D. K. MAHAJAN J. - The Income-tax Appellate Tribunal (Delhi Bench C) has referred the following question of law for our opinion :
'Did the Tribunal misdirect itself in law in coming to the finding that the loss of Rs. 4,80,988 arising from the sale of shares was not deducible from the profits of the company ?'
The assessee-company, Messrs. Patiala Biscuit Manufacturers Private Limited, Rajpura, is a private limited company, and was floated for the manufacture of biscuits. This company belongs to the Dalmia Jain group. In the year 1947, the company purchased 11,950 4 1/2 per cent. Second preference shares worth Rs. 12 lakhs and odd of Rohtas Industries Limited, Dalmianagar. The company did not possess sufficient funds. A loan of Rs. 9,46,000 was raised by it from the Gwalior Bank at 3 1/2 per cent. to finance the purchase. In the year 1950, the company raised a further loan of Rs. 11,50,000 from Bharat Fire and General Insurance Company. Both the Rohtas Industries Limited and the Bharat Fire and General Insurance Company belong to the Dalmia-Jain group of companies. The loan of Rs. 11,50,000 was paid off in the following manner :
The assessee-company issued 50 redeemable mortgaged debentures of Rs. 10,000 each to the Bharat Fire and General Insurance Company;
Rs. 6,50,000 were paid off in cash by the sale 11,950 second preference shares Messrs. Rajpal Chadha and Company. The preference shares were purchased by the Bharat Fire and General Insurance Company.
This sale of shares resulted in a loss to the company to the extent of Rs. 4,80,988 on 6th of October, 1951. This loss was ultimately transferred to the profit and loss account of the company for the year ending 31st of December, 1951. In the revenue account, the loss was described as :
'To loss on sale of joint stock company shares.'
In the assessment year 1952-53, the company, before the Income-tax Officer, claimed that this loss being a revenue loss was deductible from its business income. This contention was negatived by the Income-tax Officer. The Income-tax Officer held as follows;
'The facts pointed out above clearly show that the shares were not acquired as stock-in-trade and with the object of making profit from rise in their value. It is, therefore, held that the shares were being held as investments. The loss suffered is capital loss and cannot be allowed as a deduction from the revenue income of the assessee.'
An appeal by the assessee to the Appellate Assistant Commissioner met with no success. While dismissing the appeal, the Appellate Assistant Commissioner observed as follows :
'The appellant never dealt in shares either before or after this transaction. Shares were subscribed for in a company in which the directors of the appellant-company are also interested. No doubt the duration of the purchase is from 19th July, 1947, to 13th December, 1947, which covers a period of five months, yet this depended on the fact as to what shares were issued and subscribed for. The entire block was sold on one day after a period of four years and in between these four years, there was not a single purchase or sale. No doubt, the appellant is authorised to deal in shares by clause 39 of the memorandum of association, but the same memorandum also authorised it to make investments and in fact the appellant has made investments in National Savings Certificates, which have all also been shown as investments in the balance-sheet along with the shares. Shares were never shown separately as being held for dealings in business. I have studied the different rulings quoted by the appellant and the income-tax officer and although the courts have mentioned that the intention at the time of purchase may be a guiding factor for determining whether the transaction was in the nature of business or not, yet that alone cannot decide the issue. The facts and circumstances of the transaction as a whole have to be considered. The different rulings quoted all relate to transactions in which profits were earned. It therefore, cannot be argued that the appellant purchased shares with the intention of incurring a loss. These were new shares issued for the first time, when the appellant purchased them and they were not reported in the share market. There is, thus, no reason as to why the appellant did not sell these shares in the subsequent years and purchase new shares in their instead if at all he had the intention of dealing shares. For him to have waited till the value fell from Rs. 100 per share to 59-12-0 per share tends to suggest that these shares were held by way of investment and the appellant was hoping for the declaration of dividends. There is no continuity of transactions to justify an inference of a business, while a profit making motive cannot be concluded either at the time of the purchase or the sale or in the intervening period. The appellant holding tight the shares for a period of four years without any charge whatsoever, clearly shows that the shares were held by way of investments, just like the National Savings Certificates. The loss claimed is, therefore, clearly a loss on the sale of investments, which is a capital loss and was rightly disallowed.'
