JAGDISH SAHAI J. - In compliance with the directions of this court under section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Bombay Bench (hereinafter referred to as 'the Tribunal) has submitted the statement of case and referred the following questions of law for the opinion of this court :
'(i) Whether there was material for the finding that the shares in question were purchased by the assessee with a view to acquire the managing agency and the control of the company or the shares constituted his stock-in-trade
(ii) Even if the shares in question did not constitute the stock-in-trade of 'the assessee', whether the profit made on the sale of shares did not constitute capital gain chargeable to income-tax under section 12B of the Act. ?'
The assessment year with which we are concerned in this reference is 1947-48. The accounting year is Dessera 2002-2003, corresponding to October 16, 1945, to October 5, 1946.
The assessee, Sri Rameshwar Prasad Bagla (hereinafter referred to as the assessee), is a partner of a partnership firm known as Agarwal and Co. The India United Mills Ltd. is a large unit of textiles and was under the managing agency of M/s. E. D. Sassoon and Co. Ltd. of Bombay. The said E. D. Sassoon and Co. Ltd. held share blocks of ordinary and referred shares in India United Mills Ltd.
In 1943, negotiations were entered into between M/s. E. D. Sassoon and Co. Ltd. one party, and Agarwal and Co., the other party. The negotiations matured into a deal. The agreement relating to the deal was recorded in a document dated January 26, 1945. E. D. Sassoon and Co. agreed to assign the managing agency of the India United Mills Ltd. to Agarwal and Co. with effect from December 1, 1943, for a consideration of Rs. 57,80,000. In addition, Agarwal and Co. agreed to purchase 16,80,000 ordinary shares of the India United Mills Ltd. of the face value of Rs. 10 each and 20,00,000, deferred share of rupee 1 each. The price payable by Agarwal and Co. for this large lot of shares was Rs. 3,37,20,000 calculated at the rate of Rs. 16-8-0 each ordinary shares and Rs. 3 for each deferred share.
The share of the assessee in Agarwal and Co. is 1/16. The partners constituting Agarwal and Co. can conveniently be grouped as : (1) Morarka group, (2) Khetan group, (3) Seksaria group, (4) Poddar group, (5) Bagla group, and (6) Kantilal Nahalchand. The Bagla group consisted of the assessee and his brother. At the time of agreement between E. D. Sassoon and Co. and Agarwal and Co. the latter was not in a position to pay Rs. 80 lakhs and a half for 5 lakhs ordinary shares. Shares worth 3 lakhs were purchased by Ram Kumar Shivchandrai of Poddar group in Agarwal and Co. and worth 2 lakhs by Khetan group in Agarwal and Co.
From the statement of case it is clear that the Poddar group and the Khetan group continued to hold these shares up to 1944. In January 1945, these 5 lakhs ordinary shares were taken over by Agarwal and Co. from Poddar and Khetan groups. The shares of the assessee in these 5 lakhs shares would be 31,250 shares. The assessees brother was also entitled to 31,250 shares which he relinquished in favour of the assessee. The result was that the assessee obtained 62,500 shares in the Indian United Mills Ltd. These shares stood in the name of a Bombay Trust Corporation, a company which formed part of the Sassoon group of companies. Soon after the managing agency was taken over by Agarwal and Co. on December 1, 1943, these shares were transferred in the names of various persons purporting to be residing in Jaipur. The transfers in the name of the assessee from the Jaipur parties were effected on January 30, 1948.
In order to pay for these shares the assessee borrowed a sum of Rs. 10 lakhs from Agarwal and Co.
Out of the 62,500 shares the assessee sold 43,700 shares as follows :
4,000 shares on 3-4-1946.
13,000 shares on 15-4-1946.
9,000 shares on 6-5-1946.
11,000 shares on 29-5-1946.
2,000 shares on 29-5-1946.
2,000 shares on 17-7-1946.
750 shares on 19-7-1946.
He made a profit of Rs. 1,80,220. This amount was utilized by him for purchasing shares of the Swadeshi Cotton Mills Ltd., Kanpur. The rest of the shares remained in possession of the assessee during the relevant previous year.
The assessee did not disclosed the profit mentioned above in his return. The Income-tax Officer, however, made an enquiry from the assessee in this respect and the latter sent a letter dated March 30, 1949, to the Income-tax Officer in the course of which he stated :
'I have already brought to your honours notice in the course of assessment proceedings and would like to confirm that I had certain shares transaction in which there has been appreciation to the tune of Rs. 1,51,927-1-11. Since it is common ground that the assessee is not dealing in shares as business, the said appreciation in capital should have been normally disclosed as capital gain in the return but I regret that the amount could not be shown, so the return already filed may be treated as amended accordingly.'
