Sankar Prasad Mitra, C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The assessee is a sterling company. It has been assessed to income-tax as a non-resident. The assessment relates to the assessment years 1961-62 and 1962-63.
2. The assessee had a controlling interest in M/s. Guest Keen Williams Ltd. of India. It had 14,10,600 ordinary shares of Rs. 10 each in the Indian company. The issued capital of the Indian company was divided into 20 lakhs ordinary shares of Rs. 10 each.
3. The Indian company on May 13, 1960, applied for rights issues of capital at the rate of one share for each share held already by a shareholder.
4. The assessee held certain shares in a company called Sankey Electrical Stamping Private Ltd. and wanted to transfer these shares to the Indian company. The Government of India gave approval to the transfer at a price of Rs. 165 per share.
5. The Indian company was permitted to make the rights issue at Rs. 28.50 as against the face value of Rs. 10. In other words, the shares could be issued at a premium of Rs. 18.50.
6. In view of the assessee's controlling interest as aforesaid the assessee had to keep in readiness a little over 4 crores of rupees to subscribe to the rights shares. The Government of India permitted the assessee to contribute to the rights issue by remittance of 11,25,000 less such sum as might be necessary to be paid as capital gains tax to the Indian Government as a result of the transfer of the shares by the assessee in Sankey Electricals. Certain other conditions were also imposed which are not strictly relevant for our purposes.
7. By letter dated October 21, 1960, the Indian company wrote to the National & Grindlays Bank Ltd., in Calcutta, on behalf of its principal, i.e., the assessee before us, for an overdraft of rupees one crore for a period of 18 months from about November 15, 1960. The necessity for the overdraft was to meet the requirements of taking up the rights issue and also the capital gains tax referred to above. The Indian company in its letter to the bank suggested that the assessee would during the period of 18 months dispose of part of its holdings in the Indian company. The reason for having a period of 18 months for such disposal was that the assessee did not want to disturb the share market and adversely affect the interest of 11,000 shareholders. The Indian company also applied to the Reserve Bank of India for necessary permission. The loan was ultimately granted with the sanction of the Reserve Bank.
8. In November, 1960, the Indian company on behalf of the assessee gave instructions to a firm of share brokers in Calcutta to sell one lakh rights out of the forthcoming entitlements at the best possible price. The share brokers agreed to sell the rights and sold a part of one lakh rights. The balance of the sale was stopped by the assessee. 4,25,000 shares had been kept as security with the National & Grindlays Bank Ltd. in connection with the overdraft account. The amounts realised as a result of the sale of a part of the shares were to be credited to the overdraft account which was done.
9. It order to subscribe for the rights shares after the sale of 66,900 rights, the assessee found the necessary finance as per accounting which was done as follows :
(1)Cash remittance from U.K. (8,75,000)1,16,46,447(2)Unutilised loan for the purchase of machinery 33,34,133(3)Value of shares transferred to the Indian company at Rs. 165 per share1,71,59,992(4)Overdraft obtained from National & Grindlays Bank 78,65,679
10. There was an exchange difference of Rs. 801 so that the net amount subscribed by the assessee totalled Rs. 4,00,05,450.
11. At the time of assessment for the assessment years 1961-62 and 1962-63, a question was raised as to whether the surplus realised on the sale of the rights and the rights shares was assessable as a revenue-profit or capital gains. The surplus on the sale of rights in the accounting year 1960 came to Rs. 69,518. The surplus in 1961 came to Rs. 32,12,684.
12. The Income-tax Officer brought these two amounts to tax on the basis that the assessee was a dealer in shares. The Income-tax Officer's view was that the assessee did not have any intention of investing rupees four crores in the rights issue and it did not have sufficient funds to that extent. He referred to the overdraft to the extent of more than 50% of the money required for this purpose and pointed out that the assessee had discharged the entire overdraft by the sale of the rights shares which it had taken. From these facts, the Income-tax Officer concluded that the assessee had not only the intention of making a business profit, but actually took steps in that direction by disposal of l/4th of its rights shares during the period ended August 31, 1962. The Income-tax Officer was of opinion that this was an adventure in the nature of trade. He taxed these amounts as business income.
13. The Appellate Assistant Commissioner held that the assessee had never been a dealer in shares; that the purpose of acquiring the rights shares was to retain control over the Indian company ; that the assessee had to borrow money for investment in these shares ; and that in order to get rid of this debt a block of shares was sold. On these facts the Appellate Assistant Commissioner could not conclude that the assessee was a dealer in shares. He held that the surplus which the assessee had earned should be assessed to capital gains.
14. Before the Tribunal, the department argued that there was a business or at least an adventure in the nature of trade. On behalf of the assessee, it was pointed out to the Tribunal that the facts, taken as a whole indicated that the assessee had to manage the whole situation carefully keeping in mind the interest of the Indian shareholders also. There was no trading in shares at any time and there was no question of any adventure in the nature of trade.
