SRINIVASAN J. - The assessee is a private limited company. Its principal business is to act as managing agents of tea companies. It had the managing agency of an estate called the Burnside Estate from 1949 onwards. The owner of the estate, one Stisted, wanted to sell the estate. The assessee entered into an agreement with the owner on December 20, 1954, by which it undertook to purchase the estate for itself or for a person to be nominated by it for a consideration of Rs. 7 1/2 lakhs. An initial advance of one lakh of rupees was paid. But it appears that even in advance of execution of the sale deed, the balance of 6 1/2 lakhs of rupees was also paid, the assessee borrowing the amount from the National Bank. The possession of the estate was taken over on January 1, 1955.
Thereafter, the assessee floated a company under the name of 'Lucky Valley Tea Estates Company Limited' with an issued capital of 5 lakhs of rupees of 50,000 shares of Rs. 10 each. This company was registered on July 18, 1955. Out of the 50,000 shares issued and allotted, the assessee obtained an allotment of 39,798 shares. A part of the borrowing from the National Bank was transferred to this company, the other part being liquidated on a borrowing by the company on a deposit of title deeds with that bank. The exact manner of the discharge is however immaterial. Practically simultaneously with the formation of this company the assessee sent hundreds of circular letters to various persons, chiefly persons who held shares in other companies of which the assessee was also the managing agent. By these letters the assessee offered to part with the shares in its possession at a price at Rs. 13 per share as against the issued price of Rs. 10 per share. In this manner within a space of a few weeks, the assessee sold 29,798 of its shares, retaining only 10,000 shares. In respect of these sales which took place in the calendar year 1955, the profit that accrued to the assessee was Rs. 89,394, and this amount was duly brought to its profit and loss account. For the assessment of the assessee for the assessment year 1956-57 the question arose whether this profit was assessable to tax. The Income-tax Officer held it to be assessable rejecting the contentions of the assessee that it was either a capital profit or a profit of a casual and non-recurring nature. Against this order of assessment an appeal was taken to the Appellate Assistant Commissioner before whom the same contentions were reiterated. The Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer taking the view that the profit arose out of a transaction which was an adventure in the nature of trade. He examined the nature of the transaction, the manner in which it was put through and reached that conclusion.
A further appeal was taken to the Appellate Tribunal. The Tribunal proceeded to examine the facts and circumstances of the case in order to determine whether there was any material which would lead to the inference that the transaction was an adventure in the nature of trade. The Tribunal held that even at the inception it was not the intention of the assessee to hold the shares as an investment. It said that a company with an authorised and paid up capital of only one lakh of rupees when it engaged itself in the purchase of an estate for Rs. 7 1/2 lakhs and in order to pay the consideration, had to raise a loan of practically that amount, could not have envisaged an investment of such a magnitude and out of all proportion to its capacity. It repelled the argument that the sole purpose which animated the assessee was the acquisition of the managing agency of the company newly formed. It thought that even assuming that there was some such intention, there was no need at all for the company to have saddled itself with very nearly 40,000 out of the 50,000 shares. The fact that a large amount was borrowed for the purpose of the purchase, that even the initial intention was that the purchase was to be by a nominee, that is to say, by a new company to be floated by the assessee, that the allotment was of the very large number of shares, far in excess of what might be deemed to be necessary, in order to enable the assessee to secure the managing agency, immediately followed by the sale of the shares at a premium, all these features led the Tribunal to the conclusion that the entirely of the transaction betrayed all the indicia of an adventure in the nature of trade. The appeal was accordingly dismissed.
On the application of the assessee, the Tribunal has referred the following question for the determination of this cour :
'Whether the inference that the aforesaid profit of Rs. 89,394 is assessable as from a venture in the nature of trade is justified in law.'
Certain dates which are relevant may be set out. The assessee entered into an agreement with the owner of the estate on December 20, 1954. The agreement stipulated that the owner shall convey to the assessee or to a person to be nominated by it the estate in question for Rs. 7 1/2 lakhs. It is common ground that even before the conveyance was executed the assessee paid the entire amount of consideration partly by way of advance and partly (to the extent of Rs. 6 1/2 lakhs) by borrowing from the National Bank. Such payment was made before the 31st of December, 1954, and the estate was taken possession of by the assessee with effect from January 1, 1955.