Against the decision of the Appellate Assistant commissioner, the company preferred an appeal to the Income-tax Appellate Tribunal, Delhi Bench 'C'. The Appellate Tribunal rejected the Appeal with the following observations :
'After having carefully consideration all the aspects of the case, we are of the opinion that the assessee-company cannot succeed. Shri Kapur has no doubt tried to persuade us with his very able arguments that this was an ordinary business deal but, to us, it seems apparent that this was a clear case of investment by one company in another connected company - a company connected through common interests of the dominant shareholders. The company had not purchased the shares in the free open market but had subscribed to the initial capital expansion of the Rohtas Company. The investment was not made in the ordinary shares or in the deferred shares but in preference shares. Even these preference shares were not first preference shares but were second preference shares which would rank for dividends only after first preference shareholders were satisfied. The shares were not entitled to participation and, therefore, there was no prospect of the prices rising much beyond par. Even the A class shares (par value Rs. 100) are selling only at Rs. 105, we were told. It is obvious that a dealer would not choose such an investment for a business or a speculative deal. One would make such investment only with an eye on the dividends or the yield. As to why the company undertook such a big loan for the narrower margin of profit (4 1/4% minus 3 1/2%), it seems that the answer must be sought in the close connection of the dominant persons who held the shares in the companies either directly or indirectly or indirectly through other companies. It is not necessary to speculate on the purpose but the facts would abundantly show that it was not a business deal but was a mere investment. It could not be and it was not a business deal.
The fact that it was an investment made for earning the dividends is also borne out by the fact that the Rohtas Company did declare the dividends as were expected.
It is agreed on both sides that this was the solitary instance of transaction in shares in the history of the company. The question is whether there was an adventure in the nature of trade. As held above, we are of the opinion, that it was not an adventure in the nature of trade but was purely an investment. The loss in the nature must be held to be capital loss.'
The company, being dissatisfied with the decision of the Appellate Tribunal, made an application to it under section 66(1) of the Income-tax Act; and the Appellate Tribunal by its order dated the 5th of January, 1963, has referred the question of law set out in the opening part of this judgment.
Mr. G. C. Sharma, who appears for the company, contends that the company is carrying on the business of manufacturing and selling biscuits. The buying and selling of shares is also a part of the business of the company Therefore, the buying and selling of shares is a commercial transaction. The loss in the sale of shares has occurred in the trading activity of the company during the course of carrying on of business. Therefore, the loss is a trading loss. It is maintained that it is not the companys case that, by itself the sale of shares was a trading transaction. But as the company was engaged in business and the company could carry on the business of buying and selling shares, the sale of shares would, per se, be a business activity without anything more. In support of his contention, the learned counsel has relied upon the majority decision of the Privy Council in Griffiths (Inspectors of taxes) v. J. P. Harrison (Watford) Limited, and particularly on the following observations of Lord Guest :
'I, therefore, conclude that neither the fact that the company intended to make a loss nor the fact that the company intended to make a fiscal advantage out of the transaction negatives trading.
In my opinion, one has to look at the transaction by itself irrespective of the object, irrespective of the fiscal consequences, and ask the question in Lord President Clydes words in Livingston : Whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in the which the venture was made.
The company had power to deal in shares, they received a dividend on these shares. This was just the ordinary commercial transaction of a dealer in shares. I ask myself the put by Lord Radcliffe in Edwards v. Bairstow : 'What details does it lack that prevents it from being an adventure in the nature of trade, or what element is present in it that makes it capable of being aptly described as anything else. What is it if it is not trade. In my view the transaction in question was not adventure in the nature of trade and the commissioners had no grounds upon which they could hold that it was not.'