15. The Tribunal agreed with the Appellate Assistant Commissioner that the assessee did not embark upon a business or an adventure in the nature of trade.
16. The following question of law on the application of the department has been referred to us :
'Whether, on the facts and in the circumstances of the case, the surplus realised on the sale of the rights, and the rights shares was assessable as a business profit, or a profit from an adventure in the nature of trade, or as capital gains ?'
17. Mr. Balai Pal appearing for the revenue has taken the following points :
(i) The question whether a transaction is a part of the assessee's business or in any event an adventure in the nature of trade can be answered only by taking a comprehensive picture of all the facts taken together and not by taking a single fact in isolation.
(ii) Where a purchase is made with the intention of re-sale, the conduct of the assessee and the circumstances of the case will prove whether the venture is on capital account or is in the nature of trade.
(iii) The relevant facts which are to be kept in view for applying the above principles in the present case are:
(a) The assessee chose to subscribe for the entire block of shares which the assessee was entitled to though it did not have adequate funds for the purpose.
(b) It was necessary for the assessee to keep in readiness nearly 4 crores of rupees.
(c) But the Government of India permitted the assessee to send in cash only Rs. 1,16,46,447.
(d) The assessee was permitted to transfer its shares in an Indian company at the fixed value of Rs. 165 per share.
(e) The assessee had unutilised loan for purchase of machinery to. the extent of Rs. 33,34,133.
(f) The assessee borrowed Rs. 78,65,379.
(g) The assessee sold shares to liquidate borrowals of Rs. 78,65,379.
18. Mr. Pal proceeds to argue that when the loan was raised the shares commanded a premium of at least Rs. 10 per share. The loan was raised with the definite intention to liquidate it by selling the very shares which were subscribed for with that loan. The assessee, therefore, knew that it could not retain those shares as investments. It was open to the assessee to renounce the rights issue and subscribe for the shares for which it had funds but the assessee did not choose to adopt this course. Moreover, the shares were sold not to meet a pressing demand because the bank agreed to overdraft facilities for 18 months but were sold much earlier.
19. Taking all these factors into consideration, learned counsel for the revenue invites us to hold that the surplus realised by sale of rights shares ought to be treated as profit in an adventure in the nature of trade. . It is obvious, according to Mr. Pal for the revenue, that the asset in question was not intended to be an investment nor could it be retained as an investment and there was the prospect of making a profit by resale. The reasonable conclusion would be that the assessee entered into this transaction with the expectation of making profit.
20. Our attention has been drawn to the Supreme Court decisions in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax 0065/1958 : 35ITR594(SC) , Commissioner of Income-tax v. Sutlej Cotton Mills Supply Agency Ltd. : 100ITR706(SC) and Dalmia Cement Ltd. v. Commissioner of Income-tax : 105ITR633(SC) . We have also been taken through the judgment of the Court of Appeal in Eames v. Stepnell Properties  43 TC 678.
21. It would be enough to refer to the Supreme Court's observations in G. Venkataswami Naidu's case 0065/1958 : 35ITR594(SC) , the Supreme Court says;
'It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade, We thus come back to the same position and. that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.'
22. Repeatedly decisions have laid down that in determining whether a transaction was an investment or an adventure in the nature of trade no universal rule or principle can be applied. Each case has to be judged on its own merits and the court has to come to a conclusion taking into account the totality of facts and circumstances.
23. It is in this context that we have to review the facts of the instant case. We find that out of 20 lakhs shares of the Indian company the nonresident assessee was holding over 14 lakhs of shares. In other words, the assessee had a controlling interest in the Indian company. Secondly, purchase and sale of shares was never in the line of the assessee's business. The rights shares were offered to the assessee on the basis of its holding of original shares. The Government of India did not permit remittances ofsterling from U.K. except to the extent of Rs, 1,16,46,447. But theassessee required more than 4 crores of rupees to purchase all the rightsshares it was entitled to. The assessee was trying to find out ways andmeans of purchasing those rights shares. The Government permittedcertain shares of an Indian company to be transferred at a fixed price.That sale fetched to the assessee Rs. 1,71,59,992. The assessee, hadunutilised loan for purchase of machinery to the extent of Rs. 33,34,133,The assessee decided upon diverting it to the purchase of rights shares.Then there was the balance of Rs. 78,65,679. The assessee took an overdraft from the National and Grindlays Bank Ltd. Taking all the factstogether there appears to be no doubt that the purpose of the assessee inacquiring the rights shares was to retain control over the; Indian company.This is a finding of fact arrived at by the Appellate Assistant Commissionerwhich the Tribunal has also accepted. The assessee has sold only thoseshares which it was necessary to sell for the purpose of liquidating theoverdraft. The cumulative effect which these facts produce on our mindis that the sales were not part of business and the surplus is to be treatedas capital gains only.
24. Our answer to the question referred to is as follows :
The surplus realised on the sale of the rights, and the rights shares was assessable not as a business profit, not as a profit from an adventure in the nature of trade but as capital gains.
25. There will be no order as to costs.