Patna H.C : Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the profit of Rs. 24,000 on the sale of the shares in question is not taxable as income of the assessee ?

Sections 28, 45

Asst. Year 1971-72

Counsel Appeared

B.P. Rajgarhia with S.K. Sharan, for the Revenue : K.N. Jain with N.K. Agarwal, for the Assessee

D.K. SEN, C.J.:

The material facts on record and the proceedings leading upto the present reference are, inter alia, that Jagarnath Prasad Chhawchharia, the assessee, is an HUF which carries on business in money lending, as also in milling wheat and paddy. On 13th May, 1967, the assessee acquired 24,000 shares of Swadeshi Cotton Mills Co. Ltd., at Rs. 5 per share. No dividend was declared on the said shares thereafter and on 20th Dec., 1969, the assessee sold the said shares at Rs. 6 per share.

In the asst. yr. 1971-72, the accounting year ending on Deepawali 2027, Samvat year, the assessee was assessed to income- tax. The assessee claimed that the surplus realised on the sale of the said shares was capital in nature and as such not taxable. The ITO held that the investment of the assessee in the said shares was not with a view to earn dividend as no dividend had been declared thereon and the assessee had earned no income by way of dividend in the past six years and that the assessee had acquired the said shares with the object of dealing in them. He held that the profit of Rs. 24,000 arising from the sale of the said shares was a profit and gain of the business of the assessee and included the same in the business income of the assessee.

Being aggrieved by the said decision of the ITO, the assessee preferred an appeal therefrom before the AAC, where it was reiterated that the assessee was only an investor in the said shares and, therefore, the profit from the sale thereof was of a capital nature and as such the surplus had been shown as a capital gain. The AAC noted that no dividend had been declared on the said shares even before their purchase by the assessee and, accordingly, held that the assessee did not intend to earn dividend therefrom. He held that the said shares were purchased by the assessee for resale at a profit. He also noted that the appellant was a money-lender and not an investor in shares. He upheld the decision of the ITO.

Being aggrieved, the assessee went up in further appeal before the Tribunal. It was contended before the Tribunal on behalf of the assessee that the purchase of the said 24,000 shares was the first as also the last investment of the assessee in shares and that the assessee had purchased the said shares by way of investment and had sold them subsequently as no dividend was received therefrom and the money of the assessee stood blocked unnecessarily. It was contended that, in the circumstances, the surplus received by the assessee on sale of the shares was not assessable as income from business as the shares were acquired for investment only.

The Tribunal held that the surplus arising out of the sale of the shares was not income of the assessee assessable to income- tax and concluded as follows : “….The assessee made investment in the year 1967 and expected yearly dividends but he did not receive any dividend and, therefore, found that the investment had been blocked. He sold the shares to redeem the investment. Therefore, the initial investment in shares and the sale of those shares cannot constitute the assessee’s business in share dealing, because only for the redemption of the investment, the assessee sold the shares so that he could use the same elsewhere more usefully.”

The Tribunal accordingly allowed the appeal and deleted the addition of the said surplus holding the same to be a receipt which is not taxable.

7. On an application of the Revenue under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the profit of Rs. 24,000 on the sale of the shares in question is not taxable as income of the assessee ?”

8. At the hearing of this reference, the learned advocate for the Revenue submitted that it was found in the instant case that the shares purchased by the assessee had never yielded any dividend and as such it should have been held that the acquisition of the said shares was not by way of regular investment but with the object that the same would be sold when the prices were favourable. The transaction of the assessee in the said shares was a transaction of business or in the nature of trade. The Tribunal, it was contended, erred in holding that it was merely a redemption of investment. The learned advocate for the Revenue contended further that, in any event, the Tribunal had erred in holding that the said surplus arising from the sale of the said shares by the assessee was not at all taxable as, even if the contention of the assessee were accepted, the same would be capital gains and taxable as such.

9. The learned advocate for the assessee contended to the contrary and submitted that the facts found by the Tribunal had not been challenged by the Revenue by a proper question and stood finally determined. As such, it was not open to the Revenue to contend at this stage that the surplus arising from the sale of the said shares was the business income of the assessee.