Lord Reid and Lord Denning dissented from the majority view and held that the transaction in question, namely the purchase and sale of shares was not a trading transaction.
Mr. D. N. Awasthy who appears for the department, contends that the Tribunal did not misdirect itself in coming to the conclusion that the loss of Rs. 4,80,988 arising from the sale of shares was not a trading loss. On the facts found by the Tribunal, the conclusion arrived at is fully justified. No error of law has occurred in arriving at that conclusion. It is maintained that there is evidence to support the findings of fact and on the basis of the cumulative effect of those facts the Tribunal has come to the conclusion that the loss in question is not a trading loss.
It is further maintained by Mr. Awasthy that the purchase and sale of shares by the company was not its ordinary business. It was merely a solitary transaction. No doubt the company could engage in the business of buying and selling shares as per clause 39 of the memorandum of association; but that by itself would not be a conclusive circumstance to lead to the conclusion that purchase and sale was a trading transaction. The learned counsel has laid great emphasis on the fact in clause 60 of the memorandum, the company had the power to invest in shares. The facts proved on the record clearly negative the suggestion that the purchase and sale of shares was a trading transaction. In fact, it was an investment transaction. A new issue of shares of a sister concern was purchased by borrowing money from a sister concern. The shares were, later on, sold to a sister concern in order to clear off the liability of the sister concern. The transaction of buying and selling of shares did not, in any manner, partake of a business transaction in the real sense. It is, therefore strenuously maintained that the Tribunal had come to a correct decision that the purchase and sale of shares in the instant case was not a trading transaction.
The question, whether a particular transaction is a trading transaction or a capital transaction has always vexed the courts. There has been lot of divergence of judicial opinion and in each case the decision has turned on its own peculiar facts. The decision cited at the bar are merely illustrative guides and do disclose the general principles that have to be kept in mind in arriving at the conclusion whether the transaction pertains to the domain of revenue or capital. At this stage, it will be proper to refer to certain passages in the famous Treatise on Income Tax by Konstam, 12th edition (The law of Income Tax, Surtax and Profit Tax by Wheatcroft based on the Law of Income Tax by Konstam). At page 1211, paragraph 430, the learned author has observed as follows :
'Clearly the problem Whether the acts of a particular taxpayer do, or do not, amount to trading is often not an easy one; in borderline cases it is a question of degree and the decision of the commissioners, whichever way it goes, is unlikely to be disturbed. Probably the best approach to the problem in any given case is first to examine the taxpayers acts and operations objectively to see whether they can fairly be called trading within the various decision already discussed or to use Lord Buck masters phrase, do they disclose an operation of business in out a scheme of profit making If the answer to this question is affirmative then a second question should be posed. If it is not trading, what is it Is there some satisfactory explanation, consistent with the facts as found, which shows that the prima facie inference of trading was wrong Clearly if the facts proved to the Commissioners satisfy them that the purpose of the operations was to provide the taxpayers with something for personal use, or a satisfactory investment, or some other benefit outside the ambit of trading, now the finding will be no trade. But if no satisfactory explanation is forthcoming a finding of trading will then follow.'
At page 1203, under the heading 'The distinction between trading and investment', the same author has observed as follows :
One of the most difficult problems in this field is to distinguish between an operation which is essentially one of investment and another operation which constitutes trading. Both may involve the purchase and resale of some item of property and, looked at objectively, there may often be little difference between the facts in each case.
Where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D. But enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of business. The simplest case is that of a person or association... buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by realisation, the gain they make is liable to be assessed for income-tax.
Sometimes a company is formed to realise the assets of a former trader and it is then difficult to resist a finding that the company is trading, as the acquisition of assets for the purpose of sale is an activity which includes the necessary elements of trading. On the other hand a company may be formed to acquire and hold land or other property in exactly the same way as an individual investor, and a subsequent sale by the company of all or part of its property at a profit does not necessarily imply that is has engaged in trade. There is, however one significant difference between an individual and a company in that the latters objects have to be stated in its memorandum of association; if those objects clearly include the acquisition of a particular type of property for the purpose of resale at a profit, this is an indication that it acquired that property by way of trade. If however, the objects of a company are primarily to acquire and hold property as an investment changes or realisation of investments will not necessarily constitute trading.
