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Bhikamchand Bagri, Calcutta Vs. Commissioner of Income-tax (Central), Calcutta - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberI.T. Reference No. 23 of 1953
Judge
Reported inAIR1960Cal681,[1962]44ITR746(Cal)
ActsIncome-tax Act, 1922 - Sections 2(4), 10, 33, 33(6) and 66
AppellantBhikamchand Bagri, Calcutta
RespondentCommissioner of Income-tax (Central), Calcutta
Appellant AdvocateR.B. Pal and ;Sudhir Bhose, Advs.
Respondent AdvocateE.R. Meyer and ;B. Pal, Advs.
Cases ReferredIn Commissioners of Inland Revenue v. Sneath
Excerpt:
- bachawat, j. 1. the reference relates to the two assessment years 1940-41 and 1941-42. the accounting year corresponding to the assessment year 1940-41 ended on the ramnavami day of samvat year 1996 and consisted of the period from 29-3-1939 upto 15-4-1940. the accounting year corresponding to the assessment year 1941-42 ended on ramanavami day of samvat year 1997 and consisted of the period of 16-4-1940 upto 5-4-1941. the assessee firm is a dealer in stocks and shares. it maintained five sets of books. it kept accounts of its stocks and shares in three different sets of books known as sets nos. 2, 4 and 5. admittedly the shares included in sets nos. 4 and 5 were the stock-in-trade of the assessee's business. the dispute is whether the shares included in set no. 2 were its stock-in-trade.....
Judgment:

Bachawat, J.

1. The Reference relates to the two assessment years 1940-41 and 1941-42. The accounting year corresponding to the assessment year 1940-41 ended on the Ramnavami day of Samvat year 1996 and consisted of the period from 29-3-1939 upto 15-4-1940. The accounting year corresponding to the assessment year 1941-42 ended on Ramanavami day of Samvat year 1997 and consisted of the period of 16-4-1940 upto 5-4-1941. The assessee firm is a dealer in stocks and shares. It maintained five sets of books. It kept accounts of its stocks and shares in three different sets of books known as sets Nos. 2, 4 and 5. Admittedly the shares included in sets Nos. 4 and 5 were the stock-in-trade of the assessee's business. The dispute is whether the shares included in set No. 2 were its stock-in-trade or were capital investments. The assessee sustained losses on sales of the shares in set No. 2 in the two accounting years. The assessee claimed that the shares were stock-in-trade and the losses must be taken into account in computing profits and losses of its business. The Department disputed the assessee's claim and contended that the losses were capital losses arising from sales of investments. The Tribunal held that the shares in set No. 2 were investment shares and were not stock-in-trade of the assessee upto 21-2-1940 that the shares were converted by the assessee into stock-in-trade on 21-2-1940 that the sales prior to that date should be treated as sales of capital investments, that the losses arising on sales after that date should be allowed to the assessee and that such losses must be computed on the basis of the difference between the market prices on 21-2-1940 and the sale prices. The question referred to the Court is as follows:

'Whether on the facts found by the Tribunal its inference that the shares in set No. 2 were investment shares and not stock-in-trade upto 21-2-40 was justified in law'.

2. This Reference is made pursuant to an order passed by the High Court under Section 66(2) of the Indian Income-tax Act on the application of the assessee. The Commissioner of Income-tax did not ask the Tribunal to state a case on the question whether the shares in set No. 2 were stock-in-trade after 21-2-1940. The order of the Tribunal that those shares were stock-in-trade after 21-2-1940 is therefore final in view of Section 33(6) of the Indian Income-tax Act. The Commissioner must be regarded as having accepted that part of the decision of the Tribunal ; see Commissioner of Income-tax, West Bengal v. Messrs. Isthmian Steamship Lines, : [1951]20ITR572(SC) . The shares must therefore be regarded as stock-in-trade during the period from 21-2-1940 upto 15-4-1940 i.e. for part of the accounting year Samvat 1996 and during the whole of accounting year Samvat 1997. This fact was in a way pointed out by Chakravarty, C. J., in his judgment calling for a further statement of case. Chakravarty C. J. also thus said that our answer to the question referred will not affect the assessment already made for the year 1941-42. I think what he meant was that our answer will not affect the finding that the shares were stock-in-trade after 21-2-1940. If our answer be that the inference that the shares were investment shares and not stock-in-trade up to 21-2-1940 was not justified in law, the answer will necessarily affect the finding of the Tribunal that the losses are to be computed on the basis ot the market price as on 21-2-1940. Under Section 66(5) it will be the duty of the Tribunal to dispose ot the case conformably to our judgment.

3. The admitted facts are as follows; One Suganchand Bagri, son of Bhikamchand Bagri deceased and his four sons constituted a Hindu undivided family. The family was a member of the Calcutta Stock Exchange Limited in the name of Suganchand Bagri and as such did business in stocks and shares. The family was also a member of the East India Jute Association Ltd. and as such carried on business in jute and hessian. It maintained five sets of account books. Set No. 1 called jaidad khata related to house properties. Set No, 2 called the gaddi or Head Office set or 'Bhikamchand Suganchand' set was in respect of assets like shares, gold, silver, jewellery and mortgages. Set No. 3 was kept in the name of Bagri and Co. and was in respect ot transactions in jute and hessian as member of the East India Jute Association Ltd. Set No. 4 was kept in the name of Suganchand Bagri No. 11 and related to transactions in shares with members ot the Calcutta Stock Exchange Ltd. Set No. 5 was kept in the name of Suganchand Bagri No. I and related to transactions in shares with persons other than members of the Calcutta Stock Exchange Ltd.

