1. One appeal is preferred by the assessee and the other by the revenue. They are being disposed of together.
2. We will first take up the assessee's appeal. The assessee-company purchased 2,700 shares from Smith & Nephew Ltd. in 1974 for Rs. 6,67,500. This company was amalgamated with J.L. Morrison Jones Ltd. on account of which the assessee was allotted 1,29,600 shares in it in exchange for 27,000 shares of Smith & Nephew Ltd. The assessee had also purchased 12,500 shares in J.L. Morrison & Jones Ltd. in 1974. Out of the above shares 74,000 shares were sold in 1975 at a profit of Rs. 60,672 which was taxed as capital gain in the assessment year 1976-77 and 12,500 shares were sold for a loss of Rs. 69,174, which was treated as capital loss in the assessment year 1977-78. During the accounting year 1977 relevant to the assessment year 1978-79, now under appeal, the assessee sold the balance of 55,600 shares for Rs. 5,56,000 and made a profit of Rs. 2,69,634. The assessee-company claimed that the above profit on the sale of shares was derived in the course of the business and so, it should be treated as income from business. The case of the assessee was that the shares were purchased to promote the interest of the business as the company in which the shares were purchased was the consumer of the products manufactured by the assessee-company. The ITO did not accept the assessee's submissions. He held that the assessee has not done anything more than an investor. The shares have been shown in the balance sheet under 'investments'. In the two previous years, the profit or loss on the sale of shares were shown by the assessee as capital gain/capital loss and treated as such.
Clause 17 of the Memorandum & Articles of Association authorises the company only to invest the money in shares and purchase and sale of shares as business is not authorised. The draft assessment order was forwarded to the IAC with the assessee's objection for his directions under Section 144B of the Income-tax Act, 1961 ('the Act'). In the directions the IAC agreed with the ITO that the profit on sale of shares constitutes short-term capital gain. Accordingly, in the assessment order dated 18-8-1981, the ITO held that the profit on sale of shares constituted short-term capital gain. Accordingly, he assessed the same.
3. The assessee appealed to the Commissioner (Appeals). He held that the purchase of shares was only in the nature of investment by the company. Even the contention that the purchase was with a view to get more business from these companies as they were consumers of the products manufactured by the assessee only goes to show that the purchase was in fact made as an investment. In a purchase with such an intention the idea will be to hold the same as an investment and not to deal in shares. Consequently, the motive of trading in shares is absent. Thus, he upheld the action of the ITO in taxing the profit on sale of shares as short-term capital gain.
4. The learned counsel for the assessee strongly urged that the shares were purchased for improving the business of the company as the company in which the shares were purchased was the consumer of the products of the assessee-company. Thus, the purchase was for the purpose of business and the profits made on sale of shares is business income. He also submitted that the Memorandum & Articles of Association authorises the purchase and sale of shares. The learned departmental representative strongly urged that the assessee is not a dealer in shares. The purchase of shares was by way of investment and so, the profit on sale of shares is rightly taxed as short-term capital gain.
5. We have considered the rival submissions. The assessee is not a dealer in shares. According to the assessee, the shares have been purchased to improve the business of the company as the companies in which the shares were purchased were the consumers of the products manufactured by the assessee-company. This itself would clearly show that the purchase of shares was by way of investment but not to deal in shares. Thus, the intention to trade in shares is absent. Unless the assessee is a dealer in shares, the profit on the sale of shares cannot be treated as income from business. In the balance sheet of the assessee-company the shares have been shown under 'investment'. It is no doubt true that this circumstance by itself is not a conclusive one but it cannot be denied that this is a relevant circumstance to be taken into consideration. The fact that the assessee has shown the shares in the balance sheet as 'investments' coupled with the fact that the assessee itself has shown the profit or loss on sale of shares as capital gain or capital loss in the assessment years 1976-77 and 1977-78 which was, accordingly, assessed would go to show that the purchase of shares was by way of investment and not as dealer in shares. Merely because the memorandum and articles of association authorises the assessee to purchase or sell shares does not prove that the assessee was a dealer in shares. In Kishan Prasad & Co. Ltd. v. CIT  27 ITR 49 the Supreme Court observed that the circumstance whether a transaction is or is not within the company's powers has no bearing on the nature of the transaction or on the question whether the profits arising therefrom are capital accretion or revenue income. It is very clear from the facts of this case that the assessee purchased the shares with a view that the said company would purchase the assessee's products. This clearly shows that the purchase of shares was not for the purpose of stock-in-trade as a dealer. Thus, the purchase of shares was only by way of investment and the profit made on sales of shares is taxable as capital gain and not as business income.
