V.G. Oak, C.J.
1. The question for consideration in this income-tax reference is whether certain shares purchased by an assessee were its stock-in-trade or by way of investment. M/s. Bagla Brothers are the assessee. The assessment years are 1951-52 and 1952-53.
2. The assessee is a partnership firm dealing in shares, and consists of two partners, Rameshwar Prasad Bagla and Satyanarain Bagla. These two persons and Satyanarain's father, Hari Shanker Bagla, constitute another partnership firm, ' M/s. Gangadhar Baijnath '. The assessee held 108 shares of Maheshwari Devi Jute Mills Co. Ltd. (hereafter referred to as 'jute mills'), at the commencement of the accounting period corresponding to the assessment year 1951-52. During the course of the accounting period the assessee purchased a number of shares of the jute mills at different rates. The shares were valued at Rs. 100 per share at the close of the accounting period. The assessee claimed a loss of Rs. 4,38,291, representing the difference between the purchase price of the shares and valuation at the close of the year.
3. Again, the assessee purchased 1,983 ordinary shares and 546 preference shares of the Muir Mills Co. Ltd. during the course of one year. The assessee claimed a net loss of Rs. 9,581, representing the difference between the purchase price of the Muir Mills Co. Ltd. and the valuation at the close of the accounting period.
4. The Income-tax Officer declined to allow the two losses claimed by the assessee on the ground that the shares had been purchased by the assessee by way of investment, and the two losses were in the nature of capital losses. This view was upheld by the Appellate Assistant Commissioner.
5. The assessee, however, succeeded before the Appellate Tribunal, Allahabad. The Tribunal held that the shares purchased by the assessee relating to the jute mills and Muir Mills Co. Ltd. were both stock-in-trade.
6. The Commissioner of Income-tax, U. P., applied for referring this question to the court. The application was dismissed by the Tribunal. This court, however, directed the Tribunal to state a case. Accordingly, the Appellate Tribunal has referred the following question of law to this court:
' Whether, on the facts and circumstances of the case, it could be held in law that the shares of the Maheshwari Devi Jute Mills Co. Ltd. and of the Muir Mills Co. Ltd. acquired during the previous year relevant to the assessment years 1951-52 and 1952-53 were the stock-in-trade of the assessee '
7. Copies of the judgment of the Tribunal and the orders of the income-tax authorities are on the record. Satyanarain Bagla, who is a partner of the assessee-firm, filed an affidavit before the Tribunal. Annexure ' E ' is a copy of the affidavit of Satyanarain Bagla. In that affidavit it was stated that the exclusive business of the firm has always been to deal in shares. The firm has never acted as managing agents of M/s. Maheshwari Devi Jute Mills Co. Ltd. The object of purchasing shares was not to acquire control over Muir Mills Co. Ltd.
8. In Ramnarain Sons (Private) Ltd. v. Commissioner of Income-tax,  41 I.T.R. 534 (S.C.) the appellant-company was a dealer in shares and securities, and also carried on business as managing agents of other companies. In order to acquire the managing agency of a textile mill, the appellant-company purchased from Sassoon David and Co., which were the managing agents thereof, 1,507 shares of the mill at the rate of Rs. 2,321-8-0 per share, although the market price was Rs. 1,610 per share. The remaining 1,000, shares of the mill held by Sassoon David and Co. were acquired by the directors of the appellant-company. Two months later the appellant-company sold 400 of those shares at a loss of Rs. 1,78,438. That loss was claimed as a trading loss. It was held that by purchasing the shares far in excess of their market price to facilitate the acquisition of the managing agency, a capital asset was acquired by the appellant-company. The intention in purchasing the shares was not to acquire them as part of the stock-in-trade. The loss was of a capital nature.
9. In that case the assessee carried on business as a managing agent of other companies in addition to dealing in shares. In the present case the assessee has filed an affidavit to the effect that it has not acted as managing agent of M/s. Maheswari Devi Jute Mills Co. Ltd. The department has not established that the assessee has functioned as a managing agent of another company or firm.
10. We have to consider whether the two sets of shares were purchased by the assessee as stock-in-trade or as investment. The two sets of shares will have to be discussed separately.
11. Firstly, we take up the jute mills' shares. The Appellate Assistant C9mmissioner has enumerated a number of circumstances in support of his view that the shares were purchased by the assessee by way of investment. These circumstances may now be discussed one by one.
12. The assessee is closely associated with the firm 'Gangadhar Baijnath'. The partners of the assessee-firm are also partners of the firm, Gangadhar Baijnath, The firm, Gangadhar Baijnath, took over the managing agency of the jute mills. In this connection we must remember that the assessee itself was not the managing agent of the jute mills. It is true that the partners of the assessee-firm are also partners of the firm, 'Gangadhar Baijnath'. But we cannot overlook the fact, that the managing agency was actually held by M/s. Gangadhar Baijnath. Again, the managing agency was not recently acquired. The managing agency was acquired by 'Gangadhar Baijnath' as far back as the year 1930. It has not been shown that there was any special reason for the assessee acquiring shares of the jute mills in the year 1950.