4. There was a disruption of the Hindu undivided family. The deed of dissolution of the Hindu undivided family is dated 11-10-1938. On the disruption of the Hindu undivided family its business including its assets was taken over as a going concern by a firm consisting of Suganchand and his four sons. The firm was constituted by a partnership deed dated 15-2-1940. The partnership deed recites that the partnership came into existence on the Ramnavami day in the year 1938, that is to say, at the commencement of the Samvat year 1995. The Hindu undivided family made an application to the Income-tax Officer under Section 25A(1) of the Indian Income-tax Act for recording the partition. On such application the Income-tax Officer passed an order on 24-1-1942 that for purposes of Section 25A(1) of the Indian Income-tax Act the partition took place at the end of Samvat year 1995, that is to say, on 28-3-1939 and that during Samvat year 1995 the family must be taken to be a Hindu undivided family. In view of this order read with Section 25A(3) the family must be deemed for the purposes of the Income-tax Act to continue as a Hindu undivided family during Samvat year 1995 and the assessee firm must be deemed to have come into existence at the commencement of Samvat year 1996. In the meantime a return which must be deemed to be the return of the Hindu undivided family was filed on 21-2-1940 for the assessment year 1939-40 corresponding to the accounting year Samvat 1995. The return disclosed a profit of Rs. 2750/- arising on sales of 125 shares in the Imperial Bank (Conty). in that accounting year. These shares were held in set No. 2. The sale proceeds amounted to Rs. 47,750/-. The Income-tax Officer excluded this profit from the assessment. His action was upheld by the Appellate Assistant Commissioner but was cancelled by theAppellate Tribunal with directions to make a fresh order. A summary of those orders is given in the subsequent order of the Income-tax Officer dated 10-9-1943. When the matter went back to the Income-tax Officer he held that the shares in set No. 2 were in the nature of investment shares and were not the stock-in-trade of the business of the Hindu undivided family and by his order dated the 10th September, 1943 again refused to add the profit of Rs. 2750/- to the income of the assessee. His order was confirmed by the Appellate Assistant Commissioner but was set aside by the Appellate Tribunal. The Tribunal by their order dated 8-8-1944 held that the shares included in set No. 2 were the stock-in-trade of the business in shares carried on by the Hindu undivided family.

5. In the meantime the assessee firm had filed returns of income in respect of the assessment years 1940-41 and 1941-42. The assessee firm produced the same five sets of books of account. In the return for the assessment year 1940-41 the assessee claimed a deduction of losses amounting to Rs. 5,70,575/- arising from sales of shares in set No. 2 during Samvat year 1996 ending on 15-4-1940. The nett loss of Rs. 5,70,575/.- consisted of losses of Rs. 5,98,179/- and profits of Rs. 27,604/-. In the return for the assessment year 1941-42 the assessee claimed to deduct losses amounting to Rs. 6,760/- arising from sales of shares in set No. a during Samvat year 1997 ending on 4-4-1941. The nett loss of Rs. 6,760/- consisted of losses of Rs. 9,767/- and profits of Rs. 3,007/-. The Income-tax Officer following his previous decision held that the losses were of a capital nature and by separate orders dated 21-9-1943 disallowed the assessee's claim for deduction of these losses. On appeal the Appellate Assistant Commissioner following the decision of the Appellate Tribunal, by two separate orders dated 13-11-1944, held that the losses should be allowed in computing the profits of the assessee's business in shares and that the assessment should be revised accordingly and set aside the order of the Income-tax Officer disallowing the losses. The Department preferred two appeals to the Appellate Tribunal. On 28-5-1945 the Calcutta Bench of the Tribunal recommended formation of a larger Bench. Accordingly a larger Bench of the Tribunal consisting of three members was formed. By order dated 28-1-1947 the Appellate Tribunal held that the materials on the record were not sufficient to enable the Tribunal to determine and dispose of the appeals and passed an order of remand directing the Income-tax Officer to make an enquiry and to submit a report with regard to certain matters. On or about 5-6-1948 the Income-tax Officer submitted a report to the Tribunal. By the order dated 10-5-1950 the Tribunal disagreed with the findings arrived at by the previous Tribunal in the order dated 8-8-1944. The Tribunal held that the shares included in set No. 2 were the assessee firm's capital investments and were not its stock-in-trade upto 21-2-1940. Subsequently this Court on the application of the assessee directed the Tribunal to state a case. The Tribunal submitted an agreed statement of case on 22-8-1952. By an order dated 24-11-1955 this Court directed the Tribunal to submit a further statement of case. The further statement of case was submitted by the .Tribunal on or about 30-7-1956.

6. The question whether a transaction is an adventure in the nature of trade is a mixed question I of law and fact, see G. Venkataswarni Naidu and Co. v. Commissioner of Income-tax, 0065/1958 : [1959]35ITR594(SC) and Saroj Kumar v. Income-tax Commissioner, West Bengal, : [1959]37ITR242(SC) . The tendency to regard such a question as a finding of pure fact is now deprecated, Edward v. Bairstow (1955) 36 Tax Cas 207: 1956 AC 14 at p. 38.

7.The question as to what are the characteristics which distinguish trading in shares from investment is a mixed question of fact and law. The legal effect of the facts found by the Tribunal and whether as a result the assessee is a dealer or an investor, is itself a question of law, see Oriental Investment Co. Ltd. v. Commissioner of Income-tax, Bombay, : [1957]32ITR664(SC) . In the instant case the assessee firm is a dealer in stocks and shares in joint stock companies. Some of the shares held by it were admittedly the stock-in-trade of its business. The question in issue is whether the shares held by the assessee firm in set No. 2 were also its stock-in-trade. Such a question is a mixed question of law and fact. The question must be determined by ascertaining whether on the facts found by the Tribunal those shares satisfy the characteristics of stock-in-trade as distinguished from simple investment.

8. The function and powers of the High Court in an Income-tax Reference involving a mixed question of law and fact are well settled. If the findings of fact do not justify the legal conclusion the High Court must interfere. In 0065/1958 : [1959]35ITR594(SC) , P. B. Gajendragadkar J., delivering the unanimous judgment of the Supreme Court observed,

'In dealing with findings on questions of mixed law and fact the High Court would no doubt have to accept the findings of the Tribunal on the primary questions of fact; but it is open to the High Court to examine whether the tribunal had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law'.