6. In Kishan Prasad & Co. Ltd.'s case (supra) the assessee-company purchased shares in order to acquire the managing agency when the sugar mill is erected. Ultimately, the mill was not erected and the agreement about acquiring the managing agency fell through. Later, the shares were sold and a profit of Rs. 2 lakhs was made. The question that arose was whether the receipt of Rs. 2 lakhs was receipt from business and not a mere appreciation in capital. On the above facts, the Supreme Court held that the purchase of shares was an investment and not an adventure and the sum of Rs. 2 lakhs received was not in the nature of income from business.
In Raja Bahadur Kamakhya Narain Singh v. CIT  77 ITR 253 (SC) the assessee purchased shares and debentures in September 1939 which were sold in 1939, 1940 and 1941. The question that arose for consideration was whether the profit made on sale of shares was assessable as business income. The Supreme Court held that the profit made on the sale of shares acquired with the intention of obtaining control over the company's management and not for dealing in them would be capital and not revenue account. It was observed as under: ... The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade.
The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.
Thus, it was held that the test to be applied is whether the assessee has made his shares and securities the stock-in-trade of a business. If it is stock-in-trade then the profit made is revenue receipt, otherwise it is a capital receipt. By applying the above test to the facts of the instant case, now under appeal, it is very clear that the shares were not purchased as stock-in-trade of the business but were purchased by way of investment.
Hence, the profit made on sale of shares cannot be treated as business income. It is assessable as capital gain.
In CIT v. Sutlej Cotton Mills Supply Agency Ltd.  100 ITR 706, the Supreme Court observed as under: Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed circumstances would only be a realisation of capital and would not stamp the transaction with a business character ...
In Rameshwar Prasad Bagla v. CIT  87 ITR 421 the Supreme Court, on the facts of that case, held that there was material for the finding that the shares in question had been purchased by the assessee with a view to acquire the managing agency and control of the India United Mills Ltd., and that the shares did not constitute the stock-in-trade of the assessee and the profit made on the sale of shares would constitute capital gain chargeable to income-tax. The ratio laid down in the above cases squarely apply to the instant case. In our view, the purchase of shares by the assessee was by way of investment and the profit made on the sale of shares was assessable as capital gain. Thus, the lower authorities were justified in assessing the profit on the sale of shares as short-term capital gain. We uphold the orders of the lower authorities on this point.
7. We will now take up the revenue's appeal. The point raised is whether the Commissioner (Appeals) was justified in directing the ITO to deduct the unabsorbed development rebate of Rs. 38,042 for the assessment year 1975-76 in computing the total income for this year.
The ITO held that the unabsorbed development rebate has also to be treated on the same footing as business loss. The unabsorbed development rebate cannot be set off against the total income. On appeal, the Commissioner (Appeals) accepted the contention of the assessee in view of the provisions of Section 33(2)(ii) of the Act. He directed the ITO to deduct the unabsorbed development rebate of Rs. 38,042 for the assessment year 1975-76 in computing the total income for this year.
8. The learned departmental representative submitted that the Commissioner (Appeals) erred in holding that the assessee was entitled for the set off of the unabsorbed development rebate. He submitted that Section 72(1) of the Act refers only to losses. The learned counsel for the assessee supported the order of the Commissioner (Appeals).
9. We have considered the rival submissions. Section 33(2)(ii) clearly states that the unabsorbed development rebate to be allowed for the following assessment years shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year to be nil and the balance shall be carried forward to the following assessment year and so on. In view of the above provisions, the unabsorbed development rebate is deductible from the total income of the assessee. Thus, the Commissioner (Appeals) was perfectly justified in directing the ITO to deduct the unabsorbed development rebate of Rs. 38,042 for the assessment year 1975-76 in computing the total income for this year, i.e., 1978-79. It is no doubt true that Section 72(1) refers only to business loss, but the provisions of Section 33(2)(ii) are very specific and they have to be applied. The Commissioner (Appeals) was perfectly justified in applying the said provisions and allowing the deduction. We uphold his order.