On the 18th July, 1955, the Lucky Valley Tea Estates Company Limited was floated with an issue of 50,000 shares of Rs. 10 each. The assessee was one of the persons who floated this company. The share capital of Rs. 5 lakhs was realised by the allotment of the 50,000 shares to 10 persons including the assessee who obtained an allotment of 39,798 shares. The Bank of India was allotted 4,898 shares and the Investment Trust Limited was allotted 5,000 shares; the balance of 304 shares was admittedly allotted to either employees or friends of the assessee. In any event the assessee obtained the predominant voice in the management of the new company and at a meeting of the shareholders on July 22, 1955, the assessee was appointed the managing agents of the new company. In between these two dates, i.e., on the 20th of July, 1955, the estate was transferred to the new company for a consideration of Rs. 7 1/2 lakhs.
On July 29, 1955, that is, within a week after this transfer was effected in favour of the company, the assessee issued numerous circular letters offering to various persons the shares of the company at Rs. 13 per share. Within a short space of six weeks the assessee had by this means sold as many as 29,798 shares. It is thus seen that the sale of these shares was effected even before the ink was hardly dry up on the sale document. That the assessee even at the time it was allotted the shares on the floatation of the company on July 18, 1955, was actuated by the intention of disposing the larger portion of the shares that had been allotted to it is undoubtedly a very reasonable inference that can be drawn from these circumstances. In fact the move for the disposal of the shares was initiated by the assessee itself by broadcast letters issued to hundreds of persons. The following is an extract from one of such stereo-typed letter :
'Dear Sir - We have pleasure in advising you that Lucky Valley Tea Estates Limited was incorporated on the 18th July, 1955, to acquire the Estate known as Burnside Estate........ The estate was bought from an European owner for Rs. 7,50,000 and allowing Rs. 1,00,000 for working capital, the present capital structure is as follow :..... The whole of the issued capital is held by ourselves and another.
From our own holding of 40,000 shares we sold to friends over 10,000 shares at Rs. 13 per share and have for sale a further 5,000 shares in small lots at Rs. 13 per share.
Difficult as it is to forcast the further in tropical agriculture, we think these shares will increase in value as the estates prosper under our management and you can be assured that the property will receive the same careful attention as we have exercised in the case of the Coonoor Tea Estates Company Limited of which you are a shareholder and which has brought that estate to the present high standard......'
The response to these letters appears to have been very satisfactory and immediate, as has been stated within a space of 40 days over 29,000 shares were thus sold by the assessee.
The principal and indeed the only argument that has been addressed by Mr. K. Srinivasan, learned counsel for the assessee, is that the acquisition of these shares was necessitated by the need of the assessee to ensure its managing agency of the estate in question. It is claimed that but for the fact that the assessee took upon its shoulders the responsibility for finding a purchaser for the estate and took the trouble of floating a company to figure as the purchaser, the assessee would well have lost the managing agency of the estate which was one of the many sources of its income-earning structure. The intention of the assessee was, it is argued, not to buy and sell the shares with a view to make a profit; the dominant intention, it is asserted, was only to take such steps as would ensure the retention of the managing agency of the estate and if that is so, it is urged, the profit earned by the sale of these shares cannot be brought to tax as resulting from an adventure in the nature of trade.
Considerable reliance has been placed upon the decision of the Supreme Court in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax. The assessee in that case carried on business as managing agents of other companies. It was also a dealer in shares and securities. Being anxious to acquire the managing agency of a textile mill, the assessee purchased from the previous managing agents, 1,507 shares of the mill at a price considerably in excess of the then prevailing market value of the shares. Within a month of the purchase the assessee sold 400 of these shares at a loss of Rs. 1,78,438 and claimed this loss as a trading loss. The question arose whether this loss could be allowed as a revenue loss, and whether the transaction was an adventure in the nature of trade. Their Lordships of the Supreme Court held that the fact that the assessee purchased the shares at Rs. 2,300 and odd when the market price was only Rs. 1,600 clearly showed that the assessee acquired the shares only to facilitate the acquisition of the managing agency of the mill, such managing agency being a capital asset. The intention of the assessee was not thus to acquire the shares as a part of stock-in-trade of its business in shares. Though the assessee was a dealer in share this transaction of purchase of the shares was not in pursuance of that line of activity. The real character of the acquisition had to be gathered from other circumstances. Proceeding to do so, their Lordships held that the loss was not a revenue loss. How a question of this kind has to be approached was thus stated by their Lordship :