It is however, well established that a company is as capable as an individual of owning property without becoming a trader and it is the nature of its operations, and not its capacity, which finally determines whether it carries on a trade. Its capacity, as expressed in its memorandum may, however, throw light on the nature of its operations and it is therefore usual for a company, whose promoters do not desire it to be treated as a trade, to be formed with a memorandum which makes it clear that profits made on changes of investments are to be treated as capital and that capital profits may not be distributed. Conversely, if a company has trading objects but no power to invest, this will be a very strong indication that it acquires property as part of its trade. The form of the memorandum is not, however, conclusive because the question is not what business the taxpayer professes to carry on but what business does he actually carry on.
There is also a further type of case where a person is admittedly carrying on a trade of dealing in land or other property but contends that some particular item of property was acquired as an investment and so is outside the ambit of its trade or has been taken out of its trade and retained as an investment. This leads to the more general problem as to what activities of a taxpayers in relation to the acquisition and sale of property do or do not constitute trading.'
Kanpur J. in Oriental Investment Company Ltd. v. Commissioner of Income-tax clearly observed that :
'The mere fact that a company has within its objects the dealing in investment in shares does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved it may be relevant for the purpose, of the determining the nature of the activities of the company.'
To the same effect are the observations of the Supreme Court in Kishan Prasad and Co. Ltd. v. Commissioner of Income-tax, where Chief Justice Mahajan, who spoke for the court, observed as follows :
'The circumstances whether a transaction is or is not within the companys 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.'
The following observations of Veeraswami J. in Commissioner of Income-tax v. Kasturi Estates Private Ltd. are also to the same effect :
Where the assessee is a company, while no conclusion can properly be based on the objects or powers of the company as found in its memorandum and articles, they are relevant matters which should be taken into account and kept in view in determining the character of the transaction in which the company has engaged. The objects and powers may be to carry on a trade or business but their existence does not ipso facto mean that they have been used. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light of the objects and powers of the company and the surrounding circumstances and facts.'
In this connection reference may also usefully be made to the following observation of Shah J. in Commissioner of Income-tax v. P. K. N. Company Ltd. :
'As already observed, determination of the question whether in purchasing and selling land the taxpayer enters upon a business activity has to be determined in the light of the facts and circumstances. The purpose or the object for which it is incorporated where the taxpayer is a company may have some bearing, but is not decisive, nor is the circumstance that a single plot of land was acquired and was thereafter sold as a whole or in plots decisive. Profit motive in entering into a transaction is also not decisive. Here, as already pointed out, the primary object of the company was to take over the assets of the P. K. N. firm to carry on the business of planters and to earn profits by sale of rubber. The incidental sale of uneconomic or inconvenient plots of land or houses could not convert what was essentially an investment into a business transaction in real estate.'