13. The Appellate Assistant Commissioner remarked that the company was paying dividend of not more than six per cent. That was no reason why the assessee should not have purchased shares of the jute mills.
14. The Appellate Assistant Commissioner further remarked that the shares of the company are not marketable. This remark appears to be unjustified. The assessee produced a letter from the secretary to U.P. Stock Exchange Association Ltd. about the market rate of the jute mills for different dates during the accounting period. Quotation of different rates for different dates suggests that there was a market for these shares. The income-tax authorities suggested that the letter dated December 26, 1963, issued by the U. P. Stock Exchange Association Ltd. was manipulated by the assessee. There is no satisfactory evidence in support of this suggestion.
15. The Appellate Assistant Commissioner further remarked that the price paid was not the market price. This observation is also not borne out by annexure ' C ' to the statement of the case. The rates quoted in annexure ' C ' were Rs. 245 on March 14, 1950, and Rs. 252 on March 18,1950. In view of the rates quoted in annexure ' C ', it cannot be said that the purchase of shares on February 26, 1950, at the rate of Rs. 250 per share was unreasonable.
16. The Appellate Assistant Commissioner took exception to the fact that the price was settled by mutual negotiation between the investor and the purchaser. It was urged for the department that, if the market rate was available with the stock exchange, there was no justification for settling the rate by negotiation. It is true that the stock exchange-quoted rates were for different dates. But that did not prevent the parties from settling the rate by mutual negotiation.
17. In Commissioner of Income-tax v. National Finance Ltd.,  44 I.T.R. 788 (S.C.) it was held that, though it may be true that the intention of one company could not be attributed to another company even though the proprietorship of the companies might be the same, the main question was whether a particular loss made by the company was a capital or a revenue loss. The transaction must be regarded as one on the capital side if the shares were never treated as part of the stock-in-trade, and were not sold in the market.
18. The Appellate Assistant Commissioner further observed that no dealer in shares is expected to purchase shares worth Rs. 8 lakhs in shares of one company, when shares of the first rate companies could be had for the same or even lesser price, carrying assured prospects of being resold at a profit. Admittedly, the assessee dealt in other shares besides the two sets of shares under discussion. The record does not indicate the extent of the total business carried on by the assessee or the amount involved in purchasing other shares. Under the circumstances, it is difficult to say whether the purchase of shares of the jute, mills to the extent of a sum of Rs. 8 lakhs was on an unduly large scale.
19. The assessee is a dealer in shares. According to the affidavit filed by the assessee, the two sets of shares were in the nature of stock-in-trade. The nature of the business of the assessee and the affidavit filed by Satya-narain Bagla were sufficient to enable the assessee to discharge the initial burden that lay upon it. At this stage it was for the department to make out that the shares were not in fact stock-in-trade, but were in the nature of investment. No doubt, the Appellate Assistant Commissioner has pointed out some circumstances against the assessee. These circumstances arouse some suspicion about the transaction relating to the jute mills. But these circumstances are not sufficient for recording a definite finding that the purchase must have been in the nature of investment. The asseesee's claim that the purchase was by way of stock-in-trade may, therefore, be accepted.
20. Next, we have to consider the purchase of shares of Muir Mills. The Appellate Assistant Commissioner noticed two circumstances about this transaction. The department suggested that the shares of Muir Mills Co. Ltd. were purchased by the assessee in order to gain control over the affairs of the company. It is common ground that Indian Textile Syndicate Ltd. was the managing agent for Muir Mills Co. Ltd. In Satyanarain's affidavit it was stated that the Indian Textile Syndicate Ltd. acquired the managing agency of the Muir Mills in the year 1947. The appointment was for a period of 20 years. There was no special reason for buying shares of the Muir Mills in the year 1950. Again, it is submitted that Bagla acquired control over the Indian Textile Syndicate Ltd. in April, 1950. The assessee purchased shares of Muir Mills between June and September, 1950. There was no particular point in acquiring shares of Muir Mills between June and September, 1950.
21. The second circumstance noticed by the Appellate Assistant Commissioner was that Muir Mills Co. Ltd. was not declaring any dividend at the material time. In Satyanarain's affidavit it is stated that the Muir Mills declared high rates of dividends consistently up to the year 1950. It was after the year 1950 that no dividend was declared by the Muir Mills. It was not, therefore, unreasonable for the assessee. to expect that there was fair possibility of selling shares of Muir Mills in due course.
22. On examining the circumstances attending the two transactions, we are of the opinion that the assessee has established its claim that the shares involved in the two transactions were stock-in-trade of the assessee. The department has not been able to establish its case that the shares involved in the two transactions were purchased by way of investment.
23. We answer the question referred to the court in the affirmative, and in favour of the assessee. The Commissioner of Income-tax, U.P., shall pay the assessee Rs. 200 as costs of this reference.