9. Under Section 66 of the Indian Income-tax Act the Appellate Tribunal can be required to refer questions of law arising out of their order. On such a reference the findings of fact by the Tribunal must generally be regarded by the High Court as conclusive. But there are well recognized exceptions to this rule, and a finding of fact cannot be regards as conclusive if there is no evidence to support it or if it is perverse and not rationally possible; see Sree Meenakshi Mills Ltd. Madurai v. Commissioner of Income-tax Bombay, 0044/1956 : [1956]1SCR691 : or if the finding is inconsistent with the evidence or contradictory of it, Liquidators of Pursa Ltd. v. Commissioner ot Income-tax Bihar, : [1954]25ITR265(SC) or if the finding is based on inadmissible evidence or upon improper rejection or relevant and admissible evidence; or if it rests on conjectures, surmises and suspicions or was arrived at on consideration of materials which are partly relevant and partly irrelevant and inadmissible, Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay, : [1954]26ITR736(SC) . Shortly put in all suchcases the finding of fact is deemed to be erroneous in point of law. An inference of tact drawn from other facts can itself be a finding of fact. A distinction is sometimes drawn between primary facts and inferences drawn from them, 1956 AC 14 at p. 36; and while a simple finding of primary facts is regarded as conclusive, inferences of fact drawn from them may be impeached on the ground mentioned above, 0065/1958 : [1959]35ITR594(SC) .

10. The Tribunal being the final fact finding body is under a duty to consider every fact for and against the assessee with due care. The Tribunal must clearly indicate the questions which arose for determination, the evidence pro and contra with regard to each question and the findings arrived at: Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, Bihar and Orissa : [1959]37ITR288(SC) ; Omar Salay Mahomad Sait v. Commissioner of Income-tax, Madras : [1959]37ITR151(SC) . The Tribunal must not misdirect itself on questions of law and must approach the facts from a proper angle. : [1954]25ITR265(SC) .

11. The distinction between investment and stock-in-trade, between fixed capital and circulating capital is well known. In Rees Roturbo Development Syndicate Ltd. v. Ducker, (1928) 13 Tax Cas 366, Rowlat J., observed,

'what is meant by the phrase 'capital asset' is that this is an asset which represents fixed capital as opposed to circulating capital, that is to say, that this is an article which is possessed by the individual in question, not that he may turn it over and make a profit by the sale of it to his advantage, but that he may keep it and use it and make a profit by its use. Then if an article of that sort is sold at a profit, that profit is not a profit of trade'.

12. These observations were approved in J. Bolson and Son, Ltd. v. Farrelly (1953) 34 Tax Cas 161. Again in British South Africa Co. v. Commissioner of Income-tax 1946 AC 62, Viscount Simon observed,

'For the purpose of assessment to income-tax (and here there appears to be no distinction between British and Northern Rhodesian tax) the proceeds of sale of an asset are brought into account if the sale is in the course of the taxpayer's trade or business. Thus, if it is his trade or business to make and to sell, or to acquire and to sell, shoe-making machinery, then the proceeds of sale of such machinery are brought into account: if it is his trade to make and sell shoes, and for that purpose he owns and uses shoe-making machinery, then if he sells such machinery, the proceeds of such sale are not brought into account. In the former case the machinery is sometime called the 'floating' or 'circulating' capital, in the latter 'fixed' capital'.

13. The onus is upon the assessee to establish that the shares in set No. 2 were stock-in-trade and the losses on sales of the shares were business losses.

14. The accounting years in question are Samvat years 1996 and 1997. The assessee is a trading partnership and was admittedly in existence during these two accounting years. In view of the order passed under Section 25A(1), the assessee-firm must be deemed for the purposes of the Act to have come into existence at the commencement of Samvat year1996. The assessee-firm is a member of the East India Jute Association Ltd. in the name of Bagri and Co. and carried on a business in jute and hessian The assessee-firm is also a member of the Calcutta Stock Exchange Association Ltd. in the name ot Suganchand Bagri and carried on the business ot buying and selling stocks and shares. Admittedly the shares in set No. 2 were the property of the assessee Firm. The dividends earned on these shares were included in its assessments.

15. Normally shares in joint stock companies acquired and held by a trader in shares are the stock-in-trade of his business. His business is to buy with a view to sell at a profit. Nonetheless the trader may if he likes acquire and hold shares for investment and not for purposes of trade. But his intention to retain them and enjoy their dividends and not to circulate and part with them in course of his business must be distinctly shown. A scrutiny of his intention is necessarily coloured by the fact that he is a trader in similar commodities. The object for which the shares in set No. 2 were acquired and held by the assessee-firm must be judged in this light. It should also be borne in mind that the assessee firm had a business organization on the Stock Exchange for dealing in shares and that the firm had special technical skill and trading opportunities in shares.

16. Shares in set No. 2 were subjects of trading through set No. 4. They were transferred to set No. 4 and were sold to third parties from there. The matter will be considered in greater detail in connection with the dealings of the Hindu undivided family.

17. The statement No. 2, in annexure 'P', to the Remand Report of the Income-tax Officer dated 23-9-1952 which is made part of the statement of case shows numerous transactions of purchase and sale of shares from set No. 2 during Samvat year 1996. Annexures 'F' and 'Fl' of the Remand Report show diverse sales of shares from set No. 2 in Samvat years 1996 and 1997. These documents suggest active trafficking in the shares from set No. 2 by the assessee-firm since it came into existence.

18. The dealings in the shares included in set No. 2 during the two accounting years were truly acts done in the carrying on of a business in shares. In Califomian Copper Syndicate v. Harris, (1905) 5 Tax Cas 159 at p. 166, Lord Justice Clerk observed,

'But it is equally well established that 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 a business'.

The principles stated in that case were approved in Commissioner of Taxes v. Malborne Trust Ltd., 1914 AC 1001: AIR 1914 PC 230; 1928 AC 132; : [1959]35ITR594(SC) ; Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-tax, Lahore . The case last cited was approved by the Supreme Court in Indra Singh and Sons Ltd. v. Commissioner of Income-tax, West Bengal, : [1953]24ITR415(SC) .