The principal contention of the counsel for the assessee that, as the assessee was engaged in business and the purchase and sale of shares was within the scope of the memorandum of the company, the transaction of the purchase and sale of shares per se would be a trading transaction, is rather specious. The decision already cited, including the Supreme Court decisions, run counter to this contention. This fact is one of the circumstances that have to be taken into account to determine whether a particular transaction is a transaction in the nature of trade or otherwise. Though this contention finds support from the decision of the Privy council in Griffins case and also from the decision of the Patna High Court in Dalmia Cement Ltd. v. Commissioner of income-tax wherein Manohar Lall J. observed as follows :
'In the present case, as shown above, what the assessee was to deal in shares and this was provided in the articles of association, and finding of fact that it invested the money in the shares of the sister company and thus promoted own interest, I would be prepared to go further that even if, as I have observed above, it be held that the company did was to invest the surplus money, they did so as a part of business in order to make a profit as was provided by Clause 13(g) of the articles of association. The directors clearly were of the opinion that during the time when the cement could not be prepared the surplus money should not lie idle in their hands and they must have invest it so that they invested it in the sister company whose shares went up in the market, thus resulting in a double advantage to themselves'
yet I am not prepared to go to that length in view of the clear pronouncement of the Supreme Court to the contrary. The fact, that the company could engage in the share business, has to be taken in to account; but, that by itself, as already said, is not conclusive of the question that every transaction in shares would necessarily be a trading transaction. The fact that the company would engage in the purchase and sale of shares, has been taken in to account by the Tribunal along with the further fact that the company could also invest in shares according to clause 60 of the memorandum. The Tribunal has further taken in to account a number of factors; for instance :
'(1) that the purchases of shares was not in line with a scheme of profit making but was a scheme for enjoying a steady dividend income from investment in preference shares;
(2) that the purchase and the sale of shares was a solitary transaction in the history of the company;
(3) that the Rohtas Company did declare dividends as was expected;
(4) that the purchase was of non-participating preference shares and normally such purchases are never made with a view to gain on the rise in the prices but are made with a view to secure safe investment; and
(5) that the purchase and sale of shares was practically the entire holding of the assessee-company in the share scrips; and the balance-sheet clearly indicated that the purchase was purely for purpose of investment; 'for its conclusion that the transaction in question is not a trading transaction.
On the other hand, the nearest case in point is the decision of the Patna High Court in Ashok Marketing Ltd. v. Commissioner of Income-tax. In this case, the facts were as follows :
'In this case the assessee is a public limited company with a paid up share capital of Rs. 5,00,000. It deals principally in goods manufactured by the Dalmia Jain group, namely, the Rohtas Industries Limited, S. K. G. Sugar Mills Limited and Dalmia Cement Limited. The main business of the company is to sell commodities like cement and sugar on commission basis and also directly to the customers on its own account. In the course of the accounting year ending on the 31st August, 1949, the assessee dealt in Government securities. On the 28th February, 1949, the assessee sold securities of the face value of Rs. 62,00,000 to the Dalmia Cement and Paper Marketing Company Limited. This sale of securities was not a sale out of the companys investments or holdings. The sale was a forward sale, and to cover it up the assessee started purchasing Government securities from other concerns. On the 3rd March, 1949, the assessee purchased Government securities of the face value of Rs. 20,00,000 from the Bharat Bank for Rs. 20,37,062-9-0.
On the 4th March, 1949, a second lot of Government securities of the face value of Rs. 2,00,000 was purchased from the Bharat Bank for a sum of Rs. 2,03,686-8-8. On the 7th March, 1949, the assessee again purchased Government securities of the face value of Rs. 20,00,000 for a sum of Rs. 20,37,521-5-8, and for the fourth time the assessee purchased Government securities of the face value of Rs. 20,00,000 from the same bank for a sum of Rs. 20,37,635-8-4. Having made all these purchases the assessee sold Government securities of the face value of Rs. 50,00,000 for a sum of Rs. 50,92,578-2-0. After these transactions the assessee again purchased certain securities. The details of sales and purchases have been furnished in annexure 'A' to the statement of the case. The assessee claimed before the Income-tax Officer that there was a loss of Rs. 30,847-14-0 as a result of these transactions in the purchase and sale of these Government securities. The claim was rejected by the Income-tax Officer and an appeal preferred by the assessee to the Appellate Assistant Commissioner was also dismissed. The assess then took the matter in second appeal before the Appellate Tribunal. It was argued before the Tribunal on behalf of the assessee that the transactions in the purchase and sale of Government securities were authorised by the memorandum of association. The Tribunal did not accept this argument and held that the dealings in Government securities were not authorised by the memorandum of association. The Tribunal also took the view that, even if the dealings were intra vires of the company, it could not be said that the transactions were performed by the assess-company in the ordinary course of its business. Accordingly, the Tribunal disallowed the claim of the assessee for setting off the loss of Rs. 30,847-14-0 against the other income of the assessee for the accounting year.'