Admittedly, the sum of Rs. 1,51,927-1-11 includes surplus realised in the sale of the aforesaid 43,300 shares of the India United Mills limited.
The Income-tax Officer repelled the plea of the assessee that the profit made by the sale of 43,700 shares of the India United Mills Ltd. was not profit liable to be taxed as such but was only a capital gain and liable to be taxed accordingly. In the previous year, the year with which we are concerned in this reference, the assessee had not been treated as a dealer in shares. The Income-tax Officer held him (the assessee) a dealer in shares on the ground that the transaction of the shares made by him were on a very large scale. He, therefore, included the sum of Rs. 1,80,220 as profit from the sale of these shares under section 10 of the Act for the purpose of making an assessment on him.
The assessee appealed to the Appellate Assistant Commissioner who maintained the findings of the Income-tax Officer substantially but reduced the assessable income of the assessee by Rs. 13,183.
The assessee then appealed to the Tribunal. An affidavit was filed by the assessee before the Tribunal. The Tribunal remanded the case to the Income-tax Officer on May 1, 1954.
In pursuance of the Tribunals order dated May 1, 1954, the Income-tax Officer submitted a report dated June 12, 1956. The appeal along with the remand report of the Income-tax Officer was put up again before the Tribunal for hearing. By its order dated September 26, 1956, the Tribunal allowed the appeal holding that the excess realised from the sale of the 43,700 shares was not income liable to tax.
We have heard Mr. Gulati for the income-tax department and Mr. M. P. Mehrotra for the assessee.
It is clear from the order of the Appellate Assistant Commission (the order has been made an annexure by the Tribunal) that the total proceeds from the sale of 43,700 shares of the India United Mills Ltd. by the assessee amounted to Rs. 8,95,435. This amount was invested by him in buying the shares of Swadeshi Cotton Mills where he had already a large holding. The total investment of the assessee in the Swadeshi Cotton Mills was to the tune of 1 crore of rupees. A similar investment had been made by Jaipuria. The assessee and Jaipuria joined as partners and took over the managing agency of the Swedeshi Cotton Mills on 4th of May, 1946. They also entered into negotiations for purchase of the Swedeshi Cotton Mills and after purchasing it took over possession of it on 4th of May, 1946. The purchase price paid was Rs. 4 crores. The shares held by the assessee as partner of Agarwal and Co. were already sufficient to qualify him for the managing agency and the managing partnership to that the object in purchasing the 62,500, shares could not be to obtain the managing agency. Clearly it was to sell the shares for a profit. In view of the fact that the interval between the purchase of India United Mills shares and their sale was not big, it is clear that the idea was not to retain these shares by way of investment. The statement of case is clear that first Agarwal and Co. paid for the 5 lakhs shares and only thereafter transferred the same to Poddar and the Khetan groups (the assessee belonged to the Bagla group). The shares were sold in small lots thereby indicating that the idea was to earn profit and sales were cautiously made in order to catch the best market.
Under the agreement it was Agarwal and Co. which had to purchase the shares and not the assessee. Consequently the assessees theory that he had purchased the shares with a view to obtain the managing agency cannot be accepted. Again, the assessee made investments with borrowed capital. Normally, a person would not purchase shares or any other article by taking loan if the idea is to retain the shares or the article as an investment because while retaining so he would have to pay large interest. It is, again noteworthy that the shares were not held by the assessee for any substantial time but were sold soon after the purchase there indicating that the idea was not to retain them by way of investment. That being the position it appears to us that the idea in the purchase of the shares by the assessee was to sell it in the market and make a profit and not to retain them in order to acquire the managing agency and the control of the company. That being our view, it appears to us clear that the 62,500 shares purchased by the assessee from the India United Mills must be treated as constituting his stock-in-trade and he must be held to be a dealer in shares. At the time of the purchase there was no question of acquiring managing agency.