19. The assessee is a partnership. A partnership is the relation between persons who have agreedto shares the profits of a business carried on by ail or any of them acting for all. Now an individual may carry on business and may do many other things but a partnership comes into existence only for the purpose of carrying on business, see Inderchand Hariram v. Commissioner of Income-tax, : [1952]22ITR108(All) approved in Lakshminarain Ramgopal and Sons v. Government of Hyderabad, : [1954]25ITR449(SC) . The property and the assets of a partnership are held by it solely for the purposes of its business. The shares in set No. 2 were the assets of the assessee-firm and must be regarded as held by it for the purposes of its business.

20. It is neither party's case that the shares in set No. 2 were held by the assessee-firm for the purposes of its business in jute and hessian or that set No. 3 had any connection with set No. 2. Presumably therefore the shares in set No. 2 were held for the purpose of its business in stocks and shares. Now where the business is trading in shares, the shares held for purposes of that business must clearly be the stock-in-trade of that business.

21. The partnership deed is not made part of the statement of case but the extracts from the deed set out in the assessment order dated 10-9-1943 show that the assessee-firm was constituted to carry on a business in shares and another business in jute and hessian. Assuming that the assessee-firm was also constituted to carry on a separate business of investments even then the shares would be stock-in-trade. Investments are part of the stock-in-trade of the investment business where the investor makes a trade of buying and selling the investments, see Scottish Investment Trust Co. v. Forbes (1893) 3 Tax Cas 231. In Assets Company Ltd v. Forbes (1897) 3 Tax Cas 542, Lord Young said ;

'I should say that I have really no doubt that any person or any company making a trade of purchasing and selling investments will be liable in Income-tax upon any profit which is made by that trade'.

22. The only inference that can be drawn from these facts is that the shares in set No. 2 were acquired by the assessee firm for the purposes of trade and were held by it as stock-in-trade since it came into existence at the commencement of Samvat year 1996 i.e. since March 29. 1939.

23. The Tribunal however refused to draw the inference that the shares in set No. 2 were the Stock-in-trade of the assessee firm prior to 21-2-1940 for two reasons. They said that

'(a) In view of the past history and the past conduct of the assessee Hindu undivided family (b) and in view of the fact that the shares were kept in set No. 2 which also included the assessee firm's capital, we are definitely of opinion that the shares in set No. 2 were the assessee's capital and not his stock-in-trade'.

24. I will firstly consider the second of the two reasons given above. The Tribunal said that set No. 2 contained assets like gold, silver, jewellery and mortgage. The Tribunal then observed that 'if a person records his shares in a set of books which deals with capital assets, it stands to reason to say that the shares are his investment shares, particularly when he is a dealer in stocks and shares and hasother sets of account books for shares which are his stock-in-trade'.

25. This reasoning seems to assume that set No. 2 dealt with capital assets only. This assumption is vitiated by conjecture and by omission to consider relevant materials on the record. Paragraph 8 of the order of assessment by the Income-tax Officer dated 10-9-1943 shows that during Samvat year 1995 the Head Office set or set No. 2 included amongst other assets a sum of Rs. 1,47,345/- in the Banking account of the branch Suganchand Bagri account No. 2 and also a sum of Rs. 6,92,159/- in the Ranking account of the branch Suganchand Bagri account No. 1. Paragraph 3 of the order ot the Appellate Assistant Commissioner dated 25-12-1943 shows clearly that these Banking accounts were of the businesses in shares whose accounts are kept in sets Nos. 4 and 5. Cash in Bank of a business is clearly the circulating capital of the business. These materials indicate that set No. 2 included not only capital assets but also the circulating capital of the business in shares whose dealings are recorded in sets Nos. 4 and 5.

26. I will assume for a moment that all the other assets in set No. 2 were capital assets. That fact of itself cannot lead to the inference that the shares kept in set No, 2 were capital assets. A dealer in shares can keep his stock-in-trade in several sets of books. Admittedly the assessee firm kept its stock-in-trade in at least two separate set of books viz. sets Nos. 4 and 5. The assessee firm could keep its stock-in-trade in a third set of books viz. set No. 2. Shares do not acquire the legal characteristics of either floating or fixed capital by their proximity to either investments or stock-in-trade. Shares in set No. 2 and the stock-in-trade in sets Nos. 4 and 5 were lumped up and were together pledged With Banks to secure overdrafts, but that tact does not of itself lead to the inference that the shares in set No. 2 were stock-in-trade. Similarly the fact that the shares were kept in set No. 2 with capital assets does not of itself lead to the inference that the shares were investment shares.

27. In this connection the Tribunal also referred to the fact that shares in certain companies found in set No. 2 were also to be found in sets Nos. 4 & 5. But I do not see how this fact leads to the inference that the shares in set No. 2 were capital assets. The lists of share holdings in sets Nos. 4 and 5 at the date of disruption of the Hindu undivided family annexed to the Remand Report dated 5-6-1948 which is made part of the statement of case show that shares in numerous companies found in set No. 4 were also to be found in set No. 5. This fact does not show that the shares in either set No. 4 or set No. 5 were not stock-in-trade. Similarly the tact that shares in set No. 2 were to be found in sets Nos. 4 and 5 does not show that the shares in set No. 2 were not stock-in-trade.

28. I will now consider the second reason given by the Tribunal. The Tribunal found that after the assessee firm took over the business in shares as a going concern there was no change in the manner in which the business had been carried on and what the Hindu undivided family did in the past was relevant material for ascertaining the intention of the assessee firm. The Tribunal looked at the past history and the past conduct of the Hindu undividedfamily and found that the profits or losses of set No. 2 had not been returned in the past and On that finding they rejected the contention of the assessee firm that the shares in set No. 2 were the stock-in-trade of the Hindu undivided family. But they observed that

'The acceptance of the contention would have been in order if the profit or loss in shares in set No. 2 had been returned in the past'.

