1. This reference has been made by the Income-tax Appellate Tribunal, Bombay, pursuant to two orders passed by this Court on applications made by the assessee Kailashchandra Tejpal under Section 66(2) of the Indian Income-tax Act, 1922, requiring the Tribunal to state the case and refer to this Court certain questions arising out of two orders of the Tribunal disposing of appeals arising out of assessment proceedings against the assessee for the assessment years 1954-55 and 1956-57. As the facts are common, the Tribunal has made a consolidated reference. The questions of law, which the Tribunal was directed to refer to this Court for the assessment year 1964-55 are-
'(i) Whether on the facts and in the circumstances of the case, the assessee was a dealer in shares or an investor?
(ii) Whether the loss of Rs. 8,506 on account of the sale of 80 shares was a business loss?'
The questions propounded for the assessment year 1956-57 are-
'(i) Whether on the facts and in the circumstances of the case, the assessee was a dealer in shares or ah investor?
(ii) Whether the loss of Rs. 12,800 on account of sale of 120 shares was a business loss?'
2. In the income-tax assessment for the year 1984-55 the assessee claimed Rs. 8,506 as loss on sales in trade of eighty shares of Hukumchand Mills Ltd., Indore. Similarly he claimed Rs. 12, 500 as loss on sales in trade of 120 shares of the said Mills for the assessment year 1966-57. The Income-tax Officer disallowed the loss because in his view the books of account produced before him were not genuine and could not be relied upon and it was not possible to verify whether the assessee suffered the loss. The Appellate Assistant Commissioner upheld the orders of the Income-tax Officer disallowing the assessee's claim on the ground that the shares were purchased and sold by the assessee by way of capital investment and as the assessee wasinterested in the management of Malwa Mills Ltd. and Hukumchand Mills Ltd. and had a share in the managing agency commission of both these Mills, therefore, the loss suffered by him on account of the sale of shares could not be allowed as a trading loss. The Tribunal confirmed the orders of the Appellate Assistant Commissioner disallowing the loss claimed by the assessee in the assessment proceedings for the aforesaid two years.
3. The facts, as found by the Tribunal, are that the assessee carried on forward business in several commodities, such as cotton, bullion, shares etc. He also derived income as a partner in a firm known as Sheonandrai Tejpal and from the managing agency of the Hukumchand Mills Ltd. On the basis of a statement given by the assessee himself showing his transactions of purchase and sale of shares of Hukumchand Mills Ltd., the Tribunal found that the assessee purchased 31 shares of the said Mills on 29th July 1948 at Rs. 658 per share and sold on 9th December 1948 sixteen shares at Rs. 569 per share. The loss incurred in the sale of sixteen shares amounting to Rs. 1,424 was allowed in the income-tax assessment for the assessment year 1950-51. On 26th July 1949 the assessee purchased 85 shares of the Mills at Rs. 425 per share and at the end of S. Y. 2005 he had 100 shares of Hukumchand Mills Ltd. on hand. Sometime in 1960 these 100 shares were converted into 300 shares at the rate of three new shares for every one old share and the assessee continued to hold these 300 shares till the accounting year S. Y. 2009 when on 7th December 1952 he sold 100 out of these 800 shares privately to one Gayaprasad. The assessee led no evidence before the Tribunal to show that the sale was at the market rate. He also did not claim in the course of the relevant assessment proceedings the loss said to be incurred by him on account of these 100 shares. The balance of 200 shares was carried forward to the following S. Y. 2010. In that year 80 shares were sold on 30th March 1964 to one Motilal, and according to the assessee he incurred a loss of Rs. 8,660 in the sale of these shares. It is this amount which the assessee claimed as loss in the assessment for the year 1954-65. The remaining 120 shares were carried forward and sold in one lot in S. Y. 2011 to one Jankibai. The loss on account of the sale of these shares amounting to Rs. 12,600 was claimed by the assessee as trading loss in the assessment year 1956-57.
