ordinary investment chooses to realise it and obtains a higher price for it than he originally acquired it at, the enhanced price is not a profit assessable to income-tax but where, as in the present case, what is done is not merely a realisation or a change of investment but an act done hi what is truly the carrying on of a business the amount recovered as appreciation will be assessable.'
12. In Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax,  41 I.T.R. 534 ;  2 S.C.R. 904(S.C.) the Supreme Court referred to its earlier decision in G. Venkataswami Naidu and Company v. Commissioner of Income-tax,  35 I.T.R. 594 ;  Supp. 1 S.C.R. 646 (S.C.) and observed that:
' In considering whether a transaction is or is not an adventure 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 with the concept of trade or business'. '
13. Where the intention of the assessee at the time of the acquisition of the shares is to resell them at a profit when the market appreciates, the shares become his stock-in-trade and the surplus resulting from the sale of shares becomes profits assessable to tax. Where, however, the assessee's intention is not to resell the shares for profit but to earn dividends therefrom, the assessee is an investor taxable only upon the dividends earned by him. When an ordinary investor (not being an investment company) changes his investments it is well-established that the surpluses realised on such change of investments are capital in nature not liable to tax. The intention of the assessee in acquiring shares has to be gathered from the totality of facts and circumstances of each case.
14. In the instant case, the Tribunal has found, on the materials on record, that the assessee had no intention at any time to use his shareholding as his stock-in-trade and make a profit by the sale thereof and the purpose of the assessee to sell the shares was definitely to change his investments. That being so, the surplus resulting to the assessee in the three years under assessment must be regarded as capital accretion consequent on realisation of the investments held by the assessee.
15. Our answer to question No. 1 is, therefore, in the affirmative and to question No. 2 in the negative.
16. The assessee will get costs of this reference which we assess at Rs. 200. Counsel's fee is assessed at the same figure.