29. The reasoning of the Tribunal on this point appears to be as follows: (a) According to the books of the Hindu undivided family the shares in set No. 2 used to be given as a loan by set No. 2 to sets Nos. 4 and 5 at a certain price and used to be returned by sets Nos. 4 and 5 to set No. 2 at the same price, (b) Those transfers were a clever device to evade proper taxation, (c) A person cannot loan to himself his own stock-in-trade, (d) If the shares in set No. 2 were stock-in-trade as soon as some shares were given to set No. 4 for the purpose of business, the Hindu undivided family made a profit or loss which should have been declared whenever necessary, (e) A certain profit made by set No. 2 in Samvat year 1993 was not declared. It should have been declared if the shares in set No. 2 were the stock-in-trade of the Hindu undivided family. (f) The contention that those shares were stock-in-trade of the Hindu undivided family would be in order if the profits or losses in shares in set No. 2 had been returned in the past, (g) In the past the profit in set No. 2 was not declared and brought to tax. (h) The profits on the shares in set No. 2 were declared for the assessment year 1939-40 for the first time, (i) The contention that the shares were stock-in-trade, cannot therefore be accepted.

30. The several steps in the reasoning are to be found in paragraphs 5, 8 arid 9 of the order of the Tribunal, I have tried to summarize them as far as possible in the Tribunal's own language.

31. Now the Tribunal was, not exercising a punitive jurisdiction. They were not inflicting a penalty on the assessee for concealing profits and making false returns.

32. The Tribunal was drawing an inference from the past conduct of the Hindu undivided family that shares in set No. 2 were not stock-in-trade.

33. The basic assumption of the Tribunal's reasoning is that the conduct of the Hindu undivided family shows that they did not treat the shares in set No. 2 as their stock-in-trade.

34. If the family treated the profits and losses arising from the 'sales of those shares as capital accretion or capital diminution and not as business profits or business losses arising from sales of stock-in-trade, their conduct is relevant material to show that the shares were not stock-in-trade.

35. It is essential to remember the basic facts. (a) There were no sales of the shares in set No. 2 directly from set No. 2 until Samvat year 1995. In that year 125 Imperial Bank shares were sold directly from set No. 2 and the profit of Rs. 2,750/- was declared in the return for the corresponding assessment year 1939-40. This fact appears from item No. 7 of the enumeration of evidence, paragraph 8(v) of the assessment order for 1939-40 dated 10-9-1943 and paragraph. 7 of the order of the AppellateAssistant Commissioner dated 25-12-1943. The profits and losses on the subsequent sales in Samvat years 1996 and 1997 directly from set No. 2 were declared by the assessee firm in the returns for the assessment years 1940-41 and 1941-42. (b) From time to time there were transfers of shares in set No. 2 from that set to sets Nos. 4 and 5. Such book transfers were shown as loans by set No. 2 at certain prices. This fact appears from the Tribunal's order dated 10-5-1950 and the Remand Report dated 5-6-1948. (c) The shares transferred from set No. 2 used to be sold and delivered to customers under outstanding contracts of sale in course of the business dealings recorded in set No. 2. This fact appears from the Remand Report dated 5-6-1948 read, with the Tribunal's orders dated 8-8-1944 and 10-5-1950. (d) The shares loaned by set No. 2 used to be replaced by transferring shares from sets Nos. 4 and 5 to set No. 2 at the loan prices. Certain shares transferred from set No. 4 in Samvat year 1994 byway of repayment of loan had been bought by set No. 4 in the market. These facts appear from the Tribunal's order dated 10-5-1950 and the Remand Report, (e) The shares in set No. 2 were valued at cost year after year. This fact appears from paragraphs 3 and 5 of the Tribunal's order dated 8-8-1944 and paragraphs 5(ii) and 6(ii) of the assessment order dated 10-9-1943. (f) The profit or losses on the loan transactions in set No. 2 were never returned. The necessary consequence was that the difference between the cost price and the loan price shown in set No. 2 was not returned as business profit or loss, (g) The profits and losses arising on the transactions recorded in sets Nos. 4 and 5 were always returned. The necessary consequence was that the difference between the sale price and loan price of the shares sold through those' sets would in the normal course be returned as business profit or loss, (h) Sometimes, e.g., in Samvat year 1995 the cost price was the loan price. This appears from paragraph 8(vii) of the assessment order dated 10-9-1943 and item No. 7 of the enumeration of evidence in the statement of case. But sometimes, e.g. in Samvat year 1993, the sale price or the market price was the loan price. This appears from the Remand Report.

36. If the shares in set No. 2 were stock-in-trade, in the event of sales of those shares, the difference between the sale price and the cost price was the real profit or loss. Since set No. 4 shows the difference between the loan price and the sale price as business profit (a) in cases where the cost price was the loan price the whole of this profit or loss was returned as business profit or loss, (b) but in cases where the market price or the sale price was the loan price no portion of the real profit or loss was returned.

37. The assumption of the Tribunal that the profits arising on sales of the shares were never returned is therefore incorrect. In order to ascertain whether those profits were returned it was very necessary to ascertain whether the loans were made at the cost price or the market price. The Tribunal did not consider that question at all. By their order dated 10-5-1950, they simply found that the loan was ,at a price and that the repayment of the loan was at the same price. , Item No. 7 of the enumeration of evidence in the statement of case and theRamand Report show that the transactions of loan were not uniform in character and that the loan price was some times the cost price and sometimes the market price. By order dated 24-9-1955 the Court therefore asked for the true meaning of item No. 7. In the further statement of the case the Tribunal stated that the Question whether the loan was the cost price or the market price had not been considered in detail by the Tribunal. They also stated that item No. 7 was inaccurately stated in the statement of case. But clearly item No. 7 is not wholly incorrect for it is supported by the assessment order dated 10-9-1943. And in the context of item No. 7 and the admission that the question had not been considered in detail by the Tribunal the statement in the further statement or case that the Tribunal had accepted the observation in the Remand Report that the loan was at the market price as also the illustration given there of the loan transaction in Samvat year 1993, can only mean that the Tribunal had found that in Samvat year 1993 there were certain loans at the market price.

38. The assumption of the Tribunal that there was always a profit from a loan transaction in set No. 2 is not correct. There was no profit in set No. 2 from a loan transaction where the cost price was the loan price.