10. The following decisions were cited at the Bar. (a) Raja Bahadur Kamakhya Narain Singh vs. CIT (1970) 77 ITR 253 (SC) : TC12R.371. This decision was cited for the following observations of the Supreme Court. “….That the question, whether an assessee carries on business or whether certain transactions are in the course of business or whether they amount to adventures in the nature of trade or business, is a mixed question of fact and law is well settled….” “….the existence of certain elements in the transactions which in law would invest them with the character of trade or business and the question on that account becomes a mixed question of law and fact, the Court can review the Tribunal’s finding if it has misdirected itself in law.” “….The surplus realised on the sale of shares, for instance, would be capital, if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.” (b) CIT vs. Associated Industrial Development Co. (P) Ltd. (1971) 82 ITR 586 (SC) : TC12R.851. In this case, the assessee, which was a company, acted as managing agents of other companies. In the assessment year involved, it sold shares held by it in three of the managed companies resulting in a surplus in its hands. It was contended that such profit was a capital gain and not income in its hands. The assessee contended further that it was not a dealer in shares and had not been trading as such in earlier assessment years and that the necessity for sale of the shares in the relevant assessment year was the reduction of a bank overdraft. It was held by the Tribunal that as there had been purchases and sales of shares by the assessee over the past several assessment years by reason of the multiplicity of the transactions, the assessee ceased to be an investor and became a dealer in shares, though it dealt only in the shares of its managed companies. It was held that the surplus on the sale of shares in the relevant assessment year arose in the course of the business of the assessee and was liable to be assessed as business profit. On a reference, the Calcutta High Court, while accepting the finding of the Tribunal that the assessee was a dealer in shares, held that in view of the fact that a part of the shares were subscribed by the assessee for the purpose of acquiring the managing agency, that subsequently large blocks of such shares were purchased and held for a long period without sale, and that the shares were sold ultimately in big blocks to reduce the assessee’s overdraft liability, the profit on sale of such shares did not accrue in the course of the assessee’s business as a dealer in shares and was, therefore, a capital receipt. On further appeal, the Supreme Court reversed the decision of the High Court and held that the High Court went beyond the matters in the controversy before the authorities below and as no decision had been invited from the Tribunal as to whether the shares in question had been held by way of investment, it was not open to the High Court to give its finding on the question which was essentially one of fact and which was within the jurisdiction of the Tribunal to determine.

(c) CIT vs. Central Kurkhend Coal Co. Ltd. (1978) 113 ITR 483 (Cal) : TC12R.911. In this case, the question before a Division Bench of the Calcutta High Court was whether the loss arising from the sale of certain shares by the assessee was revenue in nature. It was found as a fact that the assessee had purchased the said shares with dividend and had earned high dividend. The said shares were never transferred in the name of the assessee and were sold within two months after acquisition of the same by the assessee. On these facts, the finding of the Tribunal that the said shares had been purchased by the assessee with the object of making profit by way of dividends was accepted.

The learned advocate for the Revenue also cited a decision of the A.P. High Court in State Bank of Hyderabad vs. CIT (1985) 47 CTR (AP) 224 : (1985) 151 ITR 703 (AP). It appears to us that the facts in the said case are entirely different from the facts before us in the instant reference and the principles laid down in the said decision have no relevance to the controversies involved in the instant case. As such, the said decision need not be considered further.

In the instant case, it has been found as a fact that the transaction in the said shares by the assessee in 1967 was a solitary transaction over a number of years. It has been found further that no dividend was declared on the said shares in three successive years, namely, 1967, 1968 and 1969. The assessee purchased the said shares in a block and also sold the entire shareholding in one block.

On the basis of the aforesaid facts, the Tribunal has held that the said transaction by the assessee was an investment and as the investment proved unprofitable for three years, the assessee sold the same to redeem the investment and to employ the capital elsewhere more usefully.

Such findings of fact have not been challenged by the Revenue by an appropriate question and as such they have become final. The conclusion of the Tribunal, on the basis of facts as found, that the said transaction of the assessee in shares was not a business transaction nor an adventure in the nature of trade but was an investment cannot be said to be erroneous or perverse which calls for interference. On the facts, I am unable to accept the contention of the Revenue that the surplus arising from the sale of the said shares was income from business in the said assessment years and taxable as such. However, I am also unable to accept the conclusion of the Tribunal that the said surplus arising out of the sale of the said shares is not taxable at all. Assuming that the shares were held as an investment and on the sale thereof, a surplus accrued in the hands of the assessee, the same must be held to be an accretion to the capital of the assessee and as such taxable as capital gains. This was also the case of the assessee before the AAC.

For the above reasons, I answer the question referred by stating that the profit of Rs. 24,000 on the sale of the said shares is not taxable in the hands of the assessee as business income but that it is taxable as a capital gain. In the facts and circumstances, there will be no order as to costs.

BINOD KUMAR ROY, J.:

I agree.

[Citation : 176 ITR 217]