1951 (6) TMI 18 - HC - Income Tax

Court deems excess share sale proceeds as taxable revenue under Income-tax Act, ruling in favor of department

The court held that the purchase and sale of shares by the applicant company were part of its business activities and constituted a business deal. The ... - Issues Involved:1. Whether the purchase and sale of shares of Sarswati Sugar Syndicate was part of the applicant company's business activities and constituted a business deal.2. Whether the excess amounts realized in the assessment years 1942-43 and 1944-45 were revenue receipts chargeable to tax under Section 3 of the Income-tax Act or mere appreciation of capital.Issue-Wise Detailed Analysis:1. Business Activities and Business Deal:The assessee, a public limited company incorporated in 1917, had various objects including carrying on the business of commission agents, insurance agents, and other commercial activities. In 1933, the company entered into an agreement with Sarswati Sugar Syndicate Limited to invest in shares and obtain a managing agency. The terms of the agreement included investing five lacs of rupees, which was later modified to three lacs, and selling additional shares worth two lacs. The assessee company took up shares in the Sarswati Sugar Syndicate Limited to the value of three lacs of rupees and performed their obligations under the agreement. When the third mill was not erected, the Syndicate paid the assessee company Rs. 15,000 as commission. Subsequently, the assessee company decided to sever all connections with the Syndicate and sold their shares, realizing an excess amount of Rs. 20,000 in 1941 and Rs. 2,26,700 in 1943. The question arose whether these transactions were part of the company's business activities.2. Revenue Receipt Chargeable to Tax:The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal held that the excess amounts realized were liable to income-tax. The assessee company claimed exemption under Section 4(3)(vii) of the Income-tax Act, arguing that the receipts were of a casual and non-recurring nature and not arising from business. The Tribunal referred the matter to the High Court to determine whether there was material for the Income-tax Officer to hold that the receipts were arising from the business of the assessee company.Detailed Analysis:Business Activities and Business Deal:The court examined the Memorandum of Association of the assessee company, which included objects such as undertaking the management of commercial undertakings. The court found that the transaction with Sarswati Sugar Syndicate Limited was within the objects of the company and was not merely an investment but an adventure to acquire a managing agency. The court rejected the argument that the word 'securities' in the company's objects did not include shares, stating that the word must be taken in its general meaning. The court concluded that the true nature of the transaction was the acquisition of a managing agency, which was part of the company's business activities.Revenue Receipt Chargeable to Tax:The court referred to various authorities and precedents, including the Privy Council decision in Commissioner of Income-tax, C.P. and U.P. v. Motiram Nandram, which distinguished between capital expenditure and business expenditure. The court emphasized that the transaction should be viewed from the standpoint of the assessee at the time it was made. The court found that the assessee company embarked on an adventure to acquire a managing agency, which was part of its business. The realization of shares was an essential incident of this adventure, and the profits realized were part of the business of the company. The court cited the dictum of Lord Justice Clerk in Californian Copper Syndicate v. Harris, stating that enhanced values obtained from the realization of securities are assessable when done in the course of business.Conclusion:The court concluded that there was material for the Income-tax Officer to hold that the receipts of Rs. 20,000 and Rs. 2,26,700 were arising from the business of the assessee company. The court answered both questions formulated by the Tribunal in the affirmative, holding that the purchase and sale of shares were part of the company's business activities and the excess amounts realized were revenue receipts chargeable to tax under Section 3 of the Income-tax Act. The assessee company was ordered to pay the costs of the department assessed at Rs. 150.Reference Answered in the Affirmative.