39. In case where the loan was at the sale price, though no portion of the real profits arising on the sale of the shares was shown in set No. 4, an artificial profit was shown in that set on repayment of the loan and was presumably returned. Take the illustration of the repayment of the loan of 75 Anglo India Jute shares. 50 shares had been loaned at Rs. 420/- per share and 25 shares had been loaned at Rs. 410/,- per share. The total loan price was Rs. 31,250/-. The loan was repaid by returning shares which had been purchased in different lots at Rs. 290/-, 330/8/-, 332/8/- and 324/- per share i.e., at a total cost of less than Rs. 31,250/-. The cost of repayment being less than the loan price set No. 4 showed a profit on repayment of the loan.

40. I therefore find that as a result of the bookkeeping employed by the Hindu undivided family (a) sometimes the real profit was shown, (b) sometimes it was not shown and on other occasions, (c) an artificial profit was shown.

41. But the point in issue is not whether the real profit or loss was shown but whether the Hindu undivided family treated the shares as investment shares or stock-in-trade.

42. Now the surplus on realization of a capital investment is capital gain, yet in cases of sale of shares loaned at the cost price the Hindu undivided family showed the surplus as business profit. No business as profit arises on replacement of capital investment, yet on replacement of the shares loaned at the market price they showed an artificial profit as business profit. These acts and conducts are not referable to an intention to treat the shares as capital investments.

43. The book entries were no doubt irregular and artificial but they do not show conclusively either an intention to treat the shares as a capital investment or an intention to treat them as stock-in-trade.

44. The Tribunal observed that 'In fact such transfers are in our opinion a clever device to evade proper taxation'. Did they realize the implication of these observations? Taxable profits arise on sale of stock-in-trade and not on sale of capital investments. Devices to evade taxation are adopted to avoid taxation of profits arising on sales of stock-in-trades. There was no need to conceal non-taxable capital gains.

45. The Tribunal rightly ruled that a trader cannot loan to himself his own stock-in-trade. But they overlooked that neither can the trader loan to himself his own investments.

46. A loan of shares at a price is a contradiction in terms. A loan is not a sale. There is no price in a loan transaction.

47. Book entries show the conduct of the asses-see. They show how the assessee treated the transactions in his own books. But in this case they do not show an unequivocal intention of the family to treat the shares as investment shares.

48. Even if the book-entries show uniform treatment of a property as capital investment they are not conclusive and other circumstances may show that the property is stock-in-trade.

49. In Emro Investment Co. Ltd. v. After (1955) 35 Tax Cas 305, a limited company was found to carry on a trade of buying and selling properties though their receipts were required by the articles to be carried to a capital reserve account and were in fact always so carried and though the profits were never distributed as dividend but were always used to buy other properties and investments. In Gloucester Railway Carriage and Wagon Co. v. Inland Revenue Commissioners. 1925 AC 469; a company manufactured railway wagons and dealt with them by selling them outright or under hire purchase agreement or letting them on hire. The business ot the company was all one business. But the hiring accounts were kept separate. The books of the company treated the wagons made in the workshop and used in the hiring business as if they were bought by the hiring business at a price and as if they were plant and machinery subject to wear and tear. Nevertheless the surplus arising on a sale of the wagons was held to be a trade profit and not a capital gain.

50. Even the fact that the assessee took up inconsistent position by claiming to be a dealer in shares during assessment proceedings for previous years and later claiming to be an investor in shares was not regarded as conclusive in : [1957]32ITR664(SC) .

51. In the instant case the matter is much simpler because the conduct of the Hindu undivided family and their method of book keeping do not show conclusively one way or the other that they treated the shares as investments or that they treated them as stock-in-trade.

52. The inference drawn by the Tribunal from the conduct of the Hindu undivided family and their method of book keeping is therefore vitiated by conjectures, surmises and suspicion. Their grounds lor rejecting the contention that the shares in set No. 2 were the stock-in-trade of the Hindu undivided family cannot be supported. Their order dated10-5-1950 makes it plain that they were otherwise inclined to accept the contention.

53. The question whether the shares in set No, 2 were the stock-in-trade of the Hindu undivided family is a mixed question of law and fact. For the reasons given above the Tribunal's findings of fact on that question cannot stand.

54. Where, as in this case, the findings of tactby the Tribunal lose their sanctity, the Court may look at the facts to be gathered from the records of the case and draw its own conclusions, see : [1954]25ITR265(SC) . Both Mr. Meyer and Mr. Pal have invited us to draw our own conclusions from the materials on the record.

55. The Court is therefore faced with the difficult task of ascertaining the relevant materials and of drawing its own conclusions. The difficulty is increased by the fact that the Tribunal has not stated the basic facts clearly.

56. The matter is further complicated by the fact that the Tribunal has from time to time made contradictory and inaccurate statements, (a) The statement of case, the, further statement of case, the Remand Report, the assessment order for 1939-40 and the Appellate order dated 10-5-1950 contain conflicting and contradictory statements with regard to the question whether the loans by set No. 2 to sets Nos. 4 and 5 were at the cost price or at the market price and with regard to the evidence on that question, (b) In item No. 13 of the enumeration of evidence in the statement of case it is stated that there was no evidence that the assessee firm converted the investments shares into stock-in-trade. This statement is inaccurate and is contradicted by paragraph 11 of the Appellate Tribunal's order dated 10-5-1950 where the Tribunal stated that the return for the assessment year 1939-40 indicated that the shares had been converted into stock-in-trade by the firm, (c) In item No. 14 of the enumeration of evidence in the statement of case it is stated that the partnership deed had not been referred to before the Tribunal. This is clearly incorrect. Paragraph 1 of the order of the Tribunal dated 10-5-1950 referred to the partnership deed and stated that according to that deed the firm was carrying on the business formerly carried on by the Hindu undivided family, (d) In paragraph 2 of the further statement of case it is stated that it was neither the Department's case nor the assessee's case that the shares from set No. 2 were transferred to set No. 4 or set No. 5 for the purpose of sale. This statement is incorrect. In the order dated 24-11-1955 this Court pointed out that the orders made in connection with the assessments including the order of the Tribunal indicate that the shares held in set No. 2 were transferred to set No. 4 and sold to third parties from there. Paragraph 4 of the Remand Report shows that the 75 Anglo India Jute shares transferred from set No, 2 in Samvat year 1993 were sold through set No. 4 to Magniram Bangur and Co. (e) The statement in paragraph 7 of the statement of case and in paragraph 4 of the Appellate order dated 10-5-1950 that the return for 1940-41 was submitted on 22-2-44 is incorrect, because the assessment order for 1940-41 was made on 21-9-1943.