4. Early in 1950 the firm Sir Hukumchand Mannalal and Co., acquired the managing agency of the Hukumchand Mills Ltd. The assessee was a partner in the firm of Sheonandrai Tejpal. This firm entered into an agreement with Mannalal Onkarji, a partner in the managing agency firm of Sir Hukumchand Mannalal and Co., holding 1/8th shares therein, by which Mannalal agreed to share 25 per cent out of his 1/8th share in the managing agency commission with the firm Sheonandrai Tejpal. The necessary capital was given to Mannalal Onkarji by the firmSheonandrai Tejpal, but all the partners of the latter firm purchased shares of the Hukumchand Mills Ltd., in their own names. In the accounting year Section 2012 (that is, from 15th November 1955 to 2nd November 1956), the firm of Sir Hukumchand Mannalal and Co. lost its managing agency of the Mills which then was acquired by one Ramkumar Morarka.
5. On these facts, the Tribunal came to the conclusion that so far as the purchase and sale of shares of the Hukumchand Mills Ltd., was concerned, the assessee was an investor and the loss incurred by him in the sale of those shares was an investment loss; and that the assessee continued to hold these shares so long as he had an interest in the management of the Mills and a share in the managing agency commission of the Mills.
6. In our opinion; the Tribunal was right in coming to the conclusion that it did. The burden of proving that the purchase and sale of the shares in question was in the course of assessee's business as dealer in shares and not by way of investment clearly lay on the assessee. The only material that the assessee placed before the income-tax authorities was about the purchase and sale of shares of the Hukumchand Mills Ltd. in the manner stated earlier. The Hukumchand Mills' shares were purchased in 1948-49 and were sold a long time after their purchase. After the purchase effected in 1948-49, the assessee did not purchase any shares of the Hukumchand Mills Ltd. The assessee retained those shares so long as he was interested in the management of the Mills and had a share in the managing agency commission of the Mills under the agreement he entered into with Mannalal Onkarji. The assessee led no evidence to show that his intention in purchasing the shares was to acquire them as part of the stock-in-trade of his business in shares. He did not even produce any evidence with regard to the market rate of the shares on the dates on which he purchased or sold them. This evidence was necessary, for as held by the Supreme Court in Ramnarain Sons (Private) Ltd. v. Commr. of Income-tax, Bombay : 41ITR534(SC) and Commr. of Income-tax Delhi v. National Finance Ltd. : 44ITR788(SC) in considering whether a transaction was or was 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.
6A. Shri Tankha, learned counsel for the assessee, contended that as the Tribunal had found that the assessee was a dealer, it must, therefore, be taken that the sale of the Hukum chand Mills' shares was in the course of the assessee's business as a dealer in shares. There is no force in this contention. From the mere fact that the assessee was a dealer in shares, it does not follow that the transactions in Hukumchand Mills' shares were business transactions. What the assesses had to establish was that qua the purchase and sale of Hukumchand Mills' shares he was a dealer and notan investor. This is clear from the principlelaid down by the Supreme Court in OrientalInvestment Co. Ltd. v. Commr. of Income-tax,Bombay : 32ITR664(SC) andRaja Bahadur Visheshwara Singh v. Commr. ofIncome-tax, Bombay : 41ITR685(SC) that the fact that an assessee isa dealer in shares or that an assessee-companywas formed with the object of dealing in sharesdoes not invest each and every transaction doneby the assessee with the characteristics of atrade in shares but that other circumstancesalong with that fact must be considered tofind out the real object of a particular venture.The circumstance, which is strongly indicativein the present case of the fact that the saleof the shares was not in the course of theassessee's business as a dealer in shares, isthat the assessee retained those shares so longas he was interested in the management of theMills and his share in the managing agencycommission under the contract which he hadentered into with Mannalal Onkarji. Learnedcounsel for the assessee said that the shareswere purchased in 1948-49, and at that timethe assessee had not obtained any share in themanaging agency commission. That is nodoubt true. But in the absence of any evidence to show that from the inception theassessee had an intention to purchase and resale shares, either at a profit or otherwise dealin them, the fact that the assessee entered intoan agreement with Mannalal Onkarji for sharing his 1/8th share in the managing agency commission as a partner of the firm Sir Hukumchand Mannalal and Co. and that he retainedthose shares so long as he was interested inthe management of the Hukumchand Mills andin sharing the managing agency commission,clearly shows that the real object of the assesseewas not to do business in those sharesbut to acquire capital asset out of which hecould get a share in the managing agency commission.
7. In our judgment, on the material onrecord, the Tribunal was right in holding thatthe loss suffered by the assessee in the saleof Hukumchand Mills' shares was not a lossin the trade in shares. Accordingly we answerall the four questions in the negative. Theassessee shall pay costs of this reference.Counsel's fee is fixed at Rs. 160.