Ramaswami C.J. (as he then was), who spoke for the court, observed as follows :
'I do not think it is necessary to express any concluded opinion on this point. I shall assume favour of the assessee that the transactions in sale and purchase of Government securities were authorised by the memorandum of association. The point is not really relevant for deciding the question of law which is presented for determination in this case. Even assuming that the transactions were intra vires, it does not necessarily follow that the transactions were performed in the normal course of business of the company. Every act which is intra vires of the company is not necessarily done in the course of the business of the company. The question at issue in this case is whether the transactions of sale and purchase of Government securities had any pertinent connection with the normal business of the company and whether they were so related or bound up with the business of the company that it can be considered to have been performed in the normal course of business.......
I consider that there is proper material in the present case to justify the finding of the Tribunal that the sale and purchase of the Government securities were not connected with the normal business of the company. In the first place, the Appellate Tribunal has referred to the circumstance that the assessee did not produce the minute book to show that there was a resolution of the board of directors sanctioning the sale and purchase of securities. In the second place, the Appellate Tribunal has referred to the circumstance that the assessee did not produce the minute book to show that there was a resolution of the board of directors sanctioning the sale and purchase of securities. In the second place, the Appellate Tribunal relied upon the fact that the sale and purchase of securities took place between allied concerns in which the Dalmia-Jain group has the controlling interests and the transactions, therefore, seem more like domestic transactions rather than transactions entered into in the ordinary course of the companys business. The Appellate Tribunal also took into account the circumstance that the paid up share capital of the company was Rs. 5,00,000 but the total amount covered by the transactions was over one crore of rupees, and also the circumstance that the sale of Rs. 50,00,000 on the 31st March, 1949, remained uncovered for nearly three months, a procedure most unusual in a business of this nature. In my opinion, the finding of the Appellate Tribunal is supported by proper evidence and it is also not shown on behalf of the assessee that the Tribunal has misdirected itself in law in reaching this finding. For these reasons, I hold that, in the facts and circumstances of the case, the assessee-company was not entitled to claim that the loss of Rs. 30,847-14-0 suffered by it in its dealings in Government securities in the assessment year 1950-51 was loss which could be set off against other income of the assessee.'
It will also be useful at this stage to refer to certain decision wherein certain guiding principles have been laid down to determine whether a particular venture is in the nature of trade or otherwise. In Californian Copper Syndicates case Clerk J. observed as follows :
'What is the line which separates the two classes of cases may be difficult to define and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit making ?'
In G. Venkataswami Naidu and Company v. Commissioner of Income-tax Gajendragadkar J. (as he then was) observed as follows :
'Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment.'
Kapur J. in Raja Bahadur Visheshwara Singh v. Commissioner of Income-tax observed as follows :
'The magnitude and the frequency and the ratio of sales to purchases and total holdings was evidence from which the Income-tax Appellate Tribunal could come to the conclusion as to the true nature of the activities of the appellant. The principle which is applicable to the present case is what we have said above and on the evidence which was before the Tribunal, i.e., the substantial nature of the transactions the manner in which the books had been maintained, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holding......'
Keeping in view the principles laid down in the above decisions as well as the facts found by the Tribunal, I am in no doubt that the Tribunal arrived at a correct conclusion and did not misdirect itself in holding that the purchase and sale of shares in the present case was merely an investment and not a venture in the nature of trade. All the facts found by the Tribunal are relevant and have not been shown to be, in any manner, de hors the enquiry that the Tribunal was required to embark upon. The conclusion of the Tribunal on those facts is fully justified.
For the reasons recorded above, I would answer the question referred to us in the negative. However, in the circumstances of the case, I would leave the parties to bear their own costs.
R. S. NARULA J. - I agree.
Question answered in the negative