57. Ordinarily an agreed statement of case must be taken to contain, the final statement of facts.See Commissioner of Income-tax, West Bengal v. Calcutta Agency Ltd., : [1951]19ITR191(SC) . In this case even the agreed statement of case loses much of its sanctity. Parts of the agreed statement of case are described as inaccurate in the further statement of case.

58. Before considering the materials on the record it is necessary to bear in mind that the Tribunal by their order dated 8-8-1944 arising out of assessment of the Hindu undivided family for the assessment year 1939-40 found that the shares included in set No. 2 formed part of the stock-in-trade of the business in shares whose transactions had been recorded in sets Nos. 4 and 5. That finding though, not conclusive in the present proceedings is very relevant material on the question whether the Hindu undivided family held the shares in set No. 2, as stock-in-trade. In Commissioners of Inland Revenue v. Sneath (1932) 17 Tax Cas 149, Lord Hanworth, M. R. observed,

'I am therefore of opinion that the assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. No doubt, a decision reached in one year would be a cogent factor in the determination of a similar point in a following year, but I cannot think that it is to be treated as an estoppel binding upon the same party for all years'.

59. The order dated 8-8-1944 was passed by the Tribunal after mature deliberation. There was strenuous contest. The matter came up before the Tribunal twice and the final order was passed on 8-8-1944. The Department acquiesced in the finding and did not ask for a reference.

60. I will now consider the materials on the record touching the question whether the shares in set No. 2 were the stock-in-trade of the Hindu undivided family.

61. Items Nos. 10 and 11 of the enumeration of evidence in the statement of case refer to the history of the past assessment on the Hindu undivided family. For assessment years 1920-27 the Hindu undivided family was assessed partly in the hands of Bhikamchand Bagri and, partly in the hands of Suganchand Bagri. During 1927-29 separate assessments were made on Bbikamchand and Suganchand but later they were re-assessed as a Hindu undivided family. For 1921-29 books used to be produced by Suganchand but Bhikamchand did not produce books or submit returns. Suganchand used to be taxed in respect of income from share-jobbing business and dividends. Bhikamchand used to be taxed in respect of dividend and property but sometimes an estimated income from business was included in his assessment. The Hindu undivided family did not file any return for the assessment year 1929-30. For 1930-31 onwards the family used to file returns and produce books. For 1930-31 the Hindu undivided family produced two sets of books of account, one set styled Suganchand Bagri for share-jobbing business and the other set styled Bhikamchand Bagri for income from dividend, property, interest on fixed deposit and interest on securities. For 1932-33 there were four sets of books of account. (1) Suganchand Bagri No. 1 which corresponds to set No. 5, (2) Suganchand Bagri No. II. which corresponds to set No. 4, (3) Bagri and Co. which corresponds to set' No. 3,(4) Bhikamchand Bagri which corresponds to sets Nos. 1 and 2. The trading results of the sets Suganchand Bagri No. II and of Bagri and Co. used to be transferred to the set Suganchand Bagri. The first three sets were retained for 1934-40. The set of Bhikamchand Bagri was retained tor 1935-36. For 1934-35 and 1936-40 the set of Bhikamchand Bagri was split up into two sets (1) a set for recording income from property corresponding to set No. 1, and (2) the gaddi or head office set for recording income from dividend etc., corresponding to set No. 2. In all there were therefore five sets of books of account. The gaddi or the head office set was also known as the Bhikamchand Bagri set, and since the death of Bhikamchand Bagri was called Bhikamchand Suganchand set. Mr. Meyer argued that from these facts an inference should be drawn that set No. 2 and its predecessors always used to keep capital assets only. For reasons already given I am unable to draw the inference.

62. I think that no inference unfavourable to the assessee should be drawn from the following materials: (1) Item No. 4 of the enumeration of evidence in the statement of case refers to evidence showing that the shares in set No. 2 were not purchased with borrowed funds. But it does not also appear that the shares in sets Nos. 4 and 5 were acquired with borrowed moneys. Absence of purchase with borrowed funds does not appear to be the distinguishing feature of the shares in set No. 2. (2) Item No. 4 of the enumeration of evidence in the statement of case refers to evidence showing that the shares in set No. 2 were not purchased from funds of the business carried on by the Hindu undivided family. This supposed evidence was not referred to and was not considered in the order of the Tribunal dated 10-5-1950. The only material on this point is the statement in the Remand Report of the Income-tax Officer that 'it will be seen from the above recapitulation * * * that these holdings had not been acquired * * * from the funds or the business'. The preceding recapitulation of facts do not refer to any material in support of this statement. On the other hand there is material showing that set No. 2 held the liquid assets of the business in shares viz., its cash in Bank. This material is to be found in paragraph 8(iv) of the order dated 10-9-1943 read with paragraph 3 of the order dated 25-12-1943. (3) Item No. 4 of the enumeration of evidence refers to a note of protest by the Hindu undivided family for 1930-31 regarding the valuation of closing stock in the Suganchand Bagri set only and to the absence of a similar protest regarding the shares in the Bhikamchand Bagri set. It does not appear that there was any dispute regarding the valuation of the shares is the Bhikamchand Bagri set and no inference can be drawn from absence of protest regarding the latter set. (4) The shares in set No. 2 used to earn dividends. But the shares in sets Nos. 4 and 5 also used to earn dividends. The several assessment orders and the Remand Report show that the shares in all the three sets used to earn dividends while they were retained by the Hindu undivided family.

63. I will now refer to certain materials from which an inference unfavourable to the assessee may be drawn. (1) The assessee did not produce the books prior to Samvat year 1993 in the enquiry bythe Income-tax Officer in connection with the Remand Report. (2) The shares in set No. 2 in Samvatt years 1989 and 1993 were practically identical.