In considering whether a transaction is or is 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............. .. The Tribunal held that the share of the Dawn Mills purchased by the appellants did not become their stock-in-trade. But they held that the transaction having been effected in the regular course of the business of the appellants, viz., the acquisition of managing agencies, the loss resulting from the sale of shares was incidental to that business and was a revenue loss. It is not easy to appreciate the process by which this conclusion was reached. The share were purchased for the purpose of acquiring the managing agency of the Dawn Mills; they were not purchased in the course of the appellants business as dealers in shares. By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilised for earning profit, the acquisition of the shares which led to the acquisition of the managing agency could not, in the absence of an intention to trade in those shares, be regarded as acquisition of stock-in-trade of the share business. The appellants had undoubtedly purchased the share of the Dawn Mills with money borrowed at interest, but that circumstance by itself does not evidence an intention to trade in the shares...... The appellants were undoubtedly dealers in shares; but the transaction in the Dawn Mills shares was ex facie not a business transaction...... The only reason for entering into the transaction, which could not otherwise be regarded as a prudent business transaction, was the acquisition of the managing agency... the inference is inevitable that the intention in purchasing the shares was not to acquire them as part of the trade of the appellants in shares....... The managing agency is manifestly the source of profit of the appellants; but the shares purchased and the managing agency acquired were both assets of a capital nature and did not constitute stock-in-trade of trading venture. If the shares were acquired for obtaining control over the managing agency of the Dawn Mills, the fact that the acquisition of the shares was integrated with the acquisition of the managing agency did not affect the character of the acquisition of the shares. Subsequent disposal of some out of the shares by the appellants could also not convert what was a capital acquisition into an acquisition in the nature of trade.'
It will be seen from the above that the assessee in that case was not previously the managing agent of the textile mill in question. It had to acquire the managing agency and for that purpose purchased shares at prices far higher than the market value and deliberately involved itself in a huge loss. Looked at as a transaction in the course of a business in shares, it was undoubtedly highly imprudent and was obviously, therefore, not one which a dealer in shares would have entered into. This circumstance was of the greatest significance in inferring the intention of the assessee. If the intention was to obtain a capital asset, i.e., the managing agency, the purchase and the subsequent sale of the shares could not be regarded as a trading operation and despite the fact that the assessee in that case was also doing business as a dealer in shares, the particular transaction which their Lordships had to deal with took on a totally different complexion and became dissociated from anything in the nature of a trade.
In Rajputana Textiles (Agencies) Ltd. v. Commissioner of Income-tax was considered a case which was somewhat similar to the facts of the earlier decision. But the conclusion reached was different. In that case Rajputana Textiles, the assessee, entered into an agreement with Sassoon & Co., which were the managing agents of the Apollo Mills. The assessee purchased the managing agency at Rs. 12 lakhs and a block of 19,76,000 shares held by Sassoon & Co. for a consideration of Rs. 83,98,000. Out of this block of shares 13 lakhs of shares were sold by the assessee at a profit of Rs. 16,52,600. The assessee company only retained the balance of 6 lakhs of shares. The question arose whether the purchase and sale of these shares involved the elements of an adventure in the nature of trade. The Investigation Commission held it to be so and, on a reference, the High Court found that there were materials to justify the finding of the Commission. When the matter came before the Supreme Court, the usual argument that the dominant idea of the assessee was to acquire the managing agency of the Apollo Mills was put forward as taking the transaction out of the scope of a trading venture. Their Lordships referred to the earlier decision in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax and distinguished it on the facts. They dealt with the case law relevant to the subject and pointed out that it is not any single feature that would justify the inference that the transaction is in the nature of trade. They state :
'What is important is to consider the distinctive character and it is the total effect of all the relevant factors that determines the character of the transaction. All these cases are illustrative. As was said by Gajendragadkar J. in the above-mentioned case the totality of circumstances of a case and the pros and cons have to be considered and inference drawn from those facts whether a particular transaction was in the nature of trade or was merely an investment and the resulting excess from the transaction was, therefore, profit which was taxable or was merely an accretion to the capital. In the instant case the profit from the transaction that consisted of buying the managing agency of the mill company and the block of shares held by the Sassoons was in our view the profit of an adventure in the nature of trade. The two groups, Morarka and Babnas, put Rs. 20 lakhs into the assessee company which was floated for the acquisition of the managing agency and shares of the mill company which were beyond the holding capacity of the assessee company. That company never intended to hold the whole block of shares. It or its promoters before even entering into the agreement of purchase and during the course of negotiations for the purchase had entered into arrangements with the different brokers for the sale of shares or at least of a bulk of those shares which were subsequently sold at profit and but for that sale the transaction could not have been completed by the assessee company. The purchase of shares was not with the intention of holding them, the intention of the assessee was just the contrary and by the sale at a profit of the shares actually sold the assessee company expected to and did finance the completion of the transaction and thus was enabled to secure the managing agency and keep 6 lakhs shares. This inescapably was a transaction of a commercial nature. It had all the attributes of an adventure in the nature of trade.'
