1951 (5) TMI 8 - HC - Income Tax

Court rules share sale profit not business income under Indian Income-tax Act.

RADHA DEBI JALAN AND OTHERS Versus COMMISSIONER OF INCOME-TAX, CALCUTTA

The High Court held that the profit of Rs. 97,488 from the sale of 4,300 shares was not income from business as defined in the Indian Income-tax Act. The ... - Issues Involved:1. Whether the profit of Rs. 97,488 from the sale of 4,300 shares was income from business as defined in Section 2(4) of the Indian Income-tax Act.2. Whether the transaction was an adventure in the nature of trade and hence taxable.Detailed Analysis:1. Whether the profit of Rs. 97,488 from the sale of 4,300 shares was income from business as defined in Section 2(4) of the Indian Income-tax Act:The applicant, a lady related to a partner of the Firm of Surajmull Nagarmull, had an account in the firm's ledger. For the relevant accounting year, there was a credit entry of Rs. 1,44,788, representing the sale price of 4,300 shares of Naskarpara Jute Mills Co. Ltd., which were purchased for Rs. 47,300. The difference of Rs. 97,488 was taxed by the Income-tax Officer as profit from business or a venture in the nature of trade. The shares were purchased on 27th May 1940 from Howrah Trading Co. Ltd., where the applicant held a substantial portion of the total share capital. The shares were not registered until 20th November 1943, and the dividends were initially taxed in the hands of Howrah Trading Co. Ltd. due to the Department's view that the transaction was intended to avoid tax liability under Section 10A of the Excess Profits Tax Act. The shares were sold in 1945, resulting in a profit of Rs. 97,488.2. Whether the transaction was an adventure in the nature of trade and hence taxable:The Appellate Assistant Commissioner held that there was insufficient material to classify the applicant as a share dealer and allowed the appeal. However, the Income-tax Officer, supported by the Commissioner of Income-tax, contended before the Tribunal that the purchase was intended for profit, making it a transaction within the nature of trade. The Tribunal, after a reference to a third member, held by majority that the amount was taxable. The Tribunal's judgment was based on the fact that the shares were purchased on blank transfer forms and not registered for three years, indicating a non-normal investment. The shares were sold at a price lower than the market rate, suggesting a deliberate manipulation to reduce the excess profits tax liability of Howrah Trading Co. Ltd. The Tribunal concluded that this manipulation was an activity in the nature of trade.Judgment:The High Court noted that the Tribunal's references were inadequately detailed, particularly concerning the other ladies involved. The Court emphasized that all facts bearing upon the case should be fully and clearly stated. The Court examined whether the profit was a casual or non-recurring receipt not derived from business or a receipt from an adventure in the nature of trade. The Court referred to Section 10, Section 2(4), and Section 4(3)(vii) of the Indian Income-tax Act, which collectively imply that casual receipts from an adventure in the nature of trade are taxable as business income.The Court highlighted that a mere intention to resell at a profit does not constitute trade. An adventure in the nature of trade requires some continuous activity aimed at producing profits. The Court found that the ladies were not share dealers and had not engaged in similar transactions before or after. The purchase and sale of shares were isolated transactions, and the shares were held for five years before being sold, which does not indicate trading. The Court concluded that the facts did not support the Tribunal's finding that the transaction was an adventure in the nature of trade.Conclusion:The High Court answered the referred question in the negative, stating that the Rs. 97,488 profit was not income from business as defined in Section 2(4) of the Indian Income-tax Act. The assessees were awarded the costs of the reference, with one set of costs to be shared equally among the eight assessees.