64. But I must also take into account the following considerations:

(1) The Remand Report states that those books were not available. It has not been found that the books were then in existence or that the assessee deliberately withheld them. Books since Samvat year 1993 as also the assessment records for assessment years 1920-21 onwards were available.

(2) Annexure 'L' to the Remand Report shows (a) that 2000 Howrah and 50 Kamarhatty shares found in set No. 2 in Samvat year 1989 were not held in Samvat year 1989, (b) that 100 Hukum Preference and 25 Anglo India Jute shares found in Samvat year 1989 had been disposed of before 1993 and (c) 75 Union Jute, 25 Standard Jute shares, 75 Anglo India Jute, 50 Reliance Jute, 100 Kamarhatty and 2000 Howrah shares of considerable value had been loaned by set No. 2 to set No. 4.

65. The following materials suggest connection of set No. 2 with sets Nos. 4 and 5 but do not of themselves show that the shares in set No. 2 are stock-in-trade. (1) The shares in set No. 2 together with the shares in sets Nos. 4 and 5 were pledged to secure Bank overdrafts. (2) Set No. 2 held assets of the stock jobbing business viz., its cash in Bank.

66. I will now notice the special features of the case indicating that the shares were the stock-in-trade of the Hindu undivided family during Samvat year 1995:

(1) Though by reason of the order passed under Section 25A(1) of the Indian Income-tax Act the Hindu undivided family is deemed to continue during Samvat year 1995 for the purposes of the Act, paragraphs 5 and 9 of the statement of case show that in reality since commencement of Samvat year 1995 the Hindu undivided family had come to an end and a partnership consisting of the members of the family had come into existence. In judging the intention of the members of the family during Samvat year 1995 we must take into account the fact that in reality they held the shares in set No. 2 as partners for the purposes of their partnership business,

(2) The surplus of Rs. 2750/- arising on a sale of shares from set No. 2 during Samvat year 1995 was held by the Tribunal to be business profits arising from sale of stock-in-trade of the business in shares carried on by the family.

67. I will now notice the materials from which a general inference that the shares were stock-in-trade of the Hindu undivided family may be drawn:

(1) The shares in set No. 2 were the subjects of active trading through sets Nos. 4 and 5. The Remand Report dated 5-6-1948 shows that the Hindu undivided family in course of its stock jobbing businesses used to enter into contracts to sell shares. Those business transactions used to be recorded in set No. 4. Shares used to be transferred from set No. 2 to sets Nos. 4 and 5 the outstanding contracts of sale used to be fulfilled by selling and delivering those shares. In the order calling for the further statement of case, this Court therefore observed that the shares in set No. 2 were transferred to set No. 4 and sold to third parties from there. In all the circumstances of the case the Tribunal by their order dated 8-8-1944 found that the shares in set No. 2 were availed of to fulfill the obligations arising out of the transactions recorded in sets Nos. 4 and 5. That finding was accepted by the Departmental Representative as a correct statement of facts. The finding was not dissented from by the Tribunal in their order dated 10-5-1950. As far as I can see they accepted the finding.

(2) Items Nos. 2 and 3 of the enumeration of evidence in the statement of case read with the Remand Report show that in the year 1915 the Hindu undivided family started the share jobbing business and became a member of the Calcutta Stock Exchange Association Ltd., in the name of Sugan-chand Bagri. The shares in set No. 2 were all purchased after 1915 during a period of time when the family was actively trading in shares.

(3) Since 1915 the Hindu undivided family carried on the business of buying and selling shares. They had a business organization on the Calcutta Stock Exchange and had special skill and trading opportunities in stocks and shares.

(4) The Tribunal by their order dated 8-8-1944 found that the shares in set No. 2 were the stock-in-trade of the business in shares carried on by the Hindu undivided family.

(5) Even in the order dated 10-5-1950 the Tribunal thought that 'The acceptance of the contention by the Tribunal would have been in order if the profit or loss in the shares in set No. 2 had been returned in the past'.

68. From the very beginning the Hindu undivided family contemplated the possibility of trading in the shares in set No. 2. Their dealings in the shares in set No. 2 were not isolated and sporadic transactions of an investor but were part of the business in shares. In 1928 AG 132 at pp. 138, 141-2: 13 Tax Cas 366, the main business of the company was the granting of manufacturing licenses under its patents but it always contemplated the possibility of sale of its interest in the foreign patents. The company sold its rights in a foreign patent. During the twenty-two years of its existence this was the only sale of patent rights. The surplus arising on the sale of the foreign patent was held to be trade profit and the claim of the company that the surplus was a capital asset and not a profit of its circulating capital was rejected.

69. The family used to hold the shares in set No. 2 for appreciably long periods of lime. While the shares were so retained they used to earn dividends. But throughout the relevant period the shares in set No. 2 were the subjects of trading through sets Nos. 4 and 5. In 1925 AG 469, a decision already cited, Lord Dunedin observed at pages 474-75 that

'A wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilised by being hired out'.

In (1953) 34 Tax Cas 161 the surplus arising on sale of vessels used in a passenger carrying business was held to be a trade profit and not capital gain. Jenkins, L. J., observed

'I think there was evidence on which the Commissioners could conclude that these ships never didbecome the 'fixed capital assets' of a business of carrying passengers, but they were, throughout the relevant period, the subjects of a trade, albeit that while in hand they or most of them were used for passenger carrying purposes'.

70. I think that the proper inference to be drawn from the materials on the record is that, when the shares in set No. 2 were taken over by the assessee firm, they were the stock-in-trade of the Hindu undivided family.

71. The very basis of the finding of the Tribunal that the shares were not stock-in-trade prior to 21-2-1940 therefore disappears.

72. My conclusion is that on the facts found by the Tribunal the inference that the shares in set No. 2 were investment shares and not stock-in-trade upto 21-2-40 was not justified in Jaw.

73. In the circumstances the question of conversion of the shares into stock-in-trade on 21-2-1940 could not arise.

74. I propose that the question referred to this Court be answered in the negative. The assessee is entitled to the costs of the Reference. Certified for two counsel.

Lahiri, C.J.

75. I agree.


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