It is really unnecessary to refer to other cases cited by the other side. All these decisions principally indicate the method of approach to a question of this kind and lay down that no single incident relating to the transaction can be conclusive in its nature. Due weight has to be given to all the factors surrounding the transaction. Mr. Ranganathan, learned counsel for the department, has referred to Smith Barry v. Cordy, where an extreme case was considered. That was a case where the assessee had acquired certain policies, undoubtedly as an investment, such policies being intended to secure for him an income of Pounds 7,000 a year over a period of several years. This involved an outlay of nearly Pounds 100,000 and, at the average rate of Pounds 7,000 a year, was expected to yield a total of Pounds 161,000. Between 1937 and 1939 he acquired in this manner no less than 63 endowment policies on the lives of other persons. In June 1942, he sold what remained of those policies. The question arose whether the profit arising from these dealings in life insurance policies was assessable as income of a revenue nature. The Commissioner took the view that it was taxable having regard to the number of purchase transactions and the organised scheme which underlay it. When the matter came before the Court of Appeal, the court observe :
'Unless ex facie single transaction is obviously commercial, the profit from it is more likely to be an accretion of capital and not a yield of income. But that question is almost necessarily one of fact. On the other hand, to bring a source of profits within the meaning of trade in Case I, it is not necessary to show the presence of a regular business of buying and selling....
In the present case the finding that the present respondent was engaged in a concern in the nature of trade is final unless it be shown that there was no evidence to support it. There appears to us to be abundant evidence to support this finding. The case is conclusive that he made up his mind to utilise the commercial market in endowment life policies for the express purpose of getting a means of livelihood at the average rate of Pounds 7,000 a year over a long period of years .... He continued to make his purchases in the commercial market over a period of eighteen months.... To use an expression of Rowlatt J.... a person... can organise himself to do that (namely, to buy) in commercial and mercantile way, and the profits which emerge are taxable profits, not of the transaction, but of the trade. In our opinion what Mr. Barry was doing comes within the dictionary definition of both words adventure and trade, which we have quoted.'
Examining the present question in the light of the principles gatherable from these decisions, it seems to us that the Tribunal was fully justified in holding upon the materials before it that the profits arose from a transaction which was an adventure in the nature in the nature of trade. There is a singular paucity of material to establish that the intention of the assessee was to acquire the managing agency of the company. The assessee already had the managing agency of this estate even before its sale. Learned counsel was not able to place before us the agreement of managing agency which the assessee had with the previous owner, Mr. Stisted. There is nothing to indicate that the sale of this estate by Mr. Stisted to another would have had the effect of terminating the assessee managing agency of that estate. There is nothing, therefore, to establish that the assessee had of necessity to acquire a large number of shares for the purpose of securing a capital asset, viz., the managing agency. Practically immediately after the formation of the company the assessee unloaded the majority of the shares it had acquired. Its intention was obviously not to retain these shares and the purchase itself is to our minds disassociated from any intention relevant to the acquisition of the managing agency. Had it been a case where the move for the purchase of the shares came from other parties and the assessee as and when any offer was made to it disposed of the shares, we could have justifiably inferred that the intention of the assessee was to keep these shares as an investment, that is to say, as a capital asset, the disposal of which under such circumstances not leading to any revenue income. But that the assessee, within less than a week after the acquisition of the shares started to invite offers for the sales of these shares, necessarily drives us to the conclusion that even at the time of the acquisition of the shares the assessee must have had the intention of selling the shares. Even assuming that the assessee thought it necessary to retain a part of these shares in connection with its managing agency, the other circumstances bring the case more in line with the decision of the Supreme Court in Rajputana Textiles (Agencies) Ltd. v. Commissioner of Income-tax. We are accordingly satisfied that the claim of the learned counsel that the dominant intention of the assessee was the acquisition of the managing agency fails for want of support from material circumstances and is in fact contradicted by the assessees own contemporaneous conduct. The result is that the inference reached by the Tribunal that it was an adventure in the nature of trade which yielded the profit in question is amply supported by adequate material. The question is answered against the assessee. The assessee will pay the costs of the department. Counsels fee Rs. 250.