Mr. Mehrotra has placed reliance upon certain reported decisions. We proceed to consider them : Kishan Prasad and Co. Ltd. v. Commissioner of Income-tax. The facts of that case were that the assessee-company was formed in 1917, inter alia, with the object of carrying on general business and trade of commission agents and bankers, undertaking the management of commercial and industrial undertaking and dealing in bills, hundies and other securities. In 1933, the company entered into an agreement with the sugar syndicate under which in lieu of the assessee subscribing for shares worth Rs. 3 laksh in the sugar syndicate and undertaking to sell shares of the syndicate worth Rs. 2 lakhs, the assessee was to be given the managing agency of the mill of the sugar syndicate, when such mill was erected. The agreement further provided that if the mill was not erected the assessee was to be paid a commission on the shares invested by them. The mill was not erected and the agreement for acquiring the managing agency fell througho. K, the managing director of the assessee-company, who had entered into an agreement with the sugar syndicate, died in 1940 and the assessee sold out his shares in the syndicate in 1941 and 1943 for a total sum which exceeded the amount paid by them over the shares, by about Rs. 2 lakhs. The Supreme Court held that the amount spend by the assessee-company over the purchase of the shares was in the nature of an investment and not an adventure and for that reason the sum of Rs. 2 lakhs received by the assessee was not in the nature of income liable to tax. It is clear from the judgment of their Lordships that the circumstances on the basis of which they decided the case against the department was 'that beyond this insolated transaction of purchase and sale the assessee-company did not deal in shares. ' Their Lordships were also of the opinion that the circumstances of the case indicated that the object of the company in buying shares was only to obtain a managing agency of the third mill which no doubt would have been an asset of an enduring nature and would have brought the assessee-company profits but there was from the inception no intention whatever on the part of the assessee-company to resell the shares either at a profit or otherwise deal in them. This case, therefore, is clearly distinguishable. In our case, as already pointed out earlier, there was not an isolated transaction of sale and purchase but a series of transactions. Secondly, there was not and there could not be at the time when the shares were purchased any question of acquiring the managing agency. Lastly, the cumulative effect of the circumstances as mentioned earlier in this judgment is suggestive of the inference that the assessee had purchased the shares in India United Mills for the purpose of selling them again order to make a profit. The shares were not retained by it. They were sold and the proceeds were invested in another company. In Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd. the facts were that the respondent-company which ran a jute mill was a member of the Jute Mills Association. The members of his association entered into an agreement imposing restrictions upon hours of work of the members in order to protect themselves against loss resulting from over-production. The number of hours of working, called loom hours, allotted to the different mills depended upon the loomage capacity. The respondent-company was unable to work the loom to the extent of looms hours allotted to it and, therefore, sold certain looms hours to other mill receiving inreturn certain sums. The question was whether these sums were revenue receipts liable to tax. The Supreme Court held : 'that as the loom hours could not by their very nature be let out while retaining property in them and the transactions in this case were the sale of the looms hours, the receipts by sale of the surplus loom hours were capital recipes and not income. ' This case is quite distinguishable and is of no help to Mr. Mehrotra.
Mr. Mehrotra has not been able to cite any case where in on the basis of the circumstances similar to those operating in the case before us it was held that the excess amounts received by way of sale of shares did not constitute the assessable income of the assessee. It is well settled that in case of circumstantial evidence the totality of circumstances has got to be taken into consideration and the combined effect of all those circumstances is determinative of the question as to whether or not a particular fact is proved. There are no circumstances in this case on the basis of which it could be held that the shares in question were purchased by the assessee with view to acquire the managing agency and the control of the company. The so-called circumstances on which the Tribunal relied was that 'Agarwal and Co. was interested in the managing agency of some mills also which came to them as result of some agreement. ' The Tribunal confused Agarwal and Co. with the assessee. What was to be found was whether or not the assessee was interested in the managing agency of the mills and not whether Agarwal and Co. was or was not. The agreement was between Agarwal and Co. and the Sassoons. It was Agarwal and Co. which was interested, if at all in the managing agency of the mills. That being the position we cannot find out any clear circumstance either in the statement of the case or in the assessment order passed by the Income-tax Officer, the appellate order passed by the Appellate Assistant Commissioner and the order of the Tribunal to the effect that the assessee was either a party to the agreement or was interested in obtaining the managing agency of the company. Mr. Mehrotra has also not been able to point out to us any circumstance on the basis of which it could reasonably be held that it was the assessee who was interested in obtaining the managing agency or that the shares were purchased with a view to obtain the managing agency or with a view to making an investment and not with a view to earn profits.
We would, therefore, answer question No. 1 by saying that there was no material for the finding that the shares in question were purchased by the assessee with a view to acquire the managing agency, and the control of the company. We would also answer by saying that the shares constituted the stock-in-trade of the assessee.
In view of what we have said above our answer to question No. 2 is that the profit by the sale of the shares could not constitute capital gain chargeable to income-tax under section 12B of the Act because they are chargeable as profits under section 10 of the Act.
The assessee shall pay to the department a sum of Rs. 400 by way of costs. The fee of the income-tax counsel is also